MarketMinder

Headlines

Here we analyze a selection of third-party news articles—both those we agree and disagree with.

Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.


European Central Bank Sets Its Inflation Target at 2% in New Policy Review

MarketMinder’s View: Some background: In January 2020, the ECB started its first policy review since 2003. It planned to examine—and potentially update its views on—a number of issues, including the bank’s inflation target of just-below 2% y/y and how the bank can address climate change. After the pandemic delayed those efforts, the ECB announced its new strategy today. The headliner: It will now aim for 2% inflation over the medium term. While it will be ok with temporary, minor deviations above or below that target, it will now see too-low inflation as equally problematic as too-high. The ECB also plans to incorporate climate-change risks, particularly as it pertains to corporate bond purchase decisions, and incorporate climate risk into its stress test models (please don’t ask us how). Despite some hullabaloo over the implications for eurozone monetary policy in the near future and the potential politicization of its remit, we largely agree with the sentiments expressed by the two economists quoted here: These changes aren’t likely to make a major difference in policy. For one, it isn’t as if the ECB has been wildly successful hitting its just-below 2% inflation target. Per FactSet, from 2003 – 2008, annual eurozone inflation exceeded that threshold. Over the past 10 years, inflation was well below that target, coming close only one year (2018’s annual inflation of 1.8%). If anything, the ECB seems to be following the Fed’s lead and giving itself a squishier target. As for considering climate-change factors, some scale is in order. As one analyst noted herein noted, “… corporate bonds only make up a portion of the ECB’s full portfolio of quantitative easing. ‘So these changes will not really make a major difference to the ECB overall policy stance, given that the overwhelming bulk of its asset purchase are concentrated in sovereign debt.’” Most importantly for investors, a fundamental truth remains: Despite a new marketing wrapper, monetary policy decisions can’t be gamed—frameworks and words don’t ensure certain actions will follow.

Analysis: Reflation Rethink Sends Bond Markets Into a Spin

MarketMinder’s View: Pundits appear to be at a loss for why sovereign bond yields have been trending downward recently. Plenty of explanations abound, and this piece highlights a popular one: Economic growth rates appear to have peaked, the pick-up in inflation now looks transitory and slow growth lies ahead—so bond markets are reacting accordingly, with prices rising and yields falling. While we aren’t ones to read much into short-term movement—especially on a daily or weekly basis—we long suspected growth in major economies would eventually return to its pre-pandemic trend following a brief reopening-driven pop. Perhaps that is playing out now, although it remains too early to say for sure. Contrary to the suggestions here, though, we don’t think that should worry investors. Slower growth rates than the hugely bizarre and distorted figures seen in the lockdowns’ wake constitutes a return to normal—a good thing. Moreover, stocks can do great amidst slow growth—see the 2009 – 2020 global bull market for more—and ongoing challenges (e.g., the pandemic). In our view, this does favor big, boring growth stocks over the value stocks many pundits tout. But we don’t see it as bearish.

Opec ‘Gets a Pass to Lift Oil Prices’ as Hedging Losses Hobble US Shale

MarketMinder’s View: First, consider: This article touches on a number of individual companies. MarketMinder doesn’t make individual stock recommendations—we feature this article solely to highlight the broader point. With oil prices near six-year highs, American producers should be reaping the benefits, right? Not quite. It is standard practice for producers to sign oil futures contracts to lock in a certain price for a set period, hedging against potential future losses. These contracts take some of the sting out when prices drop—but they can have the opposite effect when prices rise. As this article shows, despite oil trading around $75 a barrel, “… almost a third of the US’s 11m barrels a day of production is being sold for just $55 a barrel, according to IHS Markit, a consultancy. … IHS Markit said US oil hedging losses in the first half of 2021 had already hit $7.5bn, but would rise by another $12bn if crude remained at $75 a barrel until the end of the year. Many Wall Street forecasts suggest it could go higher.” The pandemic appears to have played a big role in today’s oil hedges, as “Many of the hedges agreed by operators were signed during the worst months of last year’s crash, when creditors demanded that companies buy insurance against further price drops.” This all kind of highlights the problems in hedging after a huge drop, doesn’t it? But these hedging losses are also well-known and more hindrance than major headwind for shale oil producers, who have taken a more conservative, disciplined approach—a stark contrast to early last decade when companies prioritized growth at all costs. With that said, however, it could slow the ramp up in American production until these hedges gradually start to expire.

