Since the current bull market in US stocks set the record last week for longevity by some measures, the debate over how much longer it will continue has intensified. There’s no way of knowing when it will end, but a few recent developments suggest that there’s no reason to be anxious – at least in the near future.
First, after severely underperforming in the first half of this month, stocks outside the US are starting to rebound and even outgain American equities. The MSCI All-Country World Index excluding the US is up 2.92 per cent since August 17, compared with 1.64 per cent for the S&P 500 Index. Rising confidence in international equities should help to alleviate concern that US stocks would be able to buck a global slump for only so long. Second, despite the S&P 500 setting yet another record on Monday, equities are not that expensive. Bloomberg Intelligence noted in a report that the S&P 500 is trading near its long-term average risk premium when compared with bonds, or about the same level as both the midpoint of the first post-Second World War bull market and in the early 1980s. Although the current premium of 320 basis points might be below the long-run average of 500, it’s above the low of 105 in the 1960s rally and minus 20 when the last bull market ended in 2000.
China's global boost
Globally, stocks had their biggest day since April, with the MSCI All-Country Index rising as much as 1.02 per cent. Much of the credit for the gains was pinned to optimism over an easing of global trade tensions as the Trump administration closed a bilateral trade deal with Mexico. That certainly helped, but don’t overlook a new development in China’s foreign-exchange policy. The offshore yuan strengthened to its best level of the month on Monday after the People’s Bank of China said late on Friday that it was taking action to support the currency through its daily fixing. The announcement adds to signs that China is pushing back against yuan declines, with the central bank this month boosting the cost to short the currency and urging lenders to prevent any “herd behaviour” in the foreign-exchange market, according to Bloomberg. Recall that a surprise effort by China's government to weaken the yuan in August 2015 triggered a global slump in stocks that lasted until February 2016. Many investors have been worried about a replay if China intended to allow the yuan to depreciate much further to support domestic exporters and counter US tariffs.
Borrowing binge
US Treasuries fell as the government embarked on a heavy week of borrowing, offering $121 billion in fixed and floating-rate notes in addition to the usual complement of bills. Even though many bond traders will be away on holiday, which may make the results more volatile than usual, the sales will surely receive plenty of scrutiny. That is because these are the first auctions since the Treasury Department released data on August 15 that showed foreigners sold a net $48.6bn of Treasury notes and bonds in June, the most since October 2016. Foreign private holders, rather than foreign official ones such as central banks and finance ministries, were responsible for the bulk of the sales. Assigning a reason for the sales would be pure speculation, but it’s no secret that US debt outstanding is ballooning along with the federal budget deficit. US marketable government debt outstanding has just topped $15 trillion for the first time. At the same time, US Commodity Futures Trading Commission data show hedge funds and other large speculators hold a record number of contracts betting on a decline in benchmark 10-year Treasuries. The first auction of this week was relatively uneventful, with investors submitting bids for 2.89 times the $36bn offered, in line with the average of 2.81 times over the previous 12 monthly sales of that maturity.
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The euro
Much of the focus in the currency market on Monday was on Mexico’s peso, which was the biggest gainer among the world’s most-traded currencies by appreciating as much as 1.62 per cent amid the trade agreement with the US. Even so, that only left the peso at its strongest level since last week. Perhaps a more meaningful move in the currency market can be found in Europe, with the Bloomberg Euro Index extending a rebound that began on August 16 to its highest level since early May. The euro bulls received some good news on Monday as the Ifo institute’s closely watched gauge of German business confidence rose for the first time in nine months, surging to 103.8 in August from 101.7 in July. While companies may be postponing some investment amid still-high uncertainty over global trade, this month’s survey hints at “strong domestic activity,” according to Ifo President Clemens Fuest. The rebound is especially painful for euro pessimists, who have steadily cut their net bullish stakes from a record as recently as April to a net bearish position this month, CFTC data show.
House prices
One area of concern for the US economy is housing. Sales are showing signs of slowing after an increase in mortgage rates and a big run-up in prices. First-time buyers needed almost 23 per cent of their income to afford a typical entry level home in the second quarter, up from 21 per cent a year earlier and the most since 2008, according to Bloomberg News’s Prashant Gopal, citing an analysis by the National Association of Realtors. On Tuesday, the monthly S&P CoreLogic Case-Shiller report is forecast to show that home prices in 20 US cities increased by just 0.2 per cent in June. That would suggest prices rose a meagre 0.56 per cent in the second quarter, the weakest performance since the third quarter of 2014, when prices inched up by 0.53 per cent.
Robert Burgess is the former global executive editor in charge of financial markets for Bloomberg
