Firstly to the weekend papers where I noticed the Financial Times have run a full page article on the Internet Of Things. This is a great read and highlights how the CIA is allegedly using Smart TV’s to spy on users. It goes on with more detail on the dangers we are exposing ourselves to by allowing these devices to become such a trusted part of our lives.
If you can find it have a read but I’ll ask readers to check back on our piece on the ‘Internet of Nonsense’ a few weeks ago. It really is a fascinating study and something that will not soon be going away. **Link Here**
Now about those Bonds….
People are talking about bonds. Lots of people. Important people.
As a market commentator I find bonds a necessary part of life but unfortunately quite boring.
I’ll do my absolute best to put together a few words on why they’re more important than usual at this current point in time.
Firstly, and I apologise for the fundamentals, it needs to be remembered that bond yields and bond prices move inversely. So if a bond is sold, pushing the price down, its yield will rise and vice-versa. There’s maths involved but let’s not go there today.
Right now bonds are selling off. This is happening globally, at a substantial level and is in response to an increasing global growth and inflation outlook.
The following is courtesy of Senior Finance Editor of German Daily WELT Holger Zschaepitz and shows how $110bn USD was pulled out of global bonds last week.
This is actually quite significant…
This is significant because of what it’s done to yields and this next chart should tingle the readers with a taste for technical analysis.
US 30 year yields on a 40 year chart at a critical moment of breaking through very long-term resistance.
Courtesy Bloomberg
So what about the smaller end of the market, the higher risk junk bonds?
To the weekend FT again, page 11 where it was detailed how for only the second week this year high-yield corporate bond funds saw outflows. Fortunately, this money is (apparently) going into equity funds as opposed to retreating to the sidelines, but the question as to why this is happening is worth a look:
Government bonds are in the process of being sold off.
Either due to positional moves to equities or in anticipation of buying them back cheaper, they are being sold.
Corporate’s had a great time over the years being able to borrow cheaply.
Now, as rates rise, so too does their cost of money.
That’s where this all becomes bad for companies carrying too much debt that needs to be rolled over at a higher rate.
That will hurt.
So if inflation has a real uptick and the fed has to raise rates more than expected (we say four times this year) then it will be great for US banks but not so much for borrowers at the retail or corporate level.
A quick drink to break up the monotony…
So corporate borrowers had better hope that all this inflation actually converts into real growth, thus boosting revenues.
What we see potentially holding back inflation is some sense coming back to the oil market. A higher oil price was signaled last year as the inflationary kick starter the global economy needed. It follows that a drop below recent prices (as we saw last week) should calm inflation.
Also in the corner of the markets is the fact that the money moving out of the bond market isn’t sitting on the sidelines. It’s going into equities.
In summary, beware companies with too much debt up for renewal and not enough real growth. That should seem obvious but it’s growing in importance this year. We’ve said before that 2017 is the Year of Debt.
Keep an eye on oil and if it ignores this correction and keeps plowing ahead, inflation may get out of hand. Oil stabilising makes this moot.
We predict four Fed rate rises this year. Act accordingly.
But that’s our view for the year. We asked one of our Portfolio Managers, Martin Woods, for some short term technicals of the US S&P 500:
“From the lows in January last year – the second rally has almost reached a Fibonacci extension of 1 – this will be a difficult level for it to get through (level 2412)
If it keeps going the market could see 2605 in the medium term which would represent a Fibonacci extension of 1.5″
Courtesy eSignal
Finally something lighter following the IPO of Snapchat at the start of the month. This was in the questions section of discount robo-adviser Robinhood. Enjoy.
“I’d probably only use this if the stock went down really quickly…”
If only this were possible…
All the best,
James Whelan,
Investment Manager
VFS Group Investment Committee
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