MORNING BID – Minute by minutes

Jul 9, 2014 13:44 UTC

The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that’s prevailed for the 10-year note for quite some time now, with the primary catalyst being today’s release of the Federal Reserve’s minutes from its most recent meeting. The relevant data that investors are probably paying most attention to – the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate – the rate at which people leave jobs for others – is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn’t there yet.

And with that in mind, that means those investors clamoring for higher rates are probably going to continue to see their expectations unmet for a longer period of time, and with sovereign buyers from Europe and Japan wandering outside those halls, there’s an ongoing bid in the market that continues to thwart short-sellers who are just waiting for that right moment to bet against the bond market. That’s been a lonely trade of late – or rather, a popular trade, just a big loser as trades go.

Players in the markets may also be looking to see whether the Fed discusses the other exit strategies it has — reverse repos and the like — making that another thing to watch for in the late release. Dealers have been divided on whether the Fed will raise rates merely to 25 basis points or direct to 50 — our most recent polls are split on this, but a move to 50 would probably assuage a few of those who think the Fed is getting behind the curve.

Earnings play a factor in this equation as well however. The decline in earnings estimates has actually been subdued in the second quarter, compared with the first quarter, according to Goldman Sachs, which suggests a pickup in activity after the weak first quarter. Earnings don’t really get going for another few days, but the signs of growth will be what investors worried about valuations are looking for. The current valuation situation, as Chuck Mikolajzcak wrote in a story yesterday, points to some measures that are worrisome – the Case Shiller PE figure, for instance – while a couple of others like operating P/E, suggest only slightly expensive levels. With more strategists starting to worry of a correction, earnings would go a long way toward supporting equities.

MORNING BID – Oil and trouble

Jun 13, 2014 12:34 UTC

Riskiest markets saw their first hiccup in a while in the last couple of days, with a 100-point loss in the Dow Thursday that has raised a bit of concern for the first time in ages, it seems. Of course, 100-point drops in the Dow aren’t really what they used to be, but that doesn’t mean this nascent selloff should be ignored. Worldwide issues – the sudden rise in oil prices on the growing insurgency in Iraq – have investors backing away from equities and shifting a bit into safer assets like the Treasury market. The indirect bidders in Thursday’s auction of 30-year notes took the highest amount of the auction since 2006, perhaps as a way to offset worries about weak growth worldwide and the uncertainty in the Middle East.

The declines translated directly to the transportation stocks, where a confluence of factors have conspired to knock down the likes of airlines (just when they stopped seeming so horrible as investments). Lufthansa’s warning earlier in the week brought some fresh worries about discretionary spending, while the rise in oil prices translated directly to a falloff in the airlines.

Notably, Jason Goepfert of Sundial Research points out that transports and crude were near nine-month highs, so it’s not as if they’re just inversely correlated. He says, however, that when this does occur, the one that breaks bad is the transports sector. In the first two weeks after both hit nine-month highs, the transport names tend to keep moving up, but by six months later, the full effects of rising oil costs is felt, as the average loss when looking at 13 instances dating to 1987 shows a 5.9 percent drop.

There are other reasons for some of the recent weakness. Boeing shares were hit Wednesday after the defeat of House Majority Leader Eric Cantor in his Virginia congressional district. It may amount to little, but the loss by Cantor puts Republicans in a better position to block the re-authorization of the Export-Import Bank that has meant a lot to Boeing and plenty of other major corporations; we’ll be exploring this topic in a forthcoming story, but with $50 or so billion going for plane purchases financed by the bank, it is a headwind.

MORNING BID – $4 trillion, through the eye of a needle

Mar 28, 2014 13:19 UTC

The shift in the stock market away from momentum names and toward value is encouraging at least in some sense because it points to an ongoing appetite for equities rather than a reduction in interest there. However, one has to add the caveat that the Federal Reserve is still very much a part of this market, even as it diminishes its footprint.

The $55 billion in bond buying per month definitely continues to underpin rates and keep funding costs low for companies. Still, the market has reduced its reliance on the central bank and yet bond yields continue to sink, at least in the long-dated part of the curve, where the 30-year note neared 3.50 percent and the 10-year came close to 2.60 percent yet again.

The immediate expectation would seem to be for still-higher rates, particularly in the short end of the yield curve, where investors would be thought to trim positioning as the yield curve flattens. The market-implied rates suggest bonds are still a ways behind where the survey expectations are for the Federal Reserve – a two-year rate of just 0.45 percent will do that.

On the other hand, Citigroup analysts point out that the Fed has been consistently overestimating inflation and growth, and the Fed continues to want to adjust its target for when it will start raising rates, moving most recently from “definitely when unemployment hits 6.5 percent!” to “definitely when we say so, based on lots of indicators or something!” So maybe it’s not an underestimation so much has it is prudence. And those expecting more curve flattening, that is, buying in the short end and selling in the long end, would be ignoring that forward rates – the market’s expectations for rates going out into the future – already imply substantial flattening out (47 basis points between the 10 and 30, compared with 56 basis points in June 2004 when the Fed last began rate increases).

What’s that make out as? Essentially, Citigroup things it’s not a given that the short end will continue to sell off in a rapid fashion, but that things might take time, and the market is already on some levels pricing in a rate increase. So the slow unwind of the most accomodative monetary policy ever has begun, and it’s starting to show in rates markets, if not equities. Reducing or rolling off this $4 trillion balance sheet is threading the smallest needle in history will be quite the feat, if it can be done without more major shocks.

MORNING BID: Rebalancing act

Mar 21, 2014 13:37 UTC

There have been a few quiet days of trading lately, but today will not be one of them. Friday includes the quarterly expiration of index options and futures and single stock options and futures, and also a huge index rebalancing that will result in a lot of trading at today’s close.

