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.


Stocks and Bonds Are Falling in Lockstep at Pace Unseen in Decades

MarketMinder’s View: Is bonds’ role in a diversified portfolio undergoing a sea change? “Through Monday, the S&P 500 was down 13% for 2022 and the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—was off 10%. That puts them on track for their biggest simultaneous drop in Dow Jones Market Data going back to 1976. The only other time both indexes dropped for the year was in 1994, when the bond index declined 2.9% and the S&P 500 fell 1.5%.” Those returns have many questioning bonds’ ability to hedge portfolio risk, though we think the rarity in which stocks and bonds endure comparable declines argues the opposite. It happens, but unless this becomes a permanent market phenomenon, we don’t think bonds’ primary role in a portfolio—i.e., dampening overall portfolio swings for investors needing stable cash flow—is in jeopardy. Note, too, bonds needn’t offset stock moves or even be void of short-term volatility to be beneficial. Nor are “volatility” and “negativity” synonymous. In our view, bonds’ job in a portfolio is to swing less than stocks overall and on average, which they have. For more on why it is premature for investors with blended portfolios to ditch their fixed-income allocation, please see our 4/7/2022 commentary, “How to Think About Bonds’ Rocky Q1.”

UK Ministers Ditch Plans to Empower Tech Regulator

MarketMinder’s View: Please note, MarketMinder isn’t for or against any policy or regulation; we aim simply to assess their potential economic or market impacts—or lack thereof. Also, specific companies this article mentions are for illustrative purposes only, as we don’t make individual security recommendations here. Disclaimers out of the way, given the prominence proposed Tech regulations have received in the press over the years, we think this article highlights why they don’t always pack the punch many think. In this case, the UK appears unlikely to give its newly installed Tech regulator much enforcement teeth. “The [UK] government’s new legislative programme is not expected to include a bill to provide statutory underpinning to the digital markets unit that is based within the Competition and Markets Authority, said people briefed on the situation. Without the legislation the UK tech regulator will not be able to set rules for leading internet companies and impose fines on them for breaking those rules. The government announced plans to set up the digital markets unit in 2020 and said it would be given powers to devise codes of conduct for tech companies and fine those that did not comply up to 10 per cent of annual turnover. The unit was established in ‘shadow form’ last year and is operating with around 60 staff, but has no powers beyond the Competition and Market Authority’s existing capabilities.” While monitoring regulations and their potential unintended consequences is worthwhile, this is a timely reminder ballyhooed rules don’t always take their initially proposed form—politics can water them down. For more on why policies aimed at Tech often fail to land as feared, please see Research Analyst Larissa Murray’s 12/18/2020 column, “Much Ado About Digital Taxes.”

Europe Is About to Ban Russian Oil: What’s Next?

MarketMinder’s View: If adopted, how much will the EU’s proposal to ban direct purchases of Russian oil matter? Beyond rearranging who buys what in global markets, the ban plan would take effect gradually and grant exemptions to countries most affected (e.g., Hungary and Slovakia). Meanwhile, Russian gas continues flowing to Europe. As the article notes: “Russian oil may be an easier target than gas, analysts say. ‘The oil system can reconfigure itself,’ said Oswald Clint, an analyst at Bernstein, a research firm, adding that oil was ‘a very deep, liquid and fungible market’ served by thousands of tankers.” So, instead of Europe, Russian oil could go to China and India (perhaps at a discount), freeing up supplies elsewhere. Also, non-sanctioning countries could turn around and sell their purchased oil—or refined products from it—to EU countries sanctioning Russia. Now, added trade friction comes with costs, but a) markets largely reflect these already and b) workarounds, although not ideal, probably steer the European and global economy away from worst-case scenarios. Yes, it is possible an EU Russian oil ban could “derail the economic recovery,” but it isn’t assured given readily available options, and the risk is well-known—it isn’t sneaking up on markets. For more on why, please see yesterday’s commentary, “Three Quick Hits on Energy.”

