Date: August 14, 2018
Investors Haven’t Been This Bullish on U.S. Stocks Since 2015
The bull run that has taken U.S. equities to record highs this year may be about to reach its peak, according to the latest survey of fund managers by Bank of America Merrill Lynch. Allocations to U.S. stocks jumped 10 percentage points this month to a net 19 percent overweight, the highest since January 2015, the survey said. That makes America the most popular equity region for the first time in five years, according to the bank’s analysts. “With investors telling us they are long the U.S., the Fed and cash, our view remains: peak profits, policy and returns,” said Michael Hartnett, BofAML’s chief investment strategist. “Rising corporate leverage concerns say bonds should outperform stocks, while a weaker profit outlook suggests defensives could outperform cyclicals.” Safe-haven appeal has combined with a strong earnings season to keep the stock market of the world’s biggest economy attractive this year even as President Donald Trump’s trade curbs pose a threat to global economic growth. Some 57 percent of respondents in the BofAML survey cited a trade war as the biggest tail risk. A net 67 percent of recipients said the U.S. was the most favorable region for corporate profit expectations, the highest proportion in 17 years. Long FAANG and BAT remained the most-crowded trade identified by investors for the seventh straight month. The survey was conducted between Aug. 3 and 9 among 243 investors with a total $735 billion under management.
U.K. Unemployment at 43-Year Low Fails to Ignite Pay Growth
U.K. unemployment dropped to a new 43-year low in the three months through June but the pace of wage growth eased. The jobless rate stood at 4 percent, the least since February 1975, the Office for National Statistics said on Tuesday. Economists had expected it to stay at 4.2 percent. The decline helps to explain why the Bank of England increased interest rates this month. Policy makers believe inflationary pressures are building in the labor market as skill shortages force employers to raise wages to attract and retain staff. Yet the absence of stronger pay growth so far also raises questions about whether the unanimous decision to put up the cost of borrowing was justified. There was little sign of overall wages stirring in the latest data — the rate slowed to a nine-month low of 2.4 percent between April and June — but the BOE sees a pickup toward 3.5 percent. For policy, much also depends on productivity. Without a significant improvement, firms may find their profit margins coming under pressure and increase prices to compensate. Flash figures for the second quarter show output per hour rose 0.4 percent, leaving productivity up just 1.5 percent on the year — below the rates enjoyed before the financial crisis. The pound initially climbed after the data, before erasing its gains to trade little changed at $1.2775 as of 10:17 a.m. in London. The market-implied probability of another BOE rate hike in May 2019 edged up to about 45 percent, from 39 percent on Monday. BOE officials expect unemployment to fall to 3.9 percent this year and Governor Mark Carney has signaled that further rate hikes will be needed to return inflation to the 2 percent target, assuming Britain avoids a chaotic departure from the European Union next year. Wage growth excluding bonuses slowed to 2.7 percent, the weakest since January but still ahead of the 2.4 percent rate of inflation. Upward pressure on settlements is expected to come from the public sector, where millions of workers will this year benefit from the easing of a cap on pay increases in place since 2010.
Turkey Banks Get Respite on Liquidity Moves, Tight Policy Calls
Turkish policy makers’ steps to support the financial system helped bolster investor confidence and gave the nation’s financial sector a much-needed breather on Tuesday. Turkish banking shares rose as much as 5.3 percent, snapping a three-day losing streak that wiped out almost 17 percent of their market value. The lira also jumped 5 percent, paring its losses over the past month to 26 percent. The central bank on Monday stepped in to support the banking system by lowering the amount of money commercial lenders must park at the regulator. It also eased rules that govern how they manage their lira and foreign-currency liquidity. The banking regulator limited swaps transactions to help make shorting the currency more difficult. Ali Fuat Erbil, chief executive officer of Turkiye Garanti Bankasi AS, praised the steps in an interview with NTV television on Tuesday. Turkey appeared to be approaching a “normalization period,” but that doesn’t mean the ‘fire is out,” he said. Erbil’s comments echoed those by Turkiye Is Bankasi CEO Adnan Bali, who said the steps were “the right moves in the right direction” in an interview on BloombergHT television a day earlier. On Tuesday, Denizbank CEO Hakan Ates said the central bank had averted a “speculative attack” and that banks were ready for an organized stress test if needed. There were also signs on Tuesday that business leaders were beginning to rally together to try and bring an end to Turkey’s market crisis and pressure the government to act. An unusual joint declaration by business group Tusiad and the Turkish Chamber of Commerce laid out a roadmap that included tighter monetary and fiscal policy, a framework for relations with the European Union, an end to Turkey’s damaging political spat with the U.S. and a long-term plan to end inflation. Pledges by Treasury and Finance Minister Berat Albayrak on Sunday and by President Recep Tayyip Erdogan on Monday have also reassured investors that extreme measures such as capital controls weren’t on the table. Turkey would never seize deposits or forcibly convert foreign currency, Albayrak said in a statement published by Hurriyet newspaper.