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Stock Traders Have Turned Into Snowflakes

Fragile market psyches lead financial commentary. Plus, Treasury-auction troubles, emerging-market enthusiasm and more.  

Stock Traders Have Turned Into Snowflakes
A trader reacts while working on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

(Bloomberg Opinion) -- It’s been a great year for the global stock market, with the MSCI All-Country World Index up 13.7 percent. But the message Tuesday is that investors are far from convinced the rally is sustainable, going by the reaction to the International Monetary Fund’s latest global economic outlook.

Stocks had been enjoying a strong day until the IMF report hit at 9 a.m. New York time, causing the MSCI index to go from being up as much as 0.20 percent to dropping as much as 0.45 percent. Stock investors took flight on headlines reporting that the IMF cut its global economic growth outlook to the lowest since the financial crisis in 2009, when output shrank. That sounds scary, but the IMF’s 3.3 percent estimate for 2019 is not that out of line with the level of output since the global economy began to recover. In fact, growth has fluctuated from about 3.4 percent to about 3.75 percent since 2012. Plus, the IMF expects growth to accelerate to 3.6 percent next year, climbing back to the upper end of the recent range. In that context, the sell-off in stocks says a lot about the delicate nature of investors’ psyches these days. In other words, this year’s rally in equities was largely all about the dovish turn taken by central banks led by the Federal Reserve. And with stocks having largely recovered from the tumble late last year, that theme has been played out. Investors now seem more prone to sell on any news perceived as negative; that’s a bad development, seeing as companies are due to report stagnant earnings growth for at least the first half of 2019.

Stock Traders Have Turned Into Snowflakes

“Better global growth needs to take over as a driver of risk appetite,” Goldman Sachs Group Inc. strategists including Christian Mueller-Glissmann and Alessio Rizzi wrote in a research note. They added a note of caution, though, saying “the eventual recovery might disappoint and there is potential for further shocks from politics and rates.”

ITALY IS SLIDING FAST
It doesn’t help animal spirits when the economy backing the world’s fifth-biggest bond market shows evidence of rapid weakening. Italy’s government cut its target for growth this year to just 0.2 percent. That figure – down from 1 percent previously – includes the estimated impact of measures the government has already agreed to implement to help the economy, according to Bloomberg News. Expansion this year would be 0.1 percent without the steps, according to a draft of a document seen by Bloomberg. The news not only helped underpin Italy’s $2.26 trillion of bonds, but the global sovereign bond market as well. The yield on Italy’s 10-year bonds fell 6.2 basis points to 2.42 percent. The thinking here is that the European Central Bank will have no choice but to maintain policies that support the euro zone’s bond market, especially with a trade war between the European Union and U.S. beginning to escalate. The Trump administration said on Monday it would impose tariffs on $11 billion in imports from the EU because of its support for Airbus SE. The EU is preparing retaliatory tariffs against the U.S. over subsidies to Boeing Co.

Stock Traders Have Turned Into Snowflakes

A LACKLUSTER TREASURY AUCTION
While Saudi Arabia had no trouble whatsoever attracting investors to its $12 billion bond deal, the same can’t be said of the U.S. Demand at the Treasury Department’s auction of $38 billion in three-year notes was the second-lowest for any auction of that maturity within the past 10 years, based on the amount of bids submitted relative to the amount offered. A class of bidders that was believed to include foreign investors was also below average. What makes the results so surprising is that the top-ranked rates strategist at BMO Capital Markets noted in a report before the auction that they expected demand to be high for the notes, given the widely held view in money markets that the Fed may lower benchmark interest rates before too long. “If, in fact, the Fed’s next move will be a cut - ‘fine-tuning’ or otherwise - the three-year sector stands to benefit asymmetrically from policy rates that might be lower in the not-too-distant future,” the BMO strategist wrote. Perhaps the poor results could be tied to the dollar, with the Bloomberg Dollar Spot Index stuck in a tight range so far this year and putting a halt to 2018’s uptrend. Foreign investors might not be inclined to invest in dollar-denominated assets if they feel the currency has little prospects of appreciating.

Stock Traders Have Turned Into Snowflakes

BANKS ARE BETTER, BUT NOT BANK STOCKS
Don’t expect to see any happy faces when the chief executives of some of the biggest U.S. banks appear before the House Financial Services Committee on Wednesday. The House hearing is titled, “Holding Megabanks Accountable: A Review of Global Systemically Important Banks 10 Years After the Financial Crisis.” Witnesses include heads of Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. Bank stocks have been chronic underperformers, with the KBW Bank Index dropping 8.60 percent over the past 12 months, compared with a gain of about 10 percent in the S&P 500 Index. This has less to do with worries about the health of banks than it does with concerns that the Fed’s dovish turn and a narrow yield curve will make it harder for banks to grow their profits. In fact, banks are arguably safer now than ever before based on three market-based metrics. First, surplus liquidity at major banks – deposits minus loans – has soared to $2.8 trillion from less than $250 billion before the crisis based on Fed data. Second, bank funding costs have fallen back to near record lows, showing little concern from counterparties about any inherent risks. And third, an index of credit-default swaps tied to the subordinated debt of big banks is also near record lows. Bank profits may not be booming, but that doesn’t mean banks are sound.

Stock Traders Have Turned Into Snowflakes

WHERE IT’S NOT SO BAD
Emerging-market stocks broke from developed-market peers on Tuesday, with the MSCI Emerging Markets Index rising for the ninth straight day. The gauge is now at its highest since June. Emerging markets came out relatively unscathed in the IMF’s global update. The organization sees growth in these economies slowing just 0.1 percentage point this year to 4.5 percent, versus the 0.3 percentage point slowdown in advanced economies to 2 percent. The IMF’s forecasts for China, India and Brazil were either left unchanged or boosted slightly. Even so, international investors seem to be losing interest in EM. The IIF says nonresident flows into EM financial assets declined in each of the first three months of the year, from $52.6 billion in January to $31.2 billion in February and $25.1 billion in March. “We believe weak capital flows to EM reflect the positioning overhang we have been writing about recently,” the IIF said in an April 1 report. In other words, investors loaded up on EM assets as they tumbled last year, betting that the slide was overdone. That left them overexposed, and the declining trend line in flows reflects a rebalancing.

Stock Traders Have Turned Into Snowflakes

TEA LEAVES
What exactly did ECB President Mario Draghi really mean when he said two weeks ago that policy makers should look at ways to soften the impact of negative rates. Was it an admission that the euro zone’s economy is worse than many suspect and that negative rates will be around much longer than most anyone expected? Market participants may find out more Wednesday when Draghi holds his regular press conference following the ECB’s policy meeting. What we do know is that the ECB is in no rush to revamp its negative interest-rate policy. ECB committees, whose work is often the basis for formal policy proposals, haven’t discussed the matter, Bloomberg news reported, citing people with knowledge of the matter. Some officials are still convinced that the benefits of a deposit rate below zero outweigh the drawbacks, and they see no need to redesign the policy, said the people, who asked not to be identified.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

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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