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Wall Street Observer

Wall Street Observer

Toppy stock markets spark more “bubble” chatter

By Thyagaraju Adinarayan and Aaron Saldanha

LONDON (Reuters) – A strong start for world equities in 2021 after the fastest bear-to-bull market switch last year has prompted market mavens to flag worries about pricey assets, with BofA calling it the “mother-of-all asset bubbles”.

The torrent of cash sloshing around world markets due to the unprecedented stimulus measures in place to fuel economies coming out of the pandemic-led recession has fed into the euphoric rush to equities, particularly Big Tech.

The U.S. Federal Reserve for instance has been purchasing bonds at a record pace, doubling its balance sheet to nearly $8 trillion in less than a year. During the same period, the five biggest tech stocks have seen their market value double.

As financial assets worth $1.1 billion are gobbled up by global central banks every hour, there is irrational exuberance on Wall Street, according to BofA.

Goldman Sachs’ Chief Executive David Solomon and strategists at some major investment banks have since January been warning about stock market volatility, particularly in the immediate future.

Most traditional market-top signals have been flashing amber – just as they did before the bursting of the dotcom bubble two decades ago. But what’s different this time is that interest rates look firmly stapled to the floor for years to come.

Ten-year yields on bonds of G7 countries are hovering near record lows, lending credence to “bubble” naysayers and captured in the hefty ‘equity risk premium’ (ERP) relative to historical averages.

“You’re practically ‘forced’ to move into riskier assets,” said Jeroen Blokland, a portfolio manager at Robeco, adding that outside the United States, things look even less bubbly.

The benchmark U.S. S&P 500 is now the most expensive developed market index based on the price-to-earnings ratio, trading at levels last seen during the dotcom bubble of the late 1990s.

Though Blokland sees rising odds that markets globally end up in a bubble, he said the upcoming cash injections and fiscal spending could further support asset prices.

Some data points below signal higher odds of a bubble:


Sitting at 22-times 12-month forward earnings, the S&P 500 is trading well above its long-term average of just 16x. Other major indexes are also trading above long-term averages, but are still far from S&P’s extreme levels.

(Graphic: Global stock valuations surge well above long term averages: https://fingfx.thomsonreuters.com/gfx/buzz/yzdvxwaonpx/Pasted%20image%201613736119174.png)


The frenzy is also visible in options markets. The CBOE put-to-call ratio has been pinned at near 20-year lows for eight months now, at levels last seen just before the dotcom bubble burst in 2000. Put options confer the right to sell at a pre-agreed price and calls allow holders to buy.

(Graphic: Put-to-call ratio pinned at 20-year lows for months now: https://fingfx.thomsonreuters.com/gfx/buzz/jznpnojexvl/Pasted%20image%201613736649173.png)


Super-low bond yields leave equities attractive for investors navigating between the two asset classes, and that’s captured by the still hefty ERP relative to historical averages.

(Graphic: Table on Equity Risk Premium for G7 and China: https://fingfx.thomsonreuters.com/gfx/mkt/jznvnojdxpl/Table%20on%20Equity%20Risk%20Premium%20for%20G7%20and%20China.png)


While the reflation trade drives gains in small cap stocks, which fell heavily last year, interest in tech stocks hasn’t abated. That’s built a concentration risk in markets as the sector expands to make up a fifth of all global stocks – the highest since the dotcom bubble of the late 1990s.

(Graphic:Concentration risk in world stocks? Tech dominates: https://fingfx.thomsonreuters.com/gfx/buzz/jbyvrdxjnve/Pasted%20image%201613737694920.png)


Another indicator is the extent of central bank liquidity support in the system. M2, a measure of money supply that takes into account cash and deposits, jumped sharply last year spawning bubbles in many corners of the markets from bitcoin to high-flying tech stocks.

(Graphic: nasdaq and US money supply: https://fingfx.thomsonreuters.com/gfx/mkt/dgkplzjwmpb/nasdaq%20and%20US%20money%20supply.JPG)

(Reporting by Thyagaraju Adinarayan and Aaron Saldanha; Editing by Vidya Ranganathan and Susan Fenton)


Take Five: Bond yield rise might be the real thing

LONDON (Reuters) –


Higher U.S. Treasury yields have so far done little more than jolt equity markets off record highs. That will change if “real” yields — adjusted for inflation — take off.

