Traders Remember to Stop Crying and Start Buying

(Bloomberg Opinion) -- Traders left the office Wednesday probably thinking the world was falling apart. The MSCI All-Country World Index of stocks was in the midst of its worst four-day slump since March, and both commodities and emerging-market currencies had fallen to their lowest levels in more than year. But then traders remembered what has become the No. 1 rule in recent years: Buy when things look their bleakest. 

As if on cue, the MSCI rebounded to gain the most in more than three weeks, commodities were at one point up the most since April and emerging-market currencies posted their biggest gain this month. Although credit for the recovery was assigned to comments by China’s Ministry of Commerce that it would seek talks with U.S. officials to resolve the budding trade war between the two countries, the fact that just the prospect of mere chats among low-level policy officials was enough to spark animal spirits shows that traders believe it’s far from the time to get defensive. It was only last month that the International Monetary Fund reiterated its forecast for the global economy to expand 3.9 percent this year, the fastest pace since 2011. There are certainly trouble spots around the globe — China, Turkey, Argentina — but nobody really feels the worldwide economy is in true jeopardy as long as the U.S. keeps humming.

A monthly survey of fund managers by Bank of America Merrill Lynch released this week showed that allocations to U.S. stocks jumped 10 percentage points this month to a net 19 percent overweight, the most since January 2015. And rather than cutting their earnings forecasts for 2019, analysts have been raising them. At the start of the year, analysts forecast that members of the S&P 500 would generate earnings of about $146 a share in 2018. Now, they expect earnings of about $161.50 a share, according to data compiled by Bloomberg.

DOLLAR CONFUSION
What is the U.S. government’s dollar policy? That used to be an easy question to answer, highlighted by former Treasury Secretary Robert Rubin’s unequivocal declaration in the mid-1990s that the U.S. had a “strong dollar” policy. But the Trump administration has sent mixed signals, suggesting multiple times that perhaps the dollar is too strong and that the U.S. would be better off with a weaker currency to help boost exports and cut the trade deficit. Once unthinkable, an increasing number of strategists have said in recent weeks that the odds of the U.S. intervening to weaken the dollar are rising. But on Thursday, President Donald Trump seemed to endorse the greenback’s elevated level by tying it to confidence in the U.S., saying in a tweet that “money is pouring into our cherished DOLLAR like rarely before.” Rather than changing his view, the tweet may have more to do with Trump and his advisers knowing that much of the turmoil in emerging markets in recent weeks is being blamed on a rising dollar. As such, Trump may believe the stronger the dollar, the stronger his hand in trade and other talks with the likes of China and Turkey. “The governments, corporations, banks, and households in EM have dollar liabilities that will become a problem as the dollar rises,” Stephen Jen and Joana Freire of hedge fund Eurizon SLJ wrote in their latest report to clients. The Institute for International Finance estimates that dollar-denominated debt in 21 major emerging-markets economies has surged to about $6.4 trillion from $2.8 trillion in 2008.

BOND MARKET MISMATCH
Money may be pouring into the dollar, but that money isn’t finding its way into U.S. Treasuries. In fact, Treasury Department data released late Wednesday showed that in June foreigners sold a net $48.6 billion of Treasury notes and bonds, the most since October 2016, according to the rates strategists at BMO Capital Markets. Foreign private holders, rather than foreign official ones (think central banks and finance ministries), were responsible for the bulk of the sales, the BMO strategists noted. That left net purchases year-to-date at a paltry $20 billion, much lower than the heady days of 2011 and 2012 when purchases totaled more than $400 billion annually, Bleakley Financial Group’s chief investment officer, Peter Boockvar, said in a note to clients Thursday. This is a worrisome development for the U.S. government because the Treasury could rely on foreigners to buy its government debt and finance the budget deficit without pushing up borrowing costs. But foreign holdings of U.S. debt have dropped from a peak of $6.32 trillion in October to $6.21 trillion while U.S. marketable debt outstanding has risen to $15.1 trillion from $14.3 trillion. The question bond bulls must ponder for the first time in years is whether domestic demand will be enough to fill the void as the U.S. borrowing increases to finance $1 trillion budget deficits. 

