Market liquidity is usually a pretty banal subject, garnering little attention. But in the last year, it has gone from being a dry afterthought to being the subject of frequent articles claiming it’s a major concern, particularly in the bond markets. So much so, that Bloomberg’s Matt Levine had a running section of his daily link wrap titled, “People Are Worried About Bond Market Liquidity” for months and rarely ran low on articles to share. It is now bigger news when there aren’t “People Worried About Bond Market Liquidity!” So what is market liquidity, and are the recent fears justified—or overblown?
Market liquidity refers to how easily an asset can be bought or sold without dramatically impacting the price or incurring large costs. It’s a defining feature separating asset classes, a key consideration for investors. Some financial assets, like listed stocks, are easy to buy or sell with little price impact and small commissions—they’re “liquid.” Conversely, commercial real estate takes time to sell and likely includes high commissions and significant negotiations—it is “illiquid.” For most investors, particularly those with potential cash flow needs, liquidity is an important facet of any investment strategy.
Bonds are among the more liquid investments available for investors, though liquidity varies among different types. Treasurys, among the deepest markets in the world, are highly liquid. Corporates and municipals are less so, and some fancier debt is actually quite illiquid.
Flags fly in front of the Parthenon in Athens. Photo by Bloomberg/Getty Images.
After five years of Greek crisis, two defaults and going-on three bailouts, many still fear a contagion across the eurozone. While default and “Grexit” risk persist, the risk of a contagion has fallen significantly over the last few years. The eurozone economy is improving, foreign banks hold less Greek debt, bank deposits aren’t fleeing other peripheral nations, and euroskeptic parties poll well behind traditional parties across the eurozone. Greece’s problems are contained and shouldn’t put the broader eurozone at risk.
|By Fisher Investments Editorial Staff, 03/27/2015|
In Friday’s third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled “the worst news.” Others claim a “profit recession”—whatever that means—looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis’ measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren’t exactly rare and occur at random points throughout a bull market and expansion.
Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment
Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.
European Union Government
European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.
There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.
Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.
|By Jon Hilsenrath and Harriet Torry, The Wall Street Journal, 08/26/2016|
MarketMinder's View: Another meeting, more wishy-washy commentary from the Fed. Financial pundits waited with bated breath for this week’s central banker shindig in Jackson Hole, WY, particularly hot for Fed head Janet Yellen’s speech. In it, she repeated the same message as other Fed speakers from the past several weeks in making the case for “gradually reducing accommodative policy.” Specifically, Yellen said, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” Then she went on to dial the whole thing back, basically telling the audience in highfalutin and difficult-to-unpack terms that everything she just said may be completely moot by the next time they meet. Folks, all this handwringing and excitement is unnecessary. The Fed has repeatedly demonstrated its talk doesn’t foretell its actions. What’s more, the US economy and yield curve can handle another hike.
|By Staff, RTT News, 08/26/2016|
MarketMinder's View: This is actually a pretty darn positive downward revision. US Q2 GDP growth was revised down by 0.1 percentage point (1.1% vs 1.2%) for benign reasons: Imports (which subtract from GDP) were revised higher, signaling stronger domestic demand, and state and local government spending was revised lower. Non-residential fixed investment and consumer spending, meanwhile, were both higher than initial estimates. Other recent data are also positive: After-tax corporate profits rose 4.9% q/q in Q2, core consumer prices rose a moderate 1.8% y/y, and the Conference Board’s US Leading Economic Index (LEI) rose in July for the second straight month. No recession has ever begun while LEI was rising. Now, most of these numbers (GDP, profits, prices) describe the past and may be revised again in the future, and markets in the present have moved on—but they do add to an economic picture rosier than many appreciate.
|By Peter Coy, Bloomberg, 08/26/2016|
MarketMinder's View: Folks, we highlight this not to depress you on a Friday, but rather, as a prime example of inconclusive statistics making for a scary headline. Here is the argument: Higher unemployment leads to fewer auto accidents, since fewer people are commuting. Now, from a high level, perhaps you find yourself nodding along and saying, “Well, that makes sense!” However! We took a closer look at the methodology here (you can too!) and came away with more questions than answers. Like, are we to extrapolate one dataset (provided by one insurance company) from one state (Ohio) as being emblematic for the entire U-S-of-A? Look, we understand Ohio commonly gets bestowed “national barometer” status due to its swing state-status for presidential elections, but we know from experience that driving conditions in Dayton, Ohio do not match those in Los Angeles, CA or central Texas. Also, the data are self-selected (drivers who allow their driving to be monitored in exchange for a discount from the insurance company), introducing more limitations. And, finally: The time series is limited here, considering the ability to monitor driving doesn’t predate the present economic cycle. We do this data deep-dive on your behalf, dear reader, as a friendly reminder that you should always be skeptical of click-baity headlines that may play to certain biases—remember, bias blinds, a detriment in investing.
|By Charles Riley, CNNMoney, 08/26/2016|
MarketMinder's View: French GDP was flat in Q2, a sharp slowdown from Q1’s 0.7% q/q growth. The underlying components weren’t great: Household consumption was also flat, exports and imports contracted (-0.1% and -2.0%, respectively) and business investment fell, too (-0.4%). Now, are the Euro 2016 soccer tournament, terrorism and labor strikes the primary reasons French growth came to a halt, as this piece suggests? We don’t think it’s quite that straightforward. While all three factors could have pulled forward/dampened growth, don’t lose sight of the bigger picture. France has grown in fits and starts throughout this global expansion, and flat quarters are common: five in the past three years. Despite this drag, France hasn’t knocked broader eurozone growth, as the 19-member bloc has grown for 13 straight quarters.
Market Wrap-Up, Thursday, August 25, 2016
Below is a market summary as of market close Thursday, August 25, 2016:
- Global Equities: MSCI World (-0.2%)
- US Equities: S&P 500 (-0.1%)
- UK Equities: MSCI UK (-0.8%)
- Best Country: Ireland (+0.7%)
- Worst Country: UK (-0.8%)
- Best Sector: Utilities (+0.1%)
- Worst Sector: Health Care (-0.9%)
Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 1.58%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.