|By Ye Xie, Lu Wang and Eshe Nelson, Bloomberg , 02/12/2016|
MarketMinder's View: We found this take interesting, particularly for many of the pundits’ reactions. See this quote: “Central banks are getting out of control; They are now more a problem than a solution.” Consider: For most of this expansion, central bankers were deified as saviors, the only support markets had—a theory we widely viewed as bunk. Now, as several central banks have turned to negative interest rates to spur growth by allegedly prodding banks to lend more—the ECB in 2014, Japan’s BoJ last month, Sweden’s Riksbank this week—markets are seemingly calling out the man (or woman/board) behind the curtain. This may help explain why markets are convulsing right now, but in the long run, this may not be such a bad thing—perhaps central bankers will finally get the memo that they should stop meddling around and go back to letting markets operate without their “help.” Time will tell, but it is an interesting sentiment wiggle. For more, see Elisabeth Dellinger’s column, “Sweden’s Central Bank Pushes Harder on String.”
|By Jack Ewing, The New York Times, 02/12/2016|
MarketMinder's View: This is a good snapshot of how out of whack sentiment toward the eurozone is relative to reality. Even after 11 straight quarters of growth (0.3% q/q in Q4, 1.5% for 2015) putting eurozone GDP a rounding error from its all-time high, folks talk about structural issues (e.g., demographics), debt, unemployment and the slow growth since 2008—overlooking the euro crisis-driven recession entirely, and the subsequent cyclical shift to growth. Most negativity towards the eurozone these days seems based on matters long in the past. They then offer up the fear du jour and can only find one positive: the ECB. A strong services industry—the strongest sector for most eurozone members—is never mentioned.
|By Ben Wright, The Telegraph, 02/12/2016|
MarketMinder's View: Err… In a word, no. But in several more words, we caution readers: This is jam packed with misperceived notions (like markets are down because there are “more sellers than buyers”) and hyperfixates readers on different measures of past returns (the VIX, how far down the gauges are, etc.). Corrections—short, sharp, sentiment-driven market drops of -10% or more—are regular features during bull markets, and that is what we think is going on now. Fundamentals look fine, and this appears to be a swing akin to 2011 or 1998, driven by fears, not facts. As uncomfortable and challenging as they are, stocks can bounce back as quickly as they fell. Now it’s true, some narrower stock indexes (e.g., the FTSE 100) have breached the -20%, which some dub “bear market territory”, but narrow gauges often fall below -20% in corrections, as many did in 2011. That is due to their construction and doesn’t have many broader implications. Our advice for beginners is different: Always be looking forward and asking yourself, “Do I have a sound, well-thought out reason to expect stocks to fall significantly from here?” For more, see our 2/9/2016 commentary, “Are Markets Retesting Your Mettle?”
|By David A. Levine, The New York Times, 02/12/2016|
MarketMinder's View: This is a solid take that builds on the author’s prior post (here) regarding folks’ tendency to underestimate their investment time horizon, leading them to put too little into stocks. This time, he takes on one of the most important questions an investor faces: If more stocks is the right general direction, what should your allocation to stocks be? Conventional wisdom holds that most folks should have a mix of stocks and bonds (e.g., 60-40 or 50-50) to mitigate the short-term volatility characteristic of stocks, and those same experts usually advocate higher fixed income allocations based on an investor’s age. However, as noted in this piece, this overstates many folks’ need for bonds, and for an investor with a long time horizon and goals and needs commensurate with owning stocks, a 100% equity allocation may be the optimal solution. Now, that can create comfort issues that you and your adviser must discuss. And in some cases, it does make sense for investors to hold fixed income, depending on their cash flow needs, time horizon and specific goals. But the logic employed here arguing stocks’ superiority in the long run is sound. This is an excellent read for volatile times like the present.
