(Bangkok)

While many are worried about the domestic economy and whether the US is headed for a recession, those invested in emerging markets should perhaps be even more concerned. One of the fears specialists in the area have is that there is probably about $200 bn of unreported Chinese loans on the books of emerging market borrowers. China is not obligated to report these loans anywhere, so no one is quite sure of the size of the exposure. The risk is that as the economy sours, and these credits debts become distressed, China could impose some severe conditions on borrowers, which could cause emerging markets to seize up.

FINSUM: We could see this becoming an issue, especially because China will be feeling distress itself, which means it is likely to use a heavy hand. Even if nothing comes of this, it will likely weigh on EM asset prices in the near-term because of the uncertainty.

(New York)

All the signs seem to point to commodity prices headed lower. Why you may ask? Pretty simple—the economy looks to be weakening, so demand will be lower at a time when supply will stay high. But no so fast, says Evercore, who argues that oil prices may be in for a counterintuitive rise of at least 19% by the end of the year. Evercore contends that production will be flat this year, as OPEC is curtailing output. At the same time, global monetary policy easing is likely to sustain demand, meaning the basic picture for oil may be more bullish.

FINSUM: We think this is an optimistic view that does not take full account of the worsening economic outlook.

(Washington)

In may seem like an eternity in market terms, but 2021 is right around the corner if you are a regulator. The DOL is reportedly racing to get a new DOL rule finalized and implemented before a new administration may takeover in January 2021. The DOL is reportedly set to release a new version of its signature rule this December. But even if it does so, experts say it will a tight push to get a rule implemented before a new administration might take over. In fact, many say the DOL will need to debut its proposal for the new rule by October in order to achieve the January 2021 deadline.

FINSUM: So we know this rule is supposed to be “harmonized” with the SEC’s rule, but there is preciously little additional information. We do think the tight timeline will push the department (which has a new chief after Acosta resigned) to issue a rule more quickly than most in our industry probably realized.

(San Francisco)

Bad news for tech investors and Silicon Valley executives—it looks like Big Tech is going to bear the brunt of the trade war. The group of stocks surged yesterday on the announcement of the delay of tariffs on China. This is because a major part of the tariffs relates to hardware that is core to technology companies’ products. Most specifically, the Treasury said it would delay tariffs until December 15th on “cellphones, laptop computers, videogame consoles, certain toys, computer monitors, and certain items of footwear and clothing”.

FINSUM: While this development offers some relief, it will likely be fleeting. The trade war with China is looking increasingly intractable and tech is right in the middle of it.

(New York)

The yield curve is sending increasing warnings that a recession is coming. While the three-month and ten-year yield has been inverted for months, a new inversion occurred yesterday, when the ten-year yield moved below the two-year yield. Even more eye-opening was that the 30-year bond yield fell to just 2.06%. That figure shows that investors have abandoned all fear of rising rates and all economic bullishness.

FINSUM: We don’t know whether to be more worried about a big correction in bonds, or that the economy may actually be as bad as bonds are suggesting! Either way things look bad.

(New York)

The markets nosedived again today as recession fears are spiking amongst investors globally. While US investors got a bit of a reprieve from the trade war due to the announcement that new tariffs had been delayed, bad economic data out of Germany and China made a global recession look more likely. The big selloff not only dragged US bonds into a 2/10-year inversion, but also inverted the UK yield curve for the first time since 2008. German bonds saw yields fall to a record low (in negative yield territory).

FINSUM: The doom and gloom is warranted given the current backdrop, but it is also not unreasonable to think the current “wall of worry” is the perfect mountain for this bull market to climb.

(New York)

The US’ leading bond manager has just made a bold call. Pimco thinks that US bond yields will follow Europe and go negative. Speaking about the market situation more broadly, Pimco says “The next several years could be the exact opposite of what we saw in the past five to 10 years … That was high returns on financial assets and low volatility. That will be turned upside down”. Pimco is particularly concerned about a recession, believing it would send yields sharply lower. However, that is no sure bet, because if the trade war gets sorted out sooner than expected, yields would likely move higher quickly.

FINSUM: Yields moving lower seems to be the path of least resistance, so we think that is the direction that bonds will trend.

(New York)

Something discouraging is happening to the US real estate market. Home prices and sales are continuing to be weak despite a huge drop in mortgage rates. Lower mortgage rates should have given a boost to new home sales and construction, but the opposite has occurred. Home price gains and sales have slipped considerably and permits for new construction have fallen 6.6% in 15 months.

FINSUM: The question, as ever, is whether the weakness in housing is presaging an economy-wide recession, or is just an isolated situation. We favor the latter.

(New York)

Low volatility stocks have been the hero of the volatility over the last year. In the past 12 months, the S&P 500 has returned 3.2%. That compares to a whopping 14% plus for low volatility stocks, such as in the S&P 500 low-vol index. By definition, low volatility stocks are boring (think utilities, insurance, and REITs) and have stable earnings. That works well for defending against market swings, but the protection means that valuations are WAY above their long-term average (three standard deviations above). That said, falling rates are very helpful to this class of stocks, so there is wind at their backs.

FINSUM: Despite quite high valuations, we think low vol stocks will continue to do well so long as the trade war continues to plague markets.

(New York)

There are a lot of safe havens that people are trying to use to defend against market turbulence right now. The two that immediately come to mind are Treasury bonds and gold. However, those are clearly overbought, so where is another good place? Some REITs are offering very attractive defensive profiles. REITs generally do well during periods of falling rates as their yields become ever more attractive. They were beat up during the rate rises of 2018, but have surged this year, up 20%. What is very compelling, though, is that despite the big rise, REIT valuations are just now returning to their average historical valuations. Speaking about the nature of REIT cash flows, especially regarding long-term leases, “The cash flow is locked in, and that’s just not the case for most of the stock market”, says and Eaton Vance Real Estate fund manager.

FINSUM: Certain REITs seem like they could be a very good buy right now given that they are not overpriced and have falling rates as a tailwind.