It was last year’s real yield plunge which sent cash flooding into stocks; while expensive, they looked like a good deal compared with real yields of minus 1%.

But big-time government spending plans and prospects of economic reopening have lifted real 30-year Treasury yields to eight-month highs, just 11 basis points shy of 0%. Ten-year real yields are at five-week peaks.

There’s little consensus on when yields will become a problem for equities. But some assets are already seeing an impact — gold for instance struggles to compete with income-bearing investments when yields rise and is down 6% this year.

Graphic: It’s getting real – https://graphics.reuters.com/USA-BONDS/REAL/rlgpdejxyvo/chart.png


The Reserve Bank of New Zealand’s meeting on Wednesday might tell us if the first country to reduce COVID-19 cases almost completely will also be the first to consider cutting back monetary policy support.

A lot has changed since the RBNZ’s November policy statement. The kiwi economy is beating forecasts and markets are no longer pricing in negative rates.

Governor Adrian Orr will revise up forecasts for growth and inflation but he faces a communications challenge: acknowledging improvement without spooking markets.

A rate rise may be years away but the prospect of a stimulus slowdown is on investors’ minds — 10-year sovereign bond yields are up 50 bps this year.

Graphic: New Zealand’s economy bounces back – https://fingfx.thomsonreuters.com/gfx/mkt/oakveredjpr/Pasted%20image%201613729699719.png


Debt relief for low-income economies will be high on the agenda of G20 finance officials when they meet on Feb. 26-27.

They will debate the idea of extending IMF funding and the initiative allowing the poorest countries a six-month suspension on some debt payments, as well as more comprehensive relief. There are also calls for the G20 to lead a global COVID-19 immunisation plan.

It will be the first G20 meeting since Joe Biden took over as U.S. president, so the tone may be very different from the Trump years which saw many global alliances fractured. That could be a positive shift at a time when countries are struggling to ensure economic recovery stays on course.

Graphic: Debt-to-GDP ratios of DSSI countries with sovereign bonds – https://graphics.reuters.com/AFRICA-DEBT/qzjvqmlllvx/chart.png


The British pound has become an unexpected currency market poster child for the COVID-19 recovery theme.

It has marked a major milestone in hitting $1.40, a near three-year high. But just two months ago it was mired in Brexit risks and the worst economic outcome of any major industrialised country.

Since mid-December, sterling has strengthened by around 5.5% against the dollar and by 6.5% versus the euro as Britain’s vaccination programme got off to a flying start. Hopes of an earlier end to lockdowns have lifted it 2% against the dollar in February.

Some consider the pound expensive. A Reuters poll predicted the U.S. economy would recover to pre-pandemic levels within a year but saw Britain taking twice that time.

There’s also the question of whether the Bank of England might take interest rates negative. Money markets expect it will, though not before the second half of 2022.

Graphic: GBP top FX performer – https://fingfx.thomsonreuters.com/gfx/mkt/jbyprdmwnpe/GBP%20top%20FX%20performer.JPG


Journalists are rummaging through their pun drawers for ways to describe the deluge of special purpose acquisition companies (SPACs) that have hit markets over the past year.

SPACs are essentially blank cheque companies which raise money in an initial public offering with the aim of buying a private firm and taking it public.

Already this year, 144 SPACs have raised $45.7 billion, data from SPAC Research shows, often backed by high-profile investors and celebrities.

The trend is not without bad press. Investment banks managing the deals earn fees by finding the SPAC a company to acquire — within two years. That raises fears of insufficient due-diligence.

While primarily a U.S. phenomenon, SPACs are sprouting in Europe too. Ex-UniCredit CEO Jean-Pierre Mustier, and German tycoons Christian Angermayer and Klaus Hommels have announced SPACs.

SPAC launches are plentiful but how actual acquisitions — or “deSPACing” — develop will show whether the trend lasts.

