In another sign of just how far central bankers are going to keep the financial system on their shoulders, the ECB is holding a conference call today to discuss whether to accept junk bonds as collateral for loans to banks. To be clear, this would be a nuanced acceptance of junk bonds in that they would agree to taking newly anointed junk paper, aka fallen angels. It’s the same game the Fed is now playing.
At the same time and in the face of all the ECB buying, Italian bond yields continue higher. They jumped by 15 bps on Monday, 22 bps yesterday and by another 3 bps today to 2.18%. Italy’s budget deficit as a % of GDP is expected to be 10% soon. Yields are also rising today in Spain and Portugal with 10 bps move up in each. It literally is the ECB vs the market.
ITALIAN 10 yr yield
Not that I needed another reason to be bullish on gold and silver but this just adds to it on the assumption that the ECB is just going to continue to print in order to suppress interest rates. Separately, on the belief that what we’re seeing in oil prices this week is what bottoms are made of, the big, mega cap oil majors with their large dividend yields look really attractive. I believe we’re going to see a lot more reopenings in May around the world, which means more and more people are going to be getting back in their cars again in the months to come which is a key part of the demand side which has basically disappeared.
Following the rally in stocks to almost 2900 as of Friday, it of course got people more bullish according to Investors Intelligence as mood follows price. Bulls rose to 43.3 from 40.9 last week and up 10 pts from the week prior. Bears fell by 1.2 pts to 30.8 and the spread between the two is at the highest since March 11th. Those expecting a Correction fell to the least in 13 weeks. From a contrarian standpoint, sentiment is no longer the friend of the bulls like it was in March. Not that we can’t keep rallying but it gets tougher from here solely looking at this sentiment gauge.
After believing a month ago that we hit A bottom in March, not THE bottom, I believe a 2200-2900 SPX trading range is being established here until proven otherwise. I view 3000 in the SPX as the real ceiling here as the run to 3400 in the last 2 months of 2019 was pure central bank driven fluff. Yes, the central bank is printing like crazy now too but unlike then, the fundamental backdrop is obviously quite different. I do believe we’ve reached peak virus fears and however many bumps in the road we have ahead of us, I think we’ve seen the worst. But, once the reopening in the US begins in earnest, call it mid to late May, that will ironically be the next real test for stocks because the reality of how gradual economic activity will be will take over from the fear of the virus. I expect an eventual lower P/E ratio on a lower pace of earnings. Maybe value stocks have a shot of catching up to growth in that environment. Talking my book I hope so.
There wasn’t much of a change in mortgage apps this week as the average 30 yr mortgage rate held at 3.45%, the lowest on record. Purchases rose 2.1% w/o/w after a sharp decline in the weeks prior but they are still down 31% y/o/y. Refi’s were basically flat, down by .8% w/o/w but are still up by 225% y/o/y. If one hasn’t refi’d with rates at these levels I have no idea what one is waiting for. As for purchases, we of course know the challenges right now.