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It’s been more than a month since U.S. equities lagged behind their global peers on consecutive days. Perhaps it’s just a reflection of investors deciding it’s a good time to cull some gains with U.S. stocks among the best performers this year, especially on a currency-adjusted basis. The escalating trade war between the U.S. and China has taken a turn for the worse, and nobody is really sure how much damage it will do to profits.
On Thursday, Bolsonaro sought to build bridges with political parties he had long criticized, but failed to get firm backing in talks with leaders that together represent about 200 of the country’s 513 deputies. The day before his economy minister, Paulo Guedes, was broadsided in a lower house hearing that showcased the government’s lack of cohesion and strategy in Congress.
Brazilian assets are suffering as increased friction between President Jair Bolsonaro and some of his key allies in Congress threaten to slow or even derail the pension overhaul seen as critical to controlling the fiscal deficit. While foreign investors had long warned of continued political risk in Brazil, local investors had fueled a surge in stocks and bonds that began in mid-2018 on optimism Bolsonaro would garner sufficient support for the bill. Bolsonaro’s public support has plummeted, he’s antagonizing key allies and his cabinet is riven by intrigue and infighting.
Clearly, investors were overjoyed with the prospect that the Fed had their backs. The concern here is that the Fed’s moves will only serve to suppress market rates, putting further pressure on the already razor-thin difference between the short-term rates banks pay on their own borrowings and the long-term rates they charge lenders. In the banking business, this is known as the net interest margin.
Not only that, stocks are on track for their best quarter since soaring 15 percent in the July through September period of 2009. “The pain trade for stocks is still up,” Michael Hartnett, the chief investment strategist at Bank of America, wrote in research note Tuesday. The firm’s closely monitored monthly investor survey found that allocations are just a net 3 percent “overweight” to global equities, the lowest level since September 2016.
“It’s difficult to see another story as positive as Brazil’s in the region,” said Emy Shayo, JPMorgan Chase & Co.’s head of Latin America equity strategy. The bank sees a “virtuous cycle” amid tighter fiscal policy and easing monetary policy, a combination that “attracts external capital and helps companies to recover a lot of what they lost in terms of profits," according to Shayo.
Indexes that measure the cost to protect both investment- and speculative-grade U.S. corporate bonds from default fell to their lowest levels since October, a sign of optimism about borrowers’ ability to pay their debts. The credit-focused investment firm announced that it was selling a 62 percent stake to Brookfield Asset Management in a deal worth about $4.7 billion. Well, for one, Oaktree’s chairman and co-founder is the legendary Howard Marks, who built his fortune as a vulture investor in distressed debt.
Breakeven rates on two-year Treasuries — a measure of what bond traders expect the rate of inflation to be over the life of the securities — has risen to the highest since May. In addition, the difference in yield between bonds due in 10 years and longer-term debt due in 30 years – a part of the curve that’s less influenced by Fed policy – is the widest since 2017. To be sure, no one is calling for runaway inflation. At 1.90 percent, the two-year breakeven rate is below the Fed’s 2 percent inflation target.
The Australia dollar is usually one of the major beneficiaries of a global “risk on” rally in markets like the one this year given its close economic ties to China. The latest decline came as Reserve Bank of Australia Governor Philip Lowe shifted to a neutral policy outlook as he acknowledged increased economic risks at home and abroad. Indeed, the nation’s economic data has been consistently falling below analysts’ forecasts since the beginning of December as measured by the Citi Economic Surprise Indexes amid a weakening housing market and high consumer debt loads.
Fed Chairman Jerome Powell may have just come up with a new one for market participants to debate: substantially. At the Economic Club of Washington, D.C., on Thursday, Powell said the central bank is sticking with its process of shrinking its balance sheet assets to a more normal level, which removes stimulus put into place to revive the economy after the financial crisis and recession a decade ago. The balance sheet, which reached a peak of $4.52 trillion before falling to a recent $4.06 trillion, “will be substantially smaller than it is now” though bigger than it was before the crisis, Powell said.
The more than 60 economists surveyed by Bloomberg don’t forecast gross domestic product falling below 2 percent until 2020. The widely followed cyclically adjusted price-to-earnings ratio developed by Yale University Professor Robert Shiller compares the S&P 500 Index with its average earnings over the previous 10 years to account for economic swings. The current CAPE ratio suggests that stocks are trading near their long-term average risk premium when compared with bonds, according to Bloomberg Intelligence.