NFT Sales Are Flatlining

MarketMinder’s View: This article serves two purposes, in our view. One, it is a stark warning to potential buyers about the risks and volatility in the market for non-fungible tokens (NFTs, digital assets certified to be unique or in very limited supply). Two, it shows how much sentiment toward NFTs, which was borderline frothy not long ago, has retrenched. Consider: “The sale of nonfungible tokens, or NFTs, fell to a daily average of about 19,000 this week, a 92% decline from a peak of about 225,000 in September, according to the data website NonFungible. The number of active wallets in the NFT market fell 88% to about 14,000 last week from a high of 119,000 in November. NFTs are bitcoin-like digital tokens that act like a certificate of ownership that live on a blockchain. … That lack of interest isn’t unique. Interest in NFTs measured by the number of searches for the term peaked in January, according to Google Trends, and has fallen roughly 80% since then.” We have nothing against NFTs, but it is worth remembering that all investments are a balance between risk and reward. In the past two years, we have a lot of evidence that—at least as of now—NFTs may occasionally offer big returns (sometimes for the producer more than the buyer) but with big risk.

U.S. LNG Deals Surge as Europe Turns Away From Russian Energy

MarketMinder’s View: “Low winter inventories and record high natural gas prices in Europe already had two-thirds of U.S. [liquefied natural gas, or LNG] cargoes heading to Europe before Vladimir Putin’s invasion of Ukraine. The war pushed Europe to ease dependence on Russia and expand port infrastructure to take in more LNG tankers. … Since then, prospects have improved for about a dozen of U.S. LNG projects that held federal permits but lacked supply deals and funds to move forward. Long-term purchasing agreements are critical to securing financing for the multi-billion-dollar projects, demonstrating market demand for the final product and ensuring that lenders will be repaid.” This is worth being aware of to help see how the energy market is shifting in response to Russia’s invasion of Ukraine and threats to cut off European gas supplies. But it isn’t very useful to investors, considering markets are well aware of this and likely already factored these developments into share prices.

Nicola Sturgeon Has Just Admitted Defeat

MarketMinder’s View: First, please note that MarketMinder favors no party nor any politician, assessing developments solely for their potential impacts on markets and the economy (or lack thereof). With that said, after the Scottish National Party (SNP) came within two seats of a majority in the devolved country’s parliament in last year’s election, some uncertainty has lingered in the UK over a possible second Scottish independence referendum, following the defeat of a motion in 2014. SNP head and First Minister Nicola Sturgeon has publicly talked tough on this as a means to motivate her base ahead of local council elections this week, seen widely as a litmus test of party clout. We have long argued that such a measure would need Westminster’s approval, as Scotland lacks the legal authority to hold a unilateral independence vote. Now it seems Sturgeon agrees. “Appearing on Radio 4 this week, the First Minister was asked about the ongoing row over the legal advice she has received on her rerun referendum. Anticipating a continued refusal by the UK government to issue another ‘Section 30’ order (that’s the part of the Scotland Act that allows the UK government temporarily to devolve reserved matters of policy to Holyrood to legislate upon, as happened with the first independence referendum in 2014), Sturgeon is keen to know whether lawyers reckon Holyrood has the legal authority to hold a vote anyway. The BBC’s Martha Kearney asked her if she would go ahead if the legal advice suggested it would be illegal. Sturgeon replied: ‘I wouldn't want to go ahead with a referendum that wasn't legal.’ It’s hard to overstate how significant this is, because the Scotland Act is pretty unequivocal in its terms: matters concerning ‘the constitution’ are explicitly reserved to Westminster.” That basically means no IndyRef2 is likely any time soon.

