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.
MarketMinder’s View: The titular “sausage war” that many recent headlines have warned threatens UK-EU trade relations appears to be deescalating. “The European Commission’s vice president Maros Sefcovic has advised diplomats from the bloc’s 27 member states to agree to Prime Minister Boris Johnson’s request for extra time to work on the fraught question of trade rules for Northern Ireland, according to officials familiar with the talks. A formal deal has not yet been reached and the U.K. said talks are ‘ongoing.’ Under current arrangements, the sale of chilled meats and fresh sausages into Northern Ireland from the rest of the U.K. is due to be banned when the grace period expires at the end of the month.” So, while the issue isn’t resolved yet, both sides appear fine with kicking the can down the road for several months. While this story has grabbed eyeballs, its ability to permanently disrupt trade relations across the Channel (or the Irish Sea, for that matter) always seemed overstated to us. Even if the UK-EU trade agreement fell through, commerce wouldn’t cease—a no-deal Brexit reality would take its place, and we already know what that would look like. As Brexit retrospectives roll in with the UK referendum’s five-year anniversary today, we see this minor spat as a microcosm of an ordeal that has had much less economic—and market—impact than most initially feared. Furthermore, we fully expect to see any number of tiffs between Britain and the EU on a variety of fronts in the coming years. Not necessarily because of Brexit, but because heavy trade partners often squabble over small things. Brexit simply makes such UK-EU tiffs new and, we guess, extra newsworthy.
MarketMinder’s View: Preliminary “flash” purchasing managers’ index (PMI) readings from select developed economies for June so far confirm nations opening up are experiencing heady economic rebounds. “Surveys of purchasing managers by IHS Markit showed euro-area activity growing at the fastest pace in 15 years, with companies struggling to keep up with demand and prices surging. The equivalent U.K. index was only slightly below May’s record, with firms hiring staff quicker than at any time since it began collecting data in 1998. ... In the U.S., a measure of manufacturing activity expanded in June at the fastest pace in records dating back to 2007 -- fueled by easing pandemic restrictions and a strengthening domestic economy. Service providers also registered continued growth in costs and prices charged, providing further evidence of the inflationary pressures building across the economy. In contrast, a similar survey in Japan showed private-sector activity contracting, led by services. Some business restrictions remain in place there to prevent flareups of the virus as the nation prepares for the Tokyo summer Olympics next month.” We think a few things here are noteworthy for investors. First, stocks factored in this growth long ago. So while it is nice to see confirmation in the numbers, old news isn’t market-moving, in our view. Second, this goes for apparent growth differentials, too. It isn’t as if markets missed the news about Japan’s lingering restrictions or its vaccination push ahead of the Olympic games. Third, we would push back on the notion of supposed “inflationary pressures building.” Yes, supply shortages have caused prices for some goods and commodities to rise. But rising prices signal to producers to find ways to increase capacity and production to overcome bottlenecks. Skyrocketing prices in some categories were likely to be passing, which is why we don’t think they bothered forward-looking stocks. For more, please see today’s commentary, “The Ebb in Inflation Fears.”
MarketMinder’s View: First, please note that MarketMinder isn’t for or against any policy or legislation. Our analysis serves only to assess its potential market impact—or lack thereof. We also don’t make individual security recommendations. The companies mentioned here are part of a broader theme we wish to highlight: Pending legislation “aimed at reining in Big Tech” doesn’t seem likely to surprise anyone. As the article describes, “The companies spent nearly the past two years under federal, state and congressional investigation into how they use their clout to fend off competition, extend their dominance into adjacent markets or abuse their dominance.” The House Judiciary Committee has so far advanced two of six legislative proposals as of this writing. One increases antitrust bodies’ budgets and the other “ensure[s] that antitrust cases brought by state attorneys general remain in the court they select.” We don’t know whether these or the other four bills—some of which could result in operational changes in companies’ business units and have faced the most resistance from lobbyists and the companies themselves—will eventually become law. However, from an investing perspective, these issues aren’t sneaking up on anybody. The more pundits chew on them—like now—the less likely any resulting legislation should shock. We carefully monitor for legislative risk, but unexpected surprises tend to knock stocks the most—and little here qualifies. Then too, we think investors should also consider the upside possibility if reality turns out to be even slightly better than feared.
