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Central banks should be ‘terrified’ of equity markets

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

Celebrated hedge fund manager Paul Tudor Jones believes Federal Reserve chairwoman Janet Yellen should be "terrified" of U.S. equity markets,

"The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be 'terrifying' to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference … Last week, Guggenheim Partner's Scott Minerd said he expected a "significant correction" this summer or early fall. Philip Yang, a macro manager who has run Willowbridge Associates since 1988, sees a stock plunge of between 20 and 40 per cent, according to people familiar with his thinking."

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"Paul Tudor Jones Says U.S. Stocks Should 'Terrify' Janet Yellen" – Bloomberg

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Crude markets are working towards their worst week in the past month, but Goldman Sachs believes investors are ignoring fundamentals and trading solely on technical factors,

"Goldman Sachs Group Inc. says there's no fundamental evidence in the oil market to justify this week's selloff in prices. The bank finds the pace of declines in U.S. crude inventories encouraging, with an acceleration in draw downs expected through the second quarter as OPEC cuts output and demand grows, according to a report dated April 20. Meanwhile, a mid-week slide in prices was driven by crude trading through its 50-day and 100-day moving averages, Goldman said."

"Goldman Says Ignore the Technical, Savor the Fundamental on Oil" – Bloomberg
"OPEC cut doubts put oil on track for biggest weekly drop in a month" – Reuters
"@LizAnnSonders Interesting chart highlighting oil price breakeven levels by region/field @JavierBlas2 @DallasFed @WSJ @SoberLook " – (really good chart) Twitter

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If I were listing news stories in order of importance, this one would go first. But, Report on Business readers continue to inexplicably ignore stories about the Chinese economy even though it drives resource prices and a big portion of the S&P/TSX Composite. Every time I put the word 'China' in a headline, the column is guaranteed to be met with widespread apathy.

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The Financial Times writes,

"For China, an ebullient first quarter of GDP growth is giving way to anxieties that the world's second-largest economy may have peaked. This belief has already depressed the prices of key commodities, upon which the fortunes of several emerging markets depend. All this, coupled with mounting geopolitical risks in North Korea and Syria, combined this week to push down the yield on the US 10-year Treasury note — a bellwether for the world's economic prospects — to its lowest levels since November last year. Lower Treasury yields reveal declining confidence in the US and, by extension, global growth."

A compelling argument can be made the reflation trade of the past nine months was driven primarily by China re-opening the credit spigots, not anything happening in the U.S.

"Global investor sentiment will turn ultimately on China" – Financial Times
"Ignore China's Credit Risks at Your Peril, Says Top Manager" – Bloomberg

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Tweet of the Day: "@macleans It's hard to shake the feeling that when it comes to Ontario's new housing measures, the government is flying blind. ow.ly/hNGf30b1XFG " – Twitter

Diversion: Bank robber, jailhouse lawyer, named professor at Georgetown University,

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"From Prisoner to Professor: Convicted Bank Robber Hired to Teach at Georgetown Law" – NBC News

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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