Last Updated: 22 November 2023
But if calling turning points is impossible, that doesn’t mean one should ignore possible warning signs that a trend change may be near.
Several technical and sentiment indicators for the equity markets are now suggesting that the wind may be shifting to favour those of a bearish disposition.
According to the excellent Trader’s Narrative blog, a measure called the equity buying/selling climax ratio, as well as market breadth, sentiment surveys and put/call ratios are all beginning to show signs of a top. These technical indicators, of course, are not perfect, and the blog’s author notes that seasonality may still favour the bulls (an unusually positive September for shares may lead to momentum-based buying for a while longer).
But it may be more important, both for fixed income and equity investors, to note what’s going on in the credit markets.
On the face of it the bullish trend is continuing – credit indices such as the iTraxx Main and Crossover are closing in on the lows (in yield terms) recorded in April, while the rally in corporate bonds of all descriptions since last March’s bottom has been nothing short of breathtaking.
Fund managers are increasingly being forced into riskier areas of the debt market to preserve clients’ income, while comments from central bankers to the effect that penalising savers is an explicit goal of policy are only helping to exacerbate the panic buying of instruments offering enhanced yield (as well as propelling gold very rapidly to new highs).
If it’s almost unbelievable that, so soon after the credit crisis, financial policymakers are effectively forcing people to releverage, this only reflects intellectual confusion at the world’s central banks.
In a speech last week New York Fed President Bill Dudley managed to greet the recent rise in the US savings rate and the trend towards deleveraging as necessary conditions to restore sustainable growth, but then also to praise quantitative easing as a way to support higher asset prices, easier credit and greater consumption. Investors so far appear to be focussing more on what the Fed is doing than on the first half of what it’s saying.
In the UK, you have deputy governor of the Bank of England Charlie Bean telling people to go out and spend and borrow more. At the same time, however, the head of the Bank’s financial stability unit, Andy Haldane, is producing analysis showing that UK banking sector assets as a proportion of GDP have risen tenfold since 1970, surely suggesting a need to shrink the financial sector and the overall level of lending in the economy.
But, this aside, the sale over the last couple of months of new 100-year issues in the bond markets – first by Rabobank, then, this week, by the government of Mexico – may signify that the bond boom/yield collapse is reaching its climax.
It’s notable that, prior to this week’s Mexico issue, the last 100-year bond sold by a Latin American entity was in early 1997 (by Chile’s Embotelladora Andina). That year, of course, marked a significant peak in the emerging debt markets, as the Asian currency crisis in late 1997 was followed by Russia’s default a year later, then by rolling defaults in Latin America in 2001-2005 (in Argentina, Paraguay, Uruguay and Venezuela).
In fairness to Mexico, the country hasn’t reneged on its obligations since 1982, though it would have done so in the winter of 1994/95 without a US-commandeered international bailout. External debt now, at 20% of total federal debt and 5% of GDP, seems manageable. Lending to the country for 100 years, though, shows a remarkable degree of investor confidence, given that academics and sovereign debt specialists Carmen Reinhart and Kenneth Rogoff have pointed out that Mexico has spent fully 40% of the time since 1800 in default.
None of us will be alive in 2110 to see what has happened with this particular issue. Whether the fund managers buying it will even be in their current jobs in five years’ time is a stretch. But as a potential sign of a blow-off top in investor confidence, Mexico’s new century bond certainly comes close to ringing the bell.