TURKEY BEGINS COMEBACK
Judging by the currency market, Turkey is taking the right steps to shore up investor confidence after sanctions imposed by the U.S. The lira appreciated for a third consecutive day, gaining 18.1 percent as Turkey announced a $15 billion investment from Qatar and said it wouldn’t impose capital controls to support the currency. Even so, the currency is still down some 16 percent for the month as some notable investors say the country needs to do more to explain how it will dig out from its worst currency crisis in decades, according to Bloomberg News’s Ben Bartenstein and Constantine Courcoulas. In a rare half-hour long conference call, Turkey’s Treasury and Finance Minister Berat Albayrak told about 6,000 global investors that he won’t impose capital controls while underscoring the need to rein in inflation and narrow the worst current-account deficit in years. It’s unlikely Turkey will take steps such as tighter fiscal policy, raising rates and restoring central bank independence, said Kathy Jones, chief fixed-income strategist at Charles Schwab Inc. “The real issues are the economic policies,” said Shamaila Khan, director of emerging-market debt at AllianceBernstein. “The reaction to the sanctions from the U.S. would have been very different if the government was following orthodox policies.” Mohamed El-Erian, chief economic adviser to Allianz SE and a Bloomberg Opinion contributor, said Turkey “is trying to rewrite the crisis management chapter in the playbook for emerging markets. It’s trying to go without interest rate hikes. It’s trying to do it without the IMF. That’s hard. It’s not impossible, but it’s hard.”

COFFEE COOLS
Although it was a good day for raw materials, with the Bloomberg Commodity Index rising as much as 1.29 percent in the biggest gain since April, coffee prices continue to struggle to find a bottom. Generic prices touched $1.0170, the lowest since 2013. Prices are now down 19.4 percent this year. For coffee, the story is all about too much supply. Arabica coffee stockpiles held at port warehouses monitored by the ICE Futures U.S. exchange stands at 2.12 million bags, the most since 2015 and up from a recent cycle low of 1.25 million bags at the end of 2016. While global economic concerns are “affecting all commodities, it ends up hurting even more those that have no bullish fundamentals at the moment, as is the case of coffee,” Rodrigo Costa, U.S.-based coffee director for Brazilian trading company Comexim, told Bloomberg News. For example, coffee production in Indonesia, the world’s third-biggest robusta grower, will probably rise to the highest in three years as favorable weather boosts plant growth, according to Bloomberg News’s Eko Listiyorini and Yoga Rusmana. At the same time, higher output in Brazil and Vietnam may lead to a global surplus of 6.6 million bags, or 396,000 tons, in the year to September 2019, estimates Sucden Financial Ltd.

TEA LEAVES
The U.S. economic data calendar is sparse until Wednesday, when investors will receive an update on existing home sales for July and the Federal Reserve releases the minutes of its last monetary policy meeting at the start of the month. That leaves a Monday appearance by Federal Reserve Bank of Atlanta President Raphael Bostic as the signature event until the data start flowing again. As a member of the central bank’s Federal Open Market Committee that sets monetary policy, Bostic’s comments deserve attention. Bostic will be discussing the U.S. economic outlook with the Johnson City, Kingsport and Bristol Chamber of Commerce in Kingsport, Tennessee. Bostic has reiterated in recent public comments that he remains in the camp seeing three interest-rate increases in 2018. He has also said he views his job as ensuring the yield curve doesn't invert, according to Bloomberg Economics. Also, Bostic has warned that a disruption from a trade war could shift risks to the downside. Overall, Bostic is deemed to have a neutral policy stance on the Bloomberg Economics Fed Spectrometer.

DON’T MISS
Turkey Treasury Dump More Vexing Than Russia’s: Brian Chappatta
Commodities Meet Their Wile E. Coyote Moment: David Fickling
This Bond Shows How Worried Italy Investors Are: Marcus Ashworth
Rising Interest Rates Put China in a Bind: Christopher Balding
Israel’s Economy Has Earned A Few Tiger Stripes: Zev Chafets
 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

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.

©2018 Bloomberg L.P.