Is The Bond Market Sniffing Out Equity Market Trouble?

A short-term testing phase is underway in the global equity market, and a number of factors argue that it needs more time to play out. Five major concerns could weigh on stocks from a tactical perspective.

First, policy divergences between the Fed and the ECB are unlikely to widen further, as the ECB signaled at its March meeting that the Eurozone is past peak monetary policy easing with the latest 4-year TLTRO II bank take up coming in at €233bn fixed at 0%. Historically, the relative sovereign spread has been a reliable equity market topping out signal. The chart shows that the U.S./Eurozone 10-year sovereign bond spread has been an excellent leading indicator of the broad equity market, and the current message is to expect at least a tactical pullback. In fact, every time the spread has hit 100 basis points, relative bond market mean reversion has subsequently occurred, leading also to a broad equity market wobble.

We doubt that monetary policies can diverge significantly for much longer without any negative global ramifications. Given that the inflation expectation gap between the U.S. and the Eurozone has remained intact since last summer, real interest rate differentials are the driving factor of the recent steep divergence. Historically, this pushes capital flows onto U.S. shores to the point where the dollar typically overshoots thus draining global liquidity and eventually a tipping point occurs.

The weak link this time could be emerging markets, as a sustained and unchecked dollar bull market (underpinned by policy divergence) risks uncovering the hard currency debt excesses in the region. This is a risk we are closely monitoring.

Second, our global equity market EPS model has…

For additional details, please see the April 7th Report titled “Quarterly Review And Outlook”, available at


The Great Debate: Does China Have Too Much Debt Or Too Much Savings?

In this month’s BCA webcast I moderated a round table with my colleagues Peter Berezin (Global Investment Strategist), Arthur Budaghyan (Emerging Markets Strategist), and Yan Wang (China Investment Strategist) discussing the global macro and market implications of China’s rising debt burden:

1. What implications does a country’s savings/investment balance have for credit growth? Do credit bubbles originate from high national savings?

2. The world is climbing a wall of worry about China’s debt load and the pace of its domestic credit growth. Are these concerns justified? How worried should we be about the misallocation of capital in China?

3. What are the investment implications of China’s debt profile for global financial markets? Is rampant capital flight still a risk for the RMB?

4. What signposts should investors watch to determine whether China’s macro outlook is evolving in either a constructive, benign, or ominous direction for the global economy and financial markets?

The focal point of the view cleavages on China within BCA centers on how analysts interpret the relationship between savings, debt, and the ensuing implications for the allocation of capital. Links to the special report and webcast (enclosed) elaborate on how these issues inform the macro and market outlook for China and beyond.

See our Special Report:
Listen to our Webcast replay:


Is The S&P500 Suffering From Short-term Fatigue?

Equities are exhibiting signs of mild fatigue. Breadth has begun to narrow, and new highs have sagged compared with new lows (see chart). Both of these technical developments have warned of previous tactical pullbacks. The recent reset in oil prices may also test investor nerves.

Oil prices have been a critical macro variable, because they influence inflation expectations and the corporate bond market (high yield bond spreads shown inverted, see chart). Crude oil price
corrections have accurately timed equity retreats (see chart), and general risk aversion phases. To be sure, the global economy is no longer on a deflationary precipice, suggesting that weaker oil prices may not foreshadow a soft patch, but they may be a good enough excuse for profit taking in the equity market after a good run.

Contrary to popular perception…

For additional details, please see the U.S. Equity Strategy latest report titled: ”Reading The Market’s Messages”, available at

gss blog

Are Eurozone Banks A Buy?

Buying Europe at the expense of America has been a widow maker trade since the depths of the Great Recession, but factors finally appear to be falling into place for a preference shift away from the U.S. and toward the Eurozone.

Given the relative regional outlook, buying euro area banks/financials at the expense of U.S. banks/financials should be a winning pair trade.

Nevertheless, we would rather err on the side of caution and boost euro area financials to overweight in global equity portfolios.

The euro area is lifting out of the economic doldrums. The ECB’s easy money policies have finally coaxed the economy close to a self-sustaining recovery. The latest manufacturing PMI data were very strong, signaling that real GDP growth should accelerate. In addition to easy monetary policy, fiscal policy has also contributed to GDP growth. Keep in mind that in calendar 2016, the euro area’s real GDP grew faster than the U.S. A healthy economic backdrop typically spurs loan demand, which is positive for bank profitability (see chart).

Moreover, inflation is at the ECB’s target. Headline CPI has accelerated…

For additional details, please see the February 24th Report titled “Nearing Stall Speed”, available at


What Does The S&P 500’s Forward P/E Controlled For Volatility Signal?

In a blog post in early February, we showed that our Complacency-Anxiety Indicator hit a new high. Another way to measure greed overwhelming fear is the relentless rise of the S&P 500 forward P/E over the VIX. The spread between these two measures can also gauge complacency. As seen in the chart, this indicator has also soared to an all-time high. Momentum continues to drive the broad market trend and valuations have taken a backseat, emblematic of blow-off phases.

How long can this overshoot phase last? There are obviously no easy answers. However, in the absence of any major monetary, economic and/or geopolitical shocks, an examination of our Composite Technical Indicator suggests…

For additional details, please refer to the U.S. > Equity Strategy Report titled “Overbought, But…”, available at