U.S. Equity Bulls Just Say No to Contagion
(Bloomberg Opinion) -- U.S. investors might want to brush up on their old proverbs, especially the one about how pride goeth before a fall. Although the S&P 500 Index edged lower for a second straight day Wednesday, there’s an overwhelming sense that America’s stocks will continue to shrug off the emerging-market-induced downdraft engulfing equities in the rest of the world.
Such sentiment is seen in Investors Intelligence’s weekly survey of newsletter writers, which showed that 60 percent now consider themselves bulls. To be sure, it’s been hard to be anything but positive on U.S. stocks, especially with economic data like that released by the Institute for Supply Management Tuesday. The group said its manufacturing index for August surged to the highest since May 2004. So much for trade wars denting business confidence. But there are two things to note about the 60 percent level in the Investors Intelligence survey. The first is that the organization says it “signals elevated risk and the need for defensive measures." In other words, optimism is too high. The second is that the level is the highest since January, just before the S&P 500 tumbled 10 percent over the course of two weeks despite strong economic data. Also, those expecting a “correction” in stocks is the lowest since late January, suggesting a sharp, unexpected move lower could prove painful. A couple of prominent Wall Street firms are starting to worry that U.S. investors are too complacent to the risks facing the global economy.
Goldman Sachs Group Inc.’s bull/bear market indicator has risen to what it says is an alarmingly high level. The measure has shown a close relationship with the S&P 500’s forward returns since 1955, with peak readings coinciding with the start of the last two bear markets, according to Bloomberg News’s Lu Wang. Citigroup Inc. strategists are urging investors to cut back on risk as Friday’s jobs market report could show robust wage gains, which could fuel inflation concerns and spark a sell-off just like in February.
While U.S. stocks are flying high, emerging-market equities are flirting with a bear market. The MSCI Emerging Markets Index of shares extended its slide on Wednesday to 19.7 percent from a January closing peak, just below the 20 percent mark that would denote an official bear market. But more than a few investors are betting the slump has run its course — or at least doesn’t have much further to go. Appetite has picked up for options that pay off when the iShares MSCI Emerging Markets ETF climbs, a fund that’s declined 6.16 percent since the start of August, reports Bloomberg News’s Dani Burger. Data compiled by Bloomberg show total open interest for call contracts stands at 4.7 million, the most since February and near levels notched in December 2015, just before emerging-market equities began a strong two-year rally. Khiem Do, co-head of Asian multi-asset strategy at Baring Asset Management, says the outlook for emerging markets hinges on whether the Federal Reserve follows through on its plan to raise interest rates two more times this year. “If the Fed were to pause, this would be fantastic news for emerging markets,” he said in a Bloomberg TV interview. “But the Fed is likely going to hike rates again in September. December we’re not sure, they may pause. As soon as they pause, that would be a massive relief for emerging markets.”
A MONEY-MARKET CURVE INVERSION
The Baring strategist quotes above capture a consensus in markets, which is that rising U.S. interest rates are making the dollar stronger at the expense of emerging-market currencies, equities and fixed-income assets. At least one Fed official is sympathetic to such views. “Financial market information suggests that current monetary policy is neutral or even somewhat restrictive today,” Fed Bank of St. Louis President James Bullard said Wednesday in a presentation at an investor conference in New York. He added that market metrics indicate that the Fed’s projections for additional hikes are “too hawkish for the current macroeconomic environment.” He may be right. In the money markets, traders see one-year rates being lower in two years than in one year. That hasn’t happened since early 2007. This is a signal that traders see the Fed having to cut rates before too long. It’s also notable that a Morgan Stanley index that gauges the expected number of rate hikes has fallen to as low as 2.07 from 2.71 in late July. Maybe the turmoil in emerging markets actually is closer to the end than the beginning.
STERLING GOES FOR A RIDE
One of the big complaints among developed-market currency traders is a general lack of volatility — at least compared with the days before central banks such as the Fed, European Central Bank, Bank of Japan and Bank of England became actively involved in markets with their quantitative easing policies. But Wednesday felt like the good old days, at least for the pound. The Bloomberg Pound Index was down as much as 0.46 percent before suddenly shooting higher by as much as 0.83 percent as Bloomberg News reported Germany is ready to accept a less detailed agreement on the U.K.’s future economic and trade ties with the European Union in a bid to get a divorce deal done. The gauge then gave up most of those gains as some reports expressed doubt that any agreement is near. Brexit is being done in two parts: first, the separation agreement to make sure the exit is orderly, and then the future trade accord, which won’t be negotiated until after the U.K. leaves. The question of how much detail to agree on before Brexit has divided EU governments, with Germany and France pushing for a detailed plan and the U.K.’s closest allies, such as the Netherlands, wanting to leave options open, according to Bloomberg News.
SILVER CHEAPENS AGAINST GOLD
One of the bigger head-scratchers in global markets in recent months has been the weakness in gold. The precious metal has dropped about 10 percent to $1,200 an ounce this year despite the turmoil in emerging markets. One fashionable explanation is that emerging-market countries are selling gold to raise cash. Perhaps, but that doesn’t really explain what’s happening in silver, which has cratered some 17.5 percent. Silver is now the cheapest relative to gold since 2008. Of course, as Bloomberg News’s James Poole reports, a stronger dollar and rising U.S. interest rates have curbed the appeal of non-interest-bearing assets such as precious metals. But silver is probably getting penalized because it has more industrial uses than gold and there’s rising concern that a budding global trade war could curb manufacturing. Money managers are growing increasingly bearish on silver, taking their net short position last week to the biggest since April. “Silver traders have been throwing in the towel lately,” George Gero, a managing director at RBC Wealth Management, told Bloomberg News.
It’s that time of the month when investors, economists and strategists get a flood of data on the U.S. jobs market. First up will be the monthly ADP Research Institute’s employment report Thursday, which is likely to show that private-sector hiring remained robust in August. The median estimate of economists surveyed by Bloomberg is for a reading of 200,000 jobs added. Although that’s down a bit from the 219,000 in July, don’t be surprised if the actual reading comes in ahead of estimates. While jobs in the professional and business-services sector have been running strong in the recent reports, others — such as manufacturing — are expected to pick up even further, according to Bloomberg Economics. That’s especially true after the Institute for Supply Management said Tuesday that its monthly manufacturing index climbed to its highest reading since May 2004.
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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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