|By Victoria Stilwell, Bloomberg, 02/12/2016|
MarketMinder's View: Remember when folks were fretting the month-over-month drop in December retail sales? Welp, that -0.1% m/m slip was revised to a 0.2% m/m rise, same as the January figure. Now, some caveats: Retail sales are a narrow gauge of total consumer spending (since they don’t include services spending), and it’s possible that the advance January figure could get revised downward next month. We caution investors from reading too much into volatile monthly readings, whether they’re negative or positive. However, the more important point: When excluding gasoline station sales (hugely impacted by falling oil prices), US retail sales have been steadily growing at around 4% annually. Nothing scary about that. For more, see today’s commentary, “How Has Oil Impacted Retail Sales?”
|By Staff, Reuters, 02/11/2016|
MarketMinder's View: While we agree it is high time central banks rethink “extraordinary monetary policy” moves like negative-interest rate policy (which has been cutely named, NIRP after its cousin, zero-interest rate policy or ZIRP), we don’t think tweaking it to mitigate the blow on banks by buying up more long-term assets is a very good solution. Ultimately, the best idea is to just not do negative rates. While their intent is to force banks to lend idle reserves or pay a price, in actuality banks have bought sovereign bonds instead, driving the entire yield curve down. That is the opposite of stimulus, and articles like this make us think investors may be awakening to that reality at long last.
|By Richard Rubin, The Wall Street Journal, 02/11/2016|
MarketMinder's View: A matter worth watching. For months, the EU has been going after businesses (from the US, EU and elsewhere) for back taxes, citing entirely legal maneuvers as “tax avoidance” and demanding back taxes. While the scale to date has been small, it is the kind of situation we watch for potential signs of escalation, particularly involving the US, given our government’s sensitivity to so-called “tax inversions.” This is the Treasury’s first official communique to EU leaders on the subject, arguing the EU’s retroactive taxes represent it “adopting an entirely new legal theory and applying it retroactively in a broad and sweeping manner.” Investors should keep an eye trained here for developments, though this isn’t a major new negative as this stands now.
|By Nate Silver, FiveThirtyEight, 02/11/2016|
MarketMinder's View: As ever, we favor neither political party nor any candidate, and offer this solely as an interesting update on the election in the wake of New Hampshire’s “First in the Nation” primary. This article is a cogent, interesting roundup of the headwinds and tailwinds for candidates after New Hampshire, illustrating mostly why this race is too early to forecast presently. As noted here, “But between 1980 and 2012, nine Republican candidates received at least 20 percent of the vote in each state. Four of them eventually received their party’s nomination and three others came reasonably close; the final two (Buchanan in 1996 and Ron Paul in 2012) were factional candidates who probably never had much of a shot.”
|By Robert Samuelson, Real Clear Politics, 02/11/2016|
MarketMinder's View: This article, which argues the current downturn has been driven by Emerging Markets’ faltering growth, has a fair few flaws. First, it mixes economic growth relative to the zeitgeist from years ago with actual, absolute output. Yes, in 2005 or 2006, folks may not have expected a China slowdown in 2015. But the country is still growing 6.9%, adding hugely to world output—not subtracting. It then fixates on commodity heavy Emerging Markets—like Russia and Brazil, which are a mess indeed, but aren’t indicative of the group overall. Let’s consider some other, non-commodity driven EMs that benefit from low commodity prices: India grew 7.3% y/y in Q4, Indonesia grew 5.0% y/y. In all, of the 20 Emerging Markets countries that have reported GDP data for either Q3 or Q4 2015, only four show contraction. That doesn’t support the blanket negativity offered up here.
|By Peter Coy, Bloomberg, 02/11/2016|
MarketMinder's View: An excellent discussion of the non-politicized, monetary reasons why the Fed pays banks interest on excess reserves, lacking only a couple of points: One, it is worth noting that the Fed has wanted this ability since at least 2006, before the financial crisis. This isn't a crisis-born development, though it was implemented amid a slew of crisis-born measures in 2008. Two, this is why the monetary base (what the Fed’s quantitative easing boosted) is not a relevant input into monetary policy alone, because reserves (what the Fed creates) only become money if the Fed bases new loans on them. Excess reserves don't underpin loans.
