The week will include rate announcements from the Federal Reserve and Bank of Japan, and the conclusion of the G-20 meeting in Beijing, making central bank policy a key topic in coming trading sessions. While there have been many calls for cooperation among policymakers, it’s clear that each central bank’s priorities remain firmly grounded in domestic considerations. In a research note issued today, economists at the European Central Bank concluded that the bank’s quantitative-easing program has worked to stabilize inflation expectations. To date, ECB president Mario Draghi has been tight-lipped about his response if regional growth suffers after the U.K.’s decision to exit the European Union. Separately, in comments to the media in China, Swiss National Bank President Thomas Jordan affirmed that his team is closely monitoring the impact of Bank of England and ECB actions on his economy and reiterated that the Swiss franc remains significantly overvalued. Bank of Japan governor Haruhiko Kuroda reiterated to the media over the weekend his willingness to expand stimulus measures while continuing to dismiss the notion of “helicopter money” as a solution. For now, investors are left to ponder which bank will act first if Brexit does create a drag on global demand.
Verizon to buy Yahoo! web assets. Multiple media outlets reported today that Verizon Communications will acquire Yahoo‘s core business units in a deal valued at nearly $5 billion. After the transaction, Yahoo will continue to hold stakes in Alibaba Group and Yahoo Japan. The combined Verizon and Yahoo digital advertising platform will rank third behind Alphabet (Google) and Facebook.
Julius Baer earnings, assets rise. First-half financial results issued today by Swiss wealth manager Julius Baer Group included a 5 percent year-over-year increase in earnings and a 4 percent climb in assets under management. The bank’s total income for the period hit 362 million Swiss francs ($367 million) versus 39 million francs during the same period after adjustment for provisions for settling with U.S. tax authorities.
German business confidence better than forecast. Ifo Institute sentiment data released today revealed a better-than-forecast mood among corporate leaders with the headline index at 108.3 versus a consensus forecast of 107.7. Both expectations and current assessment subindices also registered stronger than expected.
Portfolio Perspective: Equities Float on Global Demand for Yield — Sean Darby, Jefferies
The Standard & Poor’s 500 failed to close on Friday above its record high set in midweek with oil prices weakening but bond proxies firm. “The risk-free rally” stalled on the back of a softened $828 million injection into U.S. investment-grade corporate bonds and a $1.3 billion injection into U.S. non-investment grade high-yield bonds — the largest in 19 weeks and the second-heaviest since 2004. The reach for yield remains insatiable.
There was a minor $2.7 billion outflow from U.S. equities but the financial sector continued to attract solid inflows. The internal dynamics within the equity market is cloudy with higher volatility shares rising while the S&P 500 broke away from the 30-year Treasury bond but high-yield bond prices failed to gain ground after a stellar rally. The VIX curve steepened.
The Federal Open Market Committee will hold a two-day meeting on Tuesday and Wednesday. We do not expect the Fed to change rates in either direction. U.S. economic surprise indexes continue to blow off but economic releases remain mixed with July’s Philly Fed index weaker than expected but under the hood in July looks much improved from June, with new orders rising to 11 from -3 and shipments rising to 6.3 from –2.1.
The best analogy we can offer investors on U.S. equities is that they are “floating” like a ship on the global demand for yield, waiting for earnings and growth to reassert themselves. While positioning is skewed towards a deflation scenario, the biggest risk for markets in the short-term is a higher inflation scenario, which would mean much richer real-bond yields.
Sean Darby is chief global equity strategist at Jefferies in Hong Kong.
