Five Things You Need to Know to Start Your Day - Bloomberg

Investor worries mount, China’s developers priced for meltdown, and Facebook’s problems far from over.

Debt, inflation

President Joe Biden yesterday could offer no guarantee the U.S. wouldn’t breach its legal debt limit in two weeks. While investors still see little chance of a default, the yield on Treasury bills coming due close to the end of the month are significantly higher than those maturing earlier or later. Meanwhile, the 

surging cost of energy around the world and supply bottlenecks are pushing inflation higher, with survey data showing the price increases are starting to take their toll. Markets have their eyes firmly fixed on this week’s jobs data in the hope for some good news. 

Selling    

There are increasing signs that the efforts by authorities in Beijing to ringfence China Evergrande Group may already be failing. Yesterday’s failure by another developer, Fantasia Holdings Group Co., to repay a $205.7 million bond has reignited fears of widespread defaults among Chinese developers. The country’s junk dollar bonds are seeing the biggest selloff in at least eight years, with the closure of mainland Chinese markets for a week-long holiday only serving to exacerbate liquidity problems in the sector.  

Back 

Facebook Inc. said it has found no evidence that user data was compromised during yesterday’s hours-long outage of its social media apps. The company blamed a problem with its network configuration for the loss of service to the more than 2.75 billion people that use its platforms. While Facebook’s shares are regaining some of yesterday’s lost ground in pre-market trading, its problems are far from over as a whistle-blower is set to testify to the Senate today about problems with how the company manages itself. The revelations could lead to tighter regulation of the social media giant. 

Markets mixed 

While there is some dip-buying of technology stocks this morning, the uncertain outlook means global equity gauges are putting in a very mixed performance. Overnight the MSCI Asia Pacific Index slipped 0.7% while Japan’s Topix index closed down 1.3%. In Europe, the Stoxx 600 Index had gained 0.7% by 5:50 a.m. Eastern Time with banks and tech stocks leading the gains. S&P 500 futures pointed to a small bounce at the open, the 10-year Treasury yield was at 1.495%, oil was close to $78 a barrel and gold dropped. 

Coming up... 

The U.S. August trade balance is at 8:30 a.m., with the final reading of September PMIs at 9:45 a.m. and the ISM Services index at 10:00 a.m. The Senate Facebook hearing begins at 10:00 a.m. Securities and Exchange Commission Chair Gary Gensler testifies to the House Financial Services Committee from 12:00 p.m. PepsiCo Inc. reports earnings. 

What we've been reading

Here's what caught our eye over the last 24 hours.

And finally, here’s what Justina’s interested in this morning

As a reporter who’s written a lot about quant strategies, a tension I often grapple with is one between simple recent patterns and long-term statistical evidence. Take the relationship between rates and equity factors. It’s been a reliable rule in recent years that when bonds fall, value stocks outperform at the expense of expensive growth names. This has held up well lately: From its late September trough, the Dow Jones market-neutral value index has rebounded 6%. Over that period, 10-year Treasury yields spiked 16 basis points and the yield curve steepened.

Yet quants like to stress it hasn’t always been like that. In Robeco’s latest note, Guido Baltussen and others show rates and value only became strongly linked over the past decade. Similarly, AQR has also argued the two actually don’t have a strong relationship over a longer history, and anyhow, bonds are not an effective tool to time value exposure.
 

Still, most investors, sell-side strategists and journalists are happy enough that the heuristic works reliably well now. In the post-crisis era of QE all the way through the height of the pandemic, rates got so low (from middling economic growth, demographics etc.) that a lot of money crowded into growth, especially megacap tech, widening valuation spreads across the market. That extreme gap made the positioning much more sensitive to rates. From that perspective, we should expect to see the relationship remain, since those spreads remain historically wide.

(Another explanation is the debt structure of value versus growth stocks, which I summarized briefly here.)

Robeco’s point is if you’re long-term enough, as factor investors like to be, these relationships don’t really matter. But for now, the bonds up, value down rule still looks intact.

Follow Bloomberg's Justina Lee on Twitter at  @justinaknope

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