Hope Floats, Skepticism Lingers

Risk sentiment improved as February gave way to March.

Global equities were higher, marking a stark contrast with last week, when stocks struggled to cope with rapid rate rise in developed markets.

The RBA stepped up bond-buying, even as Aussie yields were already moving sharply lower coming off the weekend. At one point, 10-year yields fell more than 30bps. Some noted that the market is still fragile, characterized by wide bid-asks Down Under and apparent problems managing yield-curve control. The RBA meets Tuesday.

European shares looked poised for an outsized advance and the MSCI Asia Pacific Index rose the most in a month.

Analysts have generally played down the backup in rates. Over the weekend, Goldman said the level of yields in the US isn’t high enough to threaten stock valuations, even as the speed of rate rise was a concern.

JPMorgan’s Mislav Matejka, meanwhile, doubts the durability of the bond selloff, especially at such speed and noted that historically, a steeper curve was a positive signal for equities. Profit growth should be “significant” in 2021, JPMorgan said, in a note. Dips should be bought, they reckon.

Final manufacturing PMIs out of Europe for February showed strength. The bloc-wide gauge hit the highest in three years at 57.9. “Manufacturing is appearing as an increasingly bright spot in the eurozone’s economy so far this year,” Chris Williamson, Chief Business Economist at IHS Markit remarked.

“The PMI has reached a three-year high to run at a level that has rarely been exceeded in more than two-decades of survey history – notably during the dot-com bubble, the initial rebound from the global financial crisis, and in 2017-18,” Williamson added.

You don’t hear that everyday — a comparison between eurozone manufacturing PMIs and the dot-com bubble.

Still, if “hope floats,” skepticism lingers.

As the dollar came off the lows in European trading, Bloomberg’s Eddie van der Walt cautioned that “uncertainty wasn’t washed away from markets.” “While calm has been restored for now, traders probably won’t want to venture too far from their screens,” he added.

Oh, and Democrats’ “Plan B” for leveraging the tax code to institute a de facto minimum wage hike was shelved, sources said. Apparently, getting Joe Biden’s stimulus plan through the Senate expeditiously means abandoning the minimum wage push for now. Practicality, and such.


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3 thoughts on “Hope Floats, Skepticism Lingers

  1. The US government has approx. $30T of debt, of which $20T is held by third parties (not SSA or Fed Reserve).
    Of the annual $3T US Federal budget (excluding “one, two or three off” stimulus payments), approx $380B was interest in the last fiscal year.
    If I do the math, seems impossible that rates will be allowed to go up much, if at all. Seems literally impossible that rates could even get to 5%- as even $21T( maybe interest payments to Fed/SSA are suspended) x 5% is $1T of interest expense- which would equate to 1/3 of our existing Federal budget. LOL
    Not sure how it will be controlled by the Fed, but controlled it will be.

    1. Of course ultimately, this entire charade is just that — a charade.

      What kind of sense does it make for one government entity (the Fed) to buy bonds from another government entity (Treasury) in order to keep long-term interest rates on those bonds tamped down when the interest is denominated in a currency that the same government issues?

      We are engaged in insanity. Pure, unadulterated insanity masquerading as something else because people have accepted the notion that “money,” “dollars,” “bonds,” and “markets” are real things, with their own set of rules that operate independently of us.

      But that’s just not true. If it was, bonds would trade on Saturdays. Why don’t they? Because we collectively decided that Saturdays are better spent walking the dog, or going to the park, or watching television, or just resting and doing nothing.

      Then, come Monday, we go right back to pretending we have no control over these independent entities called “bonds” or, if we do have control, that we have to exercise that control via a series of ridiculously convoluted and circular maneuvers which all involve manipulating (digital) pieces of paper that we made up.

  2. Here’s a fun story from a different bubble era and perhaps a lesson.

    Amazon’s Convertible Bonds Get a Closer Look: Rates of Return
    June 30, 2000 (Bloomberg)

    “The fundamental problem with the operations lies in the fact that Amazon does not generate positive net cash flow per unit of product it sells,” Suria said in his report.

    In the first quarter, Amazon paid out $320.5 million more in cash than it brought in, more than 10 times the company’s fourth-quarter negative cash flow. Amazon, except for a brief period in 1995, hasn’t been profitable. The Seattle-based company’s losses to date total about $1.2 billion.
    The 4.75 percent convertibles now yield about 11.7 percent. That compares with an average yield of about 10.44 percent for 10-year notes of industrial companies with high single-“B” credit ratings. But Amazon’s convertibles are rated several notches lower, so investors are taking on more risk for the higher return.

    If you're going to take a chance on a busted convertible, then I probably wouldn't make it Amazon.com,'' said Robert Wheeler, senior vice president and convertible-bond analyst at Miller Tabak Roberts LLC. Over the long term,I think Amazon makes it, but there might be more room for the downside” on the convertible debt as well as the shares.

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