|By Leanne Miller, CNBC, 02/11/2016|
MarketMinder's View: Well, no, being bearish isn’t “crazy,” and anticipating the median bear return probably wouldn’t be categorized as that either. However, basing an entire market call and portfolio positioning on past market movement is a complete fallacy, and that is all that is offered here. No fundamental reason supporting that bearish view is offered—only a list of previous lows, chart patterns and extrapolations based on feelings. Bear markets are caused by fundamental negatives wiping trillions from economic output, not momentum, support, resistance or any other description of prior returns.
|By Avantika Chilkoti, Financial Times, 02/11/2016|
MarketMinder's View: Looking for some positive news from Emerging Markets? Look no further. Thursday, Indonesian President Joko Widodo announced the country would dramatically open its economy to foreign investment, a liberalization of rather epic proportions and an about-face from recent protectionist rhetoric. “A total of 35 industries were removed from the list [of industries off-limits to foreigners] on Thursday, including film, tourism and restaurants, in what economists are referring to as a ‘big bang’ move that could drive efficiency and competitiveness in local industry.” Restrictions remain, mind you, but this is a large reform step, indeed. In addition, Widodo expressed interest in joining the Trans-Pacific Partnership. Although that deal remains far from a done deal, the statement is a noteworthy and welcome change in political rhetoric.
|By Jason Scott, Bloomberg, 02/11/2016|
MarketMinder's View: Let's be clear: Australia's deputy prime ministerial post isn't very relevant to global markets, except in this one sense: Barnaby Joyce, discussed here, frequently employs strong protectionist rhetoric, and the Australian PM post has been a revolving door in recent years. It is worth watching whether this trade-heavy nation bends in a protectionist direction based on his influence (or eventual leadership). Now, like the US, the Aussie Prime Minister cannot unilaterally overturn trade agreements, so support in Parliament would be key. And it remains to be seen what is talk and what is real. We merely believe it’s worth noting for potential future reference.
|By Neil Irwin, The New York Times, 02/10/2016|
MarketMinder's View: That ad in question was from Quicken Loans, which touted a new smartphone app that makes it easier for folks to apply for a mortgage. Streamlining the administrative process of securing a mortgage is surely a plus for most folks. But some worry the app will make it too easy, encouraging people to borrow more than they can afford, possibly leading to another credit crisis. To us, whatever you think of the ad, a couple of thoughts: One, that so many have opined on how unwise it was is a sign of sentiment—folks still see financial crisis ghosts around every corner. Second, the US doesn’t have a “growth strategy”—the US isn’t China, and the virtuous cycle the ad discusses is a fictionalized account of how the economy works. The US economy grew in cycles from 1980 to 2007 because we have an incredibly innovative capitalist system. Not because lots of people bought houses. Even at its peak in 2006, housing (and this is a generous tally including all furniture purchases) never exceeded 7% of US GDP. Finally, we didn’t get the financial crisis because of lax lending standards. That caused the housing bubble, indeed, but the trillions in economic activity crushed in 2008 resulted much more from mark-to-market accounting and the government’s wild crisis response than loan losses. Read this for more on that.
|By Mark Blyth, The Guardian, 02/10/2016|
MarketMinder's View: This piece seems pretty darn confused, spooling together common narrative after common narrative, leading one to the conclusion the world economy has fundamentally changed because of (drumroll) demographics. (Rimshot.) It starts by arguing investors are detached from reality because they believed Fed rate hikes—which supposedly make money more expensive for borrowers—will spur demand for loans through boosting confidence. But an increase in the fed-funds rate doesn’t make money more expensive for borrowers, it makes overnight borrowing more expensive for banks. Individuals borrow at long-term rates, and those have come down since the Fed hiked rates last December. The argument then zigzags though a discussion of commodities that fails to point out prices always create winners and losers; trade, based on mercantilist viewpoints outdated since Adam Smith; and China (which this more or less rightly exonerates); and then blames income inequality, which is purely sociological, for weak growth, adding that the aging population is the real bogeymen, though neither income inequality nor demographics have suddenly shifted from a year or two ago when stocks were hitting record highs. That leads us to believe this is a case of market turmoil causing some folks to believe that “the game has changed for financial markets” and that “there is no going back to boom times.” But the game has not changed at all. Misplaced fears over the economy have been around for ages, and they will likely persist. As long as people are largely free to innovate and invent, discovering new ways to improve our standard of living, economies and financial markets will likely grow as they have in the past, and people will opine that they can’t.
