Market Recap & Box Score

Monthly Recap: January 22, 2018

The New Year has not interrupted the equity markets as the S&P 500 and MSCI World Indices have increased over 5% since 19-Dec-17.  The TSX was also up for the period, albeit to a lesser degree at 1.3% as Canadian energy names continue to lag through the depressed price of Western Canadian Select oil.  Gold seemed to catch a bid during the month, reversing almost the full downswing since September.  Much of this was predicated on a weak USD, though for gold to climb in a period where interest rates are rising is interesting.  Bullions unusual response may be attributed to hints of inflation perking up, as gold has historically been a strong hedge against inflation surprises, while some cite sustained foreign central bank demand for providing support for its price.  West Texas Intermediate oil once again continued to rise in January.  It is 10.4% higher for the period, recording its 7th consecutive monthly rise since July 2017.  The combination of global growth expectations, repeated drawdowns of US oil inventories and the continuation of OPEC production quotas have helped reinforce the price for crude.  The oil market seems to be at a crossroads in the short-term.  CFTC Commitment of Traders reports all-time high net speculative long positions which contrasts with US Extraction & Production companies, who are progressively applying hedges to lock-in current prices.

It is popular to justify the relentless surge in the stock market by citing earnings momentum.  However, the data suggests that investor confidence and the fear of missing out may be blinding investors to the risk.  According to FINRA, margin debt in US customer accounts is at all-time highs ($627.4Bn as of Nov-17), swelling 18.5% since December 2016.  The embedded chart helps put into context the level of margin debt outstanding when compared to US GDP.  Credit has exploded past historical tops seen in 2000 (dot.com bust) and 2007 (financial crisis) and momentum is building.  Prolongation of support from the Federal Reserve and even expanded QE in response to a rollover in equity markets are fueling extreme market optimism.  However, enthusiastic borrowing is not enough to spark a bear market, but it indicates the potential implications if investors become forced sellers due to modest market weakness.

January Chart Memo

US Treasury yields continue to rise, especially at the short end of the curve.  The 2-year Treasury Yield has risen 0.80% from September 2017 to 2.07% as economic data and inflation expectations increase expectations of Fed rate increases in 2018-19.  The 10-year Yield has also broken out, reaching its September 2014 high of 2.66%.  Technical analysts are keen to monitor future price movements as the 10-year pushes up against the upper end of its 30-year trendline.  The 30-year yield movement has been much more subdued as bond investors question the long-term viability of current growth and inflation trends.