Mario Draghi’s hints about stimulus leads financial commentary.
In 2010, when major central banks began debasing their currencies by slashing interest rates to near zero — or even below — and printing money to buy financial assets, Brazilian Finance Minister Guido Mantega famously labeled the moves nothing less than a “currency war.” Such talk died down in 2017 and much of 2018 as the focus turned to a synchronized global economic recovery, but Tuesday showed the war may be coming back in a big way.
The Bloomberg Euro Index fell after European Central Bank President Mario Draghi said that “ additional stimulus will be required” if the economic outlook doesn’t improve. U.S. President Donald Trump quickly accused Draghi of deliberately trying to weaken the euro, thereby “making it unfairly easier” for the euro zone to compete against the U.S. Draghi responded by saying the ECB doesn’t target the exchange rate. Draghi’s right, but he also knows that all else being equal, easier monetary policy tends to lead to a weaker currency. In many ways, central banks and government officials have few other choices than to seek a weaker currency to make their economies more competitive. It’s been a decade since the Great Recession, and despite a prolonged period of interest rates near zero or below and many trillions of dollars injected into the financial system through asset purchases by central banks, the global economy has yet to achieve anything akin to escape velocity. In fact, the International Monetary Fund is projecting the slowest pace of growth since 2009. There’s even a growing belief that the U.S. has abandoned its long-held strong dollar policy. Indeed, Trump has often voiced his preference for a weaker dollar, which ties into his demand that the Federal Reserve and Chair Jerome Powell lower interest rates immediately. Citigroup’s economists pointed out in a research note Tuesday that during a recent trip to Europe, a common question among clients was whether the Trump administration would actively aim for a weaker dollar in coming months.
Expensive Currency
A Fed index puts the value of a dollar at a record high against a basket of its peers
Don’t forget that China has allowed its yuan to weaken, and it’s probably only a matter of time before Japan’s Ministry of Finance tries to jawbone the yen lower after that currency’s recent strength. It’s not as if Trump is wrong to be concerned about the dollar. A record net 60% of investors in a Bank of America monthly survey released Tuesday say it’s overvalued, up from 44% in May. “While we continue to expect global growth to remain relatively stable, if trade wars push the global economy into a growth recession and leads to another round of quantitative easing, across advanced economies central banks, then trade wars could metastasize into currency wars as well,” the Citigroup economists wrote.
SO BEARISH THAT IT MIGHT BE BULLISH
Stocks globally had one of their best days of the year Tuesday, with the MSCI All-Country World Index soaring as much as 1.3%, proving yet again that markets tend to do what causes the most amount of pain. That’s based on the results of the Bank of America survey, which also revealed that investors are their most bearish since the financial crisis. Allocation to global equities fell 32 percentage points to a net 21% underweight. That may seem odd given the MSCI All-Country World Index is up 13.3% already this year and staging an impressive rebound from May’s rout, but the survey is hardly an outlier. The State Street Global Markets monthly index of investor confidence has been hovering around its record lows since the end of December. The Leuthold Group’s “Defensiveness Indicator,” which in essence measures the performance of gold relative to other commodities and safety-net stocks relative to their more highflying peers, now sits in the top quintile of all readings since 1990, according to Bloomberg News’s Sarah Ponczek. In essence, these measures suggest that rather than a sign of complacency, this year’s rally in equities has taken most everyone by surprise. And with stocks being so out of favor, any positive developments on the trade front or economy could propel them even higher. At 17.3 times earnings, the MSCI All-Country World Index is trading at a lower multiple than in 2106 and 2017, when it exceeded 20 times despite aggregate borrowing costs being lower today and central banks turning dovish.
