U.S. Stock Rally Gets Some Welcome Company
(Bloomberg Opinion) -- Since the current bull market in U.S. stocks set the record last week for longevity by some measures, the debate over how much longer it will continue has intensified. There’s no way of knowing when it will end, but a few recent developments suggest that there’s no reason to be anxious — at least in the near future.
First, after severely underperforming in the first half of August, stocks outside of the U.S. are starting to rebound and even outgain American equities. The MSCI All-Country World Index excluding the U.S. is up 2.92 percent since Aug. 17, compared with 1.64 percent for the S&P 500 Index. Rising confidence in international equities should help alleviate concern that the U.S. stocks would be able to buck a global slump for only so long. Second, despite the S&P 500 setting yet another record Monday, equities aren’t that expensive. Bloomberg Intelligence noted in a report Monday that the S&P 500 is trading near its long-term average risk premium when compared with bonds, or about the same level as both the midpoint of the first post-World War II bull market and in the early 1980s. Although the current premium of 320 basis points might be below the long-run average of 500, it’s above the low of 105 in the 1960s rally and minus 20 when the last bull market ended in 2000.
CHINA DELIVERS A GLOBAL BOOST
Globally, stocks had their biggest day since April, with the MSCI All-Country Index rising as much as 1.02 percent. Much of the credit for the gains was pinned to optimism over an easing of global trade tensions as the Trump administration closed a bilateral trade deal with Mexico. That certainly helped, but don’t overlook a new development in China’s foreign-exchange policy. The offshore yuan strengthened to its best level of the month on Monday after the People’s Bank of China said late Friday that it was taking action to support the currency through its daily fixing. The announcement adds to signs that China is pushing back against yuan declines, with the central bank this month boosting the cost to short the currency and urging lenders to prevent any “herd behavior” in the foreign-exchange market, Bloomberg News reported. Recall that a surprise effort by China's government to weaken the yuan in August 2015 triggered a global slump in stocks that lasted until February 2016. Many investors have been worried about a replay if China intended to allow the yuan to depreciate much further to support domestic exporters and counter U.S. tariffs. “The central bank’s statement to support the yuan has boosted market sentiment,” said Kang Chongli, an analyst with Lianxun Securities in Beijing, according to Bloomberg News.
BORROWING BINGE CONTINUES
U.S. Treasuries fell as the U.S. government embarked on a heavy week of borrowing, offering $121 billion in fixed- and floating-rate notes in addition to the usual complement of bills. Even though many bond traders will be away on vacation, which may make the results more volatile than usual, the sales will surely receive a lot of scrutiny. That’s because these are the first auctions since the Treasury Department released data late on Aug. 15 that showed foreigners sold a net $48.6 billion of Treasury notes and bonds in June, the most since October 2016. Foreign private holders, rather than foreign official ones such as central banks and finance ministries, were responsible for the bulk of the sales. Assigning a reason for the sales would be pure speculation, but it’s no secret that U.S. debt outstanding is ballooning along with the federal budget deficit. U.S. marketable government debt outstanding has just topped $15 trillion for the first time. At the same time, U.S. Commodity Futures Trading Commission data show hedge funds and other large speculators hold a record number of contracts betting on a decline in benchmark 10-year Treasuries. The first auction of this week was relatively uneventful, with investors submitting bids for 2.89 times the $36 billion offered, in line with the average of 2.81 times over the previous 12 monthly sales of that maturity.
THE EURO’S ON THE MOVE
Much of the focus in the currency market Monday was on Mexico’s peso, which was the biggest gainer among the world’s most-traded currencies by appreciating as much as 1.62 percent amid the trade agreement with the U.S. Even so, that only left the peso at its strongest level since Wednesday. Perhaps a more meaningful move in the currency market can be found in Europe, with the Bloomberg Euro Index extending a rebound that began on August 16 to its highest level since early May. The euro bulls received some good news on Monday as the Ifo institute’s closely watched gauge of German business confidence rose for the first time in nine months, surging to 103.8 in August from 101.7 in July. While companies may be postponing some investment amid still-high uncertainty over global tarde, this month’s survey hints at “strong domestic activity,” according to Ifo President Clemens Fuest. The rebound is especially painful for euro pessimists, who have steadily cut their net bullish stakes from a record as recently as April to a net bearish position this month, CFTC data show. The Bloomberg Euro Index has risen 2.57 percent since Aug. 15, putting it into the black for the year for the first time since May 14.
HOGS AND CORN
Parts of the embattled agriculture market got a lift from improved trade relations between the U.S. and Mexico, one of the largest foreign buyers of American meat and grain. Hog futures jumped and corn erased most of its losses amid the news that the U.S. is signing a new trade accord with Mexico to replace the North American Free Trade Agreement. Mexico imports more pork from American farmers than any other country and is a top destination for corn, according to Bloomberg News’s Megan Durisin. October hog futures jumped as much as 3 cents a pound, the maximum allowed by the Chicago Mercantile Exchange, and cattle also rose by the limit. December corn futures on the Chicago Board of Trade pared declines of as much as 1.5 percent after the trade deal was reported. Prices were 0.6 percent lower at 12:24 p.m local time. The deal between the two countries maintains duty-free access in farm products, according to the U.S. Trade Representative’s Office. The Department of Agriculture in a statement said the deal addresses concerns on agricultural biotechnology and grading of farm products. Concerns about a global trade war has caused the Bloomberg Agriculture Subindex to slump 10.6 percent so far in 2018, putting this year on track to be the worst since 2008.
One area of the U.S. economy where there’s a bit of concern is housing. Sales are showing signs of slowing after an increase in mortgage rates and a big run-up in prices. First-time buyers needed almost 23 percent of their income to afford a typical entry level home in the second quarter, up from 21 percent a year earlier and the most since 2008, according to Bloomberg News’s Prashant Gopal, citing an analysis by the National Association of Realtors. On Tuesday, the monthly S&P CoreLogic Case-Shiller report is forecast to show that home prices in 20 U.S. cities increased by just 0.2 percent in June. That would suggest prices rose a meager 0.56 percent in the second quarter, the weakest performance since the third quarter of 2014, when prices inched up by 0.53 percent.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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