Italy Passes $20 Billion Aid Package Focused on Energy Relief

MarketMinder’s View: This article details Italy’s plan to step up aid for consumers and small businesses by subsidizing households via a one-off €200 payment to millions of lower-income Italians and a gasoline tax cut, which operates on two misperceptions. Whatever you think of the idea of aiding Italian households, the plan is funded by an increase to the windfall profits tax on Energy firms, first enacted in March. The rate will rise from 10% to 25% on “extra” profits earned due to high electricity and oil prices, an effort to ensure the subsidies don’t increase Italy’s deficit, for fear of piling on more debt that many analysts are sure the country can’t afford. However, taxing Energy firms’ profits when prices are high dissuades investment in increasing production and injects uncertainty into a highly cyclical industry—bad economics, in our view, that could prolong a period of high prices if enacted on a wider scale than this. Two, we are unconvinced Italian debt is the looming crisis so many think. As we discussed around the end of last year, Italian interest payments’ share of tax revenue is at the lowest point on record. Yes, that does hinge on bond yields, which have risen lately. But they are still historically low and, critically, 77% of Italian debt is fixed-rate with an average maturity just over 7 years, per the Italian Treasury. That means short-term changes in yields like we have seen this year won’t affect Italy’s ability to fund its debt materially. We aren’t recommending they do so—we aren’t in the public policy prescription business—but if the country wanted to borrow to fund an aid package, we suspect it could easily do so.

‘Flash Crash’ Hits Stocks in Europe

MarketMinder’s View: The reporting here, which is fact-packed and objective, is fine. We just don’t understand all the hoopla in general, as so-called fat-finger errors aren’t unusual. Likening every one of them to 2010’s “Flash Crash” exaggerates them, in our view. That crash neared -10%, lasted over half an hour and resulted in countless orders getting cancelled. It was a big old mess that triggered years of investigations and breathless reporting. This crash was shallower, and the full V-shaped pattern lasted only about 15 minutes. Circuit breakers kicked in, as they are designed to do. So far, the exchanges haven’t canceled any orders. Life went on quickly. Glitches like this are interesting, but they are also just an occasional part of everyday market activity in the digital age.

Hungary Floats Veto Threat as EU Works to Ban Russian Oil

MarketMinder’s View: Last week, when Germany signaled it was willing to support a gradual, phased-in EU ban on Russian oil and natural gas imports, a lot of pundits acted like an official ban was just around the corner. We thought that seemed a tad hasty—partly for the technical reasons discussed in our commentary on the topic, and partly because EU member-states have varying degrees of dependence on Russia. Coastal countries can receive liquefied natural gas by supertanker, for instance, but landlocked countries have far fewer options. One such country is Hungary, which relies on pipelines from Russia to deliver the goods. For Hungary, curbing reliance on Russia would likely require a massive infrastructure build, which is why the country isn’t on board with a ban. EU sanctions require unanimity, so as long as Hungary holds out, a full ban probably stays off the table. Now, we could wind up with an EU ban that carves out some countries and takes effect very gradually. We won’t weigh in on the effect of that from a geopolitical standpoint, as markets are generally cold to such things. But from an economic standpoint, that is a pretty far cry from a shocking, sweeping ban, which should help reduce the likelihood of a widely feared energy crunch inducing a sharp regional recession.

China Factory Activity Contracts in April at Steeper Pace as Lockdowns Bite

MarketMinder’s View: Unsurprisingly, Chinese purchasing managers’ indexes (PMIs) tumbled across the board in April as lockdowns advanced across several major economic hubs. This piece focuses on manufacturing PMIs, which slipped in the mid-40s, but the official services PMI was also quite grim at just 40.0, per FactSet. Readings over 50 indicate expansion, so a read this far below isn’t pretty. But also, these data simply confirm what analysts and commentators have warned of for weeks—that lockdowns would have a sharp immediate economic impact, which stocks also already knew. In a way they help reduce uncertainty, as we are now getting some numbers weighing the extent of the impact, which can replace the guessing. Moreover, these metrics tell us what just happened, not what will happen, which is crucial since stocks are forward-looking. We don’t know when China’s lockdowns will abate, but there is now a solid history of economies bouncing fast when they do. Soon stocks will shift to pricing in this future, if they haven’t started doing so already.