Sweden’s Lofven Wins Parliament Backing to Form New Cabinet

MarketMinder’s View: MarketMinder is politically agnostic, favoring no politician or party in any country. Our political analysis serves only to assess developments’ market impact—or lack thereof. As this article describes, Sweden’s political status quo could be set to return for at least the foreseeable future: “[interim Prime Minister Stefan] Lofven, 63, resigned as prime minister just three weeks ago, following a no-confidence vote triggered by a plan to deregulate rental housing. ... His Social Democrats will control about a third of the seats in parliament in the coalition with the Green Party. The former union leader and welder needs to hold his shaky coalition together and push a budget proposal through parliament in the fall. If he fails, he has vowed to resign again, possibly sparking Sweden’s first snap elections since 1958.” Just how shaky is the government? “Lofven’s new center-left minority government was backed by 116 lawmakers, with 60 abstaining and 173 being against it. That means Lofven won by 2 votes as he needed to avoid an absolute majority opposing his nomination.” Whether the government survives through the fall is unknown, but at least for now, gridlock and the status quo reign in Sweden—a reality stocks are familiar with.

A Planned Biden Order Aims to Tilt the Job Market Toward Workers

MarketMinder’s View: The titular “tilt” here: a planned executive order on competition policy. “The order will encourage the Federal Trade Commission to ban or limit noncompete agreements, which employers have increasingly used in recent years to try to hamper workers’ ability to quit for a better job. It encourages the F.T.C. to ban ‘unnecessary’ occupational licensing restrictions, which can make finding new work harder, especially across state lines. And it encourages the F.T.C. and Justice Department to further restrict the ability of employers to share information on worker pay in ways that might amount to collusion. More broadly, the executive order encourages antitrust regulators to consider how mergers might contribute to so-called monopsony — conditions in which workers have few choices of where to work and therefore lack leverage to negotiate higher wages or better benefits.” Now, as always, MarketMinder isn’t for or against specific policy—our focus is strictly on the economic and market impact. Whether you think this is a good or bad idea, we remind readers of two important realities. One: President Joe Biden hasn’t issued the order yet, so we don’t know the exact details, how it might affect markets or whether it could survive court challenges. Two: Executive orders grab eyeballs, but they lack the power of law—the purview of Congress—and are subject to judicial review. They are more of a nudge by the executive branch—and one whose broader impact is overstated. Particularly in this case, considering—as the article explains—several of the relevant policies are set at the state, not federal, level.

China Considers Closing Loophole Used by Tech Giants for U.S. IPOs

MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations; companies the article mentions are purely to illustrate a broader point: Investors must be aware of the regulatory landscape companies operate in, as new rules can add uncertainty and introduce unintended consequences. As this article describes, “The China Securities Regulatory Commission is leading efforts to revise rules on overseas listings that have been in effect since 1994 and make no reference to companies registered in places like the Cayman Islands, said the people, asking not to be identified discussing a private matter. Once amended, the rules would require firms structured using the so-called Variable Interest Entity model to seek approval before going public in Hong Kong or the U.S., the people said.” The article runs through potential implications, but for investors, a wait-and-see approach is wise, in our view. We don’t know whether these proposals will be adopted or not—or amended further—but while companies “that have already gone public may need approval for additional share offerings in the offshore market,” it doesn’t seem like current shareholders will be affected, as the focus appears to be on future Chinese IPOs abroad. Regulatory developments are worth monitoring, but markets are familiar with the Chinese government’s intervention efforts—little here looks likely to roil Chinese stocks, in our view. For more on China’s stepped-up regulatory oversight of its Internet companies, please see our 4/1/2021 commentary, “Volatility Strikes China.”

