October 3. Laugh or Cry
–Friday’s rumor that DB’s fine from the DOJ was to be cut to $5.4b sparked a sharp short cover rally in stocks and was a contributing factor in the steepening of the curve. (2/10 up 3.2 bps to 84.5). Over the weekend, this rumor remains unsubstantiated, yet stocks are maintaining their bid. I don’t know whether to laugh or cry in terms of the way the market trades. Actually, that phrase comes to mind because German Economy Minister Sigmar Gabriel said of DB, “I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators.”
–Along the same lines, there’s an article on Bloomberg about the Canadian markets. “Signs of optimism abound across every market in Canada, even with annual growth in the world’s 11th-largest economy barely topping 1 percent. Stock valuations in the S&P/TSX Composite Index have surged to the highest in 14 years; mergers reached a record in the third quarter, and investors are soaking up bonds sold by Canadian provinces and companies.” The article notes that the p/e is 23.6, quite lofty. http://www.bloomberg.com/news/articles/2016-10-03/canadian-investors-didn-t-get-the-memo-about-weak-global-growth The point is that investment flows don’t seem to have much to do with valuations and underlying growth, but it’s always the flows that matter most.
–On Friday, the Nov/Jan Fed Fund spread settled 13.0, the high for the cycle, while Jan/April settled at only 4.0. The former spread captures odds of a December meeting hike, the latter includes meetings on Feb 1 and March 15. All near euro$ one-year calendar spreads are between 13 and 14.5. So the market is sort of saying, we’re likely getting one hike prior to year end, and then probably another one at some time over the next year or two. No wonder vol is low.
–However, the market that created all the angst about deflation and slow growth, Crude Oil, had a very strong week gaining $3.76 and as of this writing is higher than any price in September. The hard fall to the bottom was late last year. Going forward if oil stays here, every day the yoy gains are going to be quite strong in percentage terms.
–ISM expected 50.2.
