To be clear, the reason “what could possibly go wrong?” has become such a ubiquitous phrase these days has a lot to do with the fact that this has all become one trade.
Across the board it’s all a bet on the expected slow pace of DM policy/balance sheet normalization and conditions remaining “just right” for that slow pace to make sense to policymakers. “Just right” in this context means decent growth, but not too decent, and inflation that’s subdued enough to keep central banks from getting too aggressive.
As long as the accommodation remains largely in place, carry trades will continue to work, the vol. sellers will remain solvent, etc. etc. In short: until someone at a DM central bank makes a hawkish policy mistake, everyone is going to keep picking pennies in front of steamrollers. Because that’s all this is now – just having the balls to hang around longer than the next guy and squeeze out that last little bit of carry or those last few basis points of spread compression before everyone gets run-the-fuck over.
Well with that as the context, do consider this out Monday afternoon from Bloomberg:
- Investors are willing to allocate more to emerging markets even after a majority maintained or increased their exposure in the past year, according to a survey by Columbia Threadneedle Investments.
- 58% of respondents expect to increase their EM allocation over the next 12 months, up from a 28% at the end of 2016
- 72% of the respondents said they are “positive” with the outlook for EM equities over the next 12 months, more than the 45% share at the end of last year
- A gauge of emerging-market investor sentiment calculated by Columbia has increased since the end of 2016 and jumped more than 70% since 2015, according to the firm’s report
- The survey was conducted in June and comprised 220 financial advisers and investment professionals, half of which manage more than $100 million in assets
Now that may very well end up being the right way to think about things, but do note that the MSCI EM index is already up some 25% YTD and volatility has collapsed. Here’s what that looks like in terms of EEM:
It’s the same story with the China ETF:
Again: “what could possibly go wrong?”
Which brings us to a visual summary of an exceptionally boring day. A day in which the Dow hit another record and a day in which global stocks hit a new peak overnight:
The jobs report high did wear off a bit by the time Europe got into the swing of things and ultimately, European shares were a mixed bag with the DAX once again the laggard:
The dollar managed to hold onto its post-NFP gains, but do note that sentiment is, well, bearish:
Oil’s in wait-and-see mode ahead of expected OPEC jawboning. Here’s Bloomberg’s Alex Longley:
It’s not just stocks experiencing lower volatility — price swings in oil have been on the decline too, with three separate gauges closing at multi-month lows on Friday. The NYMEX WTI Volatility Index settled at 27.9%, that’s a drop of more than half from the level it was trading at before OPEC cut output. That comes even ahead of this week’s meeting between OPEC representatives and their allies to discuss lapses in output compliance. Yet with traders heading off for holidays, lower volatility could well be the path of least resistance — at least for the rest of the summer (or, God knows, maybe longer.)
As a reminder, we got this on Sunday:
Only to get this on Monday:
Operations at Sharara oil field back to normal after halt since Sunday due to armed protesters shutting down some facilities, according to statement on state-run National Oil Corp. website.
Basically, supply is still the problem:
“Everybody I’ve spoken to is waiting for some very positive jawboning to come from that meeting tomorrow,” Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida, said earlier. Here’s a 5-day chart that shows (again) that $50 on WTI is proving to be a tough nut to crack:
Meanwhile, iron ore on the Dalian Exchange has now surged to its highest since March 21…
… while steel rebar went limit-up, hitting its highest since April 2013 today.
But don’t worry. Because this isn’t another “what could go wrong?” deal, Reuters promises:
However, this is not just irrational exuberance.
There are good reasons for steel’s extended rally and as long as steel prices generate high margins for China’s steel mills, there will be a knock-on effect on iron ore pricing.
It’s definitely “not irrational exuberance.”
It’s just that people were panic buying everything from iron ore to rebar to eggs at the open:
Yes, “FOMO” – or maybe “FML” is better.
The bottom line there is that it is notoriously difficult to determine what’s speculation and what’s rational trading when it comes to commodities prices in China. And as Reuters does go on to note in the same piece linked above, “the 140-million ton elephant in the room for iron ore pricing is the amount of the stuff now sitting in Chinese ports.”
Anyway, we’re floating in summer limbo ahead of Jackson Hole which means that for the time being, the answer to “what could possibly go wrong?” is probably “not much.”
So it’s “party on, Wayne,” for now.
But don’t forget that outside of 2017, there’s only been one other year that saw the Dow hit record highs for 9-straight sessions or more.
That year was 1987.