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Bank of America warns a market pullback in Q1 is now ‘very likely’

Posted in Uncategorized by dionrabouin on January 27, 2018

The record pace of money flowing into equity markets has triggered a strong sell signal for analysts at Bank of America-Merrill Lynch (BA) (BAML).

In a report titled “Non-Stop Euphoric Cabaret,” BAML analysts say their selloff indicator shows stocks are very likely in for a fall in February or March. They noted that the historical average peak-to-trough drop in the S&P 500 (^GSPC)  was 12%.

Charging Bull Wall Street
The idea of the bull market dying because of central banks tightening too quickly is a concern, according to some experts. (AP Photo/Mary Altaffer)

The metric, known as the Bull & Bear Indicator, rose to 7.9, its highest level since March 2013. In contrast, the measure showed a reading of 0 in February 2016.

The culprit may be the slew of cash sloshing into global equities. BAML observed an all-time high $33.2 billion inflow to equity funds this week; a record $12.2 billion inflow to active funds; $1.5 billion into gold, a 50-week high; and record inflows to tech and Treasury Inflation Protected Securities.

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This chart shows the rotation globally out of bonds and into equity positions, specifically high-yield bonds. Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global

They also noted its measure of “private client equity exposure rising at fastest pace in 10 years … cash allocation at record low (10%); 98% of global equity markets trading above 50 & 200 day moving averages,” in the report.

These warnings come as some fund managers who say that now may be a time to hold some cash.

A similar note from Jefferies also found record levels of cash moving into equity funds this week with emerging markets and European equity funds seeing all-time high inflows. During the week ended Jan. 24, the size of inflows hit a record high in dollar terms and was the largest in percentage terms since November 2016.

Jefferies also noted the increasing allocations into riskier assets like emerging markets equities and out of global bonds.

“At the regional and sector levels, last week’s addition was one of the best in history,” analysts said in a note to clients. “The $8.0 billion (0.6% of AUM) and $8.2 billion net injections in EM and European equities was a record high in dollar terms. Furthermore, the $11 billion and $1.1 billion equity purchase in Asia and EMEA stood at a two-and-a-half-year and five-year high respectively.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.


Fink and Dalio think it’s ‘stupid,’ but some money managers say to go into cash

Posted in Uncategorized by dionrabouin on January 27, 2018

Asset managers aren’t quite ready to call the end of the stock market’s bull run, expecting the market to keep moving higher at least in the medium term. Billionaire hedge fund manager Ray Dalio telling reporters at Davos, “If you’re holding cash, you’re going to feel pretty stupid.” BlackRock’s chief executive Larry Fink got in on the act as well, urging investors in places like China and Germany to stop keeping money in cash as stock markets reach new highs.

However, a few are advising clients to take a breather and go into cash as they see stronger pullbacks and a return of volatility that has been largely absent in equity markets over the last two years.

Edward Jones’ Kate Warne has been urging clients to build up their cash positions.

“I always think you want to be preparing for the next phase of the market, not just taking advantage of seemingly day-to-day highs,” Warne said. “Most of us know that won’t last forever. I think we would agree the odds of the market hitting new highs every day this year are zero.”

Warne believes stocks will continue to rise in the medium term but she sees volatility returning after a placid past two years.

“And it’s going to feel worse because we’ve had such little volatility,” she said. That could leave investors shellshocked and looking to sell out of positions too early.

LPL Financial noted that Thursday marks the 398th trading day since the S&P 500 declined at least 5%. That breaks the record for market tranquility set in 1996.

Ray Dalio, founder of Bridgewater Associates.

Advisers in other asset classes are also encouraging investors to step back from the punch bowl. Karl Schamotta, director of FX strategy and structured products at Cambridge Global Payments, is encouraging clients to hold cash or optionality in the event of some unexpected market shock that saps risk appetite and brings investors back to the dollar. The greenback has fallen nearly 12 percent since its 2017 peak.

“That’s the risk,” Schamotta said. “It’s gone too far too fast and history would suggest that we see some sort of mean reversion there.”

He adds the large speculative positions stacked expecting the dollar to continue falling are ripe for a reversal that could be up to half of the dollar’s slide.

Peter Toogood, chief information officer at Embark Group, and Sonja Laud, head of equity at Fidelity International, told CNBC earlier this year that it was time for investors to join them in “de-risking” their entire portfolio.

“Bonds are insane and fixed, equities are on highs that don’t make sense… the only diversifier is gold and cash, that’s the only thing left, because everything is expensive, period,” Toogood said.

