The Daily Prophet: America's Stock Price Is Falling Hard and Fast
(Bloomberg View) -- It's said that a nation's currency is not much different than a company's share price in that it's the best indicator of investor sentiment. If true, then the U.S. has some work to do in order to win back the confidence of investors.
While no one is calling it a crisis, more investors and strategists are linking the greenback's latest bout of weakness to the political situation in Washington. The Bloomberg Dollar Spot Index has fallen for five straight days to its lowest level since Nov. 8, the day Donald Trump was elected president. The thinking is that all the distractions surrounding the Trump administration will make it harder for any pro-growth legislation such as tax cuts and infrastructure spending to be enacted by lawmakers. That, in turn, would temper the pace of Federal Reserve interest-rate increases, damping demand for dollar-denominated assets.
Bullish bets on the dollar have been toppled as the world’s most popular trade after five months of holding the top spot, a Bank of America Merrill Lynch survey of fund managers found, and hedge funds have cut net long positions to an 11-month low. The chances of the dollar climbing this year against the euro have plunged to just 14 percent, options market pricing implies, according to Bloomberg News' Lananh Nguyen. "The market's patience with the how" the Trump "administration handles things" is wearing thin, Vasileios Gkionakis, the head of global currency strategy at UniCredit Bank in London, said in a Bloomberg Television interview.
HOW DO YOU EXPLAIN STOCKS?
There are a number of reasons why U.S. stocks aren't suffering: A weaker dollar would be good for exporters and the diminished odds of fiscal stimulus might curb future Federal Reserve interest rate increases. Although stocks look strong from an absolute basis, with the S&P 500 Index topping 2,400 this week for the first time, on a relative basis, they are laggards. Since mid-March, the S&P 500 has risen just 0.65 percent, compared with a 6.48 percent gain for the MSCI All-World Index excluding U.S. shares. Although the companies in the S&P 500 are on pace to deliver 16.5 percent earnings growth for the first quarter, the strongest since 2011, analysts continue to lower their expectations for the rest of the year, according to Bloomberg Intelligence.
EUROPE THE NEW HAVEN?
Surprisingly, with all of its perceived political instability, Europe looks to be a major beneficiary of the U.S. political troubles. The Bloomberg Euro Index has shot up, reaching its highest level since Nov. 9. The STOXX Europe 600 Index is up 9.94 percent since the end of January, beating the 6.94 percent gain in the MSCI All-Country World Index. Investors piled into long-dated bond sales on Tuesday with the U.K. and France seeing orders of more than $67 billion following Emmanuel Macron’s win in the presidential election, according to Bloomberg News' John Ainger and Hannah Benjamin. Orders for U.K. 40-year gilts were said to exceed 26 billion pounds ($33.5 billion), the most on record, according to people familiar with the matter, who weren’t authorized to speak publicly and asked not to be identified. Orders for French debt expiring in May 2048 were said to be above 31 billion euros ($34 billion). The final size of the U.K.’s deal was set at 5 billion pounds, while France’s was set at 7 billion euros.
EMERGING MARKETS FLY HIGHER
Despite the rising concerns over the political situation in the U.S., investors don't fear a global contagion. That is evident in the performance of emerging markets, where a lower dollar is supporting commodities prices and easing concern about the ability of borrowers to repay dollar-denominated debts. The MSCI EM Index of shares continues to fly higher, rising for seven straight days to bring its gain this year to a lofty 18 percent. “The speed of the rally has been very impressive, and investors might need a breather, even if the long-term trend remains pretty bullish,” Andrea Tueni, a trader at Saxo Bank in Paris, told Bloomberg News' Blaise Robinson. The MSCI Emerging Markets Currency Index has gained 6.19 percent. Russia is auctioning the most ruble debt in more than four years, taking advantage of borrowing costs at the lowest since 2013. The Finance Ministry will offer the equivalent of almost $1 billion at its weekly sale on Wednesday.
THAT DIDN'T LAST LONG
On Monday, it looked like animal spirits were returning to the oil market as crude jumped to its highest level in more than two weeks, flirting with the psychologically important $50 a barrel level, after Saudi Arabian and Russian energy ministers reaffirmed their commitment to production cuts in an effort to support prices. Today, not so much. The rally stalled as traders awaited U.S. crude inventory data, according to Bloomberg News' Mark Shenk. There’s a concern that a surge in U.S. production, together with an increase in Libyan output and signs of recovery in Nigeria, may undercut OPEC's strategy to stabilize the market and prop up prices. West Texas Intermediate for June delivery dropped 19 cents to settle at $48.66 a barrel on the New York Mercantile Exchange. The contract rose $1.01 to close at $48.85 on Monday, the highest since April 28.
TEA LEAVES
OPEC’s internal Economic Commission Board meets in Vienna on Wednesday to discuss the market in preparation for the group’s formal meeting on May 25. OPEC members agreed in November to cut 1.2 million barrels a day of oil production through the middle of the year. Longer cuts at already agreed-upon volumes are needed to reduce global inventories to the five-year average, the energy ministers of the world’s biggest crude producers said at a joint press briefing in Beijing on Monday. OPEC members’ earnings may increase to about $539 billion this year, based on the Energy Information Administration’s projections for oil prices and exports. Net revenue from oil exports sank 15 percent to about $433 billion in 2016 -- a 12-year low -- due to lower oil prices and a decrease in net oil exports, the EIA said in a report.
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Robert Burgess is editor of Bloomberg Prophets.
To contact the author of this story: Robert Burgess at bburgess@bloomberg.net.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
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