Three snapshots for Wednesday
Most U.S. banks passed their annual stress test driving shares higher. Where does this leave their valuation? Looking at price-to-book value in aggregate (1st chart) they are only just trading above a ratio of one, looking cheap compared to a 15-year average ratio of two. However a premium is opening up over European banks which are still trading below book value, and analyst forecasts for return on equity suggest banks are in a very different environment to the last 15-years (2nd chart)
The UK could start issuing 100-year bonds as it seeks to lock in current low interest rates. Recent sales of long-dated UK gilts have met with strong demand, and as the chart below shows yields on 50-year gilts hit a record low of around 3 percent in January.
Three snapshots for Friday
The U.S. economy probably created 210,000 jobs last month, according to a Reuters survey. If the forecasts are accurate, the government’s jobs report on Friday would mark the first time since early 2011 that payrolls have grown by more than 200,000 for three months in a row. Refresh chart
China’s annual consumer inflation slowed sharply to a 20-month low in February, and factory output and retail sales also cooled more than forecast, giving policymakers ample room to further loosen monetary policy to support flagging growth.
Greece averted the immediate risk of an uncontrolled default, winning strong acceptance from its private creditors for a bond swap deal which will ease its massive public debt and clear the way for a new international bailout.
Two months rally + long markets = correction?
The debate in global financial markets is whether the new year’s rally is either just pausing or coming to an end.
Many say the rally so far has been driven by only thin volumes (for more on volumes read this story) and thin volume rallies tend to outlive high volume stampedes.
The market certainly seems to be getting very long — which itself suggests that the market was due for a correction one way or another.
Data Explorers, provider of securities lending data tracking and short selling and fund activity across 20,000 institutional funds, says the value of stock on loan stands at $706.5 bln as of the beginning of March, its highest since December 7, against a lendable supply of $7.4 trln.
(Click on the graph to enlarge)
Timing the next bull market in stocks
.jpg)
Markets are down again today (MSCI world index down 0.7 pct so far this morning) and the market overall is nearing a bear market territory again (from a three-year high hit in May).
But asset managers are starting to look forward. JPMorgan Asset Management reckons that if one assumes the current bear market for most equity indices started in 2000 and that the the trend of the previous experiences is to be repeated, then the current environment should be ending around 2014 (By the way, those who predict stock market cycles with sunspots activity reckon the year 2012 or 2013 is the bottom, but that’s a different story.)
But 2014 does seem a long way off.
“While this may sound depressing from 2011, we hasten to add that we are not expecting the ongoing bear market to result in continued downside, but rather in persistence of broad range-trading prior to a sustained breakout to the upside,” Neil Nuttal of JPM AM writes.
Nuttal says that since 2000 the S&P 500 average level is close to 1,200 (compared with Thursday’s close of 1,216.13) , meaning the market has not slid too far out of range.
“At present, the wall appears to be very much in evidence while providing very little opportunity for ascent, notably in Europe, but not exclusively so… The majority of investors are light of risk, meaning that the pain trade (the development that would cause the most pain to the most people) would be a sharp rally in risk assets,” he adds.
Hungary and the euro zone blame game
More tough talk from Hungarian officials on the ‘unjustified’ weakness of the country’s currency, which has dropped 11 percent against the euro this year to all-time lows.
This time, it’s central banker Ferenc Gerhardt arguing that the weakness of the forint is out of sync with economic fundamentals and blaming it on the debt turmoil in the euro zone.
Perhaps he should look a little closer to home.
Hungary’s drift from orthodox economic policy since the centre-right government took over the reins last year has made it the most exposed of eastern European economies.
The ruling party Fidesz swept into power promising to create a new social contract that would subject the economic system to the “popular democratic will”. Ironically, the policies of Prime Minister Viktor Orban have made Hungarian markets more sensitive to the global sentiment than ever.
Domestic investor participation in local bonds and stock markets has fallen since the government controversially seized private pension fund assets to boost state coffers this year.
Average daily trading volumes on the Budapest stock exchange have slipped 25 percent this year while non-resident ownership of local-currency bonds are at elevated levels — as high as 40 percent — and estimated to be worth a considerable 4.8 trillion forints ($20 billion)
@ Intriped
Buffet said to CNBC that he was looking to buy up equity of large eurozone companies if the price was cheap enough.
The bearish eurozone headline splatter is the usual market fodder directed towards softening those prices.
Wouldn’t get too excited unless you are a shareholder.
from Jeremy Gaunt:
Twisted Sister and the Federal Reserve
The Federal Reserve's "Operation Twist" has set the literary- and musical-allusion juices flowing. It is all about the Fed selling or not rolling over short-term debt and buying long-term bonds instead in order to keep borrowing costs low.
But that is frightfully dull for economists, analysts and reporters trying to get attention for their work. So, so far we have heard:
-- "Let's Twist Again", a reference to the 1960's Chubby Checker record about the dance craze . Problem is that the second line is "Like we did last summer", and the Fed did nothing of the sort, launching plain old quantative easing instead.
