A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
The U.S. yield curve inverted Wednesday morning for the first time since the financial crisis – the 10-year Treasury yield fell below the two-year yield – causing panic in some quarters.
An inverted yield curve has been a reliable indicator of U.S. recession (with an 18-month lag), but, with all the central bank market activity over the past decade, it’s difficult to know if the old rules still apply.
I am taking the curve inversion seriously, but not literally.
It is by no means a good sign of the market’s bullishness on future economic growth, but the developed world demographic situation has created a glut of savings and a shortage of places to park them. The demand for bonds is pushing yields lower, and this may not be an accurate signal of economic optimism or pessimism.
“U.S. Treasury bond curve inverts for first time since 2007 in recession warning” – Report on Business
“Yield curves inverted in the U.S. and U.K., flashing warning signals for the global economy” – Bloomberg
“ Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning” – CNBC
Chinese economic data was reported weaker than expected overnight, and this is not good news for investors in resource sectors,
“China’s industrial production in July grew at its lowest rate since February 2002 … Industrial production .. grew by 4.8 per cent in July from a year earlier. This was down from 6.3 per cent in June … retail sales, a key metric of consumption in the world’s most populous nation, grew by 7.6 per cent in July, down from 9.8 per cent growth in June, and well short of economists’ prediction of 8.6 per cent growth”
“China slowdown persists as industrial economy posts worst growth since February 2002” – South China Morning Post
UBS strategist Francois Trahan warned investors not to buy the current equity market dip,
“Today's backdrop for equities is very different from last December when the S&P 500 was set to rebound. Forward-earnings growth was hovering near 20% at the trough in equities in late 2018 vs a paltry 2.51% now and even lower forward-EBIT growth of 0.51%. More importantly, interest rate trends argue it will get worse for S&P 500 earnings from here…
"[At] this stage of the equity cycle, ‘buying the dip’ has been a losing proposition across history more often than not... once PMIs break below the 50 level and trend lower, we enter what we like to call the “riskaversion” phase of the cycle. The S&P 500 has only been able to deliver positive returns once during “risk-aversion” across the nine cycles we studied. These are not exactly great odds and help explain why we think of [buying the dip] as a “losing proposition” during the risk-aversion phase of the equity cycle.”
“@SBarlow_ROB UBS: "BTD is 'a losing proposition' at this stage of the cycle " – (research excerpt) Twitter
Tweet of the Day:
Some nice charts from DB's Torsten Sløk on negative yielding debt. A short thread, starting with the main one, showing that the value of negative yielding debt is over $15tn, or about 27% of global total. pic.twitter.com/S8uJflRu6F— Robin Wigglesworth (@RobinWigg) August 13, 2019
Diversion: “ What is geoengineering—and why should you care?” – M.I.T. Technology Review