MarketMinder’s View: The Bank for International Settlements (BIS), which many consider central banks’ central bank, backed “the development of central bank digital currencies (CBDCs), saying they are needed to modernise finance and ensure ‘Big Tech’ does not take control of money.” Does this mean “Fedcoin” and the like are coming soon? As the article describes, the BIS thinks governments may need to set up national ID systems for them to adopt CBDCs successfully. But for most developed market countries, this would probably require parliamentary or congressional action, which is far from assured. Moreover, that is just one change to consider—there are myriad others (e.g., the impact on the current financial system)—and as noted here, most experts think digital dollars or euros are years away. While we think developments in this space are worth monitoring, a complete overhaul of countries’ monetary plumbing seems like more distant speculation than anything for investors to act upon at this point.
MarketMinder’s View: If you have a dependent child at home, you may have recently received a letter from the IRS. Usually, this would be a rather disturbing event, given that the IRS communicates its intent to audit folks via letters like this. But in this case, it is notification you may be eligible to receive monthly checks from the government starting next month as part of the America Rescue Plan (the $1.9 trillion COVID response plan passed early this year), which expanded the child tax credit. For 2021, the government will pay the expanded credit in monthly installments; next year it will simply be a deduction, like the credit has historically been. This article offers some good details around this and why you may wish to actually decline to take the monthly checks. You see, “While the IRS is using older income information to deliver the monthly payments, the credit owed is ultimately determined by 2021 income and will have to be reconciled on next year’s tax return. That means individuals who got a new job or received a raise in 2021 may find themselves owing money to the government if their monthly payment was too high, tax professionals warn.” So you may wish to talk to your tax professional before these checks start flowing next month.
MarketMinder’s View: The rising popularity, especially among institutional investors, for environmental, social and governance (ESG) investment strategies is creating a bit of a conundrum: The research firms and index providers who rate companies use quite different criteria. Many governments worldwide see this as a problem, with British regulators the latest to weigh in on the need for regulation to standardize these definitions. While we have no view on whether or not regulation should come to pass, we think the story mostly highlights the dire need for investors to get educated about what ESG does and doesn’t mean. For example, fossil fuel firms aren’t eliminated under most ESG strategies, and even some firms that are highly rated on the environmental side may not have a totally clean footprint. Further, there can be conflicts between highly rated E and S or G firms. All in all, if you want to invest in ESG strategies, make sure you understand how the manager is defining the criteria and how actively they will manage the various tradeoffs that can occur in the space. It may also be worth watching how any potential regulation that emerges impacts portfolio management, although a global regulation on this front will likely take considerable time to play out, if it does at all.
MarketMinder’s View: This is a good piece reinforcing and building on points we have long made regarding economic measurement issues stemming from the pandemic, like base effect skew. What is perhaps most interesting about it is the fact it illustrates how and why skew won’t entirely fade as spring 2020’s lockdowns fall out of the data. Here is a salient snippet: “Here’s an easy question: Did the normal seasonal pattern hold during the winter of 2020-21? Of course not. Applying the normal seasonal adjustment factors, based on historical norms, is misleading. No one can possibly know the right seasonal adjustments for 2020-21. Quirky events from the uneven recovery and the impossibility of getting seasonal adjustment right during the pandemic are creating a data fog that won’t lift for a few more months. Try to look through it.”
MarketMinder’s View: While it is true bank stocks have had a pretty strong first half of 2021 to date, we don’t really share the optimism in this category continuing to lead. Yes, banks posted strong trading results and IPO activity. Yes, borrowers aren’t struggling as much as many feared last year, allowing banks to release money they had set aside to cover souring loans, buoying profits. But those are backward-looking factors that don’t seem hugely likely to repeat ahead. The only truly forward-looking factor here is the notion of inflation and economic growth accelerating ahead, which could help banks by generating higher interest rates and more loan demand, increasing (currently torpid) loan profit growth. But that is a forecast and a widely known one (not to mention, one that isn’t guaranteed to come true). The notion that “stocks don’t reflect all the good news yet” seems to presume markets are totally unaware of this forecast. On the contrary, banks’ discounted valuations may be more due to the fact the increase in inflation and growth isn’t likely to prove lasting—a temporary, reopening-related pop—which could set up bank stocks to disappoint investors going forward. For more explanation of why we think banks’ leadership is unlikely to last, please see our 4/16/2021 commentary, “Don’t Buy Big Banks’ Q1 Earnings Bounce.”
