Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Categorized | Currencies

Runaway stocks approach rally’s end point

Posted on November 30, 2013

Two weeks ago, Jack Lew, US Treasury Secretary, was in Asia making the rounds in Singapore, Tokyo and Beijing. Those who attended meetings with Mr Lew assumed he was coming to apologise for the way the debate in Washington on extending the debt ceiling was handled in the previous month and to offer reassurance that the next time the matter comes up, it will be handled more smoothly.

For those investors who are judged on their performance in dollar terms – such as the Chinese sovereign wealth fund – and those in non US dollar terms – such as the Singaporeans – since the dollar is the world’s reserve currency, such issues matter enormously. But listeners who expected an apology or an explanation were mistaken.

    Instead, Mr Lew instructed his audiences that Asia needed to get its act together and improve its own governance. He further alienated attendees at one session in Singapore by refusing to address the concerns of local bankers about extraterritoriality as the US unilaterally imposes rules on foreign banks with any presence in the US at all.

    But today none of that matters. The consensus is that, despite the cavalier treatment of investors in Treasury securities, whether foreign or domestic, and despite official behaviour that is unworthy of a nation whose currency is the universal safe haven and store of value, the US dollar will be strong next year and the US market will be the biggest game in global markets. This past week the Nasdaq Composite rose above 4,000, a level not seen in 13 years, not since the euphoria of the tech bubble. As everything financial rallies to pre-crisis levels, it is no longer 2007 again – it is better than that.

    More sober observers may well wonder why that should be the case.

    At this odd moment in time, the US markets are the beneficiaries of two contradictory trends: one is today’s reality and the other is tomorrow’s expectation.

    Neither of them has anything to do with economic fundamentals, unfortunately. The bullish reality today is that the Fed is still supplying massive liquidity to the markets, driving asset prices ever higher. Moreover, incoming chairman Janet Yellen is even more committed to quantitative easing than the current occupant of the seat Ben Bernanke.

    At the same time, though, the same market pundits who were sure that the Fed would tighten policy and taper asset purchases back in September are predicting that the Fed will now do so early next year on the back of some positive economic signs – including the recent stronger-than-expected payrolls report.

    The anticipated move away from QE is, ironically, also supportive since that expected tapering will mean a stronger dollar and an expectation of improved fundamentals ,and, finally, perhaps corporate spending on plant and equipment.

    So the market is going up for both reasons. Price/earnings multiples have gone from 14 times at the end of last year to almost 17 times – (2007 again).

    “Multiple expansion is driving stock market performance to a far greater degree than earnings, while earnings themselves are being driven to a remarkable extent by share buybacks,” notes CLSA analyst Christopher Woods.

    Those share buybacks amounted to some $218bn in the first half of the year, and keep rising, as do dividend payouts. Capex, of course, remains as subdued as ever. But never mind because, for the moment, that is what keeps the Fed with its foot on the monetary accelerator.

    Analysts like Mr Wood are now beginning to query what can go wrong and bring the stock market down, beyond the sort of geopolitical shock that is always a possibility. His answer is the continuing threat of deflation.

    As the disconnect between the rising prices of financial assets and the real economy continues, is it possible that even the most aggressive easing has limits? And does the fact that the more sceptical analysts are beginning to pose the question mean that this point is in sight?

    The real incomes of most of the population have not risen at all. And if the only beneficiaries of QE are the very wealthiest, can their spending be enough to support the real economy? In a world where demand will probably be weaker tomorrow than it is today, can asset prices rise indefinitely?

    Every day they rise suggests perhaps that the end point is nearer.