|By Matt Levine, Bloomberg, 02/10/2016|
MarketMinder's View: First of all, MarketMinder does not recommend individual securities; this blurb is simply an example of a broader theme we wish to highlight, not a recommendation to buy, sell or take any other action. This is a collection of articles, and we don’t usually feature such roundups here. After all, rounding up round ups would be bizarre. That said, the first section of this—addressing Germany’s Deutsche Bank—is super timely and salient, a wonderful discussion of why recent fears over European banks’ creditworthiness likely aren’t as acute as they may seem. Recently, investors feared Deutsche Bank may be unable to make upcoming payments on some of its contingent convertible debt (CoCos), causing its yields to convulse, the cost of insuring its debt to spike and its stock price to tumble. In response, Deutsche has reportedly decided to beef up its capital (debt/equity) ratio, by buying back those CoCos at a discount to par, reducing its net debt, thereby boosting its capital (and booking a tidy profit). As the article concludes: “One thing this tells you is that the worries about Deutsche Bank aren't very acute. I mean, you can worry about Deutsche's long-term profitability or capital position or legal expenses …. But bank panics aren't about long-term profitability. They're about liquidity: They're sparked by the worry that the bank won't have enough money to pay you back. The fact that the market would reward Deutsche Bank for reducing its liquidity to improve some theoretical accounting metrics suggests that its concerns about Deutsche Bank just aren't that pressing.”
|By Binyamin Appelbaum, The New York Times, 02/10/2016|
MarketMinder's View: During Congressional testimony earlier today, Fed head Janet Yellen commented, “Financial conditions in the United States have recently become less supportive of growth,” and that, “These developments, if they prove persistent, could weigh on the outlook for economic activity.” In specifically addressing stocks’ volatility, Yellen said: “We have not seen shifts that seem significant enough to have driven the sharp moves that we have seen in markets.” She went on to say, “Let’s remember that the labor market is continuing to perform well. … We want to be careful not to jump to a conclusion about what is in store for the economy.” Calming words, indeed, But realistically, this is all just gobbledygook. Consider: Pretty much all the sanguine commentary in here from Ms. Yellen is about the labor market, and it presumes financial markets are overreacting because jobs are good. However, this is putting the cart before the horse. The fact is, markets lead economic activity and labor markets react to economic activity. You can’t prove markets are behaving irrationally by citing jobs—that would be … irrational. That said, you can do so by noting today’s positive yield spreads, the overall positive earnings season most are overlooking, the strong services sector in the developed world, and more. Those are leading and/or coincident indicators, not late laggers like labor markets. Maybe you agree with the “Fed Up” protestors who occupied the seats at today’s hearing and want the Fed focused on job creation. But if so, we’d suggest you separate that from your portfolio strategy.
|By Andy Bruce and Gavin Jones, Reuters, 02/10/2016|
MarketMinder's View: Industrial production—manufacturing, mining and utilities output—fell in December in the UK, France, Italy and Germany, stoking fears Europe’s economy may be slipping into recession. But heavy industry represents a small slice of overall output—it’s dwarfed by services such as finance, health care, restaurants and accommodations, which Services PMIs show grew nicely in January, a month after these dated data from December. Also, falling industrial output in the UK and US is largely the result of unseasonably warm weather, crimping utilities output, and the ongoing global commodities slump, which hit mining production. The economy would most likely be growing faster if heavy industry was expanding, but slumping industrial output doesn’t necessarily mean the rest of the economy will soon follow suit.