MarketMinder’s View: As the Brexit vote approaches its fifth anniversary, the retrospectives are rolling in. This is a good one that handily shows how off-base the warnings of calamity proved: “Rewind five years, to the morning after a vote that took almost everyone by surprise, and the consensus was that the British had committed economic suicide. The pound dropped by the most on record, at one point getting close to parity with the euro and even the dollar. Investors fled from the London market. A new Prime Minister was desperately searching around for some kind of strategy for leaving the EU, and business was attempting to work out how it could cope with our departure. As we now know, the predictions of Project Fear turned out to be wildly over-blown. House prices haven’t collapsed, unemployment hasn’t soared, and although some jobs have been lost, factories have not relocated wholesale to France and Spain, nor has the City decamped en masse for Frankfurt and Paris even if Amsterdam has picked up some trading business.” It goes on to highlight the changes Brexit has brought, including an increase in trade with the non-EU nations, rising wages, a nascent shift to more advanced manufacturing and signs that at least some deregulation may be in the offing. Whatever your personal opinion of all this, in our view, it all points to a country poised to beat dismal expectations, which we think explains markets’ long-running resiliency to Brexit.
MarketMinder’s View: Due to a fresh Covid outbreak in Shenzhen, maritime trade faces yet another traffic jam: “The [Yantian] port’s capacity to handle containers plummeted early this month. It was still running at 30 percent below capacity last week, the port announced, and state-controlled media said on Monday that full recovery might require the rest of June. … Long lines of container ships awaiting cargo bound for North America, Europe and elsewhere have had to anchor off Shenzhen and Hong Kong as captains now wait as long as 16 days to dock at Yantian. Small vessels mounted with their own cranes have been ferrying many containers straight from riverfront factory docks in the Pearl River Delta to container ships near Hong Kong, as exporters try to bypass delays at Yantian.” Now, we have seen this movie before—a few times. Neither the Suez Canal blockage, Brexit teething problems nor similar traffic jams at US West Coast ports had a materially negative impact on global commerce this year. They have delayed trade, not destroyed it—a fact this coverage helpfully points out. It has elevated shipping costs, but that likely proves temporary. Mostly, this is just one more sign of supply struggling to keep up with robust demand. Eventually, these things even out.
MarketMinder's View: While most of the developed world has made decent progress on vaccinations and reopening, Canada is behind the curve. With just 18% of its population fully vaccinated, much of the country is locked down, and on Friday the government delayed a full border reopening until July 21. The Public Safety Minister added more color on that on Sunday, saying the US-Canada border won’t reopen fully until 75% of the population is vaccinated. Yet the government has announced a partial loosening of travel restrictions for vaccinated citizens and residents, and the country is set to receive enough vaccines to meet its goal by late July. So despite the delay, there are green shoots on the horizon. Mostly, we highlight this as one more example that reopening progress doesn’t correlate with returns. Canada, despite its reopening lag, is far ahead of the MSCI World Index this year. Sector composition matters much more right now, and Canada is heavy on two of the world’s top performers, Energy and Financials. Not that we expect those sectors to lead from here—both have benefited from sentiment-driven countertrends that appear likely to prove fleeting, in our view. But it does show how much markets globally have moved on from the pandemic.
MarketMinder's View: Summertime is the season for sequels, and not just on the cinematic front: Congress is once again staring down the debt ceiling, which returns August 1. That is the date the Trump administration’s temporarily suspending the debt ceiling expires, and the ceiling will be equal to the amount of debt outstanding at that date. Failing a deal before then, the Treasury will begin using its so-called extraordinary measures to continue servicing debt and meeting obligations without having to borrow anew. As noted herein, analysts expect that capability to expire in the autumn, making that the real deadline. Predictably, the article then goes into handwringing about potential default and the government being “unable to fully meet its obligations on time,” followed by an avalanche of partisan grandstanding. Considering how charged this commentary is, please note that MarketMinder doesn’t favor any politician or political party, and we assess political developments like this solely for their potential market or economic impact. On that front, a couple of points. One, all of the speculating about bipartisan compromise—and the risk of chaos without it—seemingly ignores that Democrats can use budget reconciliation to raise the debt ceiling. This piece pays some heed to that, but in focusing on the potential for the debt ceiling to be included in the infrastructure spending bill, omits that reconciliation rules allow for one pure debt ceiling bill per fiscal year. So, that is an option. Two, even if extraordinary measures run out, the US almost certainly won’t default—just as it didn’t the last time that happened in 2013. The Treasury can prioritize payments, and the Supreme Court long ago interpreted the 14th amendment as requiring the Treasury to pay its debts before all other obligations. With US tax revenue dwarfing debt service costs—and Congress still able to issue new debt to replace maturing Treasurys—there is plenty of bandwidth to avoid default. In our view, this goes a long way toward explaining why no prior debt-ceiling breach caused a bear market or debt crisis.
