By Michael Stanes, Investment Director at Heartwood Investment Management
Notwithstanding that there has been a recent fading of momentum in the reflation trade, signalled by lower bond yields and the underperformance of certain more cyclical parts of the equity market, we believe the fundamental backdrop remains supportive to financial markets. Markets have come through a quieter period of late, but we view this pause as constructive. Investors’ expectations had moved too quickly and are now being scaled back to more realistic levels. Economic survey data had reached lofty levels which were unlikely to be sustained due to the trailing gap with real activity data. Furthermore, the rolling over of inflation expectations should in time help to relieve the pressure on real incomes and add support to consumption. Overall, global growth continues to present a positive picture. The fundamentals remain supportive to corporate earnings growth, which is already seeing improvement. According to FactSet, companies in the S&P 500 reported their first two quarters of back-to-back profits growth in two years. In addition, plentiful liquidity continues to remain a key driver of financial markets, aided by very accommodative central bank policies.
Although our level of conviction in the economic outlook remains, we have made no changes to portfolios, remaining modestly overweight risk assets. That being said, our risk exposures are tilted towards more specific and targeted areas of the market, whether by sector or market-cap, which reflect our degree of confidence in the fundamental outlook. We are not inclined to increase risk levels further, as we are mindful of upcoming event risk in Europe, especially the French election, as well as broader geopolitical risks. Furthermore, while markets have paused, there has been no major setback and therefore few compelling broad valuation opportunities.
On a final note, we should acknowledge that over the past month the UK government has triggered Article 50, an event that largely went unnoticed by the markets. While Brexit remains a significant event risk in the UK, we believe any fallout will be relatively contained to our domestic market. We reiterate our caution on the UK economy and maintain a defensive home bias positioning.
Equities: Our view remains that a modest overweight in equity is appropriate. The reflation trade has lost some momentum around fears of Trump’s ability to implement his reform plans post the unsuccessful attempt to repeal the Affordable Care Act. We wish to remain fully invested in the US (and no more given valuations), with more targeted exposure – healthcare being one theme we have recently added. We remain positive on Europe, despite the upcoming event risk of the French election, and are encouraged by continuing economic improvements. Japanese equities have delivered lacklustre returns, but we continue to believe that developments in the corporate sector are supportive. We have taken some exposure to small- and mid-cap Japanese equities. Our less preferred market is the UK amid signs of slowing consumption, meaningful structural imbalances and Brexit uncertainty. In emerging markets, we maintain our overweight position but would not add at this point, given recent resilience and possible risk of a trade policy shock out of the US.
Bonds: The loss of momentum in the reflation trade has benefited bond markets through lower inflation expectations, a fall in longer-dated bond yields and support to emerging market debt given a softer tone to the US dollar. A supportive fundamental backdrop has also helped corporate credit markets. Given the hawkish tone of the Fed minutes as well as more focus on an ECB exit strategy, we continue to believe that being short duration remains appropriate. Moreover, headline inflation trends in the UK continue to rise. We hold select exposures to shorter-dated investment grade corporate bonds, specialist lenders and emerging market sovereign debt.
Property: UK property developers and listed vehicles have been solid performers this year, supported by better than expected fourth quarter results and the rally in UK gilt yields. Nonetheless, there are few catalysts that we can see in the shorter term, given supply concerns and uncertainty around Brexit, and we retain our underweight position. On a regional basis, we are primarily invested in cities outside of London, which are less exposed to ‘Brexit’ fallout. Outside of the UK, we are also looking at opportunities in the US REIT (real estate investment trust) market, although we remain wary of the impact of the Fed’s more hawkish stance.
Commodities: The lack of volatility in the oil market came to an abrupt end in the last few weeks, but having fallen sharply prices are now recovering. We continue to expect that an improving global economic environment and a tighter supply/demand balance will ultimately be supportive to commodity prices this year. Direct access to this market is through owning futures contracts rather than the physical assets and while the risk/return profiles are looking more attractive across some parts of the complex, they are not yet at levels where we are ready to invest. We have, though, a position gold in some strategies for diversification.
Hedge funds: While we have held a limited allocation to hedge funds in recent years on concerns around performance, we believe that increasing interest rate divergence should create more opportunities going forward. Our preference remains for macro/CTA strategies, but we are also taking a more positive view on equity hedge strategies, given the greater likelihood of increased stock dispersion (i.e. between winners and losers), as well as credit long/short strategies.