Eurozone Ministers Seek to Forge Ahead With Banking Union

MarketMinder’s View: Yep, this is still going on. Longtime readers may recall that way back during the eurozone debt crisis in 2011 – 2013, eurozone leaders and the ECB earmarked a banking union as a way to avoid future panics. Back then, everyone was worried about the so-called “doom loop” of troubled banks and sovereigns. Meaning, banks developing balance sheet trouble because of large holdings of troubled sovereign debt, requiring government bailouts, which required more government borrowing, which made debt more troubled, which further undermined confidence in banks and triggered a run on deposits as people sought to move money from troubled national banking systems to more stable countries. At the time, policymakers surmised that a banking union would prevent this capital flight, strengthening the system overall. Yet as allegedly make-or-break as it was, leaders couldn’t agree on it. They kept releasing proposals, disagreeing on the specifics, holding summits, announcing vague plans and releasing more proposals. They are still at it, and there doesn’t appear to be much optimism. “The German government has been reluctant to sign up to an arrangement that could leave its taxpayers exposed to weaknesses in the Italian financial system. Italian banks have strengthened their balance sheets since the eurozone crisis through mergers and capital raisings, but regulators are still concerned about some lenders. … In an interview last month, [Irish Finance Minister Paschal] Donohoe told Financial News: ‘If we can’t gain agreement on this plan now, it is not obvious to me when else we might be able to gain it in the near future.’” We have long said reform initiatives like this would become part of the long-term backdrop for eurozone stocks, without much market influence. So it is with this, as the incomplete union hasn’t prevented eurozone stocks—including bank stocks—from doing overall fine since the crisis.

Russia Uses Domestic Dollar Stash to Avoid Defaulting on US Bonds

MarketMinder’s View: In the latest episode of Russia Default Watch, it looks like Russia has avoided that outcome for now. Early in April, Russia tried to pay interest on a dollar-denominated bond in dollars, but the transfer bank blocked the payment, citing sanctions. Then it tried paying in rubles, leading credit ratings agencies to deem the bond in “selective default” since the contract had no provision for payment in alternate currencies. Now, with days to spare before the grace period runs out, the ever-reliable unnamed sources familiar with the situation say Russia has paid the bond using its on-shore stash of dollars and the US authorities are letting it go through. The reprieve is probably very short-term, however, considering US banks’ special license to continue processing Russian payments expires on May 23. So stay tuned, although this isn’t the biggest deal for the global financial system given how little exposure Western banks and investors have to Russian debt, which markets have long since valued at pennies on the dollar. Mostly, we view the reality of Russian default—whenever it occurs—as something likely to help uncertainty fall. Markets have pre-priced that event, so its actual occurrence would likely let the world move on with few ripples.

Making Your Cash Work Harder as Interest Rates Rise

MarketMinder’s View: Look, we get that it is exceedingly frustrating that checking and savings account interest rates aren’t rising with the fed-funds target range, forcing bank deposits to earn zero interest even as the CPI inflation rate passed 8%. That is just, ouch. And we also get the urge to find a higher yield for cash and think there are some sensible ways to do that. This article’s suggestions, however, strike us as a mixed bag, as some ignore one of the primary reasons to hold cash: liquidity. We like I Bonds just fine, for instance, but if this cash is your emergency fund, the one-year lockup period is a detriment. We like short-term bonds, but a laddered approach using individual securities is a fixed income investment, not cash, and exposes you to the risk of loss if you have to sell before the securities mature. It is critical to keep your goals and needs in mind—the why behind your cash position—when deciding what to do with it. As for the other solutions this article offers, our advice, as always, is to do your own due diligence and consider all potential risks and tradeoffs.

U.S. Consumers Shrug Off High Inflation, Lean on Savings to Boost Spending

MarketMinder’s View: This is an overall pretty good write-up of today’s personal consumption expenditures (PCE) data for March, which showed inflation-adjusted consumer spending rising 0.2% m/m as consumers continued shifting from goods (-0.5% m/m) to services (0.6%). “Spending was boosted by demand for international travel, dining out at restaurants as well as hotel stays. There were also increases in healthcare spending and outlays on recreation and transportation services.” In other words, the end of Omicron restrictions has boosted demand for travel and leisure services, helping offset the headwinds higher prices pose to demand for non-essential physical goods. Now, these data were folded into Q1 GDP, so nothing here is new for stocks, but they show positive consumer trends continuing into March despite inflation’s acceleration that month, which the retail sales report had called into question. So, good news. This report also included the Fed’s preferred inflation gauge, the PCE price index, which accelerated to 0.9% m/m and 6.6% y/y, due largely to energy and food prices. (The rise in core prices slowed from 5.3% y/y to 5.2%.) We wouldn’t go so far as to say the peak is in, as the article surmises, but we do agree with the broader points underpinning expectations for inflation to slow gradually over the period ahead: “Economists expect the increase in the annual PCE price index to start slowing in the coming months as last year's large gains drop out of the calculation. In addition, the shift in spending back to services from goods is seen easing pressure on supply chains.” Lastly, while we do think it is fair to expect the inflation rate to remain high even as it slows, since it takes a while for big prior price increases to fall out of the inflation math, we don’t think the Employment Cost Index is a good predictor. Wages follow consumer prices, not the other way around.