Pension Savers Losing Twice as Much to Scams, as Police Struggle With Foreign Cyber Gangs

MarketMinder’s View: As this article relates, “Statistics from Action Fraud, the UK’s anti-fraud agency, showed victims are now losing on average more than £50,000 of their pension pots after being conned by online fraudsters. The revelation comes following a year in which online fraud has exploded as people have been forced to do more of their business on the internet during the pandemic.” The unfortunate, but necessary implication, as the article goes on to detail: It behooves investors to be on guard and take precautions against anyone, “offering easy ways to increase their returns. The [UK’s Financial Conduct Authority] said people should treat online ads offering pension advice with the same caution they would unsolicited financial advice from a stranger in a pub.” We agree, and we would simply add: Don’t respond to any unsolicited communication, whether email, text or phone call. For more on how to deal with the preponderance of fraudsters in COVID times, please see our 3/25/2021 commentary, “Simple Steps to Defend Yourself Against Financial Predators.”

OPEC Discord Could Unleash a New Level of Volatility in Oil Market

MarketMinder’s View: There are tons of articles like this one clogging the internet today after a disagreement between the UAE and Saudi Arabia caused OPEC+ to fail to reach a deal to boost output. This article covers two disparate outcomes: One, OPEC splinters, with member-states boosting production rapidly and causing prices to crater. The other, OPEC+ fails to reach any deal, with still-higher energy prices as a result. Of course, these are possible outcomes, but markets deal in probabilities, not possibilities. OPEC members always have different agendas, needs and wants from an output standpoint, and rumors of the cartel’s impending demise have circulated many times—especially back in 2014 and 2015. Some members have left over time, too. We aren’t sure this scenario is really more threatening to OPEC’s existence. Particularly when you consider, “… U.S. drillers do have capacity to increase drilling. ‘Certainly, $90 oil would encourage a lot of drilling in not only the Permian, but in the Bakken and Rockies,’ Andy Lipow, president of Lipow Oil Associates said. ‘I think as prices creep up, one of the things [OPEC+ members] are worried about is a spike higher that would encourage lots of drilling in other parts of the world.’” No one can know whether that theory is correct as to OPEC’s worries, but we do know drillers are people and people respond to incentives. If prices stay where they are or rise some more, we would anticipate US firms boosting output. There is a lot of spare capacity in the world today above and beyond OPEC, and that argues for oil prices not running away now.

US Service Sector Grows, Albeit Slightly Slower in June

MarketMinder’s View: “The Institute for Supply Management said Tuesday that its monthly survey of service industries retreated to a reading of 60.1, following a [sic] all-time high reading of 64 in May. Any reading above 50 indicates the sector is expanding.” Look, a services purchasing managers’ indexabove 60 is quite strong by historical standards—June’s was actually the ninth-highest reading since the series started in July 1997, suggesting broad growth in the services sector, which dominates America’s economy. But it is noticeably lower than the three previous months. We aren’t ones to read into every data wiggle and extrapolate it forward, but it looks like the reopening pop in growth is showing signs of fading, as we have long expected. Those thinking economically sensitive value stocks are set to lead based on swift growth rates ought to take note.

Your Money Market Fund Is Just Like a Checking Account—Usually

MarketMinder’s View: Here is a rather, dare we say, fun look at the issues of liquidity and dollar-per-share pricing in money market funds—and the rising tide in favor of revising the post-financial crisis regulations governing them. At issue: There is a mismatch between investors’ expectations and the reality of liquidity and price stability in money funds, which park investors’ cash in short-term debt instruments ranging from commercial paper to Treasurys to municipal bonds in order to generate interest. Funds targeting mom-and-pop investors carry a theoretically fixed $1 per share price, and redemptions from the fund are same day. But when markets get stressed—like the last two bear markets—funds are forced to fire sell securities. They may depress prices in the process, or even fail to find buyers—meaning an investor could actually take a loss or fail to get out when they wanted. Regulation supposedly fixed this after the financial crisis by installing redemption gates and mandating that fund prices float … for institutional investors in everything other than Treasury funds, that is. But redemption gates backfired, exacerbating the problem, by giving investors extra incentive to sell out of a fund fast (before the gate blocked them). The latter didn’t fix the issue because it didn’t include retail investors. The study this piece sources notes two competing solutions: 1) let all prices float or 2) make funds carry huge reserves, like banks, which would likely dilute returns. But regulators can’t do both, and investors should pay note to which one they pick.

