Bedrock’s Newsletter for Friday 18th of May, 2018

Newsletter_HeaderMountains_newsletter_750x450

 Friday, 18th of May 2018

The week opened with the US opening its embassy in Jerusalem and as expected, it caused much noise and turmoil, as well as the deepening fissure between the USA and the EU resulting from Trump’s decision to walk away from the Iranian nuclear deal. The immediate effect was the rise in the price of Oil. On Thursday Brent crossed the $80 per barrel for the first time in over 3 and a half years! WTI at $71.60 is also solid… What else? Oh, Trump might be losing his bid for a Nobel, as the North Koreans are hinting at a cancellation of the leaders’ meeting in June.

Let’s look at the markets and get an unbiased, Dollar-weighted opinion here.

The US$ is holding at its recent highs, the DXY index steady at about 93.50, inching upwards just ever so slightly. Much of the Dollar move can be attributed to the clear increase in US$ interest rates. The yield on the benchmark 10-year Treasury note and the yield on the benchmark 30-year Treasury bond rose to new multiyear highs early Thursday as a streak of solid economic data continued. Short-term rates also topped multiyear highs: the yield on the two-year Treasury note reached 2.598%, its highest since August 2008, and the yield on the five-year Treasury note hit 2.957%, its highest since June 2009. The yield on the benchmark 10-year Treasury note climbed to 3.122% Thursday, its highest mark since July 8, 2011, while the yield on the 30-year Treasury bond hit 3.248%, its highest level since July 13, 2015. The 10-year Treasury rate is especially important given its role in helping set rates for a whole range of business and consumer loans, including home mortgages. Some will argue that this rise cant be the true reason for the relative US$ strength, as yields on the German Bund and the Japanese JGB’s have risen in tandem, if not quite as much.

The Fed next meets on June 12, when it is expected to hike the federal funds rate for the second time this year. Investors are betting the Federal Reserve will keep its aggressive stance even if it unnerves financial markets a bit. Traders for the first time Monday assigned a 51 percent chance of a fourth interest rate hike this year by the Fed, according to the CME Group.

The U.S. Leading Economic Index rose in the month of April. The index rose 0.4%, underpinned by widespread component strength. The rise implies that strong growth is expected to persist in the second half of this year, noted Wells Fargo in a research report. Growth in the Coincident and Lagging indices rose 0.3% in April. Stock prices and housing permits were just the only negative contributors in the month. The interest rate spread remains the top contributor to the index, but its strength has faded more recently as the yield curve has flattened. The components related to the labour market, initial jobless claims and manufacturing hours worked, reversed last month’s slide, contributing 0.10 and 0.13 percentage points, respectively. The weak and hard data continue to underpin one another, a signal of stable and balanced growth. The April print adds further evidence that the economic growth will continue through 2018, and implies that the Fed will continue to administer rate hikes, added Wells Fargo.

So, the economy is doing well in the USA and in much of the rest of the world. Unemployment is non- existent in the US and declining even in Europe. And the Fed may well be on a tightening path and if they do embark much further, it is likely other central bankers will adapt their own policies. So, should we fear for our equities?

When it comes to rising bond yields, there are those who think the accompanying jump in corporate borrowing costs will doom stocks and those who think it won’t matter much because rising rates reflect a growing economy. The evidence just got stronger for those in the latter camp. Despite the headlines linking the recent malaise in major U.S. equity indexes to the jump in 10-year Treasury yields above 3% for the first time since early 2014, one key group of stocks keeps ploughing ahead. On Wednesday, the Standard & Poor’s SmallCap 600 Index, whose constituents range from Roto-Rooter owner Chemed Corp. to dollar-store operator Fred’s Inc., rose to an intraday record, extending its gain for the year to 6.12%. Given their smaller size and, presumably, their limited financing options relative to their larger brethren, these companies should suffer disproportionately from a rise in borrowing costs. But as we know from surveys such as the one from the National Federation of Independent Business, small business optimism is near all-time highs. Of course, most of these companies don’t have much of an international presence, so they aren’t being hurt by the dollar’s rebound. Still, it’s looking like the economy is on sound footing after a first-quarter slowdown. The economists with Bloomberg Intelligence say that bond yields have “considerable room” to rise before materially impacting the economy, given the wide gap between nominal growth and interest rates. That gap has rarely been wider than what has persisted over the past several years, BI Chief U.S. Economist Carl Riccadonna wrote in a research note Wednesday. As for the stock market’s little guys, the near-term outlook is bright: the projected earnings growth rate for small-cap companies next year is about 10 percentage points above that of S&P 500 members, BI equity strategists Kevin Kelly and Gina Martin Adams wrote in a research note Wednesday.

