Tuesday, September 6, 2016

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1--Could the ECB Start Buying Stocks?  --Central bank buying has boosted bond markets; now equities might be in their sights


Some economists say the European Central Bank, which meets Thursday to decide if it should expand its current bond-buying program, should invest in equities. The reason: It is running out of bonds to buy.

A move by the ECB into equities would have big implications for Europe’s stock markets, which have been rocked by a series of shocks this year, from volatility in China to Britain’s vote to leave the European Union. The prospect of billions of euros flowing into equities could prop up prices, much as ECB bond purchases have done for debt securities. The signaling effect from the ECB’s unlimited money-printing power may also limit downturns in equities....

When policy rates approached zero, central banks in the U.S., the U.K., Japan and the eurozone turned to bond purchases to reduce long-term interest rates. Buying equities would likely yield some of the same effects in terms of encouraging consumption and investment through higher household wealth and lower cost of capital....

Mr. Gagnon suggests a more aggressive approach, pointing to the success of Hong Kong’s central bank in supporting the economy during the late 1990s Asian financial crisis by buying around 10% of the Hang Seng Index. That move sparked a 40% rally in stock prices within two months, and the index more than doubled over the next 18 months

2--Time to Worry: Stocks and Bonds Are Moving Together   -- Share prices and bond yields moved in the same direction in just 11 of the past 30 trading days, close to the lowest since the start of 2007

The simplest explanation is that expectations of interest rates being lower for longer—some central bankers have suggested lower forever—pushes the price of everything up, and yields down. When the focus is on the discount rate used to value all assets, bond and stock prices rise and fall together, creating the inverse relationship between bond yields and shares.
Such a focus on monetary policy isn’t healthy. It leaves markets more exposed to sudden shocks, both from changes in policy and from an economy to which less attention is being paid.....

3--Investors See Danger as Global Assets Get Pricey-- Rich valuations, lagging fundamentals cause concerns; U.S. stocks are up even as profits have fallen

Few analysts worry that central banks will suddenly change course after years of market-supportive policies. But some portfolio managers warn that economic fundamentals broadly haven’t kept pace with unusually high valuations, making asset prices vulnerable to sudden shifts in sentiment. ....

(fear of "missing out")  While asset prices may appear overextended and volatility too low for comfort, many portfolio managers are loath to sharply raise cash holdings, afraid to miss out on gains...

Wall Street’s fear gauge, the CBOE CBOE -0.08 % Volatility Index, has in recent weeks fallen to its lowest level in two years, a sign investors might be too complacent and could be caught off-guard by an unexpected move in markets. The index was at 11.98 on Friday, less than half the levels seen in January and June. The S&P 500 is up 6.7% for the year, U.S. oil has climbed 20%, and the MSCI Emerging Markets Index of stocks has risen 31% through Friday from its January lows. Meanwhile, economic growth in the U.S. has been uneven, with labor markets gaining steadily while manufacturers struggle. At the same time, oil stockpiles are holding near record levels and show few signs of falling, which is already pressuring oil prices.....

Total earnings of companies in the S&P 500 have shrunk for four straight quarters, and revenue has declined for six.
Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, has reduced his equity positions, wary of rising stock prices and stagnant earnings.
The S&P 500’s price-to-earnings ratio of 18.4 compares with a 10-year average of 16. Mr. Grohowski said he would likely reduce his stock allocation further if prices continue to rise without a corresponding increase in earnings.
“This is not an extremely comfortable place to stay overweight in equities,” Mr. Grohowski said.

4--Central Banks and Markets: Mind the Confidence Gap   -- The persistence of unconventional policy doesn’t seem to be boosting confidence among investors, even as it enriches them

central-bank buying powers some markets to produce strong returns. Take the European investment-grade corporate bond market as an example. At the end of 2015, return expectations were lackluster given the low level of yields. Citigroup C -0.48 % strategists forecast total returns of 1.8% for 2016; J.P. Morgan JPM -0.04 % analysts thought they would actually be negative.

The ECB’s corporate-bond purchase program has changed all that. It has driven yields to new historic lows, and in the process reduced funding costs to minimal levels. As a result, European corporate bonds have returned 6% year-to-date, according to Bank of America Merrill Lynch indexes....

Investors don’t appear terribly happy, however. Some complain about the way fundamental valuation is being subverted by the wall of central-bank cash; others fear the effects on liquidity. Deutsche Bank DB -2.97 % strategists say investors are being faced with a balancing act between an aging economic and financial cycle, particularly in the U.S., and “overwhelming” technical forces including central-bank buying. Citigroup strategists Monday put their concerns front-and-center in a presentation headlined “Please don’t buy so many bonds, Mr. Central Banker”.
...

there are more valid worries. One is that while central bank efforts are proving enough to keep the economic show on the road, they aren’t doing more than that; the persistent downgrading of growth expectations and the constant refrain from policy makers themselves for politicians to take measures to boost growth sustainably are testament to that.

But, meanwhile, they are producing asset-price inflation. The fear is that the gap between asset prices and reality will close sharply as markets correct. It isn’t clear what might cause that or when: markets are still dancing to the tunes being played by central banks.


5--Brent crude futures ease as hope for output freeze fades


Brent had jumped 5 percent on Monday, after Saudi Arabia and Russia agreed to cooperate in world oil markets. But Brent pared gains later that session after Saudi Energy Minister Khalid al-Falih said there was no need to freeze output for now.
Still, his Russian counterpart Alexander Novak said he was open to ideas on what cut-off period to use if countries chose to freeze output, and said even production cuts could be considered....

Saudi Arabia said on Tuesday it would go along with a freeze in oil output if other producers agreed, but cautioned that Iran could foil any attempt to limit output.

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