Why More Highway Spending Won’t Rev Up the Economy

MarketMinder’s View: Here is a good piece highlighting how politicians have a strong tendency to overrate the impact of government spending on infrastructure, relying on the law of diminishing returns. Essentially, when you first connect two towns with a road, the linkage opens an array of new business opportunities. But with each additional road, the extent of those gains falls. “The [interstate highway system built between 1950 and 1970] meant a cross-country trip that used to take months could be accomplished in days. Businesses gained access to new suppliers and new customers. Cities were able to specialize in certain industries. International trade opened up. By one estimate, the U.S. economy would be 3.9% smaller today without the interstate highway system. But those gains all came about when the highways were built. By now, the gains have been reaped. ‘Building the interstate highway system was enormously productive,’ Mr. Fernald said. ‘That does not imply that building a second one would be equally productive.’” Furthermore, this presumes that highway spending happens swiftly. In this day and age, even after a bill passes, the funds generally trickle out over years and years, as projects wend their way through a gauntlet of approvals and studies. Some money budgeted for spending never sees the light of day. All in all, this is yet another reason why “stimulus” is unlikely to deliver a marked acceleration in economic growth.

London Reclaims Position as Europe’s Top Trading Hub

MarketMinder’s View: Remember when stock trading activity flocked from London to Amsterdam early this year and everyone said the City’s days as a global financial hub were over because London lost “passporting” rights for EU financial activity? Well lookie here: “London has reclaimed its position as Europe’s top share trading hub in a boost to the City after it lost its crown to Amsterdam earlier this year. In June, an average of €8.92bn (£7.67bn) of shares were traded each day across various venues in London, compared with €8.8bn in Amsterdam, according to data from Cboe Europe. The shift back to the City was helped by the return of Swiss share trading in London, which resumed after the UK scrapped an EU-wide ban that had been in place since 2019.” In other words, yes, London lost EU business. But leaving the EU also enabled it to gain business that was off limits before. Chalk this up as one more bit of evidence early Brexit teething problems seem to be resolving, proving earlier fears false.

The Rickety Politics of the Infrastructure Bill

MarketMinder’s View: This is verrrrrrrrrrrrrrrrrrrrry politicized, so please bear in mind that we are politically agnostic, favor no politician or party, and assess political developments for their potential economic and market impact only. Markets don’t dwell on personalities and sociology, in our view, so neither should investors. With all that said, however, this is some pretty dynamite analysis of the factors contributing to gridlock right now. Even within the Democratic party, considerable internal disagreements are stymying activity, apparently contributing to “President Joe Biden first cheering a bipartisan bill, then threatening to veto it, and then taking back the veto threat in the span of two days.” Why? “One theory for Biden’s behavior, based on both news reports and some discussions with Senate aides, is that the White House was taken by surprise when the bipartisan group reached a deal, felt obliged to endorse it, and then got scorched by progressives. To appease them, he blurted out that he would not sign the bipartisan bill without signing the second one ‘in tandem.’ But that infuriated the moderate Democrats, so he had to backtrack. House Speaker Nancy Pelosi is still keeping the pressure on the moderates, though, saying she will not allow the House to vote on the bipartisan bill until the Senate has passed the partisan one. It’s a strategy that will require stubbornness.” And time, considering it takes weeks or even months to draft actual legislation, and factions within the party disagree even on broad provisions like the dollar amount. By the time actual legislation is ready for debate, we will likely be well into midterm campaigning, which is a recipe for further inaction. So love or loathe the prospect of another big government spending package, we think stocks are rightly looking through the whole debate.

