Financial Markets Hamstrung By Low Liquidity
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Your Money Briefing Money and Market Stories from The Wall Street Journal I'm Charlie Turner in New York. Poor liquidity in several financial markets is making it more difficult for traders to buy or sell an investment when they want. We'll have more on this in a moment. First, here are some top money stories. Rising oil prices may not be good news for drivers filling up at the gas pumps, but the Wall Street Journal's Money Beat team says they stand to benefit the economy in the U.S., where oil production has ramped up sharply in recent years. After its biggest two-week jump since the end of 2016, NYMEX crude oil is approaching $70 a barrel and last week hit its highest since late 2014. Sources say U.S.
crude oil production has doubled over the last decade and U.S. oil rigs have generally been reopening for business over the last year. That means the rebound in oil prices from their lows of two years ago is a boon for energy firms and the companies that supply them. S&P 500 energy companies are expected to report earnings growth of 78% for the first three months of the year, the biggest growth among the index's 11 sectors, according to FactSet. And some see higher oil prices as a sign of an already robust economy. One sign of that?
What is meant by 'liquidity' and why does it matter to investors?
A rise in inflation, which had mostly held below the Federal Reserve's target of 2%. Reflecting those heightened expectations, the yield on the 10-year Treasury note climbed to its highest since early 2014. The Wall Street Journal's Richard Rubin says changes in the tax law mean there are fewer people who will claim the mortgage interest deduction. In 2018, the deduction will save taxpayers $25 billion, down from $60 billion in 2017, according to estimates by the Joint Committee on Taxation. That's largely because of the way last year's tax reform altered the standard deduction. The much higher standard deduction means that far fewer taxpayers will itemize their deductions. In most cases, only taxpayers with total deductions exceeding $12,000 for individuals and $24,000 for married couples will itemize.
And those deductions can now include only $10,000 in state and local taxes, which means the most likely itemizers are Americans with sizable mortgages or charitable contributions. The result is that this year... Far fewer Americans are expected to itemize deductions and use the resulting home mortgage interest deduction. Coming up, traders are being hampered by a lack of liquidity in financial markets. This is your Money Briefing from The Wall Street Journal. Welcome back. The Wall Street Journal says investors are having a tougher time trading in a number of financial markets because of worsening liquidity. Liquidity is essentially the ability for investors to buy or sell an asset when they want.
Let's talk about this development with Wall Street Journal markets reporter Gunjan Banerjee. Gunjan, has the problem of low liquidity been around for a while?
It has, and we've seen it play out in the bond markets for quite some time. But in recent years, we've also seen that development in options markets and most recently in futures markets.
What about stock markets? It's happening there as well. Illustrate the problem if you can.
In the U.S. stock market, half of more than 8,500 listed companies trade less than 100,000 shares a day, a tiny sliver of what big stocks trade.
And you write that this capacity for liquidity, it was rarely tested during the long stretch when stocks and bonds rallied with little volatility, like the stretch that we had for the past year or two. Is that what you're saying?
Exactly. And a lot of people in the derivatives market were waiting for this bout of volatility. That's an environment in which traders can make more money. In the past few months, we've seen that play out even in S&P 500 futures and options, some of the most widely traded products in the entire market. And investors often turn to those to hedge their portfolios or to make directional bets. We're seeing the average size or the number of contracts available to trade at, at the best available buy or sell prices declining.
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