What is happening to the world economy? Here are some answers, in seven charts. They reveal a world undergoing profound changes. The most important transformation of recent decades has been the declining weight of the high-income countries in global economic activity. The “great divergence” of the 19th and early 20th centuries, when today’s high-income economies leapt ahead of the rest of the world in terms of wealth and power, has gone into remarkably rapid reverse. Where once there was divergence, we now see a “great convergence”. Yet it is also a limited convergence. The change is all about the rise of Asia and, most importantly, of China.
U.S. Treasury’s International Capital Statistics Update
Tables and comments detailing foreign investment through May 31, 2017 with data released on July 18, 2017. This month, we take a look at foreign investors net purchases of U.S. assets.
Click for our complete collection of TIC charts.
A decent year in stocks. As the table below shows, the stock market is having a decent year.
Large cap stocks leading the way. As the next chart shows, large cap stocks (blue) are leading the way as small cap stocks (red) lag badly.
Market Cap weighted beats equal weight. Another way to show that large capitalized stocks are powering the overall market higher is the next chart. It shows the S&P 500 stocks market cap weighted (blue) and equal-weighted (orange). It is unusual for market cap to outperform equal weight by this degree.
Growth beats value. The chart below shows the S&P 500 pure growth (orange) and pure value (blue). “Pure” means the S&P 500 universe is out into one of these two groups. Growth is dominated by large capitalization technology stocks (i.e., FAANMG) which explain why pure growth is handily outperforming.
The best and worst sectors. The S&P 500 has 11 sectors. The two best (info tech and healthcare) and the two worst (energy and telecom) are shown below.
The most positive and negative influences on the S&P 500. The S&P also has 11 “x” sector indices. These are indices that exclude a specific sector. We show the two best and worst x-sectors below.
This is useful as it shows how much a sector influences the overall S&P 500 (by subtracting the “x sector from the overall S&P 500 in blue). So x-energy is up 12.93% versus 11.05% for the overall S&P 500. This means that the energy sector dragged down the overall S&P 500 1.88%. Conversely, x-info tech is up 8.76% against 11.05% for the overall S&P 500. This means the info tech sector has pushed up the overall S&P 500 2.29%.
The interactive chart below can be used to view the total returns for any or all of the 34 indexes provided under the “select an index” dropdown menu. The date range can be adjusted at the bottom of the chart.
The chart below shows the 35 categories that Hedge Fund Research (HFR) tracks on a daily basis (HFRX), None are beating the MSCI World (top green) and the S&P 500 (top blue).
The best performing HFR category is Fundamental Growth Index (red). Four are down for the year, Macro/CTA (dark green), Macro/CTA in Euros (brown), Macro Systemic Diversified CTA (light blue) and the MLP (energy) Index (light green) as the worst.
The best performing HFR category is Fundamental Growth Index (top red). Four categories are down on the year; Macro/CTA (dark green), Macro/CTA in Euros (brown), Macro Systemic Diversified CTA (light blue) and the MLP (energy) Index (light green) is the worst.
Bitcoin continues to fascinate observers and frustrate some owners with its exceptionally high volatility in recent weeks. Now back above $2000, Bitcoin has fought off two sharp declines since the end of May.
One contributor to higher volatility is the dramatic fall in volume after the regulatory intervention by the Peoples Bank of China. See the second tab in the story point below. Volume fell by more than 90% and has not recovered.
If you click to the third tab you can see the share of volume by currency. The USD has been slowly gaining share since the intervention but the CNY still accounts for the 2nd largest share of volume followed by EUR and JPY.
The chart below shows various tenors of interest rates since the initial FOMC hike on December 17, 2015. 10-year yields are almost exactly where they were prior to this hike. 30-year yields are actually lower over this time period.
At the same time, yields on the short end of the curve have marched much higher. A look at 3-month T-bills shows yields have shot up 84 basis points.
The flattening of the yield curve was a topic of a recent Conference Call.