For now, investors in the United States – both retail and institutional – look to be all in on the market. Bank of America-Merrill Lynch’s global fund manager survey shows a five-year low of 4.4% cash positions. TD Ameritrade CEO Tim Hockey said earlier this week that “cash as a percentage of total client assets remained at historic lows at 12.7%.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

A weak dollar isn’t good for everyone

Posted in Uncategorized by dionrabouin on January 27, 2018

There has been something of a consensus among novice economists recently that a weaker dollar is good for the U.S. economy since it makes U.S. goods cheaper in the international marketplace. That consensus was given a bit of a boost when U.S. Treasury Secretary Steve Mnuchin said about as much to reporters in Davos.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos, adding that the greenback’s short term value is “not a concern of ours at all.”

Currency traders and currency market experts aren’t so sure.

“It’s a complex question,” said Vassili Serebriakov, FX Strategist at Credit Agricole Corporate & Investment Bank in New York.A weaker dollar helps with international competitiveness. At the same time it could increase the cost of imported goods for consumers, and could increase inflation. There’s not a simple answer to that question.”

There’s also the matter of who benefits from the weak dollar.

Steven Mnuchin, United States Secretary of the Treasury, walks through the snow during the annual meeting of the World Economic Forum in Davos, Switzerland, Wednesday, Jan. 24, 2018. (AP Photo/Markus Schreiber)

Large, multi-national corporations benefit because much of their sales are made overseas and when they bring money back to the U.S. they can reap the rewards at a higher exchange rate. Smaller companies – and consumers – are a bit of a different story.

A weaker dollar “does make U.S. goods more competitive on the global market, so that is true,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

“But when we look at the makeup of the U.S. economy, we import the vast majority of our goods and the U.S. runs massive trade and current account deficits. In that respect, a stronger dollar benefits consumers. And it’s a testament to a strong economy.”

In his broader comments, Mnuchin seemed to agree.

“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

That reserve currency status is unlikely to be in jeopardy right now, but like many of the Trump administration’s proposals, economists and market analysts say it bodes poorly for the health of the nation in the long run.

“A lot of these policies may benefit certain slices of America or some voters in the near term, but broadly speaking in the long term you could argue a lot of policies this administration is pushing for undermine the economy,” Esiner said.

Others were less kind in their assesment of Mnuchin’s comments.

“[W]e’re not sure a weak dollar is a good thing; prices of imported goods would rise here,” Greg Valliere, chief global strategist at Horizon Investments, said in a note to clients, also noting that it was highly unusual for a Treasury Secretary to make such a comment.

“It might be good for U.S. corporate profits but the massive tax cuts would seem to be enough stimulus for business. Perhaps Mnuchin was suffering from altitude sickness.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

Emerging markets debt is so hot, some investors can’t get enough

Posted in Uncategorized by dionrabouin on January 27, 2018

EM debt so hotNEW YORK (Reuters) – In their hunt for yield, some investors have been venturing into offerings as exotic as Tajikistan’s sovereign bond or Iraq’s first sovereign debt sale without U.S. backing in more than a decade only to find out that even those are pricey and hard to get.

Even as emerging markets bonds lost some ground in recent weeks in the secondary market, primary offers from Panamanian bank Multibank Inc MULTB.UL, the Bahamas, and a 30-year Nigerian bond have been well oversubscribed, following a trend of lower sovereign and corporate yields.

The sellers’ market is good news for emerging market borrowers, giving them access to funds at rates once afforded only to “investment grade” issuers. But it could lead to mispricing of riskier assets and threaten valuations in the long-term by encouraging borrowers to cut coupons on future issues.

Right now it is forcing some funds to scale back.

Samy Muaddi, a portfolio manager of T Rowe Price’s Emerging Markets Corporate Bond Fund, said he has reduced his purchases of initial bond offerings as 2017 has progressed.

“We have been more selective in our new issue participation rate for single B credit including Latin American airlines and Chinese real estate,” he said.

Fund managers prefer new issues, particularly on corporate debt or debt issued by countries without a solid repayment history, because they typically sell at a discount to the secondary market. That has not been the case recently, Muaddi said, noting that the percentage of new issues in his fund has dropped from about 20 percent of purchases to 12-15 percent.

Asset managers of dedicated emerging markets funds say the mispricing largely has been caused by “tourist” dollars rushing in from passive funds and non-specialized money managers, such as hedge funds or high-yield funds, chasing higher returns.

“It’s frustrating for me as an investor,” said Josephine Shea, portfolio manager at Standish Mellon Asset Management Company LLC. “There seems to be quite a bit of indiscriminate buying without looking into underlying fundamentals.”

The difference between emerging market bonds yields .JPMEPR and yields for U.S. Treasuries has widened over the past couple months, most recently touching 339 basis points as the U.S. dollar strengthened and local factors weighed on countries in Latin America and the Middle East.

