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 Matthew Lynn, The Telegraph, 08/23/2016|
MarketMinder's View: This weekend, the world’s central bankers will gather deep in the Wyoming mountains (lovely this time of year!) to discuss global monetary policy. While this piece’s proposed agenda perhaps paints the world economy and banking system too darkly, it does raise important questions about the effectiveness of recent “extraordinary” policies. Quantitative easing and negative interest rates haven’t boosted growth anywhere they’ve been tried, and both flattened yield curves, hurting banks’ profits and loan growth. Looking their flaws in the face would be a step forward. We aren’t so gung-ho about the closing suggestions for a global debt write-off or perhaps a massive new wave of fiscal stimulus, though—central banks (particularly the Fed) could theoretically steepen yield curves by gradually selling long-term bonds from their sizable balance sheets. Who knows what lessons Jackson Hole attendees return to work next week with—it’s probably best not to get your hopes up for any major revelations—but the world economy and markets would likely be better off if central bankers became more introspective (depending on the resulting conclusions and actions, of course).
|By Ana Nicolaci de Costa, Reuters, 08/23/2016|
MarketMinder's View: The Confederation of British Industry’s latest survey of UK manufacturers recorded a jump in new export orders, widely attributed to a cheaper pound, which is down 11% against the dollar since the Brexit referendum two months ago today. July’s survey registered the lowest business confidence levels since 2009, but expectations may be turning around: 19% of companies now anticipate declining output over the next three months, while 30% project the reverse. An industry group’s review of 505 firms isn’t comprehensive, and it’s just one data point—but it’s one of a few indicators suggesting UK industry isn’t cowering in Brexit’s wake.
|By Staff, RTT News, 08/23/2016|
MarketMinder's View: In housing news, US home sales surged in July to a 654,000 annualized rate, 12.4% more than June’s total and 31.3% more than a year ago. In other signs of real estate market health, mortgage delinquency rates are low and falling nationwide, with the exception of just three states—Wyoming, North Dakota and West Virginia, all tied heavily to commodity prices. While residential real estate investment was only 3.4% of GDP last year, it’s still an incremental tailwind.
|By Staff, RTT News, 08/23/2016|
MarketMinder's View: Results are in from August’s Flash eurozone Purchasing Managers’ Index, which measures the percentage of firms reporting growth. Once again, the number was solidly positive at 53.3, with the much larger services sector outpacing manufacturing. Interestingly, business sentiment was a drag on the final number, suggesting firms remain cautious as they anticipate fallout from Britain’s vote to leave the EU. But forward-looking new orders sped up in services and grew in manufacturing, albeit more slowly. Now, flash PMIs are preliminary—the final versions are due September 5—and as with all such surveys, they measure the scope, not magnitude of growth. That said, this is more evidence eurozone growth continues.
Market Wrap-Up, Monday, August 22, 2016
Below is a market summary as of market close Monday, August 22, 2016:
- Global Equities: MSCI World (+0.0%)
- US Equities: S&P 500 (-0.1%)
- UK Equities: MSCI UK (+0.3%)
- Best Country: New Zealand (+1.6%)
- Worst Country: Austria (-0.7%)
- Best Sector: Health Care (+0.4%)
- Worst Sector: Energy (-0.8%)
Bond Yields: 10-year US Treasury yields fell 0.04 percentage point to 1.54%.
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.