A Wave of Earnings Restatements Slams a Hot Market

MarketMinder’s View: The titular restatements are coming from special-purpose acquisition companies (SPACs) and the companies they took public, and they stem from recent SEC guidance on accounting standards. Because SPACs often need to raise extra capital to merge with a target company after going public, “Many issue warrants as part of the fundraising, giving investors the right to buy stock in the new entity created by the merger at an arranged price. The warrants are seen as an important inducement for investors in what are typically high-risk early-stage companies. For years, SPACs and companies that had merged with SPACs treated these warrants as equity in their financial statements. The SEC in April said certain features of many of the warrants, such as better terms being offered to sponsors than outside investors, meant they should instead be treated as liabilities. One reason is that there is the potential for a cash payout in some circumstances.” Since that SEC missive, SPAC issuance has plunged, and hundreds have revised their financial results. “Of those, more than 200 have made a less serious type of restatement that doesn’t require alerting investors, according to an analysis by data provider Audit Analytics. A further 330 SPACs and SPAC targets have done the most serious type of correction—the kind for which a company has to alert investors and reissue its financial statements. That is more such restatements, in less than three months, than the annual total for all companies in every year since 2010, the analysis found.” This is the sort of thing that stocks price quickly and then move on from, so we aren’t calling it some massive negative for markets. As the article notes, it has probably just taken some froth out of the SPAC universe, which isn’t a bad thing. But it does underscore the importance of skepticism and not getting blinded by hype, as many investors were over SPACs earlier this year.

Brazil's Industrial Output Rises in May, Back to Pre-Pandemic Levels

MarketMinder’s View: We would just like to point out that the economic recovery from lockdowns isn’t confined to the developed world. Brazil, despite its well-documented vaccine difficulties, is also seeing data get back to normal. This is the sort of thing stocks look at—economic data bouncing much faster than people anticipated—not vaccine statistics and hyped-up setbacks. As for digging deeper into this report itself, we think the article does a fair job, so give it a look if you are as into that sort of thing as we are. We also award this piece extra points for concisely cutting through the base effects, which inflated May’s year-over-year growth rate to 24.0%, and leaning on the seasonally adjusted month-over-month figures as a more accurate representation. Those rose 1.4% from April and topped February 2020’s seasonally adjusted monthly level, completing the return to pre-pandemic norms. But a little perspective is also in order: Brazil’s industrial sector is still trying to recover from a long decline that began way back in 2011, tied to a host of supply side issues as well as the global commodities downturn of the mid-2010s. So, we aren’t suggesting runaway enthusiasm. Just noting the recovery as evidence of a world beating expectations.

U.S. Wins International Backing for Global Minimum Tax

MarketMinder’s View: Officials from 130 countries agreed to the broad outline of an international taxation overhaul, including a global minimum tax, seemingly paving the way for a major new change. That headline understandably grabs eyeballs, but as always, important details remain unsettled. For one, even with this broad support, a handful of tax havens—Ireland, Cyprus, Hungary, Estonia, Nigeria, Kenya, Peru and Sri Lanka—didn’t agree. Furthermore, America itself isn’t uniformly on board with the plan: “… it is still far from certain what tax increases, if any, will get through the closely divided Congress, where Republicans flatly oppose corporate tax increases and some Democrats say they are wary. Objections from Democrats are likely to cap the corporate tax rate at about 25%, and the administration’s proposed international tax changes haven’t gotten sustained attention from lawmakers yet.” The other nations need to enact laws, too. Even before they try, key details involving how to implement a tax and ensure countries don’t offer offsets or carve outs for select industries remain subject to debate. Getting final agreement likely won’t be smooth sailing. As noted here, negotiators hope to implement the new rules in 2023, and in our experience, that seems a tad ambitious, as getting to a global agreement on anything is a tall order. More importantly, from a market perspective, this ongoing, drawn-out negotiation process allows stocks to price in—and move on from—the prospective changes. Little here is likely to sneak up and roil markets, in our view.

