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Hawkish Central Bankers Spark A Debate About The End Of Easy Money
July 7th, 2017 | 10:04 AM | 1108 views
BLOOMBERG.COM
Coordinated or not, signals from central bankers from Europe to Canada and the U.S. have roiled financial markets: The 10-year Treasury note yield jumped more than 20 basis points, bund rates reclaimed 0.50 percent for the first time in 18 months, American financial stocks crept towards the highest level in a decade and megacap tech shares turned into market pariahs.
While a few days of trading doesn’t cement the fate of markets for months to come, the debate is heating up over whether the moves are fleeting, amplified in the short term by summer vacation-induced light volumes, or if they mark the start of the end of a decade of easy money.
For Matt Maley, Miller Tabak & Co. equity strategist, the slowing of liquidity spigots means that the rotation out of treasuries and tech is here to stay as elevated asset prices lose the support of central bankers.
“In the last 3 1/2 weeks, ever since we had Yellen at the last meeting raise rates, everything we’ve heard out of the Fed has been more hawkish,” Maley said by phone. “It gets back to don’t fight the Fed.”
And it’s not just the Fed. Investors were served a heap of hawkishness by European Central Bank President Mario Draghi last week, who said that reflationary forces had replaced deflationary ones. Just hours later, Fed Chair Janet Yellen said the U.S. could withstand higher rates and voiced concerns that asset-price levels looked “somewhat rich.”
Investors yanked $3.2 billion over the past six days from the PowerShares QQQ fund tracking the Nasdaq 100 Index, the worst such stretch since 2008, data compiled by Bloomberg show. Filling in the gaps of tech’s unwinding have been bank stocks, bolstered by a steeper yield curve. The most popular ETF tracking S&P 500 financial stocks absorbed $1.3 billion over the same period, helping the fund round out its biggest month of inflows since November.
There’s reason to believe the pain won’t last, though. While the Nasdaq 100 has lost more than 4 percent since its June 8 high, much of the selling could be attributed to profit taking after a 21 percent rally since the start of the year. With earnings in S&P 500 tech shares set to top 15 percent in the second quarter, double the rate for the index as a whole, investors may not be done chasing growth.
While Maley says the rotation out of tech will persist, banks won’t remain the primary beneficiaries of the drawdown. That’s because leverage had driven the momentum in tech shares, but the new era won’t see such big bets on riskier value shares.
“If the Fed is going to be less accommodative going forward, some of the leverage will be unwound and we won’t see a dollar-per-dollar rotation,” Maley said. “If the rotation continues, it will not be enough to keep the markets from selling off.”
U.S. Treasury selloffs look more likely to persist, analysts said, after hawkish sentiment prompted $828 million of outflows from bond ETFs in the five-days following Draghi’s comments, compared with $1.18 billion inflows the previous week.
“With Treasuries, I don’t see it bottoming anytime soon. We’re going to see the rout persist,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets. “Central banks have been in an accommodative mode for a very long time. People can now see the end of the tunnel.”
Selling in European bonds, exacerbated Thursday by ECB minutes suggesting tighter policy may soon be warranted, looks set to continue as well, said Steven Major, head of fixed income research at HSBC Holdings Plc in London, even after German bund rates more than doubled in two weeks.
“Bund yields are beginning to reflect anticipation of an extremely gradual reduction in ECB policy accommodation,” he wrote in a note to clients Thursday. “We see this is as the start of the move toward our year-end target of 90 basis points for 10-year bunds.
Source:
courtesy of BLOOMBERG
by Dani Burger
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