| | | Equity Market1. Let’s begin with the stock market where we see more evidence of complacency despite significant policy uncertainty.
• The VIX index hit the lowest level since 2007 before recovering a bit (still firmly below 11).
• It was strange to see VIX move lower in tandem with the S&P 500. These indices are supposed to be inversely correlated.
• Speculative accounts’ net short VIX futures hit another record.
this means that the Spec futures traders are positioned for even lower VIX NUMBERS.
This is the proverbial whistling past the graveyard!
• Equity implied volatility has diverged from other markets. The chart below compares VIX with swaption vol – a measure of perceived risk in interest rates. A similar gap exists between equity and currency markets.
Equity traders are just not getting it through their head that stocks can go down.
• It’s also worth noting that the index of US economic policy uncertainty has been rising as VIX declines.
whistling DIXIE past the graveyard.
2. In other developments, the US/Mexico spat is taking a toll on some sectors of the market.
• The rise in anti-US sentiment in Mexico hit Starbucks shares.
Source: Reuters; Read full article
• The threat of US/Mexico border tax is making grocery store investors quite nervous. Below is the share price of Whole Foods over the past few days.
• Here is a detailed chart of US – Mexico trade by sector. The auto industry looks especially vulnerable.
Source: @MarketWatch, @crisbarrett, @Tmp_Research; Read full article
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Credit1. European credit spreads continue to decline – driven by higher equity markets and the ECB’s bond-buying program.
complacency rules in the European high risk debt market as the investors believe that the ECB will back stop all bad out comes that could occur in Europe.
According to Morgan Stanley, “more than two-thirds of EUR high-yield bonds now trade under 3% yield”.
Source: Morgan Stanley, @NickatFP, @joshdigga
The above trends have resulted in an unprecedented gap between the cost of funding via debt vs. equity.
Complacency continues as the economic and financing functions are ignored.
Source: Citi, @NickatFP, @joshdigga
2. The US elections and higher commodity prices have “refueled” HY bond issuance.
SO we have the speculative hot money going after every manner of higher risk investment vehichle.... risk.... losing money .... that is only for the weak, timid and chicken to contemplate ... Not for the BOLD. Bulls run wild everywhere..... occasionally right into the sword of the bull fighter.
Source: @IIF; Read full article
3. US leveraged loan funds inflows remain healthy.
Fixed Income1. The chart below shows the ownership structure in US fixed income since the 1950s.
Foreign ownership of US debt continuous to grow higher and higher.
Source: Goldman Sachs, @bySamRo, @DeanDijour
2. Fixed income mutual funds continue to attract capital.
Source: Citi, @NickatFP, @joshdigga
Energy MarketsAs discussed previously, investors should be cautious going long crude oil at this juncture
• US oil rig count continues to rise.
• Speculative accounts now hold record levels of net long NYMEX crude oil futures.
Specs just are real firm believers in higher crude prices.
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