MarketMinder’s View: Echoing a similar trend in the US, UK retail sales fell -1.4% m/m in May—not because demand weakened, but because more services reopened, enabling people to switch their spending from physical goods to restaurants, pubs, salons and other simple joys. You can even see hints of this in the breakdown of how people spent at shops in May: “The 5.7pc slide in food sales offset pockets of strength elsewhere including a 9pc jump at furniture and hardware stores as Britons rushed to snap up garden furniture for outdoor entertaining.” Plus, a bit of a drop off after April’s 9.2% m/m rise isn’t shocking, as that was a one-time boom associated with shops reopening after the third lockdown. All of this looks consistent with the post-lockdown recovery stocks have been pricing in, in our view.
MarketMinder’s View: Using some sliced and diced Fed data, this piece argues retail investors’ buy the dips mentality is the reason why the S&P 500 hasn’t yet had a correction (a sharp, sentiment-driven drop of around -10% to -20%) during the upturn that began in March 2020. Nor has it fallen -5% for the past seven months. This, it implies, is unusual given an array of seemingly negative developments including high valuations, tax talk and rate hike warnings. And if retail demand fades, not to worry, stock buybacks will pick up the slack. We have a couple of thoughts about all of this. One, volatility (or lack thereof) comes and goes without warning, for any or no reason, so reading into the last few months’ calm—and trying to draw forward-looking implications from it—is futile, in our view. Two, it is indeed fair to say sentiment is quite optimistic. Early in bull markets, coverage of strong stock demand amid perceived negatives would be filled with bubble warnings. Three, while we think stock buybacks are a net positive for stocks, all buybacks announced thus far are by definition priced in, so we don’t see the $570 billion in buybacks announced this year as a reason to be super bullish from here. They are part of the positive backdrop stock prices have already incorporated.
MarketMinder’s View: As always, we aren’t inherently for or against bitcoin or any cryptocurrency—we just think investors should weigh all risks carefully for any security they are considering buying. So we bring you this piece, which highlights a risk that isn’t new but has moved into the spotlight lately: regulatory risk. Bitcoin has long been a favorite means of payment for criminals due to its reputation for being untraceable. That reputation got shattered when the feds were able to recover a big chunk of the ransom paid in bitcoin for the pipeline cyberattack several weeks back, but officials likely won’t rely on that alone to curb bad apples’ cryptocurrency use. Regulatory solutions are now gaining traction, which could raise costs for everyone buying and selling bitcoin and its cryptofriends. “One approach might be to make it harder to use or transfer cryptocurrency once stolen, much like suitcases filled with $1 million in cash are difficult to actually spend without getting noticed. The Biden administration is proposing to adopt the same requirement for crypto that all businesses have when they are paid more than $10,000 in cash—reporting it to the Internal Revenue Service. … Such measures could make a segment of crypto transactions even beyond bitcoin a little less anonymous and decentralized—a prospect that many advocates would be loath to see. Increased regulations could also make legitimate transactions more onerous, reducing cryptocurrencies’ appeal.” So, add that to your pro/con list if you are considering cryptos, and then think about your long-term financial goals and time horizon and what really has the highest likelihood of getting you there.
MarketMinder’s View: For those curious about the interest rates the Fed tweaked higher this week, this is a good explainer. In short, the aim was to keep rates in the open market from going negative. “The Fed said it was boosting the [Reverse Repurchase Program, or] RRP rate to 0.05 per cent from zero to support ‘the smooth functioning of short-term funding markets’, one of two technical adjustments it made on Wednesday. It also raised the interest it pays on excess reserves, which are deposited at the Fed by banks, from 0.1 per cent to 0.15 per cent. Partly as a result of monetary and fiscal stimulus for the US economy, cash has been pouring into money market funds that invest in short-term government securities. The surge in demand for those securities has at times pushed yields below zero this year and threatened the viability of the $4tn industry. The rate at which investors swap Treasuries and other high-quality collateral for cash in the repo market — another staple source of income for money market funds — has also dipped negative. Wednesday’s adjustments helped to lift those rates from their ultra-low levels.” Now and then, we see criticism of the Fed paying interest on excess reserves, as if it is a big handout to banks or siphons money out of the private economy. But this news shows why Nobel laureate Milton Friedman, among others, advocated for them many years ago: Without them, it is hard for the Fed to keep short-term interest rates in line with its target policy rate. Paying these small rates and keeping them in line with the Fed’s target helps money markets function more efficiently overall. Inside baseball, yes, but market plumbing is important.
