Most traders and investors know the feeling of the man on the roof this year. Longs and Shorts. Bonds and Equities. Currencies and Commodities. This has been another year to worry more and sleep less. The markets are unsettled. Just look to the reactions surrounding the ECB actions and Mario Draghi’s discussion on Wednesday. The euro traded in a 3% range and major European equity indexes swung 5% intra-day. Investors are clearly growing more skittish about the liquidity left in the Central Bank’s punchbowl.
But one thing the ECB’s actions (and other Central Bank speak) have done is to help credit. Especially the bottom of the barrel credit risks. Look at the mining sector where spreads have improved by 300 basis points. Buying of investment grade credit by the ECB will tighten up credit all around the world unless corporations use the tighter spreads to flood the market with too much new paper. No doubt some paper will be issued to help mining and energy companies survive while healthier companies issue debt to repurchase more of their equity. Credit has been the ramrod since February to push equity prices higher. Rising oil prices may have been the spark to lift credit, but you can’t deny the size and significant flows into the buying of corporate bonds and their ETFs.
While the equity bounce nears a 10% move in the S&P 500, many investors, including me, would like to see higher quality conditions in the move. But it is what it is—and this market has two weeks left before the 1st quarter is in the books. Year-to-date leaders include Consumer Staples, Utilities, Telecom Services, Garbage companies and Gold Miners. At the bottom YTD you will find Biotech, Healthcare and Financial stocks. This is not a market where I would want to push all of my chips into the middle of the table. I would suggest being highly selective in your assets, sectors and individual names. Don’t be that roofer right now.
Looking at the YTD charts, crude oil has likely had a strong hand in pulling Energy stocks, Junk Bonds and the S&P 500 higher…
The move last week in Energy was helped by both the IEA and Goldman Sachs become more positive on the supply demand situation and its effect on the downside scenario for pricing…
@georgepearkes: DB charts IEA estimates for the supply/demand gap…finally negative.
Just the one-month move in oil has led to a contagious effect in the Metals and Mining stocks as well as in those Commodity-based economies most directly affected…
Back to the ECB’s direct impact on tightening global credit spreads…
The bazooka that Mario Draghi fired last week will have an impact far beyond European shores. By including corporate bonds in the European Central Bank’s quantitative easing programme for the first time, the bank’s president reduced interest rates not just on eurozone debt but on blue-chip corporate bonds in the US, too.
His intervention gives another fillip to America’s investment-grade corporate bond market. It has also been boosted in the past few weeks because the recession fear that gripped markets at the start of the year has subsided somewhat. An issue for investors now is whether they should go with the flow and stash away some corporate bonds themselves…
Mr. Draghi is not buying US bonds, of course, but by driving down rates in the eurozone, he will be making US corporate debt relatively more attractive to yield-hungry investors. Also, a decent slug of the US corporate bond market is made up of European multinationals issuing bonds in dollars, and if the ECB is buying the rest of their debt, that makes these companies’ US issues look safer and more attractive.
In the U.S., High Yield and High Grade Credit ETF prices were running well ahead of the announcement before they got the ECB kick higher…
Higher energy prices and investors seeking higher stable returns have helped the corporate credit ETFs off of their February lows.
Regarding the recent improvement in High Yield spreads…
High yield spreads are now flattish year to date, a very sharp improvement from 101bp average widening per our last report a couple of weeks back. What particularly stands out is the Mining sector where spreads have now tightened sharply by 320bp ytd! More than one-third of the sectors high yield spreads are now tighter ytd. After net high yield bond outflows of $16.8 bil in the first six weeks of the year, there have been cumulative inflows of $9.5 bil over the past three weeks.
And why do investment grade companies like tighter credit spreads? Stock Buybacks…
Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year.
Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever…
“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”
Of course with the corporate earnings calendar coming to a close, we are reminded that the Stock Repo window will also be shutting down…
@CapitalObserver: The buyback window closes Friday for most companies
With the Q1 drawing to a close for investors, here is a look at the major risk asset class performances. Few would have bet on 12/31 that EM Debt and Stocks would be leading the gains…
As for where bonuses will be made this quarter for Portfolio Managers, they will have needed a barbell approach to their stock and sector allocations…
But keep an open mind about one side of that barbell…
“What’s the difference between the Chinese driving a massive short-covering rally in the miners and the ECB doing the same with European banks?” asked the CIO, heavily long the latter, not waiting for an answer. “Nothing.” Glencore (LON:GLEN) bottomed at 69 and now trades 142. The Euro Stoxx banking index bottomed at 95 and now trades 115. “Are people right to be short miners over the long-term? Yes. Are they right to be short European banks? Yes. Will they get steamrolled this month?” he asked, breathless. “The ambulances will be lined up.”
(EricPeters/WkndNotes)
As for the bottom YTD sectors and major assets…
Oil, Gold and Metals have had a good bounce, but the long term performance still has quite a bit to fix…
Banks have had enough trouble with negative rates, flattening spreads and government regulation. Now one of the top bankers is worrying about aggressive lending standards…
The head of M&T Bank has sounded the alarm about an “intensely competitive, almost frothy” market for US loans, the latest warning about loosening credit standards.
Robert Wilmers, who has been at the helm of the New York bank for 33 years, said prices for some commercial loans — including for property — were being pushed downward to “below minimum sustainable levels of profitability”, reports Alistair Gray in New York…
“The markets across our regional footprint are intensely competitive, almost frothy, with both pricing and loan structure coming under pressure,” Mr. Wilmers wrote in his annual letter to shareholders.
“Loan features such as interest-only payments for the life of the loan and fixed rates for long periods of 10 to 15 years have re-emerged.”
1.4 million Brazilians took to the streets this weekend to support the impeachment of their President…
(Oglobo)
But with an approval rating near the single digits, the stock market is cheering for a change as Brazilian equities surge…
Our hometown burrito shop has had some issues. Now the board is setting the next big payday when the stock price moves above $700 per share…
Chipotle Mexican Grill Inc (NYSE:CMG). executives now have an even more direct personal stake in the burrito maker’s recovery: their pay.
Part of their future compensation will be directly tied to the company’s share price performance, according to a securities filing late Friday.
Chipotle, which has suffered from a series of illness outbreaks tied to its restaurants last year, has seen its shares fall roughly 23% in the past year, triggering a number of shareholder lawsuits…
The board’s compensation committee said in Friday’s filing that share prices would have to return to above $700 for 30 consecutive days to trigger the new stock awards, which currently represents a considerable climb. Chipotle shares on Friday slipped 0.2% to $506.80 in after-hours trading.
Now that you are hungry, how about a very big cup (and handle) of Coca-Cola Company (NYSE:KO) which is now making all-time highs…
Big Transaction Alert: The largest real estate purchase ever for a Chinese buyer in the United States…
The Blackstone Group LP (NYSE:BX) agreed to sell Strategic Hotels & Resorts Inc. to China’s Anbang Insurance Group Co. for about $6.5 billion, just three months after it purchased the U.S. luxury-resort company, according to people with knowledge of the matter.
The price is about $450 million more than Blackstone paid for Strategic in December. The New York-based private equity firm had been planning to sell individual properties in the portfolio before Anbang made a pre-emptive offer for the entire company, said the people, who asked not to be named because the transaction is private.
Christine Anderson, a spokeswoman for Blackstone, declined to comment, as did Philip Yee, a managing director at Anbang’s North American unit.
Another new recent low in Jobless Claims should help to keep recession fears on the back burner for a while longer…
(Bespoke)
Less recession risk, plus the actions of the ECB, have placed the market odds at a summer Fed rate hike…
Finally, if you are wondering about your rising child care fees…Yes it does look like they are approaching an annual double digit inflation rate. A good economy means more working parents which leads to a supply/demand imbalance. Colleges and Universities are seeing a similar negative effect as the job market pulls students away from finishing degrees and empties classrooms.
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