Credit Suisse strategists estimate about $14 trillion in gross trading for SPX indexers and an additional $6 billion for other indexes, including the Nasdaq, Dow Jones total market index and a couple of FTSE benchmarks as well. This kind of trading is usually pretty methodical, but it will kick volume into the stratosphere – for the day, anyway.

What’s notable is where the trading is expected to take place and the stocks most affected. The biggest net adds for the day are Facebook, with an estimated $604 million in net purchases needed, thanks to its increased float, and Keurig Green Mountain at $564 million. Other notable names seeing their representation in the various averages grow include Google, Tesla Motors and Zoetis.

On the flip side, IBM leads the list of the names expected to see selling, with a net reduction of about $807 million in representation in index funds. That could lead to a bit of selling pressure among those funds, and other big share-buyback companies like Exxon Mobil, Apple, and Cisco Systems. Most of this may be on the margins, but with markets unlikely to get too long in front of the weekend, thanks to true uncertainty over the Russia-Ukraine tensions, this kind of activity could take a front seat, if only for a day.

MORNING BID – Hi Janet, Here’s a Selloff.

Mar 20, 2014 14:06 UTC

Welcome Madame Chair, here’s a market selloff for you.

Fed Chair Janet Yellen made some news that she didn’t expect yesterday. She perhaps thought she was offering some clarity when she answered the question from Reuters’ Ann Saphir as to when the Fed might start raising interest rates. That’s not how it worked, although at least in this case she didn’t mouth off to Maria Bartiromo the way Ben Bernanke did eight years ago.

What we didn’t see in her answer on the distance between the end of QE3 and the first rate hikes of “six months” (or something like that), is whether we will start to see any kind of reaction from the primary dealers surveyed by Reuters yesterday.

Most still see the Fed not raising rates until late in 2015 although there were a couple of notable changes. Barclays moved up its expectations for the rate increases to the second quarter of 2015. There were still, however, four dealers that do not see rate hikes coming until 2016. This may, on some level, put the Fed behind the curve as interest-rates adjust, though it was notable to see several Fed members in the Fed’s projections believe rates should be at 1 percent by the end of 2015. (It wasn’t much of an adjustment, but somehow, the way it looked on the dot matrix chart the cool kids were talking about was enough to get the bond market in a lather. The stock market, of course, didn’t react until someone (Yellen) told it what to do.)

What is undetermined now, however, is what the Federal Reserve will be looking at when it decides whether to raise rates or not. The market has gotten awfully used to the idea of a threshold on the unemployment rate that made things easy. Without that, it reverts to looking at a number of indicators, although the Fed chair yesterday did say that she thought the unemployment rate was one of the best indicators.

It is perhaps to the markets’ credit that many commentators remarked on the Fed’s use of several indicators as worrisome. In years past, there was great praise for Alan Greenspan just because he used to discuss looking at various pieces of data in his bathtub or whatnot. Now the market finds such alchemy to be less comforting. That may at least be a sign of maturity. Or, perhaps, the Fed has through years of communication efforts changed the markets’ belief that the Fed chair should be this omniscient presence in the market. If so, that bodes well for what is usually an awkward transition between Fed chairs. This may make that much easier, regardless of what Yellen said.

MORNING BID – Losses continue, and other concerns

Mar 14, 2014 12:27 UTC

The ructions in China have had an interesting effect on commodities prices – good for gold, crappy for copper. And more developments in this area should be expected as the market deals with growing weakness and the threat of a deflating credit bubble coming from the massive lending to various sectors in the world’s second-largest economy. Copper has been rather weak of late, but the broader CRB commodities index is actually much higher on the year. This is the biggest divergence since the eurozone debt crisis in 2011, points out Ashraf Laidi, the chief global strategist at City Index in London.

Again, the recent selling has had to do with the Chinese companies using the metal (and iron ore, too) as collateral for cheap dollar financing. So we’ve hit a weird storm here – weak yuan that makes those loans more expensive, and copper falling too, and again, that also messes with those loans. Put that together and you have a few markets moving in directions that are not beneficial to a major counterparty in several of them, for one, and resulting in the kind of activity that tends to turn into a vicious cycle.

More copper weakness, more yuan weakness, wash, rinse, repeat. Add a slowing macro economy and it’s a recipe for some more problems down the line. It’s also not good for other risk assets, even U.S. stocks, and part of the reason bonds rallied on Thursday. The growing problems there may be a reason why the Fed’s custody holdings data on Thursday afternoon showed foreign central banks dumped more Treasuries this past week than at any time – $104 billion, almost triple the previous record – as banks prepare for liquidity problems.

And it’s why things look like they’re going to be a bit ugly on Friday following more losses in Russia (down 5 percent) and in Asian markets. That’s not all, though. More defaults on trust products in China are expected. These started earlier in the year, where these big trusts that were sold to investors guaranteeing big returns backed by loans to coal producers didn’t repay investors on time. “The number of defaults are likely to accelerate in coming weeks as more Trust funds are expected to mature starting in April,” wrote Robbert van Batenburg, strategist at Newedge. He points out how intertwined these companies are in differing industries, with the common link being that they’ve all promised big returns for investors that now seem like they’re not going to come to fruition. Sound familiar? “If these problems in China escalate, a flight in gold and Treasuries is likely to ensue,” van Batenburg wrote. Well, that’s what we’re seeing again on Friday; the safe havens get the benefit while other markets suffer.

A bit of the reverse is happening in gold, which is predictably benefiting from the safe-haven allure of the yellow metal at a time when tensions are also rising between Russia and Ukraine and as a possible response from the West looms if Russia annexes the Crimean region of Ukraine (even if they want to go).

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