Every week JP Morgan surveys their fixed income clients, asking them if they are overweight duration (green), underweight duration (red) or neutral (not shown).
This week’s survey shows 42% are underweight, just off the highest such weighting since September 2005. Subtracting the underweight percentage from the overweight, the bottom panel of the chart shows a 31% “net underweight” position. This is just off the -39% net underweight position on October 2, which was the largest net short since 2006. In other words, portfolio managers are extremely bearish on bonds.
A horizontal line in the bottom panel of the chart above helps denote each time the net position of the Morgan survey crosses below -25%. This is a fairly extreme level of bearishness.
So what happens to yields when managers become this bearish? The chart below shows the cumulative change in yields from the point when the net position first crosses below -25% until it hits 0%. The blue line shows the change in yields since October 2, when net positions last crossed below -25%.
Note that whenever this survey crosses below -25%, yields stop going up.
The black line below shows 10-year yields. The various colored lines are quarterly forecasts compiled by Bloomberg from roughly 70 economists.
Note that each subsequent period’s forecast is higher than the last. This means economists are almost always bearish. The further out into the future one goes, the higher their yield forecasts get.
Actual yields rarely cross above any of the forecasts. They did in March and again in July. Soon after that yields peaked and fell.
Will this pattern repeat now that yields are approaching forecasts?
Long-term Treasury ETFs saw record inflows leading up to the September FOMC meeting. Yields failed to move lower and are rising sharply today. Some investors had already begun to lose faith before today’s move. The chart below shows 5-day net flows swung from +$1.9 billion on September 13 to -$519 million as of September 26.
Today’s losses might shake out a few more investors. The drop means all new inflows from August 17 on are now seeing losses. The price on the chart is as of 2pm eastern on September 27.
As the chart below shows, shortly after the Brexit vote last year both the Stoxx Europe 600 (red line) and the S&P 500 (blue line) fell sharply. After that initial fall, they have advanced 11.34% and 18.29%, respectively.
The MSCI World Stock Indices are all also up after initially falling. The MSCI World Index (blue line below) is up 20% while the MSCI Emerging Market Index (red line below) is up 33.45%.
European stocks have followed a similar pattern. However, the U.K. (green line below) lags the rest of the countries in Europe, up just 9.32% since the Brexit vote.
Use the interactive chart below to view returns for all the MSCI stock indices.
We have aggregated a series of metrics assessing business innovation, regulatory environment, energy access, and renewable energies. Data sources range from The World Bank to mining social media and search trends.
Higher index values indicate better conditions for economic growth in the new world of technology and renewables.
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.
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 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.
Merger Arbitrage (Human) vs Algo Hedge Fund Returns: The two charts below show the ends of the spectrum. The first chart shows the “algo and bot” driven hedge funds are doing poorly relative to the S&P 500 (blue). The second chart shows arguably a human-based activity, merger arbitrage. Of the more than 30 categories HFR tracks, this is the best performing category over the last three years, beating the global bond market (orange) and the MSCI world index (light green), but lagging the S&P 500 (blue).
Apple, Disney and Berkshire Hathaway are regarded as three most highly thought of stocks to hold for the long-term. The charts below show a ratio of the stock price to the S&P 500 on a total return basis. All three have peaked years ago against the S&P 500 and collectively have been in-line to under-performing the S&P 500 for many years. Is this yet another reason to give up on stock picking and buy a passive index fund?
Heavy Long Positioning In EM Currencies Finally Losing Ground To Developed Currencies?
ChinaIncreased Its US Treasury Holdings To $1.09 trillion in March.
Selling volatility through leveraged ETFshas fallen out of favor this month. The past 20 days have seen $218 million flow out of short volatility ETFs and $241 million flow into leveraged long volatility ETFs.
The short volatility trade has performed well even as ETF flows turned against the short volatility trade. Leveraged short volatility ETFs are +33% since mid-April. Leveraged long volatility ETFs are -22% over that same period.
Long And Short Crude ETF Assets And Flows.
Long Energy ETF flows continue to increase …
… As cumulative flows in long crude oil ETFs have dipped since February 2016.
A Look at Credit Spreads.
Gas Prices Remain Stable.
Interest Rates: In past weeks we looked at the long and short ends of the yield curve. This week we highlight Moody’s Aaa yields since 1913. Also of note on these charts are the recessions shown in gray.
President’s Approval Comparision: The black line on the bottom is of this interactive chat is Trump’s approval rating. While he has the worst approval rating for the first 115 days, he has been trending sideways since the week after he took office. So, nothing has changed. Is this about to change?