NEGATIVE YIELDS KEEP EXPANDING
Draghi’s dovish comments did wonders for the sovereign bond market, sparking a rally that pushed yields lower almost everywhere around the world. French 10-year note yields fell to zero for the first time after Swedish and Austrian benchmarks turned negative, according to Bloomberg News’s Sid Verma. There’s a good chance that the next time it updates, the Bloomberg Barclays Global Aggregate Negative Yielding Debt Index will show that for the first time since mid-2016, more than $12 trillion of bonds have yields below zero. At the last update Monday, the amount totaled $11.8 trillion. “Fifty years I’ve been in this business, and never in 50 years did I think $12 trillion would be negative interest rates,” David Kotok, chairman of Cumberland Advisors, said on Bloomberg TV. On the surface, it makes no sense for investors to pay governments to lend them their money. But it’s not that simple. For some investors, those negative yields turn positive when hedged into dollars, generating yields that are similar to or even higher than U.S. Treasuries, according to Bloomberg Intelligence. But here’s the thing: yields have room to move even lower, if recent history is any guide. The average bond yields 1.58% based on the Bloomberg Barclays Global Aggregate Bond Index, well above the record low of 1.07% reached in July 2017. At this point, no one can be blamed for wanting to bet against the bond market, but it’s worth remembering what economist John Maynard Keynes once said: “The market can remain irrational much longer than I can remain solvent.”
ONE PHONE CALL LIFTS EMERGING MARKETS
It wasn’t all about Draghi on Tuesday. Emerging markets received an added boost when Trump tweeted that he had a “very good” phone conversation with Chinese counterpart Xi Jinping and that they would hold an “extended meeting” at the Group of 20 summit on June 28-29 in Osaka. The MSCI Emerging Markets Index of stocks jumped as much as 1.59% in its biggest gain since early January, outperforming the broader MSCI All-Country World Index, as Chinese assets led the way. The iShares MSCI China ETF soared 3.25% as the offshore yuan strengthened the most in two months. As the world’s second-largest economy, sentiment toward China has an outsized impact on emerging-market assets, which have been under pressure ever since Trump threatened to raise tariffs on China if Xi didn’t sit with him at the summit. Trade talks broke off last month after the U.S. accused China’s leaders of reneging on provisions of a tentative trade agreement. What investors liked about the latest developments is that the call appeared to have been made at the request of Trump, suggesting he may ready to soften his stance toward China to pave the way for a deal. “Trump’s words on the China meeting are more conciliatory,” which is positive for developing world assets, Cristian Maggio, who heads emerging-market strategy at TD Securities in London, told Bloomberg News. Still, “We’ve seen a number of conflicting messages from the Trump administration on trade, so I wouldn’t be surprised if we saw another conflicting message on this,” he said.
COMMODITIES CELEBRATE – BUT NOT TOO MUCH
The Bloomberg Commodity Index rose to its highs of the day after Trump’s tweet about his call with Xi, in part because of gains in copper, crude oil and steel. Those moves suggest commodity traders also believe Trump may want to tamp down the rhetoric toward China before concerns about an escalating trade war causes economic activity to slow even more. “Up until now, the markets have been quite skeptical that a Trump, Xi meeting would happen,” Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management, told Bloomberg News. “This pivot to an attempt to get a deal done is certainly a lot of what’s driving” the markets now. It was just two weeks ago that the Bloomberg Commodity Index fell to its lowest level since early 2016. So while it’s 2.3% rebound since then is encouraging, it’s hardly time to break out the champagne. The index is still down more than 14% from last year’s high in May. And any de-escalating in trade talks won’t do anything to solve a global glut of commodities, especially in key materials such as oil. And while expectations have been raised for a breakthrough during the leaders’ face-to-face meeting, Commerce Secretary Wilbur Ross over the weekend played down the prospect of a significant deal in the near term, according to Bloomberg News’s Justin Sink. “I think the most that will come out of the G-20 might be an agreement to actively resume talks,” possibly with new ground rules and a schedule, Ross said in an interview Sunday with the Wall Street Journal.
TEA LEAVES
The news cycle for markets on Wednesday is likely to be dominated by what the Fed says about monetary policy at the conclusion of its two-day meeting. Markets are only pricing in about a 20% chance that the central bank lowers rates Wednesday, so the real focus will be on what the central bank says about the path of rates going forward, how dovish a message it sends and when the first rate cut of this cycle will come. “While market sentiment is leaning towards a rate cut as early as July, we suspect Chairman Powell will keep his options on the table without fully committing to any action in the near term,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. “In our view, escalating trade tensions won’t be enough for the Fed to send a strong signal for a rate cut in July and instead we will likely see some subtle changes in the statement and economic projections that tilt the committee’s views in a dovish direction.” Such a move is likely to spark even more criticism from Trump — or worse. Bloomberg News reported Tuesday that the White House explored the legality of demoting Powell in February to a governor, and the question is whether it would try to take that unprecedented action if the Fed doesn’t cut rates Wednesday or at least promise one is coming in July.
