Fresh Eyes

Fresh Eyes

I need to own up to something… I basically haven’t even looked at the markets for the past month. No excuse – I haven’t been too busy with other things.

I find I do this periodically. I don’t have any positions that require particularly close scrutiny. I have a few busy days distracted from the markets and then consciously decide to avoid them for a while.

I feel it can be very valuable. Many will disagree – a lot can happen in a few weeks. True. But at the same time what’s a few weeks in the context of the markets? We’re in this for the long-term, right?

So today, we’re beginning to catch up on things. A helicopter view – lots of charts. What will we see with our fresh eyes?

MSCI “World” index – 23 developed markets. Over 1,600 securities capturing around 90% of market capitalisation:

MSCI “Emerging Markets” index – 26 emerging markets. 1,383 securities capturing around 85% of market capitalisation:

Looks like its been a bit of a rough month for equities markets. However, in percentage terms, the moves are unremarkable.

The crew at Advisor Perspectives like to keep a rolling scorecard of the major global indices for the calendar year:

Its been a ride to nowhere for the US S&P500 over the past 1 to 2 months.

Similar story for US small-cap stocks:

Both the above charts are 12-month views. The most notable observation is how far small caps are from the highs of early 2020 whilst the mega-caps of the S&P500 managed to hit a new all-time high in recent weeks… in the midst of a global pandemic… Truly interesting times…

Tech stocks – wow!

Australia – ASX200 – yawn:

China – A-shares:

Hong Kong – Hang Seng:

Volatility – USA – Vix:

Volatility – Europe – Euro Stoxx 50 Vol (VSTOXX):

Stoxx Europe 600 Banks Index:

Ouch – still a world of hurt…

USA Banks Index

Not a pretty chart.

What about the Aussie Banks?

Whole lot of nothing.

Copper (USD):

Oil (West Texas Intermediate, USD NYMEX)

Bitcoin (USD):

Iron Ore:

Wow – there’s a winner! So, in that case, what about our beloved miners? BHP, Rio Tinto and Fortescue:

BHP

RIO

Fortescue

Fortescue – hit nearly $20 per share!

Gold (USD):

Gold coming off the boil in the last few weeks. I thought the US dollar was supposed to be on track for a collapse!

What about currencies?

US Dollar Index:

AUD – Trade Weighted Index:

AUDUSD – sure doing better than our share market:

Bond Yields:

US 3 month:

Better tidy that 3-month one up to remove the temporary read of “zero” back in March. Here’s 6 months’ worth:

Australia 10-year bond yield:

Credit Spread – US Corporates:

US – “BBB” issues:

S&P UK BBB Investment Grade Corporate Bond Index:

S&P Eurozone BBB Investment Grade Corporate Bond Index:

Corporate debt issuance continues to impress! The following featured in a September 25 Bloomberg article:

“U.S. high-yield bond sales reached an annual record of $329.8 billion Wednesday as companies reap the benefits of the Federal Reserve’s liquidity-boosting policies and investors grasp for yield.”

“The crush of debt offerings accelerated in April after the U.S. central bank began purchasing some high-yield bonds as part of its efforts to support the corporate credit markets. Since then, issuance has eclipsed the prior annual sales record of $329.6 billion set in 2012, according to data compiled by Bloomberg.”

“Companies staring at sharp, pandemic-induced revenue declines were emboldened to borrow billions of dollars to help ride out the pandemic. Some of the most virus-battered borrowers, including airlines, hotels and even cruise operators, were able to tap investors for financing, sometimes paying double-digit coupons.”

Investors Intelligence adviser sentiment readings:

I have much more data to comb through in coming days – particularly economic data. This one chart below will likely prove informative in terms of recent economic data trends. Citi’s Economic Surprise index tracks actual US economic data relative to analyst expectations. Been a wild ride

Remember, this isn’t actual economic data – it reflects where data points come in versus consensus. The massive spike recently means that actual data has been much better than expected (but not necessarily “good”).

Historically, we tend to observe this index as having some predictive powers from a contrarian perspective. When data releases are worse than expected, it often results in analysts downgrading their future expectations for the same data. Conversely, when data comes in much better than expected, analysts generally upgrade expectations. An upgrading of expectations, like we will probably find has taken place in recent months after positive surprises, sets the bar for future data higher and thus increases the chances of data being “worse than expected” in the future.

More digging is needed to verify this, but what I suspect we might find ourselves concluding is that investor sentiment towards the economy is quite “optimistic” right now.

So what else can we conclude from this helicopter view of the markets?

Many key equities markets such as the S&P500 have taken a breather from the recovery posted since the March lows. On the daily charts, you can conclude that many have breached their uptrends, although this could be reversed quickly.

We observe that breadth on a global basis has been poor. The S&P500 is up around 4% for 2020 whilst the UK’s FTSE is down over 20%.

We even observe that strength has been confined mostly to pockets of specific markets – e.g. tech stocks performing well, especially mega-cap tech.

In this highly financialised modern world, it is interesting that banks are not firing – for the last 20+ years, they have been an important markets and economic barometer.

The bullish case for equities is probably that. If breadth can pick up then the market could continue to further highs. But for major markets such as the S&P500, that would need to happen without “rotation” – if for example the banks begin to rally hard whilst the tech darlings that have driven the market sell off, then the end result is probably little change in the major indices.

We have observed that credit markets remain benign. The charts do show a minor uptick in yield spreads in the last few weeks. A widening in spreads would be a troubling sign and this requires attention.

Simultaneously, we observe a continued flood of new corporate debt issuance – companies continuing to become increasingly levered. Surely will pose a problem at some point.

Government bond yields show no signs of life – no inflation expected any time soon. We observe that commodities have had a good run. We know the probable “cause” of this, but a little more research is warranted. The probable cause is China – an uptick in the “building stuff” side of their economy, being reluctantly used to offset the decline in export demand. Empty apartments and unnecessary infrastructure… All fuelled by new debt.

Nothing of much interest at all to report so far…

Perhaps a longer-term view of markets might be in order. Yes – here’s something interesting – the weekly chart of the S&P500:

The S&P500 has found itself forming a broadening wedge pattern- often described as a “megaphone” pattern. Essentially, the pattern forms due to an increase in volatility – more violent selloffs and subsequent recoveries. It can unfold as a bullish continuation of an uptrend or ultimately prove to be a bearish turning point. Of, of course, like all technical setups, it can just disintegrate in time and end up having no significance.

Unless the corporate profit outlook miraculously improved whilst I wasn’t looking, US equities remain about as over-valued as they have ever been, against a backdrop of a likely surge in economic expectations and a deteriorating technical outlook.

It’s really hard to be optimistic here. But there’s not a lot of signs of anything much happening imminently. My best guess is we’re stuck in this “muddle along” environment.

Maybe I should have another month disconnected from the markets…