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Central banks are creating ‘fake markets,’ Bank of America strategists say

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A man wearing a mask walks past the U.S. Federal Reserve building in Washington D.C., the United States, on April 29, 2020.

Xinhua News Agency | Getty Images

Stocks have become detached from reality due to recent interventions from central banks into the bond markets, according to analysts at Bank of America.

In a research note Friday, the Bank of America Securities division highlighted the question of why the stock market is so divorced from reality as one of the most frequently asked by investors.

Despite the economic crisis brought about by the coronavirus pandemic, which has so far seen 38 million Americans file for unemployment and brought about sharp contractions in global GDP (gross domestic product), risk assets have been rallying of late.

As of Friday morning, the S&P 500 is up more than 14% and the Dow Jones Industrial Average more than 11% so far this quarter, rebounding from a historic sell-off in March as the coronavirus spread in the U.S. and throughout the rest of the world.

Chief Investment Strategist Michael Hartnett set out a number of key reasons for this unmooring of stocks, the first of which was the emergence of “fake markets.”

“Government and corporate bond prices have been fixed by central banks … why would anyone expect stocks to price rationally?” Hartnett said.

Central banks have deployed a total of around $4 trillion of asset purchases over the past eight weeks, Hartnett highlighted, and the global equity market cap has surged by $15 trillion.

In the same period, central banks have been buying $2.4 billion per hour of financial assets, which Bank of America strategists expect will fade to $608 million in the coming weeks.

However, with 2,215 out of 3,042 global stocks remaining in bear markets, more than 20% down from their all-time highs, Hartnett said this market rally should be seen in the context of the $30 trillion collapse in February and March.

The rally has been concentrated in growth-focused tech names, and the market cap of the FAAMG (Facebook, Amazon, Apple, Microsoft, Google) stocks now exceeds that of the entire euro zone equity market.

Historically, Hartnett pointed out, bear market rallies in 1929, 1938 and 1974 saw an average rebound of 61% from their respective lows, following an average 49% fall. This would take the S&P 500 to 3,180 points by the end of this rally. The index closed at 2,948.51 on Thursday.

Bank of America’s strategy was described as “tactically bullish” but “structurally bearish.” Hartnett suggested that overall market positioning is still bearish with policymakers causing an “immoral hazard” which will force investors to buy, banks to lend and corporate “zombies” to issue debt in 2020.

Zombie companies are those which make just enough money to continue operations and service debt, but hold little to no excess capital and are unable to pay off their debt.

On the bank’s structural bearishness, Hartnett projected that earnings per share (EPS) are “more likely to surprise to the downside in 2021 than 2020 as policy makers demand payback via taxes, tariffs, regulation.”

He added that the possibility of negative U.S. interest rates, pressure on bank dividends, November’s U.S. election and “peak globalization” will come into focus in the fall.

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Brazil’s Bolsonaro could soon be toppled, analysts say

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Not wearing face mask, Brazil’s President Jair Bolsonaro greets his supporters at Praça dos Três Poderes, in front of the Planalto Palace on Sunday, May 24, 2020.

Andre Borges | NurPhoto | NurPhoto

Brazilian President Jair Bolsonaro could be the first world leader to be toppled by the coronavirus pandemic, analysts have told CNBC, as the right-wing premier faces intensifying political pressure for his handling of the public health crisis.

South America’s largest country has emerged as the world’s number two global hotspot for Covid-19, with more cases reported nationwide over the last week than any other seven-day period since the outbreak began.

To date, more than 391,000 people have contracted the coronavirus in Brazil, with 24,512 deaths, according to data compiled by Johns Hopkins University.

Dr. Carissa Etienne, the director of the Pan American Health Organization, said on Tuesday that more than 2.4 million coronavirus cases and over 143,000 deaths had made the Americas the new epicenter of the pandemic.

She said the PAHO was “particularly concerned” about a recent surge in the number of new Covid-19 cases in Brazil, warning the broader region that: “Now is the time to stay strong, remain vigilant and aggressively implement proven public health measures.”

However, Brazil’s Bolsonaro, an ideological ally of President Donald Trump, has repeatedly downplayed the threat of the virus, dismissing it as a “little flu” and condemning state governors for imposing confinement measures that are causing job losses.

“Having failed to unite Brazilians in the face of (a) pandemic, Bolsonaro and his government could be the first to be toppled by it,” Robert Muggah, director of the Igarapé Institute, a think tank based in Rio de Janeiro, told CNBC via video call.