In 2010, when major central banks began debasing their currencies by slashing interest rates to near zero — or even below — and printing money to buy financial assets, Brazilian Finance Minister Guido Mantega famously labeled the moves nothing less than a “currency war.” Such talk died down in 2017 and much of 2018 as the focus turned to a synchronized global economic recovery, but Tuesday showed the war may be coming back in a big way.
The Bloomberg Euro Index fell after European Central Bank President Mario Draghi said that “ additional stimulus will be required” if the economic outlook doesn’t improve. U.S. President Donald Trump quickly accused Draghi of deliberately trying to weaken the euro, thereby “making it unfairly easier” for the euro zone to compete against the U.S. Draghi responded by saying the ECB doesn’t target the exchange rate. Draghi’s right, but he also knows that all else being equal, easier monetary policy tends to lead to a weaker currency. In many ways, central banks and government officials have few other choices than to seek a weaker currency to make their economies more competitive. It’s been a decade since the Great Recession, and despite a prolonged period of interest rates near zero or below and many trillions of dollars injected into the financial system through asset purchases by central banks, the global economy has yet to achieve anything akin to escape velocity. In fact, the International Monetary Fund is projecting the slowest pace of growth since 2009. There’s even a growing belief that the U.S. has abandoned its long-held strong dollar policy. Indeed, Trump has often voiced his preference for a weaker dollar, which ties into his demand that the Federal Reserve and Chair Jerome Powell lower interest rates immediately. Citigroup’s economists pointed out in a research note Tuesday that during a recent trip to Europe, a common question among clients was whether the Trump administration would actively aim for a weaker dollar in coming months.
Expensive Currency
A Fed index puts the value of a dollar at a record high against a basket of its peers
Don’t forget that China has allowed its yuan to weaken, and it’s probably only a matter of time before Japan’s Ministry of Finance tries to jawbone the yen lower after that currency’s recent strength. It’s not as if Trump is wrong to be concerned about the dollar. A record net 60% of investors in a Bank of America monthly survey released Tuesday say it’s overvalued, up from 44% in May. “While we continue to expect global growth to remain relatively stable, if trade wars push the global economy into a growth recession and leads to another round of quantitative easing, across advanced economies central banks, then trade wars could metastasize into currency wars as well,” the Citigroup economists wrote.
SO BEARISH THAT IT MIGHT BE BULLISH
Stocks globally had one of their best days of the year Tuesday, with the MSCI All-Country World Index soaring as much as 1.3%, proving yet again that markets tend to do what causes the most amount of pain. That’s based on the results of the Bank of America survey, which also revealed that investors are their most bearish since the financial crisis. Allocation to global equities fell 32 percentage points to a net 21% underweight. That may seem odd given the MSCI All-Country World Index is up 13.3% already this year and staging an impressive rebound from May’s rout, but the survey is hardly an outlier. The State Street Global Markets monthly index of investor confidence has been hovering around its record lows since the end of December. The Leuthold Group’s “Defensiveness Indicator,” which in essence measures the performance of gold relative to other commodities and safety-net stocks relative to their more highflying peers, now sits in the top quintile of all readings since 1990, according to Bloomberg News’s Sarah Ponczek. In essence, these measures suggest that rather than a sign of complacency, this year’s rally in equities has taken most everyone by surprise. And with stocks being so out of favor, any positive developments on the trade front or economy could propel them even higher. At 17.3 times earnings, the MSCI All-Country World Index is trading at a lower multiple than in 2106 and 2017, when it exceeded 20 times despite aggregate borrowing costs being lower today and central banks turning dovish.
NEGATIVE YIELDS KEEP EXPANDING
Draghi’s dovish comments did wonders for the sovereign bond market, sparking a rally that pushed yields lower almost everywhere around the world. French 10-year note yields fell to zero for the first time after Swedish and Austrian benchmarks turned negative, according to Bloomberg News’s Sid Verma. There’s a good chance that the next time it updates, the Bloomberg Barclays Global Aggregate Negative Yielding Debt Index will show that for the first time since mid-2016, more than $12 trillion of bonds have yields below zero. At the last update Monday, the amount totaled $11.8 trillion. “Fifty years I’ve been in this business, and never in 50 years did I think $12 trillion would be negative interest rates,” David Kotok, chairman of Cumberland Advisors, said on Bloomberg TV. On the surface, it makes no sense for investors to pay governments to lend them their money. But it’s not that simple. For some investors, those negative yields turn positive when hedged into dollars, generating yields that are similar to or even higher than U.S. Treasuries, according to Bloomberg Intelligence. But here’s the thing: yields have room to move even lower, if recent history is any guide. The average bond yields 1.58% based on the Bloomberg Barclays Global Aggregate Bond Index, well above the record low of 1.07% reached in July 2017. At this point, no one can be blamed for wanting to bet against the bond market, but it’s worth remembering what economist John Maynard Keynes once said: “The market can remain irrational much longer than I can remain solvent.”
