Market Outlook | February 27, 2017

 “There is no terror in a bang, only in the anticipation of it.” Alfred Hitchcock (1899-1980)

Unanimous Cheering

The Dow Jones Index’s eleven straight trading day winning streak has attracted even more attention from mainstream observers, as well as typical followers of financial markets.  Yet, the age-old narrative is unsurprising, as stocks roaring to record highs with ultra-muted volatility is becoming a norm. Less relevant is the chatter of the pre or post Trump, which still remains mysterious given pending policies. Frankly, taking political credit for the current bull market is hard to snatch from Central Banks, who have engineered the current climate. In fact, in coordinated effort, the central banks have ensured that lower rates provide further fuel to equity prices.

The theatrics of Dow 20,000 or the current winning streak still seems less meaningful for the real economy, radical political rifts and middle class woes in developed markets. Not to mention, an elevation of share prices of very large companies is not going to derail the growing populist movements, either.  Of course, it buys time for political leaders and it provides some bragging rights for select circles while encouraging risk-taking for those solely focused on capital appreciation.

Bond’s Concern

As March is upon us, some will look to last February when the markets marked a low after sharp selloffs. For now, crisis or panic reactions seem too distant for some, while numbing to others. Invincibility can form in a misleading manner, but there are enough doubts to the status-quo when digging deeper.  

Basically the Trump and Brexit results were very short-lived, at least, for followers of equity markets. Yet, the bond markets have made it clear about their cautious and low growth stance. First, yields are still quite low from the US to Europe. German bond yields are near zero or negative, and US 10 year Treasury Yields remain below 2.50%, which stresses the cautious stance regarding global growth.

“The two-year Schatz yield fell 5 bps to a record low of minus 0.95 percent. It is set to end the week around 15 basis points lower - a steeper drop than in any single week since December 2011.” (Reuters, February 24, 2017)

Secondly, there is still demand for safety, and, in terms of Europe, overreliance on central bank stimulus is a tangible theme. These resounding signs of confidence are apparent despite what has worked in the past in gluing together a bullish market.  Thirdly, the Dollar has been in a holding pattern without a major directional move. Finally, commodities are awaiting a notable catalyst for a directional move. Crude’s supply-demand dynamics are not fully convincing for a surge in prices, but shrinking supply is an anticipated factor.

Anticipated Turn

So with European troubles being dismissed and failing to cause major turbulence, there is a chance that the EU crisis can resurface anytime now. The Dow's streak raises the stakes much higher and, of course, disappointments are inevitable. One would need to go back to 2015 to realize a notable panic in August of that year. For those that forgot, here is the reminder of a sell-off sparked by Chinese related fears (Wiki http://bit.ly/2lp8qjT).

At this stage, there are many catalysts for a sour turn, from further rushes to safe havens to an unconvincing real economy growth to failing stimulus attempts. Wanting more than a short-term correction that can come and go, investors are waiting for a long-term picture of sustainable policies. In terms of  tangible fiscal or coordinated pro-business polices, market participants are forced to stand by patiently. The rise of asset prices and current market narrative are not providing the answers of a sustainable economy and sound policies. In the very near-term, the Dow Jones Index movements may capture ones attention, but the populist movement is reminding us that tangible growth is desperately awaited. In fact, low interest rates and higher stocks have hardly impressed or impacted the average worker in the Western World.

Article Quotes

“Bond traders are calling the Federal Reserve’s bluff. For weeks now, everyone from Janet Yellen to Fed newcomer Patrick Harker has been trying to jawbone investors into believing an interest-rate increase in March is on the table. That the meeting is “live.” Yet try as they might, the bond market seems unconvinced there’s much behind the tough talk. With less than three weeks to go, traders see slightly more than a one-in-three chance the central bank raises rates. That’s well short of the 50 percent minimum that has predicated every rate hike in the past quarter-century, according to data compiled by Bianco Research. Reasons for the skepticism are varied, but the one that stands out is the simple fact that Fed officials are running out of time to make their case. The February jobs report comes five days before Fed officials gather and inflation data will be released mere hours before their decision is announced. Both key metrics come out during the Fed’s public blackout period, which starts on March 4, leaving traders in the dark about the central bank’s intentions.” (Bloomberg, February 26, 2017)

 

“A new era of low crude prices and stricter regulations on climate change is pushing energy companies and resource-rich governments to confront the possibility that some fossil-fuel resources are likely to be left in the ground. In a signal that the threat is growing more serious, Exxon Mobil Corp. (XOM) is expected in the coming week to disclose that as much as 3.6 billion barrels of oil that it planned to produce in Canada in the next few decades is no longer profitable to extract. The acknowledgment by Exxon, after the company spent about $20 billion to put the oil sands at the center of its growth plans, highlights how dramatically expectations have changed about the future prospects of the region. Once considered a safe bet, Canada's vast deposits are emerging as among the first and most visible reserves at risk of being stranded by a combination of high costs, low prices and tough new environmental rules.” (Wall Street Journal, February 17, 2017)

Key Levels: (Prices as of Close: February 24, 2017)

S&P 500 Index [2,367.34] – Interestingly, the intra-day highs of 2,368.26 set on February 23, 2017 marked the all-time highs.  Record highs, only a few ticks removed, further reminds us of the unwavering bull market.

Crude (Spot) [$53.99] – Based on the last two summer responses, Crude prices have convinced participants on its resilience to stay above $40. As for the upside potential, buyers are wondering if prices can bust above $54 after settling above $50 for the last few months.

Gold [$1,253.65] – There is confidence on Gold prices staying above $1,150, but doubts remain about revisiting July 6, 2016 highs of $1,366.25.

DXY – US Dollar Index [101.09] –   Since May 2016, the Dollar has shown resilience and strength. Amazingly, it was in May 2011 when DXY bottomed at 72; it has ran up over 40% since then. When commodities and EM FX weakened, the Dollar accelerated further.

US 10 Year Treasury Yields [2.31%] –    For the last four years, staying above 3% has not quite materialized, leaving investors to think higher yields remain challenging. Lack of inflation and positive real economy growth numbers can drive 10 year even lower in the coming years.

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