The Daily Prophet: Da Vinci Deserves Some Credit for the Rebound

(Bloomberg View) -- Market historians of the future will note that the longest slump in global stocks since March was snapped on the same day that House Republicans passed their version of legislation to overhaul the U.S. tax code. And that would be factually correct, but they shouldn't discount the impact of Leonardo da Vinci.

A rediscovered painting by da Vinci sold for $450.3 million at a Christie’s auction in New York late Wednesday, becoming the most expensive work ever sold and smashing the $100 million pre-auction estimate. Yes, the bears will say eye-popping art prices are a sure sign of investor hubris and a market top, but to others the sale just shows how much money is sloshing around the global financial system looking for a home. It also reinforces the notion that, thanks to the easy money policies of central banks in recent years, the only places where inflation exists are in real and financial assets. Plus, global stocks had been rising steadily since the auction results were announced at about 8 p.m. New York time. The auction of da Vinci's 500-year-old “Christ as Salvator Mundi” took place just a few weeks after a Rolex that once belonged to the actor Paul Newman became the most expensive wristwatch ever sold at auction, fetching $17.8 million versus estimates of a little more than $1 million.


"Inflation is in the eye of the beholder and what is not credible is Fed members expressing worries over low inflation when we’ve had rampant asset price inflation," Peter Boockvar, the chief market analyst at The Lindsey Group, wrote in a research note.

JUNK BONDS ARE BACK IN FAVOR
Just in time for the U.S. Thanksgiving holiday next week, Citigroup says it's thankful for the selloff in the market for high-yield corporate bonds. Rather than the start of a prolonged slump that has seen the Bloomberg Barclays US Corporate High Yield Bond Index already slip 1.31 percent this month through Wednesday, the bank's credit strategists wrote in a research note that the weakness is an opportunity to pick up some newfound bargains. "In a year of remarkable low volatility, it seems like any selloff is magnified," the analysts, led by U.S. Credit Strategy head Michael Anderson, wrote in the note titled "Giving Thanks for Volatility (and Lower Prices)." "Over the past three weeks, high yield spreads have widened 60 (basis points) from the post-crisis lows, causing many investors to question if this is the first rumble of a bigger storm. There is nothing unusual about the magnitude of the weakness given the market widened 70 (basis points) in March and 50 (basis points) in August this year." The timing of the note was propitious, as high-yield corporate bond markets staged one of their biggest rallies of the year Thursday, with yield spreads shrinking about 12 basis points on average, according to data compiled by Bloomberg.



BOND FLOWS RAISE CONCERN
Despite the rebound in junk bonds on Thursday, it remains to be seen whether the longer-term trend for fixed-income assets is one of weakness. There are already signs that investors may be giving up on bonds. Investment Company Institute data show that taxable bond funds took in just $4.54 billion in the week ended Nov. 8, the smallest increase since August, according to Bloomberg News' Liz McCormick. Demand is ebbing amid signs that China’s economy is slowing while the Federal Reserve’s plans to tighten policy are seen as crimping the outlook for riskier assets, McCormick reports. “I am seeing chinks in the armor” in terms of demand for taxable bonds, Andrew Brenner, head of fixed income at Natalliance Securities, told Bloomberg News. “I don’t really think this whole thing breaks down until the tax plan gets passed,” which he anticipates happening next year, he said in reference to efforts in Congress to reduce taxes. The one area of the bond market that is in demand is long-term Treasuries, which have benefited from low inflation and investors seeking haven from recent turmoil in riskier assets. “Treasuries are cheap now,” especially relative to riskier, high-yield offerings, Brenner said.



NORWAY SHOCKS OIL MARKETS
This may be the ultimate case of watch what they do, not what they say. Norway is one of the biggest oil- and gas- producing nations in the world, which has allowed it to amass a $1 trillion sovereign wealth fund -- the world's biggest -- over the past two decades that it invests in assets around the world. So, it's safe to say that Norway has a pretty good handle on where the oil market may be headed. But on Tuesday, though, the country says it wants out of petroleum stocks. The plan would require the fund to dump as much as $40 billion of shares in international giants such as Exxon Mobil and Royal Dutch Shell, according to Bloomberg News' Sveinung Sleire. While the fund says the plan isn’t based on any particular view about the future of oil prices or the industry as a whole, but rather to diversify its holdings, it's hard to see how this is bullish for the market. "We see this as further reason to be cautious (on oil company stocks) relative to broader markets over coming one to three years, adding to likely moderated oil prices," Jason Kenney, Santander's head of pan-European oil and gas equity research, told Bloomberg News by email. At the lowest point of declines, the news wiped about $5 billion in market capitalization from stocks in the Stoxx Europe 600 Oil & Gas Index, according to Bloomberg News.



KOREAN WON REACHES NEW HEIGHTS
Is it confidence or complacency? That's what currency traders are asking themselves after watching the South Korean soar Wednesday to a fresh high for the year. The currency is now the best performer in Asia for 2017 -- and one of the best worldwide -- despite the saber-rattling over nuclear weapons between North Korea and the U.S. The war of words doesn't seem to be impacting the local economy, which expanded in the third quarter at its fastest pace since 2010 amid a rebound in exports and the government’s supplementary budget, according to Bloomberg News' Hooyeon Kim. Nine out of 25 economists predict the central bank will increase rates at its next policy meeting on Nov. 30, a Bloomberg survey shows. At 1,099.65 per dollar on Thursday, the won has now risen more than 9 percent against the dollar this year. To understand just how strong and surprising the rally has been, consider that the median estimate of strategists surveyed by Bloomberg shows that they hadn't expected the won to reach its current level until sometime late next year or early 2019.



TEA LEAVES
An industry survey released Thursday showed that homebuilders are their most optimistic since March. But will that finally start to translate into increased activity? Economists and investors will find out Friday when the government releases data on housing starts for October. Although the National Association of Home Builders' sentiment index has risen to its highest levels since 2005, housing starts have trended lower this year, culminating in a 4.7 percent drop in September. Some of the decline that month was due to the fallout from Hurricanes Harvey and Irma, which is why economists are calling for a 5.6 percent rebound for October. While residential investment subtracted from economic growth in third quarter, rebuilding will most likely boost residential construction in the fourth quarter, according to the economist sat Bloomberg Intelligence. For the fourth quarter as a whole, BI estimates a 10 percent rebound in residential investment, compared with a 6 percent drop in the third quarter.

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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 editor of Bloomberg Prophets.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

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