The economists at JPMorgan Chase & Co. are also confident. “Although the geopolitical backdrop has turned more turbulent and uncertain, the global economy appears to be steaming ahead at a solid pace,” they wrote in a research note Tuesday. They predict that global GDP expanded at a 3.1% annualized rate in the first three months of the year for a sixth straight quarter. “This combination of sustained strength and stability is rare,” they wrote. “The economy has managed this feat just two other times in the past three decades.” They forecast the global economy will accelerate to a 4% annualized rate this quarter.

There’s no shortage of hand-wringing these days over the state of emerging markets and whether a crisis is brewing after the MSCI EM Currency Index dropped to its lowest level of the year. No less than Harvard professor Carmen Reinhart said Wednesday that mounting debt loads, weakening terms of trade, rising global interest rates and stalling growth make EM worse off now than the 2008 global financial crisis. For one day, at least, those worries were put to rest. Argentina’s peso headed for its biggest two-day rally on record after the government and central bank intervened in currency markets and sold securities to tame growing anxiety in its markets. Argentina’s government sold about $3 billion of peso-denominated bonds and the central bank rolled over about $27 billion of expiring short-term notes on Tuesday, suggesting that investors are still hungry for Argentine assets, according to Bloomberg News’s Andres R. Martinez. However, other Emerging Markets currencies fell sharply  such as the Turkish Lira, the Russian Ruble and the Brazilian Real, thereby adding to the already existing angst.

We may want to consider increasing an overweight in energy stocks as the rise in oil prices seems genuine- maybe driven more by economics than political jitters? Demand for diesel and jet fuel will help push Brent crude oil prices to $90 a barrel in 2020, according to Morgan Stanley. The investment bank previously forecast Brent would average about $65 in each of the four quarters of 2020. Brent already hit a three-and-a-half-year high at $79.47 a barrel on Tuesday. It hasn’t risen above $90 a barrel since October 2014. According to the bank’s estimates, global crude oil output would need to grow by 5.7 million barrels a day by 2020 to meet growing distillate consumption. Morgan Stanley does not think that’s possible. Well, we all know that it is the prerogative of any analyst to be inconsistent…

So to the question of “where are the markets headed?” we can quote Yogi Berra – “If you ask me anything I don’t know, I’m not going to answer”.

 

rsz_picture3

Market Weekly Highlights

Currencies & Commodities

Fixed Income

Equities

DISCLAIMER

Information included in this newsletter is intended for those investors who meet the Financial Conduct Authority definition of a Professional Client or an Eligible Counterparty or for those investors who meet the CISA/CISO definition of a Qualified Investor. The content of this newsletter has been approved and issued by Bedrock S.A., Bedrock Monaco SAM, and Bedrock Asset Management (UK) Ltd. (jointly, hereafter, referred to as “Bedrock”) for information purposes only and does not purport to be full or complete. No reliance may be placed for any purpose on the information contained in this newsletter or its accuracy or completeness. Any opinions contained in this newsletter may be changed after issue at any time without notice. No information in this post should be construed as providing financial, investment or other professional advice. The information contained herein is for the sole use of its intended recipient and may not be copied, distributed or published without Bedrock’s express consent.  No representation or warranty of any kind, implied, expressed or statutory, is given in conjunction with the information and data. Bedrock expressly disclaims liability for errors or omissions in the information and data contained in this newsletter. The value of all investments and the income derived therefrom can fluctuate due to market movements. Past performance is no guide to, or guarantee of, future performance. Bedrock accepts no liability for any loss or damage arising out of the use or misuse of or reliance on the information provided in this newsletter including, without limitation, any loss of profits or any other damage, direct or consequential. You agree to indemnify and hold harmless Bedrock and its affiliates, and the directors and employees of Bedrock and its affiliates from and against any and all liabilities, claims, damages, losses or expenses, including legal fees and expenses arising out of your access to or use of the information in this newsletter, save to the extent that such losses may not be excluded pursuant to applicable law or regulation. This newsletter and the information contained herein are confidential. The copyright, trademarks and all similar rights of this newsletter and its contents are owned by Bedrock.