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.
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|By Greg Ip, The Wall Street Journal, 07/22/2016|
MarketMinder's View: This is quite political, so we hope you will turn off your biases, ideological leanings and candidate preferences—political bias is deadly in investing—and just consider what it shows: Politicians have every incentive to sell fear and emphasize their chosen narrative over facts in order to tap into emotions and win votes. Both parties do it. For investors, it’s important not to get caught up in the hype, and not let those emotions impact portfolio decisions. As for the policies discussed herein, markets care about what politicians do, not what they say, and with DC likely remaining gridlocked once the new administration and congresspeople take their stations next January, the likelihood of sweeping change seems lower than it might typically be at the beginning of a new administration.
|By Jo Craven McGinty, The Wall Street Journal, 07/22/2016|
MarketMinder's View: This is a must-read for anyone planning for retirement. Go. Now.
|By Arne Delfs, Birgit Jennen and John Follain, Bloomberg, 07/22/2016|
MarketMinder's View: “[Italian Prime Minister Matteo] Renzi is trying to navigate European Union rules stating that creditors must take a hit when banks are rescued, while also seeking to protect small investors from the fallout -- a potential vote killer that could cost him his job in a referendum due in the fall. [German Chancellor Angela] Merkel, who repeatedly stressed after the financial crisis that taxpayers should never bail out banks, is aware of Renzi’s dilemma and is prepared to support a flexible reading of the EU rules to help him, according to the officials. That could mean accepting some form of Italian government compensation for retail investors to limit the political fallout, they said.” Once again, political considerations are promoting compromise. In this case, eurozone leaders’ desire to see traditional parties retain power in Italy, not the anti-euro populist Five Star Movement. Italy’s bank issues were neither new or a global risk for markets, but an investor-friendly resolution might help sentiment somewhat, particularly as it pertains to eurozone banks.
|By Luke Kawa, Bloomberg, 07/22/2016|
MarketMinder's View: While the Atlanta Fed’s GDPNow model has its issues, this is yet more evidence US growth is stronger than most perceive and, in all likelihood, has picked up since Q1.
Market Wrap-Up, Thursday, July 21, 2016
Below is a market summary as of market close Thursday, July 21, 2016:
- Global Equities: MSCI World (-0.1%)
- US Equities: S&P 500 (-0.4%)
- UK Equities: MSCI UK (-0.1%)
- Best Country: Norway (+1.3%)
- Worst Country: Ireland (-0.7%)
- Best Sector: Utilities (+0.4%)
- Worst Sector: Energy (-0.5%)
Bond Yields: 10-year US Treasury yields fell 0.02 percentage point to 1.56%.
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.