Graphic: SPAC boom – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbwlnxpq/spac.PNG

(Reporting by Saqib Iqbal Ahmed in New York and Tom Westbrook in Singapore; Karin Strohecker, Saikat Chatterjee and Abhinav Ramranayan in London; compiled by Sujata Rao; editing by Susan Fenton)



World Bank names first African head of IFC private sector finance arm

WASHINGTON (Reuters) – The World Bank on Thursday named the first African chief executive of its private sector arm, the International Finance Corp, a position key to the bank’s efforts to finance vaccines and drive investment in low-carbon energy projects.

Makhtar Diop, a Senegalese national and the former minister of economy and finance of the West African nation, is taking over the job after serving as the World Bank’s vice president for infrastructure, overseeing the bank’s work across energy, transport, digital development and other sectors.

Earlier this week, the World Trade Organization selected former Nigerian finance minister and World Bank Managing Director Ngozi Okonjo-Iweala as its new director general.

In a statement, World Bank President David Malpass praised Diop’s experience in both the public and private sectors, saying he will help attract investment to low-carbon energy, transportation, clean water, digital services and other infrastructure.

“Makhtar’s skills at IFC will help the World Bank Group continue our rapid response to the global crisis and help build a green, resilient, inclusive recovery,” Malpass said.

Diop replaces Philippe Le Houerou, who stepped down in September 2020 after more than four years as the IFC’s CEO. Interim CEO Stephanie von Friedeburg was appointed IFC’s senior vice president of operations.

Diop told reporters that his highest priority was to reduce the risk premium for private sector investment in “fragile states,” particularly in Africa.

In June, IFC launched a $4 billion financing platform aimed at boosting the production and supply of vaccines and other critical healthcare products in developing countries.

Malpass also said that he hoped to complete the next replenishment of the International Development Association fund for the poorest countries in 2021 instead of in 2022.

Asked whether he expected the administration of new U.S. President Joe Biden to increase the U.S. contribution to IDA, he said he did not want to anticipate such a result.

(Reporting by David Lawder; Editing by Cynthia Osterman; Editing by Paul Simao and Cynthia Osterman)


COVID response drives $24 trillion surge in global debt: IIF

By Marc Jones

LONDON (Reuters) – The COVID pandemic has added $24 trillion to the global debt mountain over the last year a new study has shown, leaving it at a record $281 trillion and the worldwide debt-to-GDP ratio at over 355%.

The Institute of International Finance’s global debt monitor estimated government support programmes had accounted for half of the rise, while global firms, banks and households added $5.4 trillion, 3.9 trillion and $2.6 trillion respectively.

It has meant that debt as a ratio of world economic output known as gross domestic product surged by 35 percentage points to over 355% of GDP.

That upswing is well beyond the rise seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective debt-to-GDP jumps.

There is also little sign of a near-term stablisation.

Borrowing levels are expected to run well above pre-COVID levels in many countries and sectors again this year, supported by still low interest rates, although a reopening of economies should help on the GDP side of the equation.

“We expect global government debt to increase by another $10 trillion this year and surpass $92 trillion,” the IIF report said, adding that winding down support could also prove even more challenging than it was after the financial crisis.

“Political and social pressure could limit governments’ efforts to reduce deficits and debt, jeopardizing their ability to cope with future crises.”

“This could also constrain policy responses to mitigate the adverse impacts of climate change and natural capital loss,” it added.

Graphic: Global debt surges to new record high – https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqgwxgvx/Pasted%20image%201613519778223.png


Debt rises were particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain, and Greece increasing some 50 percentage points.

The rapid build-up was mostly driven by governments, particularly in Greece, Spain, Britain and Canada. Switzerland was the only mature market economy in the IIF’s 61-country analysis to record a decline in its debt ratio.

In emerging markets, China saw the biggest rise in debt ratios excluding banks, followed by Turkey, Korea, and the United Arab Emirates. South Africa and India recorded the largest increases just in terms of government debt ratios.

“Premature withdrawal of supportive government measures could mean a surge in bankruptcies and a new wave of non-performing loans,” the IIF said.

