A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Retail investors fled the equity markets in terror of central bank policy in late 2018 and never really came back despite the massive bounce from the Christmas Eve lows.
Markets have fallen, recovered as the Fed and Bank of Canada moved themselves to the sidelines, and have now leveled off and are seemingly in search of new direction.
Where Canada is concerned, Nordea Bank, a Scandanavian financial services company, is recommending bets against the loonie because of pressure on manufacturing activity,
“Canadian PMI momentum will most likely suffer hard over the next 3 months, judged from import PMIs from trading partners. Will Poloz have to throw in the towel completely in April? We think so.. We also keep our HUF/CAD longs alive for the same reason (even if the HUF momentum seems a little exhausted by now).”
“@SBarlow_ROB Nordea: "Canadian [manufacturing] PMI momentum will most likely suffer hard over the next 3 months" – (research excerpt, chart) Twitter
“Things could go from bad to far worse, but it wouldn’t be Canada’s ‘Big Short’: BMO” – Babad, Report on Business
“One by One, Global Bond Markets Are Flashing the Same Warning” – Bloomberg
“Oil Steady After Biggest Loss in Three Weeks Amid Economy Fears” – Bloomberg
“Foreign investors sell $1.6 billion of China stocks on Monday, the biggest single-day sale on record” – Bloomberg
“@SBarlow_ROB C: “This seems to be the result of lower resilience of financial conditions to further hikes than had previously been supposed.” – (Citi research excerpt) Twitter
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Morgan Stanley strategist Adam Richmond is recommending short positions on U.S. high-yield corporate debt.
This is more important than it sounds for equity investors – a sell-off in high yield bonds has been a reliable indicator of cyclical market peaks in the past, predicting eight of the past nine bear markets according to Credit Suisse global strategist Andrew Garthwaite.
From Morgan Stanley,
“We exited our bullish tactical call on credit at the end of February and none of our macro concerns have changed since then… while some fundamental metrics don’t look as extreme in HY, certain "qualitative" measures are arguably more problematic, such as higher exposure to sectors with long-term operational challenges … don't forget HY spreads widened sharply in all 3 growth scares in this cycle (2011, 2016, and 4Q18)… the front end of the CDX HY market is priced for very few defaults. Shorting CDX HY25 to expiry would make money if the index sees just 4 defaults over the next ~2 years … we do not think it is unreasonable to assume a more notable rise in defaults looking out into 2020.”
“@SBarlow_ROB MS: Short HY” – (research excerpt) Twitter
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The inversion of the U.S. Treasury curve – 10-year yields fell below three-year yields – caused some equity selling Friday, but I’m personally not ready to panic. Previous central bank monetary stimulus, and a growing older population that is creating high levels of demand for longer term bonds may have distorted the relationship between curve inversions and upcoming recessions.
“There’s Danger in Misreading the Inverted Yield Curve” – El Erian, Bloomberg
“ @johnauthers For those asking if 3month-10year inversion is a good recession indicator - yes it is. In the post-Bretton Woods era, no false negatives, and the only possible false positive came briefly in the extreme conditions of the 1998 LTCM crisis:” – (chart) Twitter
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Tweet of the Day:
Diversion: “Full Actors Roundtable: Tom Hanks, Gary Oldman, John Boyega, James Franco” – The Hollywood Reporter, Youtube
Scott Barlow