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#the stock market
The stock market has already picked the next U.S. president
The GOP is traditionally known as the party of Wall Street, but this year investors, for the most part, are betting against the Republican standard-bearer.
“The market appears to have decided not only that [Hillary] Clinton will win, but that it won’t be close,” David Woo, a strategist at Bank of America Merrill Lynch, said in a report distributed Monday. “Investors like landslide victories.”
Woo noted that the S P 500 has risen more than 4% since July 5, which marks the beginning of the 90-trading-day countdown to the election on Nov. 8. During years when presidential candidates won by a margin of more than 80% of Electoral College votes, the S P 500 posted average returns of 8.4% in the 90 days leading up to the election, as this chart illustrates:
The last time stocks outperformed the current rally at the halfway point was when Ronald Reagan won in a landslide against Walter Mondale in 1984.
“To us, this implies that the market is expecting Hillary Clinton to either maintain or increase her already sizable lead over Donald Trump in the opinion polls,” Woo said, citing the Iowa Electronic Markets. an indicator giving Clinton an 80% chance of beating Trump.
The IEM is a futures market operated for research purposes by the University of Iowa Tippie College of Business.
Earlier this year, Sam Stovall, U.S. equity strategist at S P Global Market Intelligence, noted that the S P 500 SPX, +0.42% has a fairly good record of predicting election results.
Since 1944, the incumbent person or party was reelected 82% of the time when the S P 500 rose between July 31 and Oct. 31, according to Stovall. The only exceptions were in 1968 and 1980, when there were popular third-party candidates in the picture.
“Whenever the S P 500 fell in price during these three months, however, it signaled the replacement of the incumbent 86% of the time,” he said.
The latest polling numbers show Clinton leading Trump in most voter surveys, according to news and data aggregator RealClearPolitics.
The S P 500 hit a record high of 2,193.81 on Aug. 15 and is poised to extend its rally to six straight months. The Dow Jones Industrial Average DJIA, +0.39% also is flirting with a slight gain in August—which would be its seventh monthly rise in a row, according to FactSet.
Meanwhile, the market is also expecting a split Congress and very little change in policy, according to Woo.
The volatility of the euro-dollar pairing EURUSD, -0.3751% which the strategist views as a good proxy to measure the risk of change in the U.S. versus the rest of the world, is at a 2016 low, implying subdued expectations for policy change.
“The combination of a Democratic president and a split Congress likely means gridlock,” Woo said. “If this scenario materializes, the experience of the past six years suggests there is little chance of a major change in the fundamental economic policies of the most important country in the world in the foreseeable future.”
As a result, investors could expect lower interest rates and a weaker dollar. But in the event the same party wins the White House and control of Congress, the greenback will strengthen and rates will rise, Woo said.
Copyright 2016 MarketWatch, Inc. All rights reserved.
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Euro Tullett Prebon: EURUSD
#bond market news
The High Yield Bond Market Has Never Been This Decoupled From Reality
Recovery rates in 2016 are extremely low.. for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%. Final recovery rates in 2015 for high-yield bonds were 25.2%, compared with recoveries of 48.1%, 52.7%, 53.2%, 48.6%, and 41.0% in full-years 2014, 2013, 2012, 2011, and 2010, respectively. Notably, average recoveries for Energy and Metals/Mining bonds were 18.3% and 20.0%, respectively, which weighed down overall high-yield recovery rates. Excluding the troubled commodity sectors, high-yield recoveries were a more respectable 46.1% (32.1% Ex-Energy only ). As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%. Final 2015 1st lien recoveries were 48.2%, while average recoveries for Energy and Metals/Mining 1st lien loans were 44.1% and 38.4%, respectively.
The record collapse in recovery rates is shown below.
It is not just JPM who points out what we first noticed in January: in an interview with Goldman s Allison Nathan, credit guru Edward Altman reiterates that same warning, although he focuses on the 2015 recovery rate which already is more than two times higher than that seen in 2016 defaults:
Allison Nathan: What is your view on recovery rates?
Edward Altman: Our approach to recovery rates is not centered on sectors. What we ve looked at carefully over 25 years is the correlation between default rates and recovery rates. As you would expect, when the former rise to high or above-average levels, you always observe the latter dropping to below-average levels. This strong inverse relationship is as much a function of supply and demand as it is of company fundamentals. So if we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default. This is primarily due to the heavy concentration of energy companies whose recovery rates depend on their ability to liquidate their assets at reasonable prices, which in turn depends on the price of oil. Low oil prices have pushed recovery rates in the energy sector below 25% and even into the single digits for some companies. And that s going to continue. So this year I expect recovery rates much below average, producing a double-whammy of high default rates and low recovery rates for credit investors.
Since then recovery rates have dropped even further. BUT high-yield bond prices have surged on the back of ECB, BOE buying and the knock-on effects of $200 billion per month of experimentation by the world s central-planners.
Simply put, the revelation of a default event exposes the vast gap between real asset values (upon liquidation or bankruptcy) and the artificially supported prices seen in bond markets .
In the 30 year life of the so-called junk bond market, the chasm between reality and central-planner-created markets has never been wider.