What’s Really Behind the Global Risk Rally? Follow the Money.
(Bloomberg Opinion) -- In trying to explain this year’s rebound in riskier assets such as stocks, corporate bonds and emerging-market currencies, most pundits point to the giant reversal in attitudes at the Federal Reserve. In December, the central bank was talking up the need for multiple interest-rate hikes. Last week, Chairman Jerome Powell said the Fed can afford to be patient. But that’s only part of a bigger story.
As the MSCI All-Country World Index of stocks rose on Tuesday for the seventh straight day, matching its longest winning streak since November 2017, investor and strategist Danielle Lacalle of Spain’s Tressis SV was noting on Twitter how the rally mirrors the global rebound in the money supply. “Forget earnings or macro,” Lacalle wrote. “This is why markets have rallied.” A custom index measuring M2 figures for 12 major economies including the U.S., China, the euro zone and Japan shows their aggregate money supply peaked at $73.1 trillion in April, before dipping to $69.8 trillion in mid-November and then rebounding to as much as $72.6 trillion at the end of January. It’s widely believed that growth of the global supply of money by central banks looking to first combat the financial crisis and then keep their economies from falling into recession has been a key reason for the stellar performance in riskier assets. That growth is evident in the more than doubling of the money-supply index from $35.3 trillion in late 2008, just a few months before global stocks embarked on a rally that would see the MSCI more than double itself by early 2018 before last year’s rough patch.
With the global economy widely forecast to decelerate, major central banks are having to delay their plans for “normalizing” monetary policy by withdrawing some of this excess liquidity, which means the party continues. “A modest easing of financial conditions globally is likely sufficient to stabilize growth in the second half of 2019,” Richard Turnill, BlackRock’s global chief investment strategist, wrote in a research note Monday. “Any decisive move in global monetary and fiscal positions toward a more growth-friendly stance could trigger a renewed bull market.”
U.S. STOCKS ARE GETTING WEIRD
The rally in U.S. stocks that has given the S&P 500 Index a 16 percent boost since Christmas Eve is lacking a few critical ingredients that normally accompany such a rapid rise. First, Investment Company Institute data show flows into equity mutual funds have been minimal relative to the outflows saw in the second half of 2018, according to Bloomberg Intelligence. Second, trading volumes are muted, with the amount of S&P 500 shares changing hands averaging just above 38 billion shares quarterly over the last year, down from a recent high near 42 billion in 2016 and less than half of peak trading volume recorded early this century. Third, and perhaps most unusual, the outlook for corporate profits this quarter and next is bleak, with many strategists forecasting an earnings recession. But among equity investors, hope springs eternal. Consensus expectations imply earnings growth will slow in the year ahead but bounce back quickly, resulting in 2019-2020 average earnings per share gains of 9.5 percent, according to BI. That is stronger than the 8.2 percent average of the past five years. Also, valuations will soon begin to work in the favor of stocks. The widely followed cyclically adjusted price-to-earnings ratio that compares the S&P 500 with its average earnings over the previous 10 years may look expensive now, but BI points out that the lean years following the financial crisis will soon fall out of the calculations, making stock prices look more reasonable even with modest profit growth.
TOO LITTLE AND CERTAINLY TOO LATE
I guess you have to start somewhere. Fiscally challenged Italy, which was an “I” in the PIIGS acronym during the euro debt crisis of a few years ago, is preparing to sell as much as 1.8 billion euros ($2.1 billion) of state-owned real estate as it seeks to rein in soaring debt. That’s according to Bloomberg News’s Sonia Sirletti and Lorenzo Totaro, citing people with knowledge of the plan who asked to not be named because it isn’t public. The finance ministry is identifying properties owned by the state and by regional and local administrations that could be sold off — mainly army barracks, hospitals and office buildings that are no longer in use. Italy is feeling the pressure. Figures released last month showed the country has fallen into its first recession since 2013, and most economists expect growth this year to fall short of the government’s anemic target of 1 percent. While every little bit of debt reduction may be seen as a positive in this environment, the bond market wasn’t initially impressed with the government’s plan. Yields on Italy’s benchmark 10-year bonds jumped 6 basis points, or 0.06 percentage point, to 2.79 percent while yields in most sovereign debt markets fell. As one of the world’s most indebted countries, with a debt-to-GDP ratio of about 132 percent, it’s good that Italy is taking action. But bond investors know math, and proceeds of $2 billion from real estate sales works out to less than 0.1 percent of the nation’s $2.26 trillion of marketable debt outstanding.
