A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
The paywall at the Financial Times has been turned off until 11:00 a.m. ET this morning, so let’s start with an FT column looking for “aftershocks” following the correction in momentum stocks earlier in the month,
“Since the financial crisis, that momentum factor has been most often associated with high-growth, glamorous companies, especially in the technology sector. But this year fearful investors have herded into high-quality, low-volatility stocks, attracted by their supposed steadiness at times of economic distress… However, many of these defensive companies — especially real estate trusts and utilities, or consumer staples like Colgate-Palmolive — benefit from falling bond yields, which make their dividends look more attractive. When this summer’s massive fixed income rally began to unwind, low-volatility, quality and especially momentum all took a beating.”
“Investors braced for aftershocks following momentum sell-off” – Financial Times
“ Explainable Beta” – Irrelevant Investor
Investors think about the financial plumbing deep within the banking system in the same way they consider biological processes like the circulatory system – not at all until something really bad happens.
Yesterday, however, there was some panic in credit markets as the overnight loan market experienced a shortage of lenders.
The focus for the upheaval was the repurchase agreement market, “repo” for short.
The repo market is gigantic – there could have been US$100-million in North American repo agreements done in the time it took to type this sentence. On Tuesday, repo loan rates more than tripled which threatened the supply of funds to the banking system, and forced the New York Federal Reserve to flood the market with US$75-billion in loans yesterday and another $75-billion today.
Credit markets are stable at time of writing, but analysts at TD believe we will keep getting these bank system funding shocks because many large U.S. banks are short on reserves,
“Until the Fed addresses the underlying issue of reserve scarcity or provides some alternative sources of repo liquidity, we see the following market implications: Key date repo spikes: We expect any reporting date such as the upcoming quarter- and year-end to exacerbate funding stresses. This can push repo significantly higher than usual month-ends or quarter-ends … Given that reserves are lower today than at year-end, any spikes in [repo lending rate] GC could be even more extreme”
“@SBarlow_ROB TD: we're going to keep seeing these repo rate spikes (among other things)” – (research excerpt) Twitter
“Explainer: The Fed has a repo problem. What’s that?” – Reuters
“Lookout, there’s a dollar crunch!” – FT Alphaville
“@SBarlow_ROB CM's Pollick on U.S. repo rates” – (research excerpt) Twitter
“Fed hits technical difficulty as it tries to regain control of rates” – Yahoo! Finance
Crude prices reversed much of the gains since the Saudi attack on oil facilities after local officials reassured markets that production will come back on stream shortly. This caused a seven per cent drop in Brent prices,
“Oil prices fell sharply on Tuesday — dropping more than 7 per cent — after Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, said the kingdom had restored half of the lost production and would fully restore output by the end of September. He added that full production capacity of 12m b/d would not be available until the end of November”
“Saudi Arabia seeks to reassure on oil supplies after attack” – Financial Times
Tweet of the Day:
Fascinating chart on global #PMI and collective policy interest rate changes in the US, Eurozone, Japan and UK. Hints that policy was tightened too much post-2016, preventing the global economy from gaining sufficient momentum. Looser policy now prescribed. #FOMC #ECB #BOE #BOJ pic.twitter.com/kot8iHNtSs— Chris Williamson (@WilliamsonChris) September 18, 2019
Diversion: The world’s longest Viking bridge” – (Brief video) Reuters