15 Apr A GOOD START TO EARNINGS SEASON
Earnings season commenced on a positive note as two mega sized financials posted positive surprises. Crude continued to advance and there was a major merger in this sector at a price 39% higher than previous day closing thus suggesting considerable unrecognized value.
The 10-year Treasury rose to the highest level in over a month as the curve continues to steepen. Two weeks ago it appeared almost every other story was about the inversion of the yield curve which lasted all of three days. Copper—a commodity regarded as an economic indicator—rose by the greatest amount this month and is trading at a multiyear high.
First quarter GDP estimates are continuing to rise and growth is now projected to be greater than 2.0%. In fact the Atlanta Fed is now projecting a 2.3% 1Q growth rate, up from 0.2% forecasted one month ago, a forecast that generated considerable coverage and extrapolations.
A major question at hand is whether or not the FOMC will again alter its view surrounding monetary policy. It is widely accepted the Central Bank radically changed its view from Hawkish to Dovish in a manner of two weeks, a change which was a major catalyst for the rebound.
Many times I have commented about the dearth of liquidity. JP Morgan wrote on Friday that liquidity in the most liquid of all debt and financial markets—the US Treasury—has improved from its December lows, but liquidity is still considerably below pre crisis levels.
The issue at hand is whether or not there will be enough liquidity in the debt markets when everyone wants to redeem funds at the same time. The Federal Reserve believes the biggest risks are in investment grade ETFs, leverage loans and emerging debt.
As noted several weeks ago approximately 49% of investment grade debt is BBB- rated. The investment grade rated debt market has tripled since 2008 to $6.4 trillion with most of the growth occurring in BBB- names. Will sellers be able to match with buyers and if so at what price?
The Federal Reserve is not just concerned about the debt market but also the liquidity in the $5.1 trillion foreign exchange market where a series of mini flash crashes have occurred during the past several months, the result of algorithmic trading programs now outnumbering humans.
JP Morgan writes the biggest challenge for the currency market in 2019 will be the lack of liquidity, the result of the regulatory entities emphasizing speed and cost of an execution versus liquidity and capitalization.
It is generally accepted extraordinarily loose monetary policies have buoyed many financial markets for so long that many are lulled into a false sense of security. Right now there is a lot of support in these debt markets from the central banks but what happens when economies get stronger and the central banks want to get out which triggers other selling, a major problem could then be on our hands.
In my view this is what occurred in December. Will such an environment return if growth continues to surprise on the upside that again alters monetary policy assumptions?
Wow! This is way too complicated. But this is part of the issue. Many have been lured into a false sense of security and simplicity where cost and speed of execution are the only parameters of purchasing decision.
What will happen this week as earnings season accelerates?
Last night the foreign markets were mixed. London was down 0.08%, Paris up 0.13% and Frankfurt up 0.17%. China was down 0.34%, Japan up 1.37% and Hang Sang down 0.33%.
The Dow should open flat ahead of the next batch of earnings. The 10-year is unchanged at 2.57%.