Stocks Are Already Responding to U.S. Gridlock
(Bloomberg Opinion) -- Maybe President Donald Trump knows more about the stock market than his detractors give him credit for. Trump tweeted on Oct. 30 that “if you want your Stocks to go down, I strongly suggest voting Democrat.” The implication was that the Democrats would block, reverse or otherwise obstruct many of the market-friendly policies his administration has carried out. But many did vote for Democrats in the midterm elections, allowing them to regain control of the House of Representatives.
And on Wednesday, stocks fell after comments by a key Democrat on trade. The S&P 500 Index fell as much as 1.34 percent, wiping out its gains for the month, after Representative Bill Pascrell of New Jersey, who is positioned to chair the Ways and Means trade subcommittee, told Bloomberg News that Trump’s new trade deal with Canada and Mexico needs changes to secure support from Democrats. The trade pact will require approval from the new Congress that convenes next year as well as from lawmakers in Mexico and Canada. “Past presidents have tried to boost the economy with pro-growth initiatives to improve their re-election chances,” though a “divided government may make it tougher for the Trump administration to get things done,” John Lynch, the chief investment strategist for LPL Financial, wrote in a research note Tuesday.
In 2016, Morgan Stanley created an index of 54 companies called the Long Trump Basket that were most likely to outperform if Trump won the presidential election. That index outperformed the S&P 500 from the election through last year. But it then performed in line with the broader market through the first quarter and has underperformed ever since as it appeared the Democrats might win back the House. It has dropped 5.41 percent since mid-April compared with the S&P 500’s 0.26 percent decline.
OIL HYSTERICS TAKE A BREAK
The market for crude did something rare on Wednesday: It rose. Oil prices jumped about 1 percent, snapping a 12-day slump that was the longest on record. The impetus for the rally was reports that OPEC and its partners are said to be discussing a deeper-than-anticipated output cut. The talks come after oil dropped as much as 29 percent between late October and Wednesday, culminating in the biggest one-day drop in three years. Such moves had led to much hand-wringing about whether the crash in oil was a sign that the global economy was rolling over and heading for recession. That remains to be seen, but the truth is that this latest drop is just a blip compared with the tumble in oil that started in mid-2014 and lasted until early 2016. Then, prices fell about 76 percent as crude plunged from more than $105 a barrel to less than $30. Although the economy slowed at the time as energy companies struggled with the rapid decline in prices, the impact is likely to be a net positive this time, according to Deutsche Bank AG chief international economist Torsten Slok. He wrote in a research note Wednesday that “lower oil prices will extend the economic expansion further because it is good news for consumers and for energy-consuming companies,” especially with a stronger dollar helping to temper U.S. inflation. This combination “is exactly what the doctor ordered for the U.S. economy if you want the expansion to continue and the Fed to be gradual,” Slok wrote.
THIS IS NOT ABOUT THE WEATHER
The market for natural gas did a moonshot Wednesday, with prices rising as much as 20 percent. That brings the four-day gain to a mind-boggling 39 percent. Most are attributing the move to forecasts for lingering U.S. cold and concern that supplies may not be adequate to meet demand over the winter. “I can’t tell you how high we can go,” Stephen Schork, president of consulting firm Schork Group Inc., told Bloomberg News. “This is a scary market.” Perhaps, but commodities traders are pretty sophisticated, and it’s hard to imagine that they suddenly got surprised by the fact that it’s cold during the winter or that supplies might be running low. Something else is probably going on, such as hedge fund reversing a big bet. That’s a theory put forth by East West Investment Management Co. market strategist Kevin Muir. In a blog post, he said the move in oil and natural gas has all the hallmarks of someone or someones that had been long crude oil against a short natural gas position. “Although I acknowledge it has become mildly colder over the past couple of weeks, do you really believe that is was enough to spike the front (natural) gas future from $2.75 to $4.03?” he asked readers on Tuesday. “This week’s move in both crude oil and (natural) gas was not the result of some well-thought out fundamental reasoning. Rather, in large part, it is due to a large hedge fund calling up their broker at 1-800-GET-ME-OUT.”
DEBT ACCUMULATION TAKES A BREAK
It’s not much, but the global debt market has shrunk for the first time since 2016. The Institute of International Finance in Washington said on Wednesday that worldwide debt fell by $1.5 trillion in the second quarter to $247 trillion. It was the first decrease since 2016. Even so, nobody’s going to say that the fixed-income market has reached some turning point after years of rapid accumulation amid the easy money policies employed by top central banks after the financial crisis. For example, that $1.7 trillion decline hardly offsets the $29 trillion that has been added since the end of 2016 alone. But now, with the Federal Reserve shrinking its balance sheet and other central banks looking to follow suit, bond investors are for the first time in a long time talking about whether there’s enough demand to soak up all the debt that’s floating around the world. That’s one reason why bond yields globally have risen to 2.25 percent, the highest since 2013, as measured by the Bloomberg Barclays Global Aggregate Bond Index. That benchmark has lost 3.63 percent in 2018, already making this the worst year since it dropped 4.49 percent in 2005.
BITCOIN LOOKS FOR A NEW FLOOR
The cryptocurrency market has been out of the headlines for a few months, mainly because its largest and most visible member, Bitcoin, has experienced a collapse in its legendary volatility. In fact, earlier this month, Bitcoin became less volatile than the S&P 500. But that all changed Wednesday, when Bitcoin tumbled as much as 15.3 percent in its biggest intraday decline since February. The bulk of the drop of $958.73 to $5,322 — its lowest level since October 2017 — happened in about 45 minutes and looks largely triggered by a break below $6,000. That’s a level that has attracted demand in the past few months, propping up Bitcoin whenever it looked to be headed lower. The latest decline is sure to have many again questioning the timing and the wisdom of such big name investors as billionaire Michael Novogratz who have raised lots of money in recent years to invest in cryptocurrencies only to see prices collapse some 70 percent from their highs in December. But even at these depressed prices, many still believe that cryptocurrencies have a lot further to drop. “I could gloat about Bitcoin collapsing 10% in a day to $5700,” economist Nouriel Roubini wrote in a Twitter posting. “But that is still some way to ZERO where Bitcoin belongs.”
Mexico’s peso has been under a lot of pressure lately, depreciating about 7.50 percent over the last month. That’s the most against the dollar among 31 major currencies tracked by Bloomberg. The declines have been sparked by the actions of President-elect Andres Manuel Lopez Obrador, who is known as AMLO, and his political party. First, AMLO ditched a $13 billion airport project for Mexico City backed by some of the nation’s wealthiest businessmen and international investors. Then officials in his political party floated the idea of eliminating fees on ATM cash withdrawals and balance requests as well as commissions charged for printing bank balances and transfers to other banks. The result is that traders expect Mexico’s central bank on Thursday to lift interest rates for the third time this year to support the currency, pushing the benchmark rate to 8 percent from 7.75 percent. “A central bank rate hike may provide some needed support to the currency in the short term,” Wells Fargo & Co.’s currency strategists wrote in a research note Wednesday. Even so, “in the medium term, we continue to be cautious on the outlook for the peso. The majority of our concerns center around policy risk under an AMLO led administration.”
The Oil-Price Collapse Is Being Driven by Cars: David Fickling
Where America’s Oil Majors Stand as Prices Fall: Liam Denning
Got Dividend Jitters? Take a Look at Emerging Markets: Shuli Ren
Italy’s Banks Leap Aboard a Burning Ship: Ferdinando Giugliano
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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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