-- Twisted Sister might be a contender, but the heavy metal band's big hit "We're Not Going To Take It" probably better descibes market reaction to euro zone debt-crisis policy.
-- "Twist and Shout", a reference to the rock song covered by The Beatles, among, others. This is better. "Well, shake it up, baby, now" could indeed be the clarion call from financial markets for the Fed to so something, almost anything. But "Come on and twist a little closer, now, and let me know that you're mine" might be going a little far.
-- So the prize for now goes to literature not music: "Oliver Twist". Young Master Twist's "Please Sir, I want some more" just about sums it up.
Any others?
Avoid financial meltdown – use a thesaurus
So it’s not just investors who are guilty of moving in a herd-like fashion.
Financial journalists use the same verbs and nouns with greater frequency as stock markets overheat but display more variety in their phraseology after the bubble bursts, a study by Irish computer scientists has shown.
Trawling through nearly 18,000 on-line news articles that mention the Dow Jones, FTSE and Nikkei stock indices between 2006 and 2010, Aaron Gerow of Trinity College Dublin and Mark Keane of University College Dublin found that the language used by the writers had become more similar in the run-up to the global financial crisis.
“Meaningful regularities” in language employed before the crash showed “progressively greater agreement” in “positive perceptions of the market”.
Financial commentaries from The Financial Times, the New York Times and the BBC as well as news wire services such as Reuters, for instance, deployed increasingly similar noun-phrases as the market overheated, possibly reflecting a “narrowing of reporting to a relatively smaller number of key events/companies.”
The verbs “rise”, “fall”, “close” and “gain” were most popular through 2007 but their usage peaked the week of October 12 when the crash begins.
Gerow and Keane argue that this convergence of language can be used to identify stock market bubbles and supplement traditional volatility analyses.
Tunisia-driven ructions in Cairo markets
What a week it has been for Egypt. All the regional political upheaval happened in Tunisia, half a continent away, but most of the pain has been felt on Cairo’s financial markets. The Egyptian stock market has fallen almost 8 percent and the Egyptian pound is languishing near seven-year lows to the dollar. The cost of insuring exposure to Egyptian debt has risen to 18-month highs.
So are investors preparing for a Tunisia-style popular uprising in Egypt? Or is it that its market, more sophisticated than Tunisia’s, is bearing the brunt of investors’ increasing bearishness on the North African region? Probably a bit of both.
Egypt faces elections later this year and 82-year old Hosni Mubarak, president for almost 30 years, is likely to run again. Just like much of North Africa and the Middle East, inflation, especially food inflation is high while youth unemployment rates are higher than most of the developing world. Risks of uprisings are seen highest in Egypt and Jordan, where there is relatively more political freedom than, say Libya, but leaders lack the oil wealth cushion that the Gulf states or Libya boast. Given Egypt’s “youth bulge” — the proportion of the population comprised of young men aged 15-34 –regime change is a risk, reckons Charles Robertson, chief economist at Renaissance Capital.
Positioning is the main issue, however. Egypt has been Middle East and North Africa (MENA) investors’ favourite market, perhaps by default because of its size and accessibility. Barclays calculates that foreigners hold up to $25 billion in Egyptian stocks and bonds and in bonds, owning 20 percent of the outstanding bonds and 15 percent of the stock market cap, meaning there is significant potential for a market reversal. Oliver Bell, senior investment officer at Pictet has gone underweight Egyptian stocks, noting: “If alarm bells start ringing in Egypt, there’s potential for quite a lot of money to come out.”
All that means the outlook for the Egyptian pound is poor, though it has stabilised somewhat thanks to the central bank’s efforts. But banks are suggesting expressing any bearishness on North Africa via a bet against the pound – BNP Paribas for instance recommends a short pound position on a three-month non-deliverable forward basis, betting it will depreciate nearly 5 percent in this period. Barclays expects the pound to fall to 6 per dollar over this year from the current 5.80. Expect little respite before Egypt’s own election, expected in September.
Solar activities and market cycles
Can nature’s cycles enrich our finance and market theories?
Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.
Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).
But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.
“The concern is that something weird is going on and that the current extreme low in the sunspot cycle, similar to the stock market, can be followed by an unusually high sunspot cycle leading to a solar maximum, or in other words, a peak in sunspot activity,” he writes in his latest book.
“Our analysis is currently indicating a stock market low in the United States in approximately year 2012, which coincides with either a sunspot low or high depending on the cycle. ”
Bad economic data, please
Interesting twist at the moment – how are financial markets going to view not-so-bad or good data out of the United States in the run-up to the next Federal Reserve meeting.
Investors have been pricing in a chunky operation by the Fed to feed the markets with cheap cash – look at the gold, silver, the Australian dollar and the Canadian dollar. Bad data from the United States will keep investors confident of such Fed action and support the flows into high yielding assets.
But any data showing the pace of recovery in the world’s largest economy is not in such a bad shape. Investors will adjust their expectations and positions, causing a sell-off in equities, speculative-grade credit and high-yielding currencies.
Maybe bad data is what investors want over the next few weeks.
