(New York)

There is a significant minority of investors who have a very particular worry about the Treasury market right now. That worry is that foreign demand for Treasuries is slumping, which could cause a big sell-off or sustained period of losses. The potential issue has two parts—the first is that a huge amount of Treasury issuance is set to take place, the second is that foreign holdings of Treasuries are at their lowest in 15 years. The combination of seemingly low demand with high supply is making some think the bonds could be in for a rout alongside forthcoming auctions. JP Morgan strategists estimate that yields on Treasuries will rise 7-8 basis points for every $200 bn of Treasuries sold. Foreigners hold $6.3 tn of Treasuries.

FINSUM: This could be a problem, but given that central bank reserves have not been growing, it makes sense that foreign Treasury holdings haven’t either. Foreign governments still need Dollar liquidity, so there is a built in demand for Treasuries which we think won’t simply evaporate.

(New York)

So where is the market headed next? That is the question on every investor’s mind. Guggenheim Partners’ CIO has just made a bold call. His answer—much higher. He argues that stocks are strong and increasingly cheap, which will spark a rally. “Stocks are cheap based on forward multiples and should rally by 15%-20% from here unless policy uncertainty around China and tariffs remains in place”. He continued, saying “I think we’re going through a classic seasonal adjustment”, but that it is paving the way for a move higher.

FINSUM: We think that once the panic passes, which it may have this weekend, investors will realize that stocks are less expensive than before Trump was elected and the economy is going strongly.

(New York)

One of the big questions in this market fall is why junk bonds aren’t tumbling in tandem with stocks. Generally speaking, high yield bonds trade in the same direction as small cap stocks as they are driven more by company fundamentals than other areas of the bond market. However, in the recent rout, this was not the case, as junk bonds have continued to perform well. When both markets fall in unison, it usually means there is big trouble brewing, but when they have become uncorrelated, it can mean there is a rally to come. For instance, in 2011, small caps fells strongly, but junk only a touch. In the following months, small caps surged 15%.

FINSUM: We think this is a positive sign for small caps, as high yield investors are not worried about company fundamentals.

(Detroit)

Many might not think of it this way, but automotive stocks are good leading indicators of the economy. Between the top car companies and auto parts suppliers, the car business creates a little shy of $3 tn in sales per year. But the market is not well at the moment. Big car company shares are down 13% this year, while suppliers have fallen 24% (not one of the top 25 has risen). Interestingly, though, vehicle sales have not fallen yet and are still strong, as they often are when unemployment is falling and consumer confidence is high. The trouble may be in China, where sales are weakening, but the key point is that there is a lot of pessimism on auto shares.

FINSUM: It is important to remember that aside from the economic factors, car companies are under a disruptive threat from technology (e.g. self-driving cars and Silicon Valley), which may be contributing to the poor performance.

(New York)

Yesterday’s relief rally has already turned sour. Earnings out of Amazon and Google greatly disappointed the market and shot the Nasdaq down as far as 3% in premarket trading. However, despite all the trouble, Wells Fargo says it is the best time to buy stocks since before Trump’s presidency. According to the head of the Wells Fargo Investment Institute, “We believe that this isn’t the end of the cycle or the bull market, and we favor deploying cash now—or even allocating incrementally over the coming days and weeks”, continuing “Current conditions have the potential to create some of the best entry points into equity markets since the November 2016 elections”. That said, Wells Fargo acknowledges that we are at the end of the “easy period” of low volatility and an accommodative Fed.

FINSUM: It is anybody’s guess as to whether this view is right, but we reluctantly tend to agree that stocks are probably going to recover from this bout of volatility sooner rather than later.