A Happy Place :)

A happy place :) It was risk-on for equities yesterday as Hong Kong officials relented to protesters.  In the UK, Parliament took control, limiting the potential for a hard Brexit which provided some extra encouragement to stock bulls.

MY TWO CENTS

1.  The state of the re-union.  Though the stock market was not singularly focused on it, the political trouble in Hong Kong was certainly part of the cocktail of stress plaguing skittish investors recently.  When Carrie Lam, Chief Executive of Hong Kong announced that she would formally withdraw the extradition bill which sparked off many weeks of riots and violence, markets rejoiced.  Though the move has very little, if any effect on the ongoing trade negotiations with China, the concession indicates Beijing’s willingness to relent, which is positive.  Speaking of Beijing,  WHILE YOU SLEPT, trade negotiators finally agreed to meet in October after struggling for days to set up a September meeting.  Agreeing to talk is certainly a positive step and equity futures rallied over night on the news.  Finally, the UK Parliament has been undergoing extraordinary measures to avoid a non-negotiated exit from the EU.  First, members of Boris Johnson’s own conservative party abandoned him and voted with the opposition to block a hard Brexit.  The MP’s then voted to take parliamentary control away from Johnson to block him from preventing further votes on the matter.  The House of Commons passed a bill that would force the PM to ask the EU for an additional three month delay and they rejected Johnson’s call for an October 15th general election.  All of these measures need to be debated in the House of Lords (similar to the US Senate), but it certainly appears less likely that the UK will crash out of the EU.  It would seem, at this point, that the British PM is over a barrel(to use a UK colloquialism).  The moves strengthened the pound and added to the bullish case for stocks overnight.

2.  Cheap money.  What does a company do when they have lots of cash, the economy is chugging along but showing signs of weakness, and rates are low?  Borrow more money, of course.  Rates have been falling for the better part of the last year as investors begin to fear economic trouble on the horizon.  The pressure on yields first hit mid-term maturities from three to seven years and slowly crept up to ten years, causing the spread between 2-year and 10-year maturities to briefly turn negative for several days.  From a borrower’s perspective that means that it is cheaper to borrow money for longer periods of time over shorter ones.  The past few weeks have also seen yield pressure move even further out on the yield curve with 30-year treasury yielding less than 2% for the first time … ever.  With longer maturity borrowing costs so low, healthy, and some not-so-healthy companies have an incentive to sell debt, even if there is no immediate need.  What do they do with all this cheap money?  In many cases they use it to pay down older, more expensive debt.  Companies also use the cash to buy back common stock, thus propping up share prices.  What it all amounts to though, is that total debt is growing … and fast.  Since the end of the last recession, non-finacial outstanding debt has nearly doubled from $37 trillion to $64 trillion and sits at all-time highs.  All this begs one to wonder if there is a corporate debt bubble building.  The Fed certainly thinks so, mentioning it constantly in its commentary, though it has been largely ignored.  Apple is reportedly going to offer a $7 billion bond offering in multiple maturities with the longest being 30 years.  Not that they need the money with $200 billion in cash and securities on the books.  But how can they pass up such cheap money?

THE MARKETS

Stocks rallied yesterday as tensions eased in Hong Kong and the British House of Commons took charge of a tense situation.  The S&P 500 climbed by +1.08%, the Dow Jones Industrial Average traded up by +0.91%, the Russel 2000 advanced by +0.85%, and the NASDAQ Composite Index jumped by +1.30%.  Bonds advanced and ten year treasury yields added +1 basis point to yield 1.46%.  The British Pound Sterling rose by +1.42% against the dollar as hopes of a negotiated Brexit increased.

WHAT’S NXT

- ADP Employment Change is expected to show +148k new jobs compared to last months +156k.

- Markit Services PMI is expected to come in at 50.9, same as a month earlier.  The ISM Non-Manufacturing PMI is estimated to be 54.0, up from last month's 53.7.

- Factory Orders are expected to have risen by +1.0%, up from last month’s reported growth of +0.6%.

- Final Durable Goods Orders is expected to have grown by +2.1%, in line with earlier estimates.

daily chartbook 2019-09-05