Cash: We have reasonable levels of liquidity across our portfolios both in cash and short-dated bonds, which we will invest as and when we see specific opportunities. Market volatility remains low, a situation unlikely to persist throughout 2017.
GameStop rally fizzles; shares still on pace for 130% weekly gain
By Aaron Saldanha and David Randall
(Reuters) – An early surge in the shares of GameStop Corp fizzled and left the video game retailer’s stock down more than 15% on Friday, throwing water on a renewed rally this week that has left analysts puzzled.
GameStop shares hovered around $94 after hitting $105 in late-morning trading. Despite Friday’s losses, the company’s stock is up about 135% for the week in the face of a broader market selloff that has sent the benchmark S&P 500 down about 2% over the same time.
Analysts have struggled to find an clear explanation for the rally, leaving some skeptical that it will continue.
“You might be able to make some quick trading money and it could be a lot of money, but in the end, it’s the greater fool theory,” said Eric Diton, president and managing director at The Wealth Alliance in New York. The theory refers to buying stocks that are over-valued in anticipation that someone else will come along to buy them at a higher price.
One catalyst that sparked GameStop’s rally in January – a high concentration of investors that had bet against the stock being forced to unwind their positions – does not appear to be as much of a factor this time.
Short interest accounted for 28.4% of the float on Thursday, compared with a peak of 142% in early January, according to S3 Partners.
Options market activity in the stock, which has returned to the top of the list in a social media-driven retail trading frenzy, suggested investors were betting on higher prices or higher volatility, or both.
Refinitiv data on options showed retail investors have been buying deep out-of-the-money call options, which are options with contract prices to buy far higher than the current stock price.
Many of those option contracts are set to expire on Friday, and would mean handsome gains for those betting on a further rise in GameStop’s stock price.
Call options, which would be profitable for holders if GameStop shares reach $200 and $800 this week, have been particularly heavily traded, the data showed.
“The actors are looking to take advantage of everything they can to maximize their impact and the timing is important,” said David Trainer, chief executive officer of investment research firm New Constructs. “The options expiration will contribute to their strategy on how to push the stock as much as they can and maximize their profits.”
Bots on major social media websites have been hyping GameStop and other “meme stocks,” although the extent to which they influenced market prices is unclear, according to analysis by Massachusetts-based cyber security company PiiQ Media.
GameStop’s stock is still far from the $483 intraday trading high it hit in January, when individual investors using Robinhood and other trading apps drove a rally, forcing many hedge funds that had bet against the video game retailer to cover short positions.
Other Reddit favorites were also lower, with cinema operator AMC Entertainment down around 5.5%, headphone maker Koss off about 25% and marijuana company Sundial Growers down less than 1% in Friday trading.
(Reporting by Aaron Saldanha in Bengaluru; Additional reporting by Devik Jain and Sruthi Shankar; Writing by David Randall; Editing by Shinjini Ganguli, Anil D’Silva and Dan Grebler)
Stocks try to recover from bond whiplash, dollar gains
By Herbert Lash
NEW YORK (Reuters) – Global equity markets swooned on Friday, even as the Nasdaq and S&P 500 tried to recover and the bond rout eased a bit, but fears of rising inflation still weighed on sentiment as data showed a strong rebound in U.S. consumer spending.
Shares of Amazon.com Inc, Microsoft Corp and Alphabet Inc edged up after bearing the brunt of this week’s downdraft, while financial and energy shares fell.
The S&P 500 gained 0.80% and the Nasdaq Composite added 1.87%. But the Dow Jones Industrial Average fell 0.3%.
U.S. consumer spending rose by the most in seven months in January as low-income households got more pandemic relief money and new COVID-19 infections dropped, setting the U.S. economy up for faster growth ahead.
The benchmark 10-year Treasury note on Thursday touched 1.614%, the highest in a year, rocking world markets. The note’s yield is up more than 50 basis points year to date and is now close to the dividend return of S&P 500 stocks.
The 10-year note fell 1.7 basis points to 1.4977%.
The amount of money swirling through markets and U.S. stocks at close to all-time highs has caused investor angst, said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.
“Many people are taking some profits and not necessarily reinvesting that money quite yet,” Kinahan said, but the tug of war isn’t over year.