The Federal Funds market is showing no signs of reviving. The Fed still targets the federal fund’s rate. They do this by using tools like fixed rate reverse repos and Interest on Excess Reserves (IOER). This suggests they think it will return some day. But as the chart below shows, this market’s volume is still down 90% from its peak and still bumping around a 40 year low. It is showing no signs of reviving. Should the Fed consider abandoning this target for another interest rate benchmark?
Measuring Political Risk. The Economist Intelligent Unit compiles Political Risk measures for 132 countries at last count. The next chart shows the 10 countries with the lowest political risk. Pretty standard stuff (Denmark then Luxembourg are the lowest).
The next chart shows the 10 countries with the highest political risk. Britain is on this list! Right above it is the Congo and Iraq. Right below it is Cambodia and El Salvador.
The reason is understandable, Brexit. But Britain with a higher risk that Cambodia? Similar to the Congo? We would argue this rating is more about the “intellectuals” at The Economist making a political statement about their disapproval of Brexit more than an honest assessment of Britain’s actual political risk.
Using the interactive chart below, you can view the political risk for any country over any period you choose.
How safe is Trump? The bettors are giving him much better than a 50% probability of stay in office until the end of next year.
The blue line below shows a 50-day moving average of the total trading volume in actual high-yield bonds as measured by TRACE. In the 50 days ending July 19, $7.66B of high yield bonds traded on an average day.
The green line shows the 50-day average of the total dollar volume (price multiplied by shares) for the 25 largest high-yield ETFs. HYG accounts for roughly two-thirds of this total. In the 50 days ending July 19, $1.56B of high-yield ETFs traded on an average day.
The red line, which shows the ratio of the green line to the blue line, shows the ETF market is currently 20% the size of the underlying cash market.
This is how one-fifth of the high-yield market now trades.
By contrast. the chart below shows the same metric for investment grade. Only 4% of investment grade market trading is driven by ETFs. Other than high yield, this is a large number when compared to other ETF sectors. It shows how dominant high yield is relative to its underlying cash market.
The black market rate of Venezuela’s currency continues to collapse resulting in hyperinflation and a worsening situation in the country. Note that in the last year the black market rate went from 1,010 Bolivars to buy a dollar to 8,481 Bolivars today. A drop of 88%.
At this rate of currency depreciation over the last year, prices in Venezuela would need to rise 833% in the last year to keep pace with inflation. This is not happening with wages. But, as the next chart shows, the Venezuelan stock market is keeping pace with this hyperinflation rate (for now). It went up by 970% in the last year (blue) leading to a 27% currency adjusted rate (red now). Venezuela’s stock market has 15 liquid stocks with Mercantil Servicios Financieros, C.A. and Banco Provincial, S.A. account for 85% of their stock market’s capitalization. Mercantil Servicios is a junk rated credit and Banco Provincial is no longer rated.
Financial Times – Dollar sinks on failure of healthcare reform
US currency hits 10-month low as hopes fade for Trump economic stimulus
The dollar has been a barometer of prospects for the Trump administration’s efforts to enact pro-growth policies of tax cuts and fiscal stimulus. As the administration has become bogged down in the past six months handling healthcare reform and dealing with the Russia scandal, the reserve currency has steadily retreated. Lacklustre economic data, notably a weaker tone for inflation and retail sales for June, have prompted the bond market to reduce the likelihood of further interest rate increases from the US Federal Reserve.
The WSJ Dollar Index has now unwound the boost it got from the election of Donald Trump in November, and is down about 6.5% this year. The greenback’s key counterpart, the euro, is up close to 10% in 2017. Early Tuesday, the euro rose above $1.15 for the first time since May 2016, reaching the top of the range it has been in since the start of 2015 under the influence of monetary-policy divergence between Europe and the U.S. The transformation in the dollar and euro’s relative fortunes in 2017 has been remarkable. The focus at the start of the year was on the U.S. Federal Reserve and its efforts to raise interest rates; now the European Central Bank has stolen the spotlight as it tacks gently away from ultraloose policy settings.