|By Simon Constable, US News & World Report, 02/10/2016|
MarketMinder's View: The four supposed signs of a bear market offered here are: Rates on 2-year government bonds exceeding 10-year Treasurys; the Dow Jones Transportation Average diverging from a rising Dow Jones Industrial Average; stocks’ 50-day moving average being below the 200-day; and folks generally just losing money, regardless of the stocks they own. None of these are quite right, in reality. An inverted yield curve—which the 2-year / 10-year spread noted here is a form of—is a very reliable economic forecasting tool, with steep yield curves suggesting banks can earn a tidy profit lending. However, this isn’t the right calculation—the more pertinent spread is 10-year rates minus overnight rates (fed funds), because banks borrow at the latter, not the two-year rate. And even when calculated correctly, it is a very imperfect timing tool. The Dow Transportation theory may have worked well when heavy industry dominated the economy, but not so much now that services account for the lion’s share of output. Regarding stocks breaking below moving averages, this only confirms what’s already happened (stocks being down) and not what’s going to happen, which is all that matters for investors. And this last point, ummm, corrections do that too.
|By Paul Vigna, The Wall Street Journal, 02/09/2016|
MarketMinder's View: Yields on Japan’s 10-year government bonds fell into negative territory Monday, spooking investors who fear this is a sign the global economy is materially weakening. But it’s more likely an unintended consequence of the Bank of Japan cutting its interest on central bank deposits to -0.1%. By charging banks to park funds, the BoJ intended to encourage banks to lend more, goosing growth. But just like their European counterparts, Japanese banks are instead moving reserves to sovereign debt, and high demand pulled already low yields below zero. The same thing happened throughout Europe, where some countries’ yields went negative as far as five years out. Just like quantitative easing, this is pushing on a string, and if central banks keep doubling down and accomplishing nothing, it could muddy sentiment more. But it shouldn’t derail the global expansion. Credit conditions remain healthy in much of the world.
|By Ben Eisen, The Wall Street Journal, 02/09/2016|
MarketMinder's View: Market downturns often end in a wave of selling, which signifies investors are not just pessimistic, but panicked. Some measure this capitulation by the correlation between all 10 sectors, noting it topped 90% near the end of 2010’s and 2011’s corrections. But they didn’t in 2012’s correction, and this article doesn’t take the dataset further back than this bull market’s beginning. You can’t draw any conclusions from four data points. There is no hard and fast rule correlations must exceed 90% for corrections to end, and just because they top 90% doesn’t necessarily mean the correction is over. Correlations eclipsed 90% last August, and though markets zoomed higher in October the correction resumed by year-end. For long-term investors who have remained invested throughout this correction, it doesn’t matter exactly when the bull trend resumes. And for investors who exited the market, looking for a sign of when to get back in, waiting for 90% correlations—or any other sign of capitulation—to reinvest risks missing out on the recovery if markets resume rising before it occurs.
|By Matt Egan, CNNMoney, 02/09/2016|
MarketMinder's View: This doesn’t really discuss why the Nasdaq is about 18% below its July 20, 2015 closing high, other than to observe that fear is rampant and seemingly disconnected from fundamentals like growing earnings. That observation seems about right to us and is much more consistent with a correction than a bear market. But our bigger beef here is with how the Nasdaq is portrayed: a collection of Technology stocks that naturally outperform in bull markets and lag when times get tough. That’s wrong on a couple fronts. One, the Nasdaq has 2600 companies, and only 572 of them are Tech. Two, Tech isn’t inherently superior during a bull market. Nor is the Nasdaq. Nor do Tech stocks innately have higher return potential than other sectors. If any of this were true, every investor would own only Tech during bull markets, own no Tech in bears, and have smashing returns. Everything has its day in the sun in the rain.