However, sustained reliance on government support could pose “systemic risks” as well by encouraging so-called ‘zombie’ firms – the weakest and most indebted corporates – to take on even more debt.

Graphic: COVID sovereign debt surge – https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkneoyvm/Pasted%20image%201613519223728.png

(Reporting by Marc Jones; Editing by Toby Chopra)


Workers missing after ArcelorMittal South Africa site accident

JOHANNESBURG (Reuters) – Rescue efforts are under way at ArcelorMittal South Africa’s Vanderbijlpark Works to find three employees missing after an accident, the steelmaker said on Wednesday.

Africa’s biggest steel producer said a portion of a stack at one of the operation’s coke batteries early on Wednesday fell on to a control room where the three employees were working.

ArcelorMittal South Africa, majority owned by Luxembourg-based ArcelorMittal SA, said the cause of the incident was not yet known but search and rescue teams were on site.

“A full investigation will follow to understand what happened and avoid anything like this from happening in the future,” ArcelorMittal South Africa CEO Kobus Verster said.

The National Union of Metalworkers (NUMSA) expressed concern for the workers trapped under the rubble.

The company said the coke battery was damaged in the incident and will likely be out for repairs once the extent of the damage has been determined.

Vanderbijlpark Works, located in the country’s economic hub of Gauteng, is one of the world’s largest inland steel mills.

(Reporting by Tanisha Heiberg; editing by Jason Neely)


Google to invest $75 million in coronavirus-hit small businesses

By Foo Yun Chee

BRUSSELS (Reuters) – Google is teaming up with the European Investment Fund (EIF) and two other organisations in Latin America and Asia to provide $75 million in funding to small- and medium-sized companies suffering from the impact of COVID-19.

The funds are part of an $800 million initiative announced in March last year in response to the pandemic.

Google, a unit of Alphabet, said on Wednesday that it would invest in two EIF funds, giving $15 million in loan capital to 1,000 European small businesses and $10 million in EIF’s venture capital fund backing 200 life sciences companies.

The EIF is part of the European Investment Bank group, the lending arm of the European Union.

In Latin America, Google will work with the Inter-American Development Bank to allocate $8 million to small companies.

It has also set up a $26 million loan fund with Kiva, an organisation that crowdfunds loans, to help businesses in Africa, the Middle East and Indonesia. Indian companies will get $15 million.

(Reporting by Foo Yun Chee; editing by Barbara Lewis)


Going all-in? Investors’ cash levels dip to 2013 pre-taper-tantrum levels

By Thyagaraju Adinarayan

LONDON (Reuters) – Cash levels in investment portfolios have hit the lowest since just before the so-called taper tantrum of 2013, according to Bank of America’s February fund manager survey, which also showed investors to be overwhelmingly bullish on the economic outlook.

World stocks have been notching successive record highs in 2021, with central banks remaining supportive and governments injecting money into the system to get economies up to speed after the damage caused by COVID-19.

“The only reason to be bearish is … there is no reason to be bearish,” Michael Hartnett, BofA’s chief investment strategist, told clients, who have the highest equity and commodity allocations in a decade.

A net 91% of them expect a stronger economy, the best ever reading in BofA’s survey published on Tuesday, which covered 225 fund managers with $645 billion in assets under management.

Investors showed they had the capacity to increase risk, taking their cash levels down to 3.8%, the lowest since March 2013, just before the U.S. Federal Reserve sparked a market tantrum by signalling its intent to wind down, or taper, the bond-buying programme it launched during the 2008 crisis.

However, investors hear echoes of the 2013 situation, and see another taper tantrum as the second biggest “tail risk” after delays in the rollout of coronavirus vaccines.

Despite these issues simmering in the background, and the huge gains across markets, BofA’s survey, conducted between Feb. 5 and 11, found only 13% of its participants concerned about a U.S. equity market bubble. About 53% said U.S. equity markets were in a late-stage bull market while 27% saw it in the early stages.

Notably, a net 25% of the investors surveyed said they were taking “higher-than-normal” risks — the highest percentage ever. “Long tech” was the “most crowded trade”, followed by “long bitcoin” and “short U.S. dollar”.

