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 Paul Krugman, The New York Times, 05/03/2016|
MarketMinder's View: We scrutinize analogies pretty closely around here, and this one doesn’t pass muster. Narayana Kocherlakota, former head of the Minneapolis Fed, likened low interest rates to insulin injections, since despite their side effects, they’re “necessary to manage a chronic disease” of slow growth and weak inflation. But the patient is actually not so ill. Eurozone growth has been uneven during the expansion—any report on 19 economies is bound to include some laggards as well as leaders—but positive for 12 straight quarters. Nor is weak inflation/occasional deflation inherently bad or always “fixable” through monetary policy. Eurozone CPI is a victim of falling oil prices, not too-tight monetary policy or a sclerotic economy. Absent falling energy prices—a boon to many businesses and consumers—eurozone inflation is closer to ECB’s 2% target. Anywhere else, moderate growth and benign inflation would earn the name “Goldilocks.” Finally, this article overstates the risk of a Chinese hard-landing or economic fallout from Brexit or Grexit. China is slowing, not crashing. Brexit, should it happen, likely won’t be anywhere near disastrous. Markets have dealt with Greece’s chronic crisis for over six years. (Oh and please look past the political stuff at the end—bias blinds, we’re non-partisan and prefer no candidate, and that part of the commentary is but a brief detour from a more focused economic discussion.)
|By Ian Wishart, Bloomberg, 05/03/2016|
MarketMinder's View: Here is yet another purported Brexit “fact” that is pulled from thin air and utterly lacking a counterfactual. From our position of studied impartiality, we’ve spilled plenty of pixels detailing how both sides of the Brexit debate like to play fast and loose with figures predicting its impact. This is another prime example. Using data showing three-fifths of UK trade is with the EU or countries the EU has trade agreements with, former Chancellor of the Exchequer Alistair Darling argues Britain’s trade with the Union is 76% higher thanks to its inclusion, as leaving would “mean introducing tariffs and barriers.” But that is true only if everyone involved botches the two-year exit negotiation process. Maybe they do! But incentives on both sides point toward much more favorable terms, and you can’t game the likelihood of failure now. Plus this is all moot if Brits vote to stay. That $367 billion price tag is what we call a statistopinion—it’s an opinion made to look fact-like by the use of conjured numbers.
|By Staff, BBC, 05/03/2016|
MarketMinder's View: Hammering out trade deals is tough, especially when 29 countries are involved—each with their own pet peeves and pet industries to “protect” in order to placate voters. The US and the EU have been working on the Transatlantic Trade and Investment Partnership (TTIP) since 2013, and the negotiations are best described by phrases like “fits and starts” and “wrangling and delays.” Most recently, the leak of 248 pages of TTIP-related documents sparked charges that the EU is conceding too much on environmental regulations and opening up governments to international trade disputes. France’s Foreign Trade Minister Matthias Fekl agreed, adding that French agriculture needs protection, and French producers should have more access to US markets. Calling for more “reciprocity” from the United States, Fekl said the talks would have to halt if the EU doesn’t get a better deal. (Perhaps not coincidentally, French voters hit the polls next year.) It’s too soon to say whether they can patch up disagreements or will have to return to the drawing board, but in any case, the squabbles aren’t reason to fret. The absence of a positive isn’t a negative: Markets like freer trade, but they’re doing all right without it.
|By Scott Grannis, Calafia Beach Pundit, 05/03/2016|
MarketMinder's View: Look, charts! Skipping over those without much market relevance, let’s focus on a couple of the more telling images. First, US manufacturing has rebounded from its lows of late 2015 – early 2016, sticking in a range that’s perfectly compatible with broad-based growth. Second, commercial and industrial lending is a particularly bright spot: Up 11% in the last year, this shows a positively sloped yield curve—formed when long-term interest rates exceed short-term—is encouraging lending. An expanding money supply and rising business activity accompany higher lending levels—all growthy trends, and faster growth should eventually follow accelerating money supply.
Market Wrap-Up, Monday, May 2, 2016
Below is a market summary as of market close Monday, May 2, 2016:
- Global Equities: MSCI World (+0.3%)
- US Equities: S&P 500 (+0.8%)
- UK Equities: MSCI UK (+0.2%)
- Best Country: Portugal (+1.6%)
- Worst Country: Japan (-2.7%)
- Best Sector: Consumer Staples (+0.7%)
- Worst Sector: Energy (-0.2%)
Bond Yields: 10-year US Treasury yields rose 0.04 percentage point to 1.83%.
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.