|By Ivana Kottasova, CNNMoney, 02/09/2016|
MarketMinder's View: The world is awash in oil, and the International Energy Agency (IEA) expects it to remain so for the foreseeable future, keeping prices low. Production in Saudi Arabia, Iraq and Iran is up year over year, even as prices continue falling. US shale producers have slowed production growth, but only by a little as producers have slashed costs through technology-driven efficiencies. Also, the IEA forecasts global demand growth will slow a bit this year due to slower growth in China, the US and Europe, further pressuring prices. Investors inclined to bottom-fish in Energy stocks may want to look elsewhere for bargains, as the sector will likely continue to struggle as long as oil prices remain depressed.
|By Rick Newman, Yahoo Finance, 02/09/2016|
MarketMinder's View: The five reasons presented here aren’t so much reasons to love the market selloff—because virtually no one likes seeing their portfolio decline regardless of their outlook—as they are reasons to believe the economy is not headed for recession, despite widespread fear otherwise. While we agree a recession isn’t likely to develop in the near term, it isn’t for many of the reasons offered here. We do agree with the first point: The Fed thus far hasn’t erred massively and inverted the yield curve, which often happens before recessions. But brushing off China because it buys less than 1% of US exports ignores China’s huge role in the global economy. If the world’s second-largest economy had an actual hard landing, it would dent global demand severely, and those ripples probably would hit America. The likelihood if this is just extremely low. As for US consumers, the savings rate doesn’t predict consumer spending and isn’t a terribly relevant economic statistic. Plus, consumers are rarely the swing factor when business cycles turn. Businesses getting lean and mean usually tips the scales—and kudos to the article for pointing out that firms have plenty of flexibility right now (though we’d add that balance sheets are healthy and cash-rich). Finally, while we agree stocks aren’t overvalued, this has little bearing on the economy, and valuations don’t predict future performance.
|By Jackie Calmes, The New York Times, 02/09/2016|
MarketMinder's View: President Obama submitted his final federal budget proposal to Congress today for fiscal year 2017. Like any budget, it would create winners and losers, but it stands almost no chance of passing. Congressional Republicans have already declared the proposed $10/barrel oil tax dead on arrival, and they object to raising funding for financial regulation and clean energy. But whether or not Washington ultimately agrees to a budget is of little consequence for investors. Washington operated without a budget for Obama’s first six years in office, as Uncle Sam ran on continuing resolutions—extending prior year spending levels into the following year. Meanwhile, the economy and financial markets grew throughout this period. It’s possible Congress and the President will agree on a budget this time around, but even if not this likely doesn’t pose a risk for the economy or markets.
|By Carl Richards, The New York Times, 02/08/2016|
MarketMinder's View: Here’s an interesting theory on why people are prone to making ill-timed decisions when markets are volatile, like selling after a big drop: “We yearn so badly for clarity that we often prefer a negative outcome we’re certain about to one that leaves us in suspense.” When markets swing, locking in a loss sometimes seems preferably, emotionally, to hanging in and risking another big down move before the recovery—even though participating in the recovery is vital. Knowing how your brain and feelings try to trick you can help you avoid serious errors.
|By Theo Francis, The Wall Street Journal, 02/08/2016|
MarketMinder's View: Here is really all you need to know about this: “With nearly a third of S&P 500 companies reporting detailed year-end financial results through early last week, capital expenditures were up 6.2% from a year earlier, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That is less than half the 13.9% increase reported in the last quarter of 2014, though much of the slowdown comes from energy companies, Mr. Silverblatt said.” Capex is still growing, which is the opposite of pulling back. Especially outside the Energy sector, whose struggles have been widely known for over 18 months. The rest of this article has little to no merit once you realize this isn’t a contraction in business spending, just a slowdown.
|By Joseph Ciolli, Oliver Renick and Lu Wang, Bloomberg, 02/08/2016|
MarketMinder's View: Though these pundits are overall still rather bullish, considering the median forecast is for a 6.4% full-year S&P 500 price gain, the downwardly revised forecasts are nonetheless encouraging. It’s fairly normal to see this sort of capitulation in the final throes of a downturn. We aren’t calling bottom or anything, but this is an encouraging development.
