The cost of funding today is zero, the price to pay one day may be higher

A difficult month for equity investors finished on a brighter note restricting the loss for August to just under 2% for the S&P 500. The FTSE 100 fared worse falling around 3%. The talking point for the month was the ever-increasing level of negative interest-bearing debt in the world, now close to 17 billion dollars. If this debt is held to maturity, guaranteeing a loss for the owners. A world that is unchartered waters for investors and left many questioning is this foretelling of an economic apocalypse? There remains plenty to be wary of, Donald Trump’s thumbs anywhere near a smartphone are one. China’s slowing economy, analysts downgrading earnings expectations and decreasing share buybacks. We enter September with the CNN Fear and Greed indicator in the extreme fear territory.

Brexit continues to make headlines as Boris Johnson maintains his battle with some members of his party and the opposition to try and renegotiate with Europe a deal rejected three times by many of the same people. Despite the headlines, sterling hardly moved in the month of August against the USD or the euro.

The dilemma equity investors continue to face is, if we take money from the stock market, where should it go? Should we add to the list of holders of assets that guarantee a loss? Some banks are now charging us to deposit money with them! It is not surprising that gold continues to attract support what is probably surprising that the asset price remains below that it reached in 2011 of over 1800 dollars. It feels hard to believe if this current environment remains that gold will not test that level again in the coming months.

So, is it time to get bearish of stocks? The coming month will possibly see another rate cut by the Fed and almost certainly see additional stimulus packages from the ECB as economic data from the region continue to show warning signs. One remote possibility we have flagged is they start to buy equities as the last resort. 

We have argued in this piece that, that negative yields may foretell of some future event. In the meantime, it will continue to offer support to equity markets, as it has been. Assuming corporates can continue to borrow at close to zero and retire equity yielding low single digits, providing this support. The pool of available equity is shrinking. The question is it right to be fearful now or when owners of this negative-yielding debt look to offload it?

Posted on September 1, 2019 .