Muggah said there were at least three ways Bolsonaro could be ousted before the country’s next presidential election in 2022, citing impeachment proceedings (including an allegation he poses a threat to public health), conviction by the Supreme Court for common crimes, or ejection by the national electoral tribunal for alleged misconduct during the 2018 campaign.

“It is tempting to say that he is making outrageous statements to deflect attention from his criminal behavior. But that would be over-estimating the man,” Muggah continued. “Crises such as this one demand focused, competent leadership. Bolsonaro is incapable of this, and the longer he remains in power, the more Brazilians will die,” he added.

A government spokesperson did not respond to a CNBC request for comment.

What is going on in Brazil?

Health experts have suggested the lack of testing in Brazil could be masking the true extent of the coronavirus epidemic.

A study by the University of Sao Paolo Medical School estimates that the number of Covid-19 infections could be around 15 times higher than the official figure.

If those predictions are accurate, it would mean that as of May 26, the actual total of coronavirus cases in Brazil stood at over 5 million.

To be sure, that’s more than three times higher than the U.S., the country with the highest number of confirmed cases worldwide.

Samu Emergency Services from Santo Andre, in the Brazilian SP state, work in the rescue of the Covid-19 patient, May 5th. Brazil has reached 16.850 deaths by the new coronavirus this Monday, May 19th, and more than 255.000 have been infected.

Gustavo Basso | NurPhoto | Getty Images

“At this point, I would be surprised if we get through all of this without some major institutional clash,” Gustavo Ribeiro, political scientist and founder of politics site The Brazilian Report, told CNBC via telephone.

Ribeiro said opposition lawmakers were currently sitting on as many as 35 different impeachment requests against Bolsonaro, with the bulk of them submitted during the pandemic.

Nonetheless, he continued, an imminent move to oust the president was unlikely, given it would effectively bring the government to a halt at a time when the country needs to be able to respond to a health emergency.

“It’s hard to say that an impeachment will happen because there is one key missing element here: We don’t have people on the streets protesting against Bolsonaro because the very people who hate Bolsonaro are the people who are home,” Riberio said.

“But I think once everything has settled down, it will become untenable,” he added.

Odds are in Bolsonaro’s favor

Earlier this month, Health Minister Nelson Teich abruptly handed in his resignation after less than four weeks in the job. The decision came after he resisted Bolsonaro’s calls for the wider use of hydroxychloroquine as a treatment for the coronavirus.

The drug, which has not been proven to effectively treat or prevent Covid-19, is the same one Trump has said he has taken in an effort to ward off the virus.

Public health officials have warned it is unsafe to do so and regulators say it can cause heart problems.

A supporter of Brazil’s President Jair Bolsonaro wearing a protective mask with a sign attends a protest against quarantine measures amid the coronavirus disease (COVID-19) outbreak, in Sao Paulo, Brazil, May 24, 2020.

Amanda Perobelli | Reuters

Jimena Blanco, head of Americas research at risk consultancy Verisk Maplecroft, told CNBC via telephone the odds were in Bolsonaro’s favor right now.

Speaking from Buenos Aires in Argentina, Blanco said if Brazil’s president was to be removed from office, the key developments to do so would need to happen over the next three months.

A change in government “needs to be a swift one rather than a protracted one,” Blanco said, explaining that the nature of the pandemic means the country “does not have the benefit of time.”

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EU unveils plan to borrow 750 billion euros to aid coronavirus recovery

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The EU flags are seen in front of the Berlaymont, the EU Commission headquarter on May 19, 2020, in Brussels, Belgium.

Thierry Monasse

The European Commission has unveiled plans for a 750 billion euro ($826.5 billion) recovery fund as the region faces the worst economic crisis since the 1930s.

The announcement came after France and Germany opened the door to issuing mutual EU debt last week, suggesting that the Commission, the EU’s executive arm, should raise 500 billion euros on the public markets.

The Franco-German initiative was described as a “breakthrough” and a “historic” step as Germany had always opposed the idea of jointly;y-issued debt, even during previous crises.

There are four European countries that still oppose the Franco-German plan and want the EU to issue loans rather than grants as a way to mitigate the economic fallout from the Covid-19 crisis. Austria, the Netherlands, Sweden and Denmark also want strong economic reform commitments in return for any financial help.

Wednesday’s proposal kicks off a discussion among the 27 EU member states. Each leader will meet, maybe via video call, on June 18 in the hope of finding a consensus over the exact details of the recovery fund. 

The European Parliament, the only-directly elected EU institution, will also have to approve any new financial aid as well.