ONE PHONE CALL LIFTS EMERGING MARKETS
It wasn’t all about Draghi on Tuesday. Emerging markets received an added boost when Trump tweeted that he had a “very good” phone conversation with Chinese counterpart Xi Jinping and that they would hold an “extended meeting” at the Group of 20 summit on June 28-29 in Osaka. The MSCI Emerging Markets Index of stocks jumped as much as 1.59% in its biggest gain since early January, outperforming the broader MSCI All-Country World Index, as Chinese assets led the way. The iShares MSCI China ETF soared 3.25% as the offshore yuan strengthened the most in two months. As the world’s second-largest economy, sentiment toward China has an outsized impact on emerging-market assets, which have been under pressure ever since Trump threatened to raise tariffs on China if Xi didn’t sit with him at the summit. Trade talks broke off last month after the U.S. accused China’s leaders of reneging on provisions of a tentative trade agreement. What investors liked about the latest developments is that the call appeared to have been made at the request of Trump, suggesting he may ready to soften his stance toward China to pave the way for a deal. “Trump’s words on the China meeting are more conciliatory,” which is positive for developing world assets, Cristian Maggio, who heads emerging-market strategy at TD Securities in London, told Bloomberg News. Still, “We’ve seen a number of conflicting messages from the Trump administration on trade, so I wouldn’t be surprised if we saw another conflicting message on this,” he said.
COMMODITIES CELEBRATE – BUT NOT TOO MUCH
The Bloomberg Commodity Index rose to its highs of the day after Trump’s tweet about his call with Xi, in part because of gains in copper, crude oil and steel. Those moves suggest commodity traders also believe Trump may want to tamp down the rhetoric toward China before concerns about an escalating trade war causes economic activity to slow even more. “Up until now, the markets have been quite skeptical that a Trump, Xi meeting would happen,” Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management, told Bloomberg News. “This pivot to an attempt to get a deal done is certainly a lot of what’s driving” the markets now. It was just two weeks ago that the Bloomberg Commodity Index fell to its lowest level since early 2016. So while it’s 2.3% rebound since then is encouraging, it’s hardly time to break out the champagne. The index is still down more than 14% from last year’s high in May. And any de-escalating in trade talks won’t do anything to solve a global glut of commodities, especially in key materials such as oil. And while expectations have been raised for a breakthrough during the leaders’ face-to-face meeting, Commerce Secretary Wilbur Ross over the weekend played down the prospect of a significant deal in the near term, according to Bloomberg News’s Justin Sink. “I think the most that will come out of the G-20 might be an agreement to actively resume talks,” possibly with new ground rules and a schedule, Ross said in an interview Sunday with the Wall Street Journal.
TEA LEAVES
The news cycle for markets on Wednesday is likely to be dominated by what the Fed says about monetary policy at the conclusion of its two-day meeting. Markets are only pricing in about a 20% chance that the central bank lowers rates Wednesday, so the real focus will be on what the central bank says about the path of rates going forward, how dovish a message it sends and when the first rate cut of this cycle will come. “While market sentiment is leaning towards a rate cut as early as July, we suspect Chairman Powell will keep his options on the table without fully committing to any action in the near term,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. “In our view, escalating trade tensions won’t be enough for the Fed to send a strong signal for a rate cut in July and instead we will likely see some subtle changes in the statement and economic projections that tilt the committee’s views in a dovish direction.” Such a move is likely to spark even more criticism from Trump — or worse. Bloomberg News reported Tuesday that the White House explored the legality of demoting Powell in February to a governor, and the question is whether it would try to take that unprecedented action if the Fed doesn’t cut rates Wednesday or at least promise one is coming in July.
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