Japan’s Factory Output Growth Provides Some Relief for Fragile Economy

MarketMinder’s View: Japan’s factory output rose 0.3% m/m in March, extending February’s 2.0% rise, while retail sales beat expectations at 0.9% y/y. Just two data points, but they show Japan’s economy growing as the quasi-state of emergency over Omicron ended—and factories weathering the supply chain storm. We won’t be shocked if industrial production hits some speedbumps this spring, as March data don’t yet reflect the full extent of China’s latest lockdowns. The major industrial hub of Shenzhen was locked down in March, but lockdowns in Shanghai and throughout the country didn’t arise until the end of March and April. So April data might register more of an impact. Regardless, for now, Japan is participating in the global reopening recovery, which is welcome news for stocks.

The Growing Threat of Global Recession

MarketMinder’s View: Are the world’s biggest economies leading the way into a global recession later this year? This article describes one way it could play out: Lockdowns in China worsen already-strained supply chain issues, the Russia-Ukraine war slams demand in Europe and roils business confidence, while a rapid US Fed interest-rate cycle hurts demand and sends the world’s largest economy into a downturn. Sounds bad, and we don’t dismiss that possibility. Yet successful investing is based on probabilities, and the likelihood that dire scenario happens appears low right now. China’s latest lockdowns are a negative, but supply chain issues aren’t new, and the global economy has managed to grow through them for months. The Russia-Ukraine war is a humanitarian tragedy, but regional conflicts generally lack the scale to start a global recession. Note, too, eurozone economic activity appears to be holding up despite the war. Fed rate hike cycles aren’t inherently bad for the economy, and for investors, stocks can handle them just fine. Given the prevalence of global recession chatter today among supranational organizations, private forecasters and other experts—including the views shared here—markets also have plenty of information and views about these issues, likely meaning they are already reflected in prices, sapping negative surprise power. As scary as times sound today, we urge investors to view the economic environment as markets do: coldly and rationally. Slowdowns and even regional recessions may occur, but stocks don’t need perfect conditions to rise—only for reality to exceed expectations. With dour sentiment dominant today, the positive surprise upside is high, in our view.

‘Peak Subscription’ a Red Flag for U.S. Economy and Markets

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations, and any companies mentioned here are coincident to a broader theme we wish to highlight. According to this analysis, online subscription and streaming services are the latest economic bellwether—and the recent cancellation trend may indicate where the broader economy is headed next. “Soaring inflation and the resulting ‘real’ income squeeze is forcing consumers to rethink spending habits and one of the most explosive trends of the COVID lockdown era is in danger of reversing. … ‘People are tightening the purse strings and being more selective about where they spend their money,’ Yahya Mokhtarzada, Truebill’s chief revenue officer, told Reuters. ‘We may have hit peak subscription.’” The back half of this article concludes Tech and Tech-related sectors benefited most from the pandemic, but with society working its way back to normal, those companies may struggle for the foreseeable future. In our view, this analysis reads a lot into a handful of earnings announcements and recent market movement. Look, we agree with some of the high-level concepts laid out here. Easing COVID restrictions allows consumers to shift spending back to services that were previously unavailable (e.g., travel). Elevated inflation is likely forcing some households to cut back on certain discretionary purchases. But we think it is off base to think this narrow slice of consumer spending reveals clues on macroeconomic trends. Consider: That presumes streaming and subscription services comprise the lion’s share of Tech and Tech-like sectors. Yet the Entertainment industry—home to a couple prominent streaming services—makes up about 15% of Communication Services (and that sector makes up 8.5% of the S&P 500, per FactSet). To think an industry comprising 1.3% of the S&P 500 will tell you much about the broader market’s direction seems like a stretch to us. For more, see our 11/12/2021 commentary, “Look Beyond ‘Bellwethers.’