|By Paul Vigna, The Wall Street Journal, 02/08/2016|
MarketMinder's View: The only correct thing in this article is the picture, which shows that Head & Shoulders is shampoo. That’s all it is. It is not a predictive chart pattern, even if you can stretch your imagination to see four happening at once. If technical analysis worked, everyone would do it and no one would mistime a market ever. It doesn’t. This is all just searching for meaning in meaningless wavy lines.
|By Danny Hakim, The New York Times, 02/08/2016|
MarketMinder's View: Did global GDP shrink 5% last year, as the IMF says it did when measured in US dollars? Or did it grow 13.6%, as it did when measured in euro? Or 3.1%, the growth rate in the IMF’s purchasing power parity calculation? Or was it 2.4%, the World Bank’s estimate? We’d venture it doesn’t totally matter—this is an academic debate and nothing more. GDP is a flawed statistic—a loose measure of economic flow that omits many of the self-employed and counts global trade as entirely zero-sum. It’s fuzzy, and currency swings add extra fuzz. More important than currency fluctuations’ skewing the global aggregate is that many more countries grew than not, and those shrinking are few in number and small in size. If that isn’t global growth, then we don’t know what is.
|By Joseph Stiglitz, Project Syndicate, 02/08/2016|
MarketMinder's View: This amounts to 957 words of economic illogic. The titular “what,” we think, is a lack of bank lending, but the ascribed causation is reversed and the discussion misses some big things. It argues the reason lending didn’t soar during quantitative easing (QE) is because the Fed paid interest on excess reserves, and it warns hiking that interest rate to 0.5% (as the Fed did in December) will only make things worse. This ignores the yield curve and grossly overestimates the impact of interest on excess reserves. It’s not like banks wanted to sit around and earn 0.25% for doing nothing. Banks actually really like taking some risk in exchange for a wider profit margin. They just were dissuaded, because QE flattened down the yield curve—the primary influence on loan profitability. At the same time, regulatory changes made lending to all but the safest buyers risky and costly for banks, and with potential profits dwindling, there wasn’t enough reward to make the added risk worthwhile. Once QE ended, however, and the yield curve steepened, lending soared. It’s still growing swiftly, even with higher interest payments on reserves, because that payment is insignificant.
|By Simon Marks and Ian Traynor, The Guardian, 02/08/2016|
MarketMinder's View: This is all still in the sources-say stage, where details are few and important items like penalties are unknown. But keep an eye on the EU’s plans to force multinationals to disclose the exact country breakdown of their earnings and taxes paid, part of the effort to combat what they all consider tax avoidance, even though it actually constitutes a perfectly legal strategy of paying taxes in the country where your regional headquarters is located. Even without details, the plan strikes us as all but impossible to enforce, as determining where commerce actually happens isn’t entirely easy in an era of cross-border transactions. If penalties are toothier than a sternly worded letter, it could make multinationals risk-averse, which wouldn’t be wonderful. It might also invite a tit-for-tat response from US officials, raising the specter of trade barriers. Or, this all might turn out to be window dressing.
|By David Reilly, The Wall Street Journal, 02/08/2016|
MarketMinder's View: The number is the difference between 10-year and 2-year US Treasury yields, which is an odd depiction of the yield curve spread. Banks don’t borrow at two-year rates. They borrow at overnight rates, and the spread between overnight and long-term yields is a tad wider. So while we do give this piece points for focusing on the yield curve, which is indeed an important signal for bank profits (which in turn influence loan growth), it seems massively overstated. Particularly since Treasury markets are volatile, and plunging long-term yields could easily be a blip.
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Market Wrap-Up, Thursday, February 11, 2016
Below is a market summary as of market close Thursday, February 11, 2016:
- Global Equities: MSCI World (-1.2%)
- US Equities: S&P 500 (-1.2%)
- UK Equities: MSCI UK (-2.4%)
- Best Country: Australia (+0.8%)
- Worst Country: Italy (-4.6%)
- Best Sector: Consumer Discretionary (-0.2%)
- Worst Sector: Financials (-2.6%)
Bond Yields: 10-year US Treasury yields fell -0.01 percentage point to 1.66%.
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.