Saturday, 27 August 2016

US stocks and bonds fall as Yellen sees stronger case for higher rates

US markets fell on Friday.

The S&P 500 Index fell 0.2 percent and US 10-year Treasury yields rose five basis points to 1.62 percent.

Markets fell after Federal Reserve Chair Janet Yellen cited “continued solid performance of the labor market” in saying that the “case for an increase in the federal funds rate has strengthened in recent months” in her speech on Friday at a meeting of central bankers and economists in Jackson Hole.

Federal Reserve Vice Chairman Stanley Fischer told CNBC on Friday that the US economy has strengthened and is “reasonably close to what is thought of as full employment”.

He added that Yellen's comments were consistent with the possibility of as many as two rate hikes this year.

Friday, 26 August 2016

Investors wait for Jackson Hole meeting amid debate over wider impact of Fed policy

Global markets were subdued on Thursday ahead of the start of a central bankers' meeting in Jackson Hole on Friday.

The S&P 500 fell 0.1 percent while crude oil rose 1.2 percent.

Central bankers are not the only ones attending the meeting in Jackson Hole. The Fed Up coalition, a pro-workers group, will also be at the meeting sidelines.

A paper published on Monday that Fed Up organiser Jordan Haedtler co-wrote with Dartmouth College economist Andrew Levin and the Economic Policy Institute’s Valerie Wilson recommended that it is “appropriate” for the Fed to consider employment and wages in setting the course of monetary policy “but the transcripts of FOMC meetings provide little evidence that Fed officials have actually done so”.

The Richmond Fed's economics writer Helen Fessenden and economist Gary Richardson on Tuesday published an economic brief addressing Fed Up’s concerns, saying that “monetary policy alone is not a sufficient or particularly well-designed tool to address inequality”.

Actually, the Fed has already shown itself willing to go beyond the strict confines of monetary policy, except that it was not to help workers but banks.

Back in 2009, following the Great Recession, John Hussman wrote:

Senator Richard Shelby made an important observation last week that the Federal Reserve's intervention in the Bear Stearns' wipeout dangerously crossed the line from monetary policy to fiscal policy. I couldn't agree more. The Fed's actions in that case were outside of its mandate precisely because by taking Bear's assets into its own portfolio, the Fed effectively provided public funds to a private corporation without recourse if the collateral goes bad. Only Congress has that power. It was literally an illegal act, but it was also done so quickly that it was presented as an irreversible fait accompli...

Thursday, 25 August 2016

Markets mixed, investors cautious

Markets were mixed on Wednesday.

The S&P 500 fell 0.5 percent but the STOXX Europe 600 rose 0.4 percent.

In Asia, the Hang Seng Index fell 0.8 percent but the Nikkei 225 rose 0.6 percent.

Commodities declined. US crude oil fell 2.8 percent.

“No one wants to be in the market, they don’t trust the market,” said Craig Hodges, chief executive of Dallas-based Hodges Capital Management, adding: “To me, we are in a bull market and no one realizes it.”

Wednesday, 24 August 2016

Markets higher but US stocks may be ripe for selloff

Markets were mostly higher on Tuesday

The S&P 500 rose 0.2 percent, boosted by robust housing market data, while European stocks rose 0.9 percent.

"If we continue to keep getting strong economic data it will become hard for the Fed to rationalize not hiking rates," said Erik Wytenus, global investment specialist at JP Morgan Private Bank.

Indeed, Savita Subramanian, equity and quantitative strategist at Bank of America, said on Tuesday: “BofAML interest rate forecasts imply a far more aggressive pace of Fed tightening than is currently priced into the market.”

Subramaniam also noted that “U.S. stocks look expensive versus history on most metrics”, and thinks that the market is ripe for a selloff.

Tuesday, 23 August 2016

Markets mixed as Fed nears targets but still-low rates a risk

Markets were mixed on Monday.

The S&P 500 fell less than 0.1 percent but the STOXX Europe 600 rose 0.1 percent and the Nikkei 225 rose 0.3 percent.

US crude oil ended a seven-session winning streak to fall 3 percent.

Oil was weighed down by a stronger US dollar after Federal Reserve Vice Chairman Stanley Fischer said on Sunday that “we are close to our targets” and that he expected expect GDP growth to pick up in coming quarters.

That could signal a coming interest rate hike, especially after a Fed staff working paper published over the weeked showed that the Fed would have the scope to respond to an economic shock if the federal funds rate hits a still-low 3 percent in the coming years.

However, Steven Englander, global head of G10 FX strategy at Citigroup, warned in a note on Monday that this actually meant that the Fed would “have almost no ability to offset a shock in current circumstances” since the nominal Fed funds rate is currently at 0.5 percent.

Englander suggested that the paper is another argument to continue stimulating the US economy now so it's in a better shape to weather those futures shocks.

However, Allianz SE’s Mohamed El-Erian, who prefers structural reforms to improve the economy, told Bloomberg on Monday that low interest rates contribute to excessive risk taking and creates a “risk of financial instability down the road”.

Monday, 22 August 2016

US stocks at record highs but "cracks appearing"

Thanks in large part to central bank liquidity, stock markets have been rallying. The S&P 500 in particular have been hitting record highs recently.

With the rally, however, US stocks may have become overvalued.

Paul Lim at pointed out that the Shiller P/E climbed to 27.3 this month. The last time the Shiller P/E was above 27 was in October 2007, at the start of the last bear market

While overvalued markets do not necessarily presage a market downturn, Citigroup’s head of global credit strategy Matt King wrote in a note over the weekend that there are “some cracks appearing” in the market.

“Central bank liquidity no longer refreshes all the parts it used to,” he wrote. He foresees “ever tighter spreads; ever more hand-wringing over a stagnating global economy; ever greater dysfunction in markets”.

Allianz Chief Economic Adviser Mohamed El-Erian also thinks that monetary policy may be reaching its limits. He told CNBC last week: "We have relied excessively on central banks."

He said that the US government needs to craft structural reforms instead, otherwise there is a risk “we're going to take a turn where slow growth turns into recession”.