Market comment December 2018

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Invesco’s Kristina Hooper is concerned Wall Street is ignoring a major risk: Wage growth. But it may reclaim the spotlight as soon as Friday when the government releases its November jobs report. Hooper believes if the number ticks up too high, it could hint at price pressures that may shift the Federal Reserve’s thinking on rates, and ultimately disrupt the bull market even more.

November jobs report could spark a major market sell-off: Invesco

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Outstanding US corporate credit market debt has more than doubled from US$3.2 trillion in 2008 to well over US$7 trillion today, with the biggest chunk of it coming in the BBB portion of the credit curve, the lowest rung of investment grade ratings. High debt growth has translated to high leverage – BBBs with 31% of BBB debt leveraged at or above 4.0x. Lower yields driven by QE had important consequences for investor behaviour as well. The search for yield became a driving force which led to substantial inflows into US credit, particularly overseas investors. Also thanks to the Fed emerging as a large non-price-sensitive, programmatic investor of agency mortgage-backed securities (MBS) as part of QE, fixed income investors became progressively underweight MBS and overweight corporate credit. As the cycle got extended, the net result of these flows into credit investments has seen the manifestation of late-cycle excesses in credit markets. High debt growth has led to high leverage and weak structural protections for credit investors.

Morgan Stanley: "A Credit Bear Market Has Started And Will Be Painful" | Zero Hedge

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Valuations shrink and shrink -- computer and software stocks trade at 15 times next year’s earnings estimates, cheaper than utilities and soapmakers -- and the selling just gets worse.

Stock Sell-Off Defies Everything the Bulls Hoped Would Stop It

“Because if you look inside the stock market...front-end cyclicals show a completely different picture than the defensive parts to the market. Auto stocks are down 30%, they’re not 10% or 11%, building stocks are down 35%, banks...are down 25%...the Russell is down 20%, retail equities are down over 20%. How in the world can the S&P 500 be down only 10% or 11%?” That’s because utilities, staples and pharmaceuticals—economically defensive stocks — are up, he says.

Druckenmiller warns that the stock market is one big ‘mirage’ right now - MarketWatch

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The total of corporate leveraged loans has hit $1.6 trillion globally, far exceeding the records set prior to the crisis of 2008. The loans ballooned after the Trump Administration reversed a stricter Obama-era policy discouraging high leverage. Now, leverage is increasing, while underlying covenant quality is decreasing. The US Federal Reserve, the Bank of England and the Reserve Bank of Australia have all sounded the alarm over the loans.

$1.6 trillion in risky 'leveraged loans' are overhanging the global economy - Business Insider

A decade after the last financial crisis and recession, the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend. One possible reason lies in the large losses in the economy’s productive capacity following the financial crisis. The size of those losses suggests that the level of output is unlikely to revert to its pre-crisis trend level. This represents a lifetime present-value income loss of about $70,000 for every American.

Federal Reserve Bank of San Francisco | The Financial Crisis at 10: Will We Ever Recover?

Do changes in U.S. dollar interest rates have a material impact on financial conditions elsewhere in the world? The answer is a resounding yes (see the paper one of us presented at this month’s IMF Annual Research Conference). When the Federal Reserve eases, the result is a dramatic increase in financial system leverage in other countries. Not only that, but the impact is larger than that of domestic policy changes.

U.S. Monetary Policy Spillovers — Money, Banking and Financial Markets