Your “springboard” guide to current market concerns, presented in a logical and concise manner, with direct links to more details.
- Share buybacks dropping
- US corporate debt issuance
- Buying US shares on margin
- Further weakness for the US dollar?
- Europe’s jobs market and ECB policy
If you are interested in . . .
Share buybacks and what less activity means for US equities
Look at . . .
A big and persistent buyer of US shares continues retreating. US company share buybacks have been falling for the past four quarters after peaking during the first three months of 2016, according to the Federal Reserve’s Flow of Funds data.
Recent research from Goldman Sachs notes how companies through share repurchases or M&A activity represent the biggest buyers of US equities since the start of this bull market in 2009.
The slowing pace of companies buying back their own shares has certainly not halted Wall Street’s stellar run so far this year. While there is a reduced tail wind of buybacks helping boost earnings per share via a lower share count, US companies have reported robust year-on-year sales and earnings growth for the recent quarter. That has helped offset the decline in buyback activity, but some warn that the clock is ticking for Wall Street bulls.
“As prior cycles/bear markets show, share repurchases tend to peak just ahead of, or coincident with, the start of bear markets. Companies are, of course, typically pro-cyclical — buying high and reducing share buybacks into the recession/bear market, in order to conserve cash,” says Longview Economics. Michael Mackenzie
Read more: US share buyback plan approvals plunge
If you are interested in . . .
The pace of US corporate debt issuance as borrowing costs drop
Look at . . .
Investors across the globe have been queueing for a piece of the US corporate debt market, helping to drive risk premiums or spreads down towards their lowest levels since the financial crisis. The search for income was evidenced by the latest jumbo bond sale from AT&T, when bankers counted orders of roughly $60bn for the $23bn transaction. More than a dozen smaller deals have followed in the days since, helping boost volumes back to a record pace for 2017.
Since the year’s start, foreign investors have purchased roughly $54bn of US corporate bonds, according to Treasury data. That, coupled with the more than $130bn that has flowed into US fixed income mutual funds and exchange traded funds this year, has helped suppress corporate borrowing costs. Moody’s data show yields on companies rated Baa, the lowest investment grade tier, have fallen to 4.36 per cent. That is down from 4.73 per cent at the end of 2016.
The question for investors is how long can this persist? Many point to the extraordinary stimulus programmes still under way by the European Central Bank and Bank of Japan as a reason yields will stay the course. But others point to rising leverage metrics, record-high equity valuations and deteriorating investor protections on riskier corporate bonds as reasons to be wary.
Regulators have also warned US banks over “aggressive” financial projections that are being used to justify loading companies up with more debt. Eric Platt
Read more: Weak dollar sharpens appeal of US corporate debt
If you are interested in . . .
The US equity market’s bull run
Look at . . .
The use of borrowed money to pump up investment gains is a compelling feature of bull runs and margin debt has been rising over the past year. Taking New York Stock Exchange data, adjusted for the market capitalisation of the S&P 500, shows the use of margin is back at a record level from mid-2015.
That is hardly surprising given the broad market’s stellar run since the election of Donald Trump. The S&P 500 has gained nearly 16 per cent and set 37 closing highs, according to S&P Dow Jones Indices, since November.
A robust second-quarter earnings season has certainly helped to drive the market higher lately and helped investors ignore the political turmoil and lack of fiscal stimulus from Washington.
As Alastair George, chief strategist at Edison Investment Research, notes: “The bull case for equities seems to be increasingly based on a single ‘Goldilocks’ scenario.”
He adds: “If equity valuations remain as high as they are and the global economy continues to slowly expand, and profit margins remain at record levels, and monetary policy remains accommodative and volatility remains low, then investors will have no alternative but to drive equity prices higher.”
The hefty use of margin debt alongside slumbering implied equity volatility — the CBOE Vix recently set an all-time nadir — and stretched valuations, means Wall Street has priced in a lot of good news. But recent flows into exchange traded funds that benefit from a rise in volatility suggest some investors are preparing for a correction. Michael Mackenzie
Read more: Lessons for devotees of this epic bull run in stocks
If you are interested in . . .
The value of the world reserve currency and implications for markets
Look at . . .
This year has not been kind to the US dollar. Measured against its main rivals, led by the euro, the dollar index has depreciated more than 9 per cent in 2017 and it is within sight of breaking down to a level last seen at the start of 2015. That represents quite a reversal given how the dollar began the year at a 14-year high and the Federal Reserve has tightened overnight borrowing costs twice in 2017.
The dollar index has declined for five consecutive months, the longest losing streak since April 2011.
So can the dollar bounce or at least steady from here?
Despite a substantial interest rate gap in favour of the US over Europe, UK and Japan, the dollar has fallen from favour. This suggests that other forces, namely the political turmoil surrounding the Trump administration and lack of fiscal stimulus being passed in Washington, are influencing sentiment.
Alan Ruskin at Deutsche Bank notes: “The market will probably continue to the view [of] the Trump administration as encouraging of US dollar weakness, at least while it is helpful for equities and growth.”
Strong investor flows into Europe — whose economy has outperformed the US this year — on top of a region that already has a solid current account surplus, has certainly bolstered the euro at the expense of the dollar. Euro strength has yet to prompt a strong response from the European Central Bank, but currency strength has begun weighing on European exporters. In contrast, US multinationals are enjoying an earnings bounce from a weaker dollar.
Beyond the main currencies, the dollar has also notably fallen versus an array of emerging market units since January. That has made EM a hot ticket among investors this year, highlighting the importance of a benign dollar for the sector’s fortunes.
Declining US core inflation also supports a view that the current Fed tightening cycle is near an end, while investors are fixated on when the ECB will signal that hefty monetary easing has a shelf life.
Barring a technical bounce for an oversold dollar, the currency requires a catalyst to jump-start its fortunes. This brings us back to data and whether the US economy can show signs of acceleration and core inflation rebounds in the coming months.
Lee Hardman at MUFG says: “While the US dollar is lacking fundamental support, we would add some caution that the risk of a reversal in the near term is also high against most other G10 currencies. The stage is being set for a corrective rebound, but there is no obvious fundamental trigger yet.”
Michael Mackenzie
Read more: Dollar can handle hurt from loss of confidence in Trump
If you are interested in . . .
The European Central Bank and its bond-buying programme
Look at . . .
The slack in Europe’s labour market. It is a factor curbing eurozone wage growth, which at 1.4 per cent is significantly shy of what economists believe policymakers would like before they scale back the ECB’s €60bn monthly bond-buying policy.
Mario Draghi, the ECB’s president, described wage growth as a “linchpin” for future policy calls. Investors and traders will next tune into Mr Draghi at the end of August when he will speak at an annual gathering of central bankers in Jackson Hole, Wyoming.
“If Draghi sticks to his word and wage growth remains the linchpin for the ECB, loose monetary policy is here to stay,” says Carsten Brzeski, ING chief economist. Michael Hunter
Read more: IMF warns eurozone against premature row-back on bond buying
http://ift.tt/2o3X354
Tidak ada komentar:
Posting Komentar