Wall Street’s “fear gauge”, the CBOE Volatility Index, dipped below 20 on Friday for the first time in almost a year.

“As volatility breaks down, this provides just one more of the many reasons for stocks to rally,” said Saxo Bank market strategist Eleanor Creagh. “With the USD and volatility on the decline, asset managers will gross up positioning.”

The buying spree prompted the MSCI all-country world stocks index to register its 12th consecutive day of gains, its longest rising streak in 17 years.

In contrast, a survey by Deutsche Bank showed investors agreeing that there were many bubbles in financial markets, with bitcoin and U.S. tech stocks topping the bubble talk.

The survey did, however, suggest “taper tantrum” fears were receding. Some 26% foresaw such an event this year, down from a third in January.

Graphic: Fed’s balance sheet vs. Big tech – https://fingfx.thomsonreuters.com/gfx/buzz/xlbpgdbzzvq/Pasted%20image%201613466288998.png

(Reporting by Thyagaraju Adinarayan; Editing by Sujata Rao and Kevin Liffey)


Government grants South African Airways $346 million to make severance payments

JOHANNESBURG (Reuters) – South African Airways (SAA) has received a further 5 billion rand ($346 million) from the Department of Public Enterprises to help make severance payments to laid-off staff as part of its rescue plan, administrators of the plan said on Tuesday.

SAA entered a local form of bankruptcy protection in December 2019 after roughly a decade of financial losses, with its fortunes worsening after the COVID-19 pandemic grounded flights.

The government committed to providing 10.5 billion rand to bailout the airline in October’s mid-term budget.

The business rescue practitioners (BRP) hired to restructure the airline said they had received 7.8 billion rand from the government including the latest payment.

The administrators, who have proposed a plan which includes reducing the airline’s staff by around two-thirds, said the money allowed them to pay cabin crew and ground staff that had accepted voluntary severance packages in August.

More than 3,000 SAA employees have accepted severance packages, while 1,300 are still in negotiations, the administrators said.

“The payment (to staff) follows the receipt of a further tranche of R5 billion from the Department of Public Enterprises on 12 February, which has further allowed the BRPs to confirm the second payment on 19 February.”

(Reporting by Mfuneko Toyana; Editing by Promit Mukherjee, Kirsten Donovan)


Recovery in global trade to stall again in first quarter: U.N. report

GENEVA (Reuters) – A recovery in global trade is expected to slow again in the first quarter of 2021 as the coronavirus pandemic keeps disrupting the travel industry after world trade contracted 9% in 2020, a U.N. report said on Wednesday.

After lockdowns caused trade to shrink 15% in the first half of 2020, it rebounded in the second half, with global trade in goods up about 8% in the fourth quarter compared with the third, the U.N. Conference on Trade and Development (UNCTAD) said.

That was largely due to developing countries, particularly those in East Asia, with trade in goods originating from the region up 12% in the fourth quarter year-on-year.

“East Asian economies have been leading the recovery process with strong export growth and gains in global market share,” UNCTAD said, adding that most manufacturing sectors rebounded in the fourth quarter, apart from energy and transport.

However, trade in services stagnated at levels seen in the third quarter, the report said, adding that exports of services from China, and to a lesser degree India, had fared relatively better than other countries.

For the first quarter of 2021, UNCTA projects a 1.5% fall in trade in goods versus the previous quarter, and a 7% drop in trade in services, although it said its forecasts were uncertain due to the pandemic and uncertainty about stimulus packages.

(Reporting by Emma Thomasson; Editing by Alison Williams)



Analysis: Food price spikes see inflation rear its head in emerging markets

By Karin Strohecker

LONDON (Reuters) – For Cleanne Brito Machado, like millions of people in developing countries around the world, shopping for staple foods such as rice, beans, oil or potatoes now means making hard choices.

“The shopping cart is getting much smaller and we’re paying much more,” said the 41-year old, who works as a maid in Brazil’s capital Brasilia. “We’ve had to give up on little trips, visiting family at the weekend, and we haven’t been able to save any money for emergencies or to have in the bank.”

