By Doug Noland
Credit Bubble Bulletin: Trump, Bonds, Peripheries, China and Italy
The trading week saw WTI crude surge 12.2%. The GSCI commodities index jumped 5.8%. Wheat dropped 3.6% and corn fell 3.1%. Italian 10-year yields fell 18 bps, and Greek yields dropped 37 bps. Meanwhile, Portuguese yields jumped 13 bps. In U.S. equities, Bank stocks (BKX) jumped 1.5%, while the Morgan Stanley High Tech index dropped 3.4%. The Biotechs (BTK) sank 6.4%. The DJIA was little changed, while the small caps fell 2.4%. Just another week for unstable global markets.
Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.
Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.
There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.
It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.
Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.