(Bloomberg Opinion) -- Those looking for good news on the economic front on Wednesday were disappointed. Reports in China showed industrial output, retail sales and investment all slowed in April by more than forecast. Germany said its economy expanded at an anemic 0.4% in the first quarter. In the U.S., retail sales declined unexpectedly in April and factory production fell for the third time in four months. This was all proof that the global synchronized slowdown is real, and yet stocks worldwide were headed for their second straight gain.
Investors largely looked past the deteriorating outlook because of reports that President Donald Trump is poised to delay a decision by up to six months to impose auto tariffs to avoid blowing up negotiations with the European Union and Japan. Nothing is official, as the reports cited unidentified people close to the discussions, but investors latched on to them anyway, underscoring how markets have entered a bizarre world where nothing else matters except the latest trade headline. “The fact that the major averages can rally in the face of” poor data “is just added evidence of the breakdown this cycle between the stock market and the economy,” David Rosenberg, the chief economist and strategist at Gluskin Sheff & Associates, wrote in a Twitter post. Such a breakdown only raises the odds that the Federal Reserve and other central banks will commit a policy error. Nevertheless, volumes have been trending down, suggesting investors are largely in wait-and-see mode. Both the 15- and 30-day moving averages in trading volume on all exchanges have dropped to their lowest levels since December despite the recent sell-off in stocks, according to data compiled by Bloomberg. That trend is unlikely to reverse until the Group of 20 summit in late June, where Trump said he plans to meet President Xi Jinping of China to talk trade.
The good news is that a bullish base seems to be forming in stocks. Although the S&P 500 Index posted its worst week of the year through the period ended May 10, Bank of America Corp. said its clients funneled $4.7 billion into equities, the most this year, according to Bloomberg News’s Justina Lee. It’s a sign that “buy the dip” is alive and well in stock markets, even as global shares erased $3.6 trillion amid renewed trade tensions, Lee reports.
BONDS DO TRUMP’S BIDDING
The Fed has taken a lot of heat lately from Trump, who suggested again this week that the central bank lower interest rates to cushion the blow from the escalating trade war with China and spur the economy. The Fed, of course, has held rates firm, but the economy has nevertheless enjoyed a huge reduction in borrowing cost thanks to the bond market. Yields on U.S. Treasuries of all maturities have fallen from an average of 3.12% in early November to 2.34% as of Tuesday, about the lowest since the start of 2018. That move has, in effect, reversed the four rate hikes by the Fed last year. Investment-grade companies can borrow in the bond market at an average rate of 3.60%, compared with 4.37% in November. Consumers are also benefiting, with Freddie Mac reporting that the average rate on a 30-year fixed mortgage dropped to 4.10% from 4.94% in November. This shows that borrowing costs are ultimately set by the market regardless of what the Fed does or doesn’t do with its benchmark rate. And right now, the market thinks yields — and borrowing costs — will go even lower. The $20.3 billion iShares Short Treasury Bond ETF took in $320 million on Tuesday, data compiled by Bloomberg show. That was the largest inflow for the fund this year, according to Bloomberg News’s Carolina Wilson and Emily Barrett.
STERLING SINKS
With all the focus on the dollar and yuan as the U.S-China trade war heats up, it’s almost as if every other currency in the $5.1 trillion foreign-exchange market is being ignored. But overlooking the pound could prove financially painful. Despite little new news on the Brexit front, the Bloomberg Pound Index has entered into an alarming slump, dropping for eight consecutive days. The gauge is now at its lowest since mid-February. But this move isn’t totally unrelated to Brexit. There’s growing evidence that investors are unconvinced that U.K. Prime Minister Theresa May can get her plan to exit the European Union through Parliament on a fourth attempt next month, according to Bloomberg News’s Charlotte Ryan and Anooja Debnath. They report that BlueBay Asset Management LLP is shorting the pound and gilts, while UBS Wealth Management is avoiding U.K. government debt, and long-term pound bull Nomura International Plc has ended its buy recommendation. May will bring her Brexit deal back for another lawmaker vote during the week of June 3. The opposition Labour party is saying it won’t support the bill in its current form after weeks of talks. “I don’t see talks between Labour and Tories going anywhere,” said BlueBay chief investment officer Mark Dowding. “Ultimately Theresa May is gone and a more hardline Brexiteer will replace her. This suggests higher risks of a hard Brexit in November.”
BITCOIN PULLS AHEAD OF THE PACK
During the cryptocurrency boom of 2017, when the price of a Bitcoin rose from less than $800 to almost $20,000, it seemed as if not a week went by that another digital currency wasn’t being created by someone, somewhere. Of course, many — if not most — were dodgy ventures thought up by profiteers looking to capitalize on the boom and exploit the “greater fool” theory of markets. But some legitimate cryptocurrencies were created. And although the market has largely suffered since those heady days of 2017, the market is making a bit of a comeback, with the Bloomberg Galaxy Crypto Index rising 83% this year (but still some 32% below its all-time high). What’s interesting about the move is that it’s not being led by one of the newcomers but by Bitcoin, which is up 121% this year. Bitcoin has been around the longest, and its performance this year shows that investors in this market are putting their faith in cryptocurrencies that have stood the test of time and proved their worth after a series of scandals and fraud schemes. Fidelity Investments will buy and sell the world’s most popular digital asset for institutional customers soon, according to a person familiar with the matter.
A NEW RUSSIAN RECORD
For a sense of just how strong demand is for bonds, look no further than Russia. Despite U.S. lawmakers’ plans to restart a debate on sanctions, Russia was able to sell the equivalent of $1.5 billion of debt on Wednesday, a record for the country. Russian markets have rallied this year on rebounding oil prices and wagers the U.S. won’t expand its penalties to target government bonds, according to Bloomberg News’s Alex Nicholson. In Washington, draft legislation was added to the agenda for a House Financial Services subcommittee hearing on the use of sanctions to address national security challenges. The bill has not been formally introduced in the House, and there is no current timeline to bring it to the House floor for a vote. While the yields on Russia’s five-year bonds have fallen about half a percentage point this year, they’re still almost 150 basis points higher than at the start of April 2018, when Washington introduced its toughest penalties yet. As for the ruble, it has appreciated about 8%, the most among 31 major currencies tracked by Bloomberg. The world’s biggest energy exporter is running the widest budget surplus in a decade, so it doesn’t actually need to sell bonds, but borrowing now could be a precautionary move to stockpile cash as the threat of new U.S. sanctions lingers, Nicholson reports.
TEA LEAVES
The retail sales data on Wednesday showed that U.S. consumers were in no mood to spend in April. Sales unexpectedly declined in April for the second time in three months, weighed down by soft sales of autos and building materials. So what might that say about the housing market? We may get some answers Thursday, when the government reports housing starts data for April. The median estimate of economist surveyed by Bloomberg is for a 6.3% increase following a drop of 0.3% in March. Granted, starts generally reflect contracts that have been signed weeks, or even months, before, but there’s no denying that developers are upbeat. The National Association of Home Builders/Wells Fargo monthly sentiment index released Wednesday showed an increase to 66, the highest level since October.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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