Long-Term Borrowing for Infrastructure and Other Needs Could Be a Great Deal for Taxpayers

MarketMinder’s View: Please note, this analysis veers close to prescribing how the government should finance itself for certain initiatives, including the Biden administration’s proposed infrastructure plan. As a reminder, MarketMinder doesn’t argue for or against specific policy. However, we thought the thought exercise included highlighted an important lesson about America’s debt service costs. While headlines tend to focus on the absolute amount of debt outstanding, what matters most is the government’s ability to make its debt interest payments. Today’s ultra-low yields allow the Treasury to refinance maturing debt at low rates—making newly issued debt affordable to service, even if interest rates rise from here. “Borrowing money for, say, one year at 0.08 percent (the yield on one-year Treasurys when last I looked) rather than for 10 years at 1.49 percent or 30 years at 2.10 percent could well cost taxpayers more in the long run, because the short-term borrowings would have to be refinanced several times at interest rates that could turn out to be much higher than today’s rates.” It goes on to sensibly note the global demand for US debt tied to our presently higher interest rates than those from major countries abroad. All in all, this is a pretty good piece that makes a reasonable point investors worried about America’s rising debt, especially in the wake of the pandemic, might wish to consider.

Rising Factory Costs Fuel Fears That Price of British-Made Goods Will Soar

MarketMinder’s View: While the headline comes in a bit hot, the article provides a fair look at the UK’s June manufacturing purchasing managers’ index (PMI), which registered 63.9—a bit down from May’s record-high of 65.6. (Readings above 50 imply expansion.) As noted here, UK manufacturers have refrained from passing on higher raw materials and components costs to customers, but that may change since the trend may continue for a while. “James Brougham, an economist at Make UK, said a combination of factors was harming the ability of factories to source components at pre-pandemic prices, including spiralling global demand as lockdown measures ease and supply shortages made worse in the UK by delays at ports after the Brexit deal with the EU in January.” While that may not be great news, we agree with BoE head Andrew Bailey’s comments herein noting that price pressures are likely to be transitory as businesses work through temporary supply shortages. These are mostly reopening pangs, in our view, and not actual inflation likely to keep prices rising for an extended period, a point many are increasingly seeing, as noted in last week’s commentary, “The Ebb in Inflation Fears."

Stock Markets Cruise to Records in First Half, but Investors Grow Uneasy

MarketMinder’s View: With the first half of 2021 in the books, some market observers worry the outlook is “growing increasingly opaque,” citing factors like accelerating inflation, sooner-than-anticipated Fed rate hikes, weaker-than-expected post-pandemic economic growth and the lack of additional “stimulus” from the federal government. Combine those concerns with “the lack of a coherent narrative” and this article argues the future hasn’t looked this hazy in a while. However, while the future is always uncertain to a degree, we don’t see today as exceptional in that regard. The litany of aforementioned alleged headwinds aren’t reason to turn bearish and don’t really generate all that much uncertainty, to us. In our view, they are false fears—and highly publicized ones at that. Since markets are efficient discounters of widely known information, they have long since processed and moved on from inflation chatter or near-term growth prospects. Rather, we think stocks are looking well beyond the next couple months as the world makes its way past the pandemic. Note, that doesn’t mean it will be a smooth ride—volatility can always strike without warning and for any or no reason—but staying invested in bull markets during both placid and bumpy periods alike is critical for long-term investors, in our view.

China Manufacturing Slows as Supply Shortages Roil Asia Industry

MarketMinder’s View: As the article summarizes upfront, China’s official manufacturing purchasing managers’ index (PMI) ticked down to 50.9 in June from May’s 51.0 while its non-manufacturing PMI fell to 53.5 from 55.2. PMIs above 50 are expansionary, although they indicate only that a majority of surveyed firms reported growth—not how much they grew. Moreover, China’s official PMIs focus more on larger, state-owned companies than small- and medium-sized enterprises. As the June data—and this article—detail, some reinstated lockdowns and ongoing chip shortages disrupting factory production are behind Chinese PMIs’ moderation. We would note, though, that low-50s PMI readings were common pre-pandemic. There may be further bumps along the way, but we mostly see China’s latest economic data reflecting a return to normalcy. We find the description herein apt: “The world’s second-largest economy has largely recovered from disruptions caused by the pandemic, with the consumption and service sectors seen catching up to exports and manufacturing, though gross domestic product growth is set to moderate. ‘Much of the recovery has occurred and the momentum is slowing. Combined with a relatively higher base, this means year-on-year GDP growth is expected to slow to 7.2% in Q2 from 18.3% in Q1,’ said analysts at HSBC.” This isn’t weakness, as some other articles interpret it, but a return to business as usual, in our view.