A mix of currency depreciation, rising commodity prices and coronavirus disruptions saw food inflation soar 14% last year in Latin America’s largest economy – the biggest increase in nearly two decades. The headline figure masks hikes in staples, such as a 76% jump in rice or a doubling of soy oil prices.

Other developing countries from Turkey to Nigeria also recorded double-digit jumps in food inflation. Major wheat and corn exporters such as Russia or Argentina have introduced curbs or taxes to preserve domestic stockpiles, exacerbating pressures elsewhere.

United Nations data showed food prices hit six-year highs in January after rising for eight consecutive months.

The unwelcome return of food price pressures has put policymakers and investors on high alert, worried what it means for inflation more broadly while economies are still reeling from the coronavirus crisis.

“Central banks will be watching the level of food prices quite carefully over the next few months because they will have to make a decision on whether to respond to this or not,” said Manik Narain, head of emerging market strategy at UBS.

Graphic: EM food inflation and FAO https://fingfx.thomsonreuters.com/gfx/mkt/nmopazmqyva/EM%20food%20inflation%20and%20FAO.PNG

Food is the single largest element of inflation baskets in many emerging markets, accounting for around half in countries like India or Pakistan compared to less than 10% in the United States.

Rising food prices have contributed to social unrest in the past. Climate change effects are expected to exacerbate price swings and rising energy prices add to the pressure.

For those like Machado, higher food bills leaves less to spend on other goods, squeezing demand for items from travel to eating out.

Many countries have already seen hard currency revenues from sectors such as tourism crater and they lack the capacity of their richer peers to pump in stimulus.

For central banks, the temptation may be to let inflation rise and keep monetary conditions loose to support growth, say analysts.

“It is a very difficult balance – governments in emerging markets are damned if they do and damned if they don’t,” said David Rees, senior emerging markets economist at Schroders.

“As a policymaker – do you choose to support your population or choose keeping the markets happy?”

Developed economies generally see food inflation as transitory. But in developing nations, persistent food price rises in the run up to the 2008 financial crisis lifted core inflation, prompting years of interest rate hikes.


In Istanbul, food market vendor Seref Geyik says he has seen the effect of opening hours cut short by the pandemic and rising wholesale prices of fruit and vegetables.

“Consumers are leaning towards cheaper stalls, they are not looking for good quality produce,” the 53-year old said.

Relying heavily on imported unprocessed foods, Turkey saw food price rises accelerate from August, when the lira chalked up monthly losses of 5% or more against the dollar.

With nearly all its energy also imported, rising energy prices from early November have added to the pressure. Dry weather has meanwhile hampered production of some local crops, from hazelnuts and chestnuts to apricots and olives.

Graphic: Inflation in emerging markets https://fingfx.thomsonreuters.com/gfx/mkt/jznvnodxqpl/Inflation%20in%20emerging%20markets.PNG

Turkey’s experience of chronically high inflation two decades ago is a cautionary tale of how price pressures can derail economic growth and shatter household and investor confidence.

New central bank governor Naci Agbal has launched a dedicated department to monitor food and agricultural prices to serve as an “early warning” system.

In January, Brazil’s central bank abandoned forward guidance that rates would stay low after the real came under pressure and bond markets sold off. In a nod to changing priorities, deputy governor Fernanda Nechio said keeping inflation under control has helped lift large numbers of people out of poverty.

Analysts predict Russia and South Africa will make the same journey.

Keeping interest rates unchanged in December, Russia’s central bank governor Elvira Nabiullina pointed to secondary effects from a rise in global food prices and the weaker rouble.

Few expect pressures to ease soon, with Chinese demand which sent global cereal prices to a six-year high showing little sign of abating.

Rice price increases led to unrest in several countries during the 2008 food crisis, and food inflation was a contributor to the Arab Spring revolts a decade ago.

“We have seen in the past instances of protests apparently at least triggered by food price spikes, (especially) when prices of staples are increasing,” said Moody’s managing director Marie Diron.

(Reporting by Karin Strohecker in London; Additional reporting by Jamie McGeever in Brasilia and Murad Sezer in Istanbul; Editing by Catherine Evans)