credit Markets

Silver Linings In Abundance.

" doesn’t pay to rail that traders are getting it wrong if you don’t like how things go."

“Talk of greater stimulus and restriction relief next week is being taken as more forward-looking information than what we learned today”, former trader Richard Breslow wrote Friday, summing up buoyant risk sentiment attributable to hopes that parts of the US economy can start down the road to normalization soon.

Risk appetite appears to be getting an extra boost from early signs of effectiveness in virus patients taking an experimental Gilead therapy.

If US equities can manage a gain Friday, it would mean a second consecutive weekly advance. Last week, you’ll recall, was the best week since 1974.

No small feat if the S&P can manage another weekly gain after that kind of “bear market bounce”.

At a certain point, we may have to abandon the “bear market rally” characterization. As absurd as it would seem to declare this bear already vanquished, “it doesn’t pay to rail that traders are getting it wrong if you don’t like how things go”, as the above-mentioned Breslow puts it.

Meanwhile, flows are normalizing. Prime money funds saw a second straight week of inflows, indicating the Fed has restored some measure of confidence with efforts to support funding markets, while high yield funds posted a record weekly inflow for the second week in three, on Lipper’s data. Overall, it was the third straight week of inflows into high yield.

“You can thank the Fed”, one money manager told Bloomberg.

High yield spreads have come in handily since the distressed levels seen during the worst of last month’s dramatics. Even high yield energy has improved.

“Thank the Fed” indeed. It’s nice to have the benefactors with the printing presses backstopping risk assets, although there are now shrill cries from the likes of Howard Marks and Jeff Gundlach, who are ostensibly concerned about “moral hazard”.

“The Federal Reserve is presently acting in blatant non-compliance with the Federal Reserve Act of 1913”, Gundlach absurdly tweeted earlier this week. “An institution violating the rules of its own charter is de facto admitting that said institution has failed and is fundamentally broken.”

It’s hard to take that kind of thing seriously. Even if you agree with Jeff, how angry can he be, really? He’s a billionaire. By his own admission, the crisis is affording him rare opportunities to buy “blue chip” art on the cheap. That’s Jeff’s silver lining. For Main Street, a silver lining right now might just be finding an extra can of Vienna sausages in an otherwise bare cupboard. Or discovering a quarter at the bottom of a loose change pile you thought consisted solely of dimes, nickels and pennies.

In any event, investment grade funds saw their first inflow in seven weeks, yet another sign that the Fed has been successful in restoring confidence to previously beset parts of the market. IG was the locus of pain during last month’s rout, and funds hemorrhaged cash during March’s scariest weeks.

You get the idea. Things are looking up. Or at least they are for financial assets.

“Markets are generally focusing on positive news-flow, with the magnitude of China’s economic contraction not far off from expectations, while countries continue to take steps to exit lockdown measures and progress is being made on treatments for COVID-19”, SocGen’s Jason Daw wrote Friday.

Still, it comes with the obligatory caveats. “Second waves” of the virus may be in the cards and the reaction this week to the Empire Fed crash, industrial production slump and record drop in retail sales stateside suggests not all depression-like data will be digested with alacrity.

“There’s still the possibility of second and third waves [of virus infection] if the reopening occurs too soon”, an analyst at Manulife Investment in London told Bloomberg Friday. “But I think the early message is that lockdowns work and the end of the bad news could be in sight”.

Again, that doesn’t apply to Main Street. There is no “end in sight” for regular folks, 22 million of whom are recently jobless, effectively offsetting all of the job creation over a decade – and then some.


3 comments on “Silver Linings In Abundance.

  1. Anonymous

    And I thought 2019’s multiple expansion was ridiculous…

    P/E’s “…to the moon, Alice!!!!”

  2. I get the market is forward looking. Still the market seems to be drinking at the trough of Fed easing and hope about the virus. So the rally is partly sentiment based. As we all know sentiment can turn on a dime. We have had a very nice rally lately. Maybe time to regroup?

    • Anonymous

      Yes, time to pause and assess. Lots of hope and “maybe this drug will work”. But still no actual solutions in hand at this moment.

      And of course, the only reason the curve has flattened is because we’ve been hiding in our holes. Case counts are still going up each day, so the bug has NOT gone away. Re-opening will be executed with some responsibility, but also a lot of stupidity and carelessness. So we’ll be muddling through this mess for some time to come.

      How many quarters can you look through at any given point in time…???

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