Date: September 25, 2018
Fed Fear Is Absent in U.S. Stocks as Markets Plow Back to Record
The bulls have regained control on the American equity market. The S&P 500 Index capped a second weekly advance, ending the five days less than two points away from its all-time high. Investors plowed $38 billion into U.S. stock exchange-traded funds through Thursday, on pace for the best weekly inflow on record. Some $10.9 billion alone was poured into the biggest ETF that tracks the equity benchmark. Investors put $14.5 billion into U.S. equity funds in the week ending Sept. 19, according to EPFR Global data, the most since March. Part of the surge in inflows is due to the revision to the Global Industry Classification Standard. The rally in U.S. equities has defied a chorus of calls for caution as investors looked past escalating tension over trade and a spike in 10-year Treasury yields to levels that roiled markets earlier this year. Not even the near-certainty that the Federal Reserve will lift benchmark rates next week slowed an advance that has the S&P 500 on pace for its best quarter since the heady days of 2013. “If the economy is truly doing well, investors are willing to be in equities despite higher interest rates,” Patrick Palfrey, equity strategist at Credit Suisse Group AG, said by phone. “We don’t see the market euphoria seen in late January. The stocks are rising for the right reason.” Investors are flocking into U.S. stocks as the S&P trades at a record high. The S&P 500 rose 0.9 percent to 2,929.67 in the five days through Friday. The Dow Jones Industrial Average advanced 589 points to 26,743.50, ending at an all-time high. It was the last of the major indexes to reclaim records set in January. Technology shares lagged behind, with the Nasdaq indexes recording slight declines. There are plenty of reasons for optimism. U.S. companies posted two quarters of stellar earnings, and the economy is advancing at the fastest pace in four years. Just this week, indicators from a manufacturing purchasing managers’ index that beat estimates to a decline in unemployment applications suggested the world’s largest economy is still accelerating rapidly, while measures of inflation remain muted. “It’s all about growth,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. “We are not in a euphoria stage.
Euro Short-Squeeze Stage Set as Currency Tests Three-Month High
Euro bears are holding tight, setting the common currency up for a potential short squeeze that could turbocharge a burgeoning rally. Hedge funds and other large speculators have been adding to their euro short positions, according to the latest data from the Commodity Futures and Trading Commission. Having reached a 19-month peak in August, the fast money had pared its net short holdings for three consecutive weeks. But it’s edging up again. The euro reached a three-month high in the spot market on Monday. Meanwhile, a Citi gauge that infers positioning by matching the returns of funds that invest in currencies with daily exchange rates between the world’s most-traded pair is signaling managers still hold sizable short-euro, long-dollar positions. The gauge has been negative since late March — a possible indicator that FX funds made money when the euro weakened by going short. The divergence in recent weeks signals that funds may be holding tight to short positions. Of course, a full picture of over-the-counter holdings is unavailable, and reported data can sometimes be muddied by spread trades and the like. But the information can still provide clues as to whether the wind is changing. Euro bears are looking increasingly brave — or perhaps out of step. The common currency was little changed on Tuesday, after brushing its highest intraday level since mid-June on Monday when it gained as much as 0.6 percent after European Central Bank President Mario Draghi said he sees a “relatively vigorous” pickup in underlying inflation — a potential precursor to higher interest rates in 2019.
Dwindling China Margin Debt Shows Traders Skeptical of Rebound
The biggest Chinese stock rally since 2015 wasn’t enough to revive speculative interest among the nation’s army of investors. The balance of margin debt on the Shanghai and Shenzhen stock exchanges fell to 826.3 billion yuan ($120 billion) on Friday, the lowest in more than two years and a 17th consecutive weekly decline. That’s even as the CSI 300 Index jumped 5.2 percent during the week. Dwindling leverage suggests no turnaround in sight for the nation’s beleaguered stocks, which are some of the world’s worst performing this year, battered by the trade dispute, a government campaign to cut debt and a slowing economy. The country also surrendered its claim to having the world’s second-largest stock market along the way. “Although there was a strong rally in stocks last week, the continuous slowdown in margin debt shows that investors, especially retail ones, are still cautious,” said Zhang Gang, Shanghai-based strategist with Central China Securities Co. “Their attitude is to hold a wait-and-see position, given the stock market is still at a relatively low level.” Retail investors make up about 80 percent of the trading volume in China’s market. Outstanding margin loans topped $300 billion at their peak in 2015, and losses snowballed when the bubble burst as investors were forced to sell shares to meet margin calls. China’s benchmark Shanghai Composite Index has fallen 22 percent since a January high, and dropped as much as 0.9 percent Tuesday. Zhang said margin financing won’t pick up unless index gains are sustained. “The market needs to see more positive signals following last week’s rally.”