Have Trillions of Fed Dollars Broken a Bond Market Warning Sign?
Global stocks were on track for weekly gains Friday as Chinese markets showed signs of stabilizing after a selloff, and data pointed to an acceleration in the eurozone economy. The Stoxx Europe 600 was up 0.4% following a mostly upbeat session in Asia, while futures pointed to a 0.2% opening advance for the S&P 500 after the Thanksgiving holiday.
Data released Friday largely pointed to a better-than-expected pickup in the eurozone economy this month. German government bond yields rose to 0.361% from 0.347% late Thursday and the euro edged up slightly to $1.1858 after the German Ifo index hit a record in November. The data suggested recent political uncertainty in Germany has so far had limited impact on business confidence, although most survey responses were submitted before political talks to form a governing coalition collapsed.
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When it comes to European political risks, “the make-or-break thing for markets is whether there’s a real risk of euro breakup,” said Valentijn van Nieuwenhuijzen, head of multiasset at NN Investment Partners. “If that’s not the case, the market doesn’t care too much.” The Ifo index followed better-than-expected eurozone purchasing managers’ surveys for November released Thursday, with the composite PMI unexpectedly hitting a 79-month high.
The eurozone economy has continued to pick up this year, echoing an acceleration in growth across the globe that has helped send stock markets to multiyear or record highs. “The question for 2018 is how to balance between the strong fundamental story and the strong investor consensus around it,” Mr. van Nieuwenhuijzen said.
In European stocks Friday, banks were the best performers as they tend to benefit from higher government bond yields. Spain’s IBEX 35 index and Italy’s FTSE MIB both rose 0.9%, and Germany’s DAX rose 0.8%, but the U.K.’s export-heavy FTSE 100 index lagged behind. Stocks in the U.S., Europe and Japan were all on track to end the week with modest gains, although trading volume is likely to be muted with many market participants away from their desks.
The focus next week is expected to shift toward the start of the Christmas holiday shopping season. Sales on Black Friday and Cyber Monday are often taken as a harbinger of the overall holiday period for retailers, but it has become harder to discern trends since such sales now tend to span more than two days, according to strategists at Scotiabank. In Asian trading, the Shanghai Composite Index edged up 0.1% after falling 2.3% Thursday in its biggest one-day drop in nearly a year.
Thursday’s decline was the biggest drop of the year for the Shanghai benchmark.
Thursday’s decline was the biggest drop of the year for the Shanghai benchmark. PHOTO: LONG WEI/ZUMA PRESS
The steep declines followed signs of Beijing’s determination to clamp down on market speculation and the country’s high debt levels. Weakness in China’s bond market also contributed to the downbeat tone as the 10-year yield recently hit three-year highs of just over 4%.
The sudden stock weakness wasn’t a cause for alarm, said Iris Pang, greater China economist at ING, adding that it could happen again in the short term as fund managers reposition and reallocate money between bonds and stocks. With ING anticipating strong Chinese economic growth through at least next year and companies there posting double-digit earnings jumps, Ms. Pang said the bank doesn’t see a top for Chinese stocks—which have lagged behind others in the region this year.
Hong Kong’s Hang Seng, which slid Thursday along with its mainland counterparts, rose 0.5% on Friday, ending the week 2.3% higher. Japan’s Nikkei finished the day up 0.1% and ended the week up 0.7% following a Thursday holiday.
Some would argue that this isn’t true energy independence, since we would still import oil in that situation. If that’s the standard, then we will never truly be independent, because there will always be economic reasons to import oil even if at the same time we export oil and finished products. For example, some Canadian crudes may always have a logistical advantage over U.S. crudes for certain refineries in the northern U.S.
But a long-term solution to U.S. energy dependence will also require significant demand-side reductions. A shift to electric vehicles, more fuel-efficient vehicles, and widespread adoption of ride-sharing could feasibly shave off several million BPD of demand over the next decade giving us, by every measure, the energy security that has driven U.S. energy policy for decades.
Until the oil-price collapse that began in 2014, the U.S. was on a trajectory to achieve zero net imports by 2019. At present, we are still about four million BPD away from that goal, but U.S. oil production is once again rising. Energy independence could be achieved in as little as four years if oil production returns to the growth trajectory of 2008 to 2014.
At the time of the 1973 OPEC oil embargo, the U.S. still produced about two-thirds of the oil we used, but our energy security weakened significantly in the decades after that, to the point where only one-third of our consumption was met by domestic oil.
The situation has changed dramatically over the past decade. The successful combination of hydraulic fracturing and horizontal drilling ushered in the shale oil and gas boom. Meanwhile, higher oil prices helped curb demand. The combined effect dropped net U.S. imports of crude oil and finished products from a high of 12.5 million barrels per day in 2005 to less than 5 million BPD in 2015. The U.S. actually became a net exporter of finished products (e.g., diesel, gasoline, etc.) in 2011 for the first time since 1949.