MarketMinder’s View: Yesterday the Fed released its latest economic projections—and current Fed folks’ predictions about what will happen with future monetary policy—precipitating many (many!) takes like this one about potential policy changes. We suggest tuning it all out. Markets have no preset reactions to Fed actions, let alone talk about possible ones. Moreover, Fed forecasts are only opinions, which can change frequently and aren’t ironclad. For example: “The Fed has upped its 2021 inflation forecast by a whole percentage point to a brisk 3.4%, reflecting the increases in prices across the spectrum for both consumers and producers.” Will inflation conform to the Fed’s new projections this time—when it didn’t before—or vice versa? Who knows! The Fed’s (best) guess isn’t necessarily better than anyone else’s. The article also suggests faster-than-forecast inflation means more rate hikes ahead than anticipated—and that this is somehow bad for stocks. But even though the Fed has direct control over short-term rates, how it will respond to future inflation is unknowable today. By the time we get to the projected rate increases the Fed anticipates for 2023, there could be an entirely different cast of monetary policymakers saying—and voting—differently. Predicting the future fed-funds rate is a futile endeavor, in our view—and trying to do it successfully isn’t necessary for investors. A rate hike cycle didn’t end the last bull market—worth keeping in mind should concerns about future rate hikes pick up steam again.
MarketMinder’s View: Please note that in all political matters, MarketMinder is agnostic; we assess developments only for their market impact (or lack thereof). In this case, the Supreme Court today reversed a lower court’s ruling that struck down the Affordable Care Act’s (ACA, often referred to as “Obamacare”) individual mandate, which some thought might cause the whole ACA to implode—potentially roiling healthcare providers and insurers. As the article notes, “Defenders of Obamacare worried that the Supreme Court – with its 6-3 majority of Republican-appointed justices – would scrap the law which has become a crucial element of the nation’s health-care system.” Instead, the country’s top court voted 7 – 2 to reverse the appeals court’s ruling, with support coming from two judges appointed by former President Donald Trump—a timely reminder that predictions about how judges, politicians or policymakers will act once in office are often futile. This is now the third time the ACA has withstood a challenge before the Supreme Court. Health Care stocks potentially impacted by the decision showed little reaction, which makes sense, in our view. The status quo held and the case has been on the docket for months, allowing stocks to pre-price various scenarios. Taking a step back, we think the ACA—from its inception to its ongoing aftermath—shows how markets adapt to major legislation. While big new laws create winners and losers, they don’t necessarily doom impacted sectors, either—especially if reality turns out to be more benign than originally feared.
MarketMinder’s View: As always, MarketMinder is nonpartisan and doesn’t favor any party, politician or policy. We consider political developments solely for their potential economic and market effects. With bipartisan support growing for a trillion-dollar-plus infrastructure package—11 Republican senators appear to be on board, giving the nominal Democratic majority enough support to overcome a filibuster—is a deal more likely? Not so fast, in our view. As the article details, in gaining some Republicans’ pending acceptance, “A handful of liberals in the Senate have threatened to vote against the bipartisan deal, which they say does not do enough to fight climate change or income inequality. If any Democrats oppose the plan, more than 10 Republicans would need to back it for it to hit the 60-vote threshold to pass legislation in the Senate.” The article notes additional legislative routes infrastructure and other policies on Democrats’ agenda can wend their way through Washington, all of which could stall—or disintegrate—in the process. We would make two high-level points for investors. As the wrangling evident here shows, gridlock has significantly watered down the initial infrastructure proposal. Anything passed would probably be a shadow of that. Then too, the more drawn out the process, the less any of it will surprise—and surprises move stocks the most.
MarketMinder’s View: This is a helpful explainer of the ins and outs of the joint bond issuance by all 27 EU members, highlighting the purpose (i.e., funding COVID relief) and possible future implications for countries and investors alike. As this notes, there is plenty of demand for EU bonds, “judging by the inaugural 20 billion euros sale under the so-called NextGenerationEU (NGEU) program in June. The deal gathered more than 142 billion euros of investor demand and was the largest-ever institutional bond issuance in Europe as well as the most the EU has raised in a single transaction. In October 2020, the first bond sale for the emergency jobs program drew more than 233 billion euros of orders for the social bonds, likely to be the most for any debt deal. It was nearly 14 times subscribed.” That said, the enthusiasm about having a new long-term reserve asset seems a tad premature to us. As noted here, the EU could decide this is a temporary, emergency-driven development and revert back to its prior position when the four-year plan ends—throwing cold water on hopes of this nascent market growing long term. We also think it is worth keeping in mind that EU debt isn’t a panacea—it doesn’t suddenly erase individual countries’ sovereign credit risks. While we wouldn’t overrate its potential—European markets were largely fine before “coronabonds’” advent—a budding EU bond market is a global financial development worth watching, in our view.