However, that number is 35 basis points tighter than the 16-year historical average and comes after spreads compressed to their tightest in three years in mid-October.


Shea said that recently bond deals in India and elsewhere in Asia have been 10 times oversubscribed and that the firm has had to drop out of corporate and even frontier market sovereign bond issues because the final interest rates have fallen well below the firm’s assessment of fair value.

In previous years, Shea said, bonds would typically be two to four times oversubscribed.

Even when they do participate in offerings, some managers say they get less than they want because of high demand. Increasing supply would ease the crunch, but investors say the amounts are already significant for some issuers. For example, Tajikistan sold $500 million in bonds, which is a lot considering the central Asian nation’s annual economic output is about $7 billion.

Jim Barrineau, head of emerging markets debt at Schroders, said he has been buying “smaller, less well-known” names and boosting emerging market corporate debt, eschewing stalwarts like Brazil, Mexico and Russia. Among his additions are international telecoms company Millicom International Cellular SA (MICsdb.ST) and mobile provider Digicel Group LTD DCEL.N, which focus on emerging economies.

MICsdb.STStockholm Stock Exchange
  • MICsdb.ST

While portfolio managers talk of “overcrowding,” many still plan to boost their emerging market debt holdings, expecting inflows to keep recovering after worries about the global effects of the U.S. Federal Reserve’s policy tightening kept investment subdued between 2013 and 2016.

This year, emerging market portfolio debt inflows are seen more than doubling to $242 billion from $102 billion in 2016, data from the Institute for International Finance shows. (Graphic: tmsnrt.rs/2AlLT2A)

“Any time you have a market that has had the type of performance that EM debt has had over last 18 months there’s going to be some trepidation, but it’s important to look at fundamentals,” said Arif Joshi, emerging markets debt portfolio manager at Lazard Asset Management.

Joshi noted accelerating growth, narrowing current account deficits and a shift to sounder economic policies in several emerging economies.

Similarly, Jan Dehn, head of research at Ashmore Investment Management, said he saw the recent pullback as part of a seasonal pattern and was using it to boost his positions.

“EM is still very, very attractive,” Dehn said. “Our plan is to buy more.”

Such optimism has prompted some managers, including T Rowe’s Muaddi and Paul McNamara, investment director at GAM, to direct funds to some less volatile and more liquid emerging market issuers.

“The sheer enthusiasm with which people are throwing money at EM,” said McNamara, “makes us cautious.”

Reporting by Dion Rabouin; Editing by Christian Plumb and Tomasz Janowski

Venezuela bondholders meeting ended without pact on strategy: sources

Posted in Uncategorized by dionrabouin on January 27, 2018

(Reuters) – A meeting of Venezuelan bondholders on Thursday to discuss how to handle the government’s request to restructure $60 billion in outstanding bonds has yielded no clear strategy, sources with direct knowledge of the meeting told Reuters on Friday.

The meeting in London, organized by UK-based hedge fund MacroSynergy Partners, was attended by about 60 creditors in person and 40 who listened in over the phone, the sources said.

The group represents an estimated 75 to 80 percent of the institutions that hold debt from cash-strapped Venezuela and its state-run oil company, PDVSA.

Attendees said the consensus was that it was too early to form an official committee since the country has continued paying its debt, even while missing some deadlines.

“There are a bunch of guys who prefer to be behind the scenes, but there are people who believe that we should start to have a dialogue with the Venezuelans,” said one bondholder who was at the meeting and spoke on condition of anonymity.

Among those in attendance were lawyers from Cleary GottliebSteen & Hamilton LLP, including Lee Buchheit, a partner who specializes in sovereign debt restructurings, sources said.

Rothschild (ROTH.PA), the Paris-based global advisory firm, also participated, two sources familiar with the meeting said, a sign that top financial firms are interested in advising on what could be one of the world’s most complex sovereign debt solutions ever negotiated.

ROTH.PAParis Stock Exchange

Another source, who listened to the meeting via telephone and also requested anonymity, said more meetings are expected before any kind of consensus is reached.

“Bondholders have no clear strategy,” the source said. “Usually it takes three to five meetings for something to come together.”

The creditors are seeking to overcome the dual problems of U.S. sanctions imposed on Venezuela and a lack of any concrete economic program from the government. Venezuela owes a substantial amount of debt to the Chinese and Russian governments, inhibiting their ability to free up cash for creditors.

Venezuelan bonds were trading mostly in negative territory, with its 2019 $2.5 billion sovereign bond down more than 3 percent in price to 24.25. The PDVSA 2022 bond fell 2.7 percent to 27.30, with a yield of 79.2 percent.

Reporting by Dion Rabouin; Additional reporting by Sujata Rao in London and Paul Kilby in New York; editing by Grant McCool