Markets
(New York)
One of the most famous names in bonds, Jeffrey Gundlach, has just put out a bold statement. Gundlach thinks there is forthcoming trouble in markets and he thinks it is the Fed’s fault. Specifically, Gundlach thinks the bond market is set for a lot of volatility. “interest rates cannot maintain the low volatility they have maintained over the last eight years”. To be clear, Gundlach is not calling for a recession, but says “But I am starting to think it is much less of a lock that there won’t be a recession before the next recession”.
FINSUM: There are two conflicting ideologies here. The Fed thinks volatility is largely an extension of the economy and policy, both of which it feels it can control to an extent. Gundlach and many other investors think there are underlying forces in the economy and markets that can only be pacified for so long. We think they are both right to an extent.
(Washington)
Investors, take a deep breath, everything about the rate outlook has changed in the last 36 hours. For the first quarter of this year, investors thought we were on an inevitable course for rate cuts as the Fed appeared highly dovish. Then the last two days happened. First, Fed chief Powell delivered a much more hawkish speech than expected, saying that the factors that were holding inflation down were just “transitory”. Then, jobs data this morning blew everyone away with 263,000 jobs created in April.
FINSUM: We think these two factors are a big deal. It is very far from clear the Fed is going to cut (we think the risks are now skewed toward a hike). What makes this worrying is that a lot of the rally this year has been predicated on a dovish Fed.
(New York)
Gold had a great start to the year, but has since fallen back and is now down 1% in 2019. That’s said, there are some encouraging signs. Global demand for gold rose 7% from a year ago in Q1, and inflows to gold ETFs rose 49% versus the same stretch in 2018. Summer is a seasonally weak period for gold, but the metals outlook is going to be highly dependent on central bank action.
FINSUM: To be honest, we do not see a bullish scenario for gold right now. There are neither worries about an economic meltdown or high inflation, so the two big drivers for gold to move sharply aren’t there.
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(New York)
Want to know an asset class that has better risk-adjusted returns than equities over the decades and still has quite good liquidity? Look no further than external sovereign bonds, or the bonds issued in foreign currencies, like the Republic of Argentina 7.5% bond maturing in 2026. The bonds also have a low correlation to stocks, which means having both of them in the portfolio overall should produce lower volatility. The asset class has flown largely unnoticed because of a lack of a benchmark or return history (until now) and the fact that there have been a handful of notable sovereign crises in recent years.
FINSUM: A lot of people shy away from this asset class, but it definitely has a place in the portfolio. The lack of correlation and the good risk-adjusted returns make it attractive.
(Washington)
Don’t look know, but market could be facing a big risk in September. Investors will remember that Congress voted to suspend the debt limit until March 1st. That date has come and passed and now the Treasury is using extraordinary measures to meet the US’ payment obligations. However, it says it will exhaust those options by September, meaning the US could end up in a major cash crunch.
FINSUM: Get ready for another early autumn political crisis over the budget, deficit, and debt ceiling.
(New York)
The markets are gleeful right now. Stocks are up 25% since their bottom in December, and things on the economic and Fed fronts look rosy. However, Citi says investors need to get out of some assets before “rain spoils the picnic”. The bank is worried about the difference between asset prices and underlying economic conditions (when looking globally). Its biggest area of worry is in corporate bonds, which have seen spreads to investment grade narrow sharply, especially in high yields, which look overvalued. Investment grade debt is troubling too, as debt levels jumped by their biggest amount in 18 years over the last 4 months. Citi thinks companies are burning through way too much cash for the growth levels they are achieving.
FINSUM: So Citi thinks this is going to be a bond market reckoning (which would surely impact stocks too). That is different than the consensus, but perhaps a good way to view the situation.