MarketWatch –Bitcoin carries digital-currency market capitalization past $30 billion
The combined market capitalization of all cryptocurrencies late Monday surpassed $30 billion for the first time, according to digital currency tracking website Coin Market Cap. That means the size of the nascent digital currency market is now worth more than twice the value of Twitter Inc and is equal to nearly half the market capitalization of Netflix Inc.
S&P Global Platts – US shale oil rebound shakes OPEC
Even with oil prices hovering around the $50/b mark, the US rig count has increased rapidly while E&P companies continue to record substantial reductions in well drilling costs. The increase in new well oil production per rig demonstrates the extraordinary gains the shale drillers have made. In April 2014, new well oil production per rig on the Bakken was recorded at 492 barrels and on the Eagle Ford at 463 barrels. In April this year, the figures are 1,067 barrels and 1,448 barrels, respectively. Moreover, US E&P companies remain confident they can continue to eke further efficiencies out of their seemingly ever-evolving factory-mode production processes.
ETF.COM (April 24 2017) – Energy ETFs A Bargain If Citi’s $60 Oil Call Is Right
The cartel meets on May 25 to discuss whether to extend the temporary production curbs put in place at the start of the year. Those curbs―a six-month output reduction of 1.2 million barrels per day from OPEC countries and 558,000 barrels per day from a group of non-OPEC countries―were aimed at reducing the enormous glut of inventories that had accumulated during the oil bust of the last couple of years. Key OPEC sources recently suggested that the cuts are likely to be extended. Kuwait’s oil minister, who expects the supply agreement to be renewed for another six months, said that he is satisfied with the compliance from OPEC and non-OPEC countries.
Mainstay Investments – High-Yield Default Rates Drop
High-yield default rates are moving lower, according to Moody’s. A growing economy, a recovery in profits, and oil prices well above winter 2016 levels have supported a spread environment, somewhat reminiscent of the growing economies of the mid-1990s and mid-2000s, although spreads were tighter then. Moody’s trailing 12-month global speculative-grade default rate fell to 3.8% in March, down from its recent peak, and is projected to average 2.5% in the fourth quarter by the research and ratings firm. The trailing 12-month U.S. speculative-grade default rate fell to 4.7% in March and is projected to average 3.1%.
CNBC – The industry that opposed Trump the most has performed best in his first 100 days
Despite loud opposition from tech firms to many of Trump’s policies, investors have hoisted many tech stocks to all-time highs since the election. Shares of Amazon, Apple, Facebook, Microsoft and Alphabet have hit one all-time high after another in 2017. The Nasdaq 100 has hit higher levels than ever, and the IPO market hit a seven-quarter high in terms of capital raised, according to Renaissance Capital.
The Financial Times – Nasdaq Composite breaches 6,000 for the first time Fang stocks — Facebook, Amazon, Netflix and Google — lead the charge
The Nasdaq Composite breached the 6,000 level for the first time on Tuesday and extended its double -digit gain for the year as investors focus on owning companies with strong growth prospects. The tech-heavy benchmark climbed as much as 0.7 per cent to 6,022 early in the day after closing at a record high in the previous session. Renewed appetite for technology stocks and a rally in the so-called Fang stocks — Facebook, Amazon, Netflix and Google — has spurred a near 12 per cent gain for the Nasdaq in 2017, well ahead of the S&P 500’s rise of 6.5 per cent. Within the main S&P 500 sectors, technology has gained nearly 14 per cent in 2017, well ahead of other big industry groups. Tech has prospered as investors have sought fast-growing companies against the backdrop of questions over the outlook for the US economy and whether the Trump administration can push fiscal stimulus measures through Congress.
ETF Trends – Oil ETFs Drubbed, But Some Argue for Upside
For example, USO, one of the most heavily traded commodities exchange traded products of any stripe, slid more than 5%, but some market observers believe oil’s most recent plunge is not justified by poor fundamentals. In fact, Goldman Sachs opines that oil fundamentals are actually decent. “Goldman is reiterating its confidence in oil at a time when investors are fretting over whether U.S. production, which has climbed to the highest since August 2015, will undermine curbs by the Organization of Petroleum Exporting Countries and its allies,” reports Serene Cheong for Bloomberg. “After posting three straight weekly gains on expectations OPEC will extend its supply cuts, crude is now set for a drop this week following a decline of more than 3.5 percent on Wednesday.” Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.