September Slump’s Just a Pause That Refreshes
(Bloomberg Opinion) -- September is developing a reputation for being cruel to investors, with the S&P 500 Index falling in three of the last four years. This September hasn’t gotten off to roaring start either, with the S&P 500 down 0.84 percent despite gaining on Monday. Even so, there are some compelling reasons it might make sense to ignore recent history.
Before this month’s slump, the S&P 500 was setting new highs, closing at a record 2,914.04 on Aug. 29. What made that leg higher even more impressive in the face of a global sump in emerging markets and wobbles in some highflying technology stocks was that it was accompanied by vigor in both momentum and breadth. On the former, Bloomberg Intelligence notes that the 14-day relative strength index and moving average convergence-divergence lines tied to the S&P 500 reached new highs. On the latter, the percentage of index members that traded above their 50- and 200-day moving averages surged, suggesting the rally is finally starting to spread beyond a handful of companies such as Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc.
To BI strategists Gina Martin Adams and Peter Chung, the stage is set for the S&P 500 to make a run at 3,000. “The bulk of the evidence continues to imply a pause amid the advance, not an abrupt U-turn,” the strategists wrote in a report on Monday.
BIG BOND BUYER RETURNS
Around the middle of each month, the U.S. Treasury releases data on foreign buying and selling of U.S. government debt and other securities. The data is closely parsed for clues as to what China might be doing with its huge $1.18 trillion pile of Treasuries. The answer of late has been not much. The bigger — and overlooked — story is what Japan has been doing, and the data show the Asian nation has been steadily dumping U.S. bonds, trimming its holdings to $1.03 trillion from a peak of $1.24 trillion in 2014. But some new data out of Japan suggest a reversal in the trend may be at hand. Japanese investors bought the most U.S. sovereign bonds in almost a year in July, acquiring a net 327.3 billion yen ($3 billion), according to Bloomberg News’s Chikafumi Hodo, citing balance-of-payments data released by Japan’s Ministry of Finance on Monday. It should be noted that the yield on the benchmark 10-year Treasury rose to about 3 percent in July from 2.81 percent earlier in the month, suggesting the widely watched 3 percent level may attract demand from a vital buyer rather than signal the start of a bear market. “Interest from Japanese investors may grow every time the 10-year Treasury yield approaches 3 percent, provided they can confirm that U.S. inflation is stable,” Masayuki Kichikawa, the chief macro strategist at Sumitomo Mitsui Asset Management Co. in Tokyo, told Bloomberg News.
ITALY CALMS NERVES
Just a few weeks ago, more than a few strategists declared that political turmoil in Italy, with its $2.29 trillion of government debt, would cripple not only the European Union but quite possibly global financial markets as well. Today, it’s more like nevermind. The yield on two-year securities fell to its lowest level in almost six weeks on Monday and the benchmark FTSE MIB Index of stocks rose the most in three months after Finance Minister Giovanni Tria added to reassuring signals that the country’s budget talks will adhere to EU rules. His remarks led Morgan Stanley and NatWest Markets to expect further bond gains as the worst of Italy’s fiscal risk might be over in the short term, according to Bloomberg News’s James Hirai and Carolynn Look. Morgan Stanley sees Italy’s budget shortfall at around 2.2 percent of gross domestic product — well within the 3 percent limit set by the EU — and says investors should buy Italian 10-year bonds, selling similar-maturity Spanish securities. NatWest Markets thinks it’s time to consider “aggressively long” positions in the nation’s five-year bonds as market sentiment improves. The policies discussed by the new populist government have weighed on Italian stocks, taking the FTSE MIB from being the best-performing index in Europe to the second worst as their spending plans raised investor concerns.
INDIA’S LOOKING DESPERATE
The sharks smell blood in the water. Speculators went after India’s financial markets with renewed vigor on Monday amid reports that the local government asked the central bank to bolster efforts to support the rupee, Asia’s worst-performing currency of the past month. The rupee weakened 0.7 percent to a record low on Monday, bringing its decline since the end of July to 5.40 percent. The nation’s benchmark S&P BSE Sensex Index of stocks fell 1.22 percent in its biggest drop since March. Yields on the nation’s government bonds rose. To speculators, the government’s actions smack of desperation, which often lead to further declines in financial assets as traders test just how far officials are willing to go to protect the economy. India is particularly vulnerable because it runs a deficit in its current account, which means it relies on foreign capital to finance budget shortfalls. Indeed, India said Friday that its current-account deficit widened to $15.8 billion in the second quarter, the most since 2013. The RBI has been selling dollars, albeit in a restrained manner, leading to a drop in India’s foreign exchange reserves to $400 billion from a record of $426 billion in mid-April, according to Bloomberg New’s Shruti Srivastava and Siddhartha Singh.
HOGS, COTTON AND FLORENCE
Hurricane Florence strengthened Monday, with its top winds reaching 130 miles (209 kilometers) an hour, making it a Category 4 storm. That’s one step short of the most severe level as it pushed toward the U.S. East Coast and the Carolinas. Although it’s not likely to make landfall until early Friday, it’s already affecting the commodities market, specifically hogs and cotton. As much as 15 inches (38 centimeters) of rain could flood cotton fields in parts of North Carolina, according to AccuWeather Inc. The state is also home to several pork-processing plants from major producer Smithfield Foods Inc., according to Bloomberg News. Cotton for December delivery rose as much as 2.1 percent to 83.75 cents a pound on ICE Futures U.S. in New York. On the Chicago Mercantile Exchange, October hog futures jumped as much as 2.9 percent to 57.25 cents a pound. The contract headed for a sixth consecutive gain, the longest stretch since its debut in May 2017. It’s been a horrible few months for agricultural commodities, with the Bloomberg Agriculture Subindex down 14.4 percent since late May, compared with a drop of 8.15 percent for the broad Bloomberg Commodity Index. In addition, about 50 million bushels of corn and 30 million bushels of soybeans could be lost because of the storm, according to Jack Scoville, the vice president of Price Futures Group Inc. in Chicago.
This week may go a long way toward determining whether the emerging-market sell-off begins to slow or becomes much worse. That’s because three key central banks will be meeting, with exasperated bull markets looking for some reassuring words. First up is Argentina’s central bank, which is meeting Tuesday. Policy makers raised the benchmark interest rate to 60 percent at the end of August, which has helped to steady the peso, which has weakened 45 percent since the end of April. Next up is the Central Bank of Turkey, which meets on Thursday. The median estimate of economists surveyed by Bloomberg News is for an increase in the one-week repo rate to 21 percent from 17.75 percent. That said, some economists expect no change, while others see an increase to at least 22.75 percent. Be warned: Turkey’s central bank is hardly independent, and it has disappointed investors before by skipping much needed rate hikes. The week ends with Russia’s central bank. Although policy makers aren’t expected to raise rates this week, traders’ expectations for increases over the next three months are the highest since 2014 based on forward-rate agreements.
Emerging-Markets Calm Is Likely to Be Brief: Mohamed A. El-Erian
Stop Obsessing About Countries’ Foreign Financing: Stephen Mihm
The Rupee Is Falling and India Should Let It: Ila Patnaik
Iran Sanctions Are Fueling Tensions Within OPEC: Julian Lee
Italy’s New Rulers Don’t Come for Free: Francesco Garzarelli
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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