Markets

(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.

(Washington)

Something very odd is going on in the minds of investors. Data on the economy continues to come out very strongly, with Q1 growth at 3.2%, and the market are nothing short of astonishing, up 25% since its December low. But at the same time, many investors and analysts think the Fed will cut rates. The reason why is disinflation, or the fact that the inflation number refuses to rise to the Fed’s target. Looking more broadly, you also have weakening in China and a slowdown in Europe, so there are macro headwinds that could wound the US. Analysts tend to fall in one camp or the other on hikes, with some, like Scott Minerd of Guggenheim, calling the idea “plainly wrong”.


FINSUM: It is very hard to predict what the Fed will do because their u-turn earlier this year caught everyone by surprise. Our bet is that if the current data holds steady, there won’t be any hikes.

(New York)

The yield curve has been injecting fear into markets all year. Investors understandably panicked when the spreads between short-term and long-term Treasuries bonds inverted a few weeks ago. However, investors have been looking at the yield curve with the wrong lens, argues Barron’s. If you actually pay attention to what has been happening recently, you will see a distinct picture of spreads rising, which is a very bullish indicator. Moving averages on the spreads have been growing, the first instance of such in a long time. A number of macro factors are supportive of wider spreads, including a now dovish Fed and strongly rising oil prices, which have injected more fear of inflation.


FINSUM: We think spreads are headed in the right direction. Taken as a whole, the market is starting to look like a good buying opportunity right now. It seems odd to say given stocks are at an all-time high, but if you look at the back drop, the situation looks pretty bullish.

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