“The U.S. equity market is still the best game in terms of safety versus opportunity. But there is a shift going on.”
The scale of the recent Treasury sell-off prompted Australia’s central bank to launch a surprise bond buying operation to try to staunch the bleeding.
MSCI’s benchmark for global equity markets slid 0.83% to 661.49.
In Europe, the broad FTSEurofirst 300 index closed down 1.64% at 1,559.48. Technology stocks lost the most as they continued to retreat from 20-year highs.
The dollar rose against most major currencies as U.S. government bond yields held near one-year highs and riskier currencies such as the Aussie dollar weakened.
The dollar index rose 0.578%, with the euro down 0.78% to $1.2081. The Japanese yen weakened 0.42% versus the greenback at 106.66 per dollar.
Gold fell more than 2% to an eight-month low, the stronger dollar and rising Treasury yields hammered bullion and put it on track for its worst month since November 2016.
Benchmark German government bond yields fell for the first time in three sessions but were still headed for their biggest monthly jump in three years after rising inflation expectations triggered a sell-off.
The 10-year German bund note fell less than 1 basis points to -0.263%.
European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.
Copper recoiled after touching successive multi-year peaks in six consecutive sessions, falling more than 3% as risk-off sentiment hit wider financial markets after a spike in bond yields.
Three-month copper on the London Metal Exchange (LME) slumped to $9,112 a tonne.
MSCI’s Emerging Markets equity index suffered its biggest daily drop since the markets swooned in March. MSCI’s emerging markets index fell 3.06%.
The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.
Currencies favoured for leveraged carry trades all suffered, including the Brazil real and Turkish lira, which slid for a fifth straight day, erasing all the year’s gains.
Asia earlier saw the heaviest selling, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since the market rout in late March.
Oil fell. Brent crude futures fell $0.78 to $66.1 a barrel. U.S. crude futures slid $1.24 to $62.29 a barrel.
(Reporting by Herbert Lash, additional reporting by Tom Arnold in London, Wayne Cole and Swati Pandey in Sydney; editing by Larry King and Nick Zieminski)
European shares drop as high yields spark profit taking in tech, resources
By Shashank Nayar and Ambar Warrick
(Reuters) – European stocks closed lower on Friday, ending three weeks of gains as investors booked profits in technology and commodity-linked shares due to concerns over rising inflation and interest rates on the back of a jump in bond yields.
The benchmark European stock index fell 1.6%, and shed 2.4% for the week – its first weekly loss this month – with technology stocks losing the most as they continued to retreat from 20-year highs.
On the day, resource stocks were the softest-performing European sectors, tumbling 4.2% from a near 10-year high in their worst session in five months.
“Equity markets across the U.S. and Europe are quite expensive now and with bond yields constantly rising, the fixed income market is proving to be more attractive than the riskier equity market,” said Roland Kaloyan, a strategist at SocGen.
“Investors are actually looking at the pace at which yields drop and the current speed is quite concerning for equity markets.”
U.S. and euro zone bond yields retreated slightly on Friday, but stayed close to highs hit this week as investors positioned for higher inflation this year. Yields were also set for large monthly gains. [GVD/EUR] [US/]
Sectors such as utilities, healthcare and other staples – usually seen as proxies for government debt due to their similar yields – lagged their European peers for the month as investors sought better returns from actual debt.
Still, the benchmark STOXX 600 gained in February, helped by a rotation into energy, banking and mining stocks on expectations of a pickup in business activity following vaccine rollouts.
Travel and leisure was the strongest sector in February as investors bet on an economic reopening boom. Banks also outperformed their peers thanks to higher bond yields.
Better-than-expected fourth-quarter earnings have also reinforced optimism about a quicker corporate rebound this year. Of the 194 companies in the STOXX 600 that have reported quarterly earnings so far, 68% have beaten analysts’ estimates, according to Refinitiv.
“As recovery hopes gain ground with the economy re-opening and vaccines coming up, coupled with earnings being relatively positive, the near-to-mid-term outlook for equities seems positive with yield movements still a part of the equation,” said Keith Temperton, an equity sales trader at Forte Securities.
Among individual movers, Belgian telecom operator Proximus was the worst performer on the STOXX 600 for the day, after it flagged a lower core profit in 2021.
(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila and Hugh Lawson)
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