AUSSIE DELIGHT MAY DISAPPOINT
One of the bigger surprises in global markets this year has been the Australian dollar. It has appreciated more than 2 percent this year against a basket of nine developed-market peers tracked by Bloomberg and was among the big winners Tuesday despite the Reserve Bank of Australia deciding to leave interest rates unchanged and acknowledging that downside risks have increased at home and abroad. For a currency to strengthen in the face of such developments is remarkable. But that’s not to say Tuesday’s gain was totally without merit, as the nation’s bank stocks soared after a year-long Australian inquiry stopped short of demanding a structural overhaul of the scandal-plagued industry. Putting that decision aside, there’s still the fact that some economists say Australia might not be able to avoid its first recession in 28 years, as the bubble in the nation’s housing market slowly deflates and the economy of its main trading partner — China — deteriorates. “The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities,” RBA Governor Philip Lowe said in a statement. Brendan McKenna, a strategist at Wells Fargo, wrote in a research note that the absence of higher rates and tempered economic prospects should keep the Australian dollar “subdued” absent a trade deal between the U.S. and China. In other words, those who jumped into the so-called Aussie as global risk assets rebounded may be in for some disappointment.
TRADE PAIN EASES FOR FARMERS
As trade talks between the U.S. and China continue ahead of the March 1 deadline imposed by President Donald Trump, one group that has a big stake in the outcome are feeling pretty confident. Purdue University-CME Group’s monthly Agricultural Economy Barometer for January rose to its highest level since June. The expectations portion of the index, which survey’s 400 producers on their sentiment and opinions regarding the health of the agricultural economy, matched its highest level since February 2017. The good feelings among producers are matched by investors. The Bloomberg Agriculture Subindex of commodities has risen 5.51 percent this year, better than the 3.52 percent gain for the broader Bloomberg Commodity Index. “Our assumption is not that the trade deal is resolved now in the first quarter, we have it more like half of the year,” Archer-Daniels-Midland Co. Chief Executive Officer Juan Luciano told investors and analysts on an earnings conference call Tuesday. The better mood comes amid reports that China is back to buying lots of U.S. soybeans. American exporters sold 2.603 million tons of soybeans to China for delivery by Aug. 31, the U.S. Department of Agriculture said Tuesday. That’s the third-largest daily transaction in the agency’s records, according to Bloomberg News.
For those optimistic that the U.S.-China trade talks are headed to a favorable outcome, it might be instructive to keep a close eye on the trade data due out on Wednesday. The median estimate of economists surveyed by Bloomberg is for the U.S. to say that its trade deficit held at about a 10-year high of $54 billion in November, little changed from the $55.5 billion gap it reported for October. Since Trump has made reducing the U.S. export-import imbalance with China one of the primary goals of his trade wars, a bad report Wednesday could spark him to dig in his heels, especially if his State of the Union speech fails to impress. “Failure to reach an accord would likely lead to another round of broad tariffs, a rate increase on existing tariffs, or both,” Bloomberg Economics wrote in a report. “Yet, the continued widening in the trade balance since September, when the last round of tariffs was implemented, is evidence that the current strategy has not had the desired impact.”
Let’s Stop Worrying About the Fed’s Balance Sheet: Bill Dudley
The U.S. Shouldn’t Get Too Creative With Debt Sales: David Ader
Macri Floats Above Argentina’s Economic Mess: Shannon O’Neil
Germany Enters the Global Economic Wars: Leonid Bershidsky
Russia’s Growth Looks Too Good to Be True: Leonid Bershidsky
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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