No rate hikes are coming at the July, September or November Fed FOMC meetings. The earliest rate hike might be at the December 13, 2017 FOMC meeting, but even that has a less than 50% probability as of today. I’ll update those probabilities using my proprietary models in the weeks and months ahead. The white flag of surrender came in two public comments by two of the only four FOMC members whose opinions really count. The four voting members of the FOMC worth listening to are Janet Yellen, Stan Fischer, Bill Dudley and Lael Brainard.
Donald Trump’s appeal last November was linked to two factors. Both are now putting the valuation bubble in equities at risk. The first factor was his emphasis on stimulus — tax reform, infrastructure spending and fewer regulations — that has pushed markets to higher and higher levels. The new administration was targeting at least 3 percent annual growth in real gross domestic product, well in excess of levels that the U.S. economy has experienced since the financial crisis. The second component of the Trump campaign presented the U.S. trade deficit as a sign that the country was being treated unfairly by its trading partners. The remedy was to impose higher tariffs on imports, with China and Mexico mentioned as specific targets. Fear that the trade restrictions the candidate threatened during the campaign would dominate the incipient administration was the reason U.S. equity futures plunged during the hours immediately after the election results were known. Retaliation by trading partners to new tariffs would have slowed global economic growth and demand, resulting in a headwind for equities.
Still, the market’s high valuation in the face of declining earnings growth and a tepid U.S. economy means some of the rally was likely driven by policy expectations. More than half of the respondents to a survey of nearly 1,100 clients conducted by Cornerstone Macro last month said they expected Congress to pass a significant tax bill before the 2018 midterm elections. The question to ask, says Cornerstone’s Andy Laperriere, is what would happen to stocks if all investors gave up on a tax cut? The answer: They would probably go down.
I signed the letter. Here’s why.
The inflation target helps define how much stimulus the Fed can deliver when it lowers interest rates to zero (a boundary below which the central bank has been unwilling to go). In a higher-inflation environment, a nominal fed funds rate of zero results in a lower real, net-of-anticipated-inflation rate — the rate that economists typically see as most relevant for consumer and business decisions. If, for example, people expect inflation to be 3 percent, then a zero nominal rate translates into a negative 3 percent real rate — a full percentage point lower than the Fed could achieve if expected inflation were 2 percent.
Just under a week from now, the Organization of Petroleum Exporting Countries will meet in Vienna to decide whether to extend the ﬁrst oil production curbs in eight years in order to eliminate a glut. The group will evaluate data, described below, that highlights two key details: First, Saudi Arabia is shouldering much of the burden. Second, non-member producers – who pledged reductions of their own – haven’t delivered in full.
At first glance, OPEC’s cuts haven’t worked — global oil inventories remain well above normal levels. But the policy’s made a difference where it really counts: juicing the coffers of finance ministries from Baghdad to Caracas. The resurgent flow of petrodollars explains why Saudi Arabia and Russia have largely convinced everyone else in the deal to extend the production cuts another nine months to the end of March 2018.
Saudi Arabia is pushing the OPEC oil cartel and other big producers gathered here this week to extend crude production cuts for another nine months. The reason: the timing of the blockbuster IPO of Saudi Arabian Oil Co., people familiar with the matter said. The Saudis want higher oil prices well into 2018 to support the initial public offering of their state-owned oil company, Aramco, people familiar with the matter said. The initial offering of 5% of the company is being timed for some time in 2018 and has been billed as the biggest ever, with valuations reaching over $2 trillion.
OPEC and its allies were close to an agreement to extend their oil-production cuts for another nine months as they seek to prop up prices and revive their economies. While ministers gathering in Vienna still planned to discuss other options — a shorter deal for six months or curbs lasting for the whole of next year — consensus was building around an agreement that runs through March 2018.