In the meantime, there are other short-term measures available across Europe. The European Central Bank is buying government bonds as part of its 750 billion euro program and there are 540 billion euros available in unemployment schemes, business investments and loans to governments. 

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Hong Kong police fire pepper pellets to disperse protests over security bill

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Police use pepper spray projectile during a Lunch With You rally in Central district on May 27, 2020 in Hong Kong, China.

Anthony Kwan | Getty Images

Hong Kong riot police fired pepper pellets to disperse protesters in the heart of the global financial center on Wednesday, as new national security laws proposed by Beijing revived anti-government demonstrations.

Police also surrounded the Legislative Council where a bill was due to be debated that would criminalize disrespect of the Chinese anthem, amid soaring tensions over perceived threats to the semi-autonomous city’s freedoms.

People of all ages took to the streets, some dressed in black, some wearing office clothes, and some hiding their identities with open umbrellas in scenes reminiscent of the unrest that shook the city last year.

“Although you’re afraid inside your heart, you need to speak out,” said Chang, 29, a clerk and protester dressed in black with a helmet respirator and goggles in her backpack.

A call to gather around the Legislative Council was scrapped due to a heavy presence of riot police.

Many shops, bank branches and office buildings closed early. Dozens of people were seen rounded up by riot police and made to sit on a sidewalk.

Protests have returned to the streets of Chinese-ruled Hong Kong after Beijing proposed national security laws aimed at tackling secession, subversion and terrorist activities. The planned laws could see Chinese intelligence agencies set up bases in the semi-autonomous city.

The move triggered the first big street unrest in Hong Kong in months on Sunday, with police firing tear gas and water cannon to disperse protesters.

The United States, Australia, Britain, Canada and others have expressed concerns about the legislation, widely seen as a potential turning point for China’s freest city and one of the world’s leading financial hubs.

Police said they had arrested at least 16 people on Wednesday, aged 14-40, for alleged crimes including possession of offensive weapons, possession of tools for illegal use and dangerous driving.

Protesters in a downtown shopping mall chanted “Liberate Hong Kong! Revolution of our times” and “Hong Kong independence, the only way out”, but dispersed as lookouts shouted a warning to “go shopping!” at the sight of police vans outside.

One protester was seen with a placard reading “one country, two systems is a lie”, referring to the political system put in place at Britain’s 1997 handover of the city to China that is meant to guarantee Hong Kong’s freedoms until at least 2047.

“I’m scared … if you don’t come out today, you’ll never be able to come out. This is legislation that directly affects us,” said Ryan Tsang, a hotel manager.

Chinese authorities and the Beijing-backed government in Hong Kong say there is no threat to the city’s high degree of autonomy and the new security laws will be tightly focused.

“It’s for the long-term stability of Hong Kong and China, it won’t affect the freedom of assembly and speech and it won’t affect the city’s status as a financial center,” Hong Kong Chief Secretary Matthew Cheung told reporters. “It would provide a stable environment for businesses.”

Hong Kong’s most prominent tycoon, Li Ka-shing, said in a statement security laws were within every nation’s right, but Hong Kong had the “mission-critical task” to maintain trust in “one country, two systems”.

Hong Kong media reported Beijing had expanded the scope of the draft security legislation to include organisations as well as individuals.

The law was being revised to cover not just behavior or acts that endanger national security, but also activities, broadcaster RTHK and the South China Morning Post reported.

U.S. President Donald Trump on Tuesday said the United States this week would announce a strong response to the planned security legislation for Hong Kong.

Hong Kong shares slide

The U.S.-China Business Council (USCBC) urged “all leaders to take those steps necessary to de-escalate tensions, promote economic recovery and the rule of law, and preserve the ‘one country, two systems’ principle.”

Asian shares slipped over rising tensions between the United States and China. Hong Kong shares led declines with the Hang Seng falling 0.46%, though it kept a bit of distance from a two-month low touched on Monday. 

Protesters and pro-democracy politicians say Hong Kong’s National Anthem Bill, which aims to govern the use and playing of the Chinese national anthem, represents another sign of what they see as accelerating interference from Beijing.

The bill carries penalties of up to three years jail and/or fines of up to HK$50,000 ($6,450) for those who insult the anthem. It also orders that primary and secondary school students in Hong Kong be taught to sing the “March of the Volunteers”, along with its history and etiquette.

“As long as citizens don’t disrespect the anthem law, there’s no need to worry, I hope people can discuss the bill rationally,” Chief Secretary Cheung said.

The anthem bill is set for a second reading on Wednesday and is expected to become law next month.

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