Germany Drops Opposition to Embargo on Russian Oil

MarketMinder’s View: Before presuming Germany’s titular shift means an EU ban on Russian oil is forthcoming—and speculating about the related economic fallout—keep an eye on the details. “EU officials designing the next sanctions proposals have to factor in that it will take some European oil refineries time to adapt to receive non-Russian crude. … The bloc is considering the option of combining a gradual phaseout of oil purchases with more immediate measures to reduce demand or cut payments to Moscow, such as a price cap or a tariff on oil imports. Another possibility is to phase out shipped oil purchases quickly and pipeline deliveries more slowly.” The publicized proposals suggest any ban would play out over some time, not overnight. Note, too, that while Germany agrees with the idea of phasing out Russian oil, the country’s officials aren’t so keen on the EU’s plans. “German officials doubt that Mr. Putin would maintain oil deliveries if the EU unilaterally cut the price it pays, and they caution that Russia could easily sell its oil to other customers such as India and China instead of accepting a lower European price.” Whatever your personal feelings may be about sanctions, we caution investors against taking politicians’ tough talk to the bank—a ban isn’t automatic and may look a lot different than headlines portray.

UK Retail Sales Slump as Soaring Energy Prices Hit Households

MarketMinder’s View: According to the Confederation of British Industry (CBI), UK retail sales volumes fell sharply in April, with many blaming soaring prices—particularly for gas, electricity and fuel. “Compiled from a survey of 108 companies, including 51 retailers, in the weeks immediately after Rishi Sunak’s spring statement, the CBI survey showed that sales volumes were considered to be poor for the time of year in April. The headline retail sales balance on the lobby group’s distributive trades survey fell to -35 in April from +9 in March, significantly below the average of -3 expected in a Reuters poll of economists.” While elevated inflation along with this month’s energy price cap increase and stealth tax hikes are likely taking a bite out of many households’ wallets—forcing them to cut back on some types of spending—rising prices aren’t the sole cause for weak retail sales volumes. “The CBI said some of the drop in sales reflected consumers switching back to spending more on services – such as eating out in pubs and restaurants and travelling on holiday – after the easing of Covid restrictions. Retail sales had soared in lockdown while other opportunities to spend were limited.” Despite different timeframes, the CBI’s April findings are consistent with the headline takeaways from the Office for National Statistics’ March retail sales report, which was released last week, and consumption trends in America’s Q1 GDP report. We sympathize with households’ hardships with higher prices and taxes, but these reports confirm realities markets are already well aware of. Rather than fixate on the past, we suggest looking ahead: Elevated inflation may linger for longer than we anticipated, but it needn’t necessarily derail economic growth or markets.

Britain Ditches Post-Brexit Physical Checks on Food in Major Customs Overhaul

MarketMinder’s View: This article focuses on one sitting politician, and as always, we don’t prefer any politician or party—we assess policies’ potential economic and market impact only, and this piece happens to also be chock full of policy. Specifically: “Britain will never introduce post-Brexit physical checks on fresh food and plants being imported from the EU, under radical new plans being drawn up by Jacob Rees-Mogg. The Brexit Opportunities Minister plans to digitise all checks and paperwork at the border forever amid the worsening cost of living crisis. … A Whitehall source said Mr Rees-Mogg wants to make the ‘suspension of physical checks permanent’ after pushing back the introduction of the next checks until the end of 2023. They added the UK will move from ‘costly physical checks to developing our digital border policy which will be much better for supply chains and consumers’. However, there will still be a ‘tiny fraction’ of random physical spot checks that will be carried out.” When it comes to politicians and the elusive “sources” sharing confidential insight, take words including “never” and “permanent” with a grain of salt: Things can change based on the political winds. But in a world where lockdowns, supply chain bottlenecks and port backups dominate headlines, we think this development offers a timely reminder that feared post-Brexit trade chaos has yet to materialize—a small silver lining, but one worth acknowledging, in our view.