Uncle Sam is cutting his credit card (22 August, 2013)
The financial market is paying attention to when and how US is going to slow down its Quantitative Easing. It is currently buying USD 85 billion of asset in the market a month. Such buying supports bond prices and keeps yield down. Bernanke and his buddies in FED are planning to reduce the credit card limit from USD 85 billion a month. The market is reacting to the expectation of tapering.
Yield on US 10 years government bond has climbed from 2.5% a month ago to 2.9% as of 22 August. Yield is the “interest” that investors get from buying the bond. The higher the yield, the better return for investors assuming the government manages to pay. European investors have probably heard enough about Italian government bond yields which are at 4.4% now, 6.5% in July 2012 and 7.2% in November 2011. Falling yield means bond prices going up and rising yield means bond prices going down. This year, bond investors are smiling with their portfolio in Portugal, Italy, and Spain and not so happy with US. Greece 10 years government bond is yielding 9.9% after printing 12.5% March and 7.9% in May. This is a baby roller coaster versus last year range of 30.4% in March and 11.2% in December. EU has another cheque ready for Greece. Most of Greece’s debt is held by other members of EU and the International Monetary Fund so all parties have their interest aligned. There will be cat fights between politicians but the debate over austerity measures and bailouts have become American Wrestling.
US and Europe stock markets are running out of steam. US stock market made new high in the beginning of August and pulled back hard in mid August. Dow Jones Industrial Index closed at 15,658.43 on 2 August and lost the 15,000 level on 21 August. Eurostoxx 50 Index made a high print on 14 August to close at 2855.89, beating the high in May. Interestingly, it was the French that led the market with CAC 40 Index outperforming German DAX Index by 2.4% in the past month. FTSE is looking weak in August. It zigzagged around 6600 level for 2 weeks then tanked to 6390.8 as of 21 August. While the developed markets are feeling uphill, the emerging markets are sky diving. India SENSEX Index did a double flip and fell from 19500 level to 17900 level in August, that’s 8.2% move. At the same time, the Indian Rupree collapsed from INR 60 to USD 1 to INR 64 to USD 1. In May, it was INR 54 to USD 1. iShares BRIC 50 ETF (BRIC LN) dropped from GBp 1600 in the beginning of August to GBp 1520 as of 21 August, still 6.6% higher than the GBp 1426 low in June. If trend is your friend, global equity market is making friends with the bears.
In a money tightening environment with weak markets in BRIC, the mining sector is feeling wobbly. Looking at FTSE 100 Index members, many mining companies appear in the worst 10 performing list. Fresnillo is a gold and silver mining company in Mexico and it is down 37% this year as the worst performer in FTSE 100 index. Chilean copper miner Antofagasta, mining giant Anglo American, Russian/Kazakhstan miner Eurasian, African miner Randgold, Rio Tinto, BHP Billiton and Glencore Xstrata are down 12-29% year to date. That’s 8 spots out of the 10 worst performers. To make the perfect 10, add Tullow Oil and Petrofac who did not seem to be benefited from the rising oil price this year. Stay away from resources related stocks seems to be the wise choice so far.
There are happier stories in the tech sector. If you like the Iron Man movies, you may want to take a look at Tesla. Founder Elon Musk is Iron Man in real life with his success in Paypal and now Tesla Electric cars, not only made him a billionaire, but put him in the same league as Steve Jobs. Tesla shares (TSLA US) has gone up 336.6% this year from USD 32 in January to USD 147.86 as of 21 August. Another better known name facebook (FB US) closed at USD 38.32 as of 21 August, beating its USD 38 IPO price in May 2012. The stock made its historical high of USD 39.32 on 5 August. Other names on my watch list and their year to date performance are Amazon (+13.4%), Google (+22.9%), Apple (-5.6%), Microsoft (+18.4%).
With US cooling its money printing machine and the speculation on Bernanke successor, the rest of 2013 could be eventful. Guru George Soros has occupied a front row seat with a bearish call on the US stock market. The conservative investors may rather be an audience to preserve their cash, sitting on some European bonds believing the EU can stay together for now.
