“Listen to the scientists, and solve it like the crisis it is…”

An interesting day’s play in prospect here in the global markets:

We’re still digesting the mixed Netflix result – expansion globally vs saturation in US, while Tesla’s are still to come – I expect the EV maker’s numbers to be decent, even a beat, but still leave massive questions about its current valuation, which rose another 8% y’day because it rose 8%..

Or, should global investors apply ESG hurdles to US Treasuries the in wake of President Trump’s climate crisis denial? And, would you be better buying China on the basis the Chinese want to talk about global coordination and trade, while America wants to talk about America?

Or, maybe we should worry about Boeing fessing up to the reality it will be H2 before the B-737 Max flies again and pilots hate it?

Or, how about the implications of a potential snap Italian election putting the League in power and on collision course with Brussels?

Or, how about the IMF being really scared about last year’s near sudden financial growth crisis which triggered last year’s global ease..

Or, what about funds being pulled from Investco because of liquidity concerns?

Or, how about US stocks being at 89% greed on the CNN Fear and Greed Index?

Why worry today when we’ll only have all these to worry about tomorrow…

But let’s start though with the Big One: Wuhan Coronavirus! It is spreading and the first case has now cropped up in the US. Coming just ahead of the largest annual human migration, Chinese New Year holidays and 3 bln journeys across the Middle Kingdom, the knock-on effects in Asia are obvious as we saw from yesterday’s knee jerk stock reaction to news of further deaths. The thing the market should be paying attention to is Medical Staff being infected – a clear sign of how infectious this thing could be. Thus far it looks most fatal to those with pre-existing conditions, but a virus that jumps species could continue to mutate and become more serious.

What’s the potential effect on markets? In the early 2000s, I can remember the SARs outbreak and how it triggered all kinds of fears, including US stocks to wobble badly – the S&P was down 16% through the SARS crisis from Nov 2002 – March 2003.  The cost of the 2002/03 SARs outbreak is reckoned to have been around $40 bln to the global economy. With markets now looking very overhyped and overbought, what if the potential the new virus triggers a similar global panic?

As I asked earlies this week, could the new virus be the No-See-Um we’ve long expected, but is impossible to predict or identify? How serious it gets depends on how infectious it proves to be – at the weekend the apparent lack of medical staff infections made it a limited effect, but that seems to have been false information caused by the slowness of the Chinese to process data. If it spreads to medical staff – its contagious!

I’m concerned the virus comes right at the top of a very frothy market… that is not a good mix.

Commodities vs Stocks

Meanwhile, I’ve been looking for further evidence of how overpriced markets are – and I am thus indebted to my chum William Dinning of Waverton for passing on his thoughts on where markets are: The ratio of global commodity prices to share prices is now at an ALL TIME LOW. Take a look – it’s a worrying graph indeed. If you can’t see the chart, the ratio was last this low just before the Great Crash of October 1929.  William makes the point equity bull markets should be fuelled by optimism on the economic cycle. This time is interesting other economic cycle indicators aren’t reflecting the optimism we see in stock prices: “If the global economy Is booming then generally commodity prices rise due to increased demand as households spend and invest.” 

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The fact global commodity prices look so depressed compared to global stocks could mean one of two things: either stocks are over-priced or commodities are underpriced. Let me make it easy for you: financial assets stocks get a lift from ultra-low rates and QE (via debt funded buybacks or yield tourism), which commodities don’t.


Excellent article in FT – The new kings of the bond market. It describes the end of credit and bond trading as we know it – something that’s been dying for years. Its portfolio trades from ETFs that matter now, with baskets of 100s of bonds priced in a heartbeat. Young guys who never spent years extolling bonds to sceptical portfolio managers, or making prices based on talking up their books, and or running syndicate marketing pitches and targeting buyers are all as naught – basically my 35 year career then! Now its about 28 year olds who shift blocks of bond without the baggage of such experience….

I remember talking about ETFs as a bond strategy to major credit funds just a decade ago, and I was politely informed by credit buyers that ETFs were equity, were nothing to do with bond markets, there would be no liquidity, and they were irrelevant. I tried to argue otherwise, but it was difficult to get traction, and as bond salesman you don’t get paid for great ideas.. just selling. I let fixed income ETF baskets go and focused on illiquid bonds instead.. Looks like I missed another opportunity to be a billionaire. Hey-ho…

I’d be very interest in readers views on where bond market trading goes from here?

Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.

Republished from the Morning Porridge by permission.

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