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Recap : Chinese Equities, Weekly Chart Take

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Commentary:

I recently had an interesting discussion with a smart friend of mine about the outlook for Chinese equities. His take was that:

1. with expectations of weak Chinese growth overdone, (whisper expectations for a sub 7% GDP figure this week were sorely disappointed)

2. economic reforms in train and supported by the leadership,

3. PBoC easing (chart of 1y IRS below)

4. and with Chinese equities cheap, (2nd chart below shows that, on a P/E basis, the Hang Seng China Index is trading at the steepest discount to the S&P 500 since 2003)

there is substantial room for upside.

Now, for old macro hands, usually this is a pretty juicy setup. It combines elements of variant perception, a clear catalyst, changing fundamentals, and attractive entry prices. When those items align, there is a good prospect of making the year. So what’s not to like?

My answer is that the Chinese equity market is simply NOT like equity markets elsewhere. In particular,

· the relationship between Chinese share prices and economic growth is different

· the way Chinese investors view the equity market is different

As a result, while it may be right to play a pro-growth view in China, Chinese equities may not be the way to do it.

Let me elaborate on that a bit. Usually, the equity markets of most rise over time as long as growth is positive. In other words, even if growth decelerates, equity prices tend to continue rising. This makes sense because earnings are strongly correlated to economic growth, so even if growth slows, as long as it is positive, earnings grow also, and share prices rise. Here is a chart of the S&P vs US GDP growth. Note the 2004-2005 and 2010-2014 periods, where growth decelerated or remained flat, but share prices continued rising:

This is a phenomenon that is not unique to developed markets. Here is a chart of India GDP vs the NIFTY index:

And Turkey:

Now take a look at the same chart for the Shanghai A-share market and Chinese GDP:

Note in particular the 2002-2005 period when GDP growth flew yet share prices DECLINED. And in the most recent few years, share price performance has not been correlated to whether growth rates were positive, but to the growth rate of growth. This reflects two things:

1. There is no historically reliable relationship between Chinese economic growth and Chinese share prices

2. One driver of Chinese share prices is LIQUIDTY (hence why share prices are related to the second derivative of GDP rather than the first)

The second item segues nicely into how domestic Chinese residents view the Chinese A-share market, which is that it is NOT a place to put investments. If you ask the typical upper and middle class Chinese about their investments, most will describe their real estate holdings or the interest they are earning at their bank. Very few will mention their holdings of equities. Which means that for the relationship between the Chinese economy and the stock market to strengthen, investor paradigms will need to change. And that, unfortunately, is something that takes a very long time.

Moving on, here are my interpretations of some charts:

After bouncing off its 1.5yr uptrend, the SPX looks to be forming a bullish triangle. And with the Philly Fed beat today,(highest print since last Sept) growth prospects may be picking up, which could provide a catalyst for more upside:

I noted on April 4th that

“In terms of yields breaking higher, the third time wasn’t the charm. The 4th time looks more likely. But we could potentially see a 1.55% print on 5y treasuries before then.”

As it happens, 5y yields touched a low of 1.548% on Monday before turning higher. It appears the fixed income short squeeze is over, and with the potential upturn in growth, (the Philly Fed has a history of being an early indicator, and the Citi US Economic Surprise Index has made its first higher high since Jan) conditions are supportive of higher yields. At the risk of jinxing myself, (gulp) we may finally get a substantive break of the 1.75% level that has been resistance since Sept:

On the other hand, 30y yields continue to print lower highs and lows. As a result 5s30s have broken to new lows. A notable quote on the 30y from Patrick Perret-Green @ ANZ: “Many have said that a 30y UST at 3.5% is expensive but 30y BTPs are now just above 4%.”

I’ll close with a few interesting links for your weekend reading:

1. FT Alphaville highlighted a very interesting speech by Larry Summers. You should read it in its entirety, but here is an interesting paragraph that stood out to me:
I think, that is, it is my best judgment about where the industrial world as a whole is, that absent structural changes in our economy it will be very difficult for monetary polices to simultaneously achieve full employment and maintain financial stability. It seems to me that that is supported by the last time that the US was anywhere near full employment. The period from 2003-2007, when we were manifestly not pursuing sustainable financial policies. And the profound difficulty monetary policy has had in Japan in generating levels of output that are consistent with full employment.
http://ftalphaville.ft.com/2014/04/17/1832512/larry-summers-on-forwarding-the-doozer-economy/

2. Google has developed an algo that can solve CAPATCHAs. Essentially, this means that computers can now read signs and recognize images. This is big. The reason why CAPTCHAs were created was because it was difficult for algorithms to decipher them – hence their use in setup processes for new accounts at many websites. This is likely to mean that driving robots & flying drones will be much better able to identify visual information without human intervention. In other words, another barrier between humans and machines has fallen:
http://www.theverge.com/2014/4/16/5621538/google-algorithm-can-solve-recaptcha-almost-every-time

3. An illustration of how the FISC system circumvents checks and balances in our political system:
https://www.eff.org/deeplinks/2014/04/in-one-sided-foreign-intelligence-surveillance-court-its-hard-to-get-whole-story

4. The safest speeds to drive is +5 to -10 mph relative to the median speed of other cars. A follow up study found that “crashes involving turning vehicles accounted for 44 percent of all crashes observed in the study and that excluding these crashes from the analysis greatly attenuated the factors that created the U-shape of the Solomon curve”
http://en.wikipedia.org/wiki/Solomon_curve#The_original_research

5. 538 put out a piece that maybe should’ve been obvious to me but I found interesting. They found a clear correlation between the length of unemployment with the level of national unemployment at the time of job loss. To me, the take away is that one of the most important aspects of a stable career path is keeping your job during recessions!
http://fivethirtyeight.com/features/the-biggest-predictor-of-how-long-youll-be-unemployed-is-when-you-lose-your-job/

Notable:

  • Jobless Claims was stable at 304k vs 315k exp and 300k prev.
  • Philly Fed improved to 16.6 vs 10 exp and 9.0
  • Canada Core CPI improved to 1.3% as exp vs 1.2% prev

Upcoming Data:

  • Fri: Good Friday,
  • Mon: Europe Holiday,
  • Tue: US Existing Home Sales, EU Consumer Confidence, Australia CPI, China HSBC Mfg
  • Wed: EU PMI, BoE Minutes, Canada Retail Sales, UK Markit PMI, New Home Sales

Written by globalmacrotrading

April 17, 2014 at 4:53 pm

Posted in Daily Recaps

Recap : CNH, SPX, Russia

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Commentary:

The rumors over a Chinese GDP print below 7% were incorrect. GDP was above expectations at +7.4% y/y versus +7.3% expected. This may increase US pressure on China to strengthen CNY, especially given that China’s USD reserves have been building further. The US Treasury published its semiannual report on currencies Tues night and ratcheted up its criticism of recent yuan weakening, noting that “Recent developments in the RMB exchange rate would raise particularly serious concerns if they presage renewed resistance to currency appreciation and a retreat from China’s announced policy of reducing intervention and allowing the exchange rate to reflect market forces. We will continue to monitor these issues closely going forward.” With USDCNH hitting new highs this week, that’s definitely something to keep an eye on, as the short USDCNH carry trade may start working again.

Separately, in equity space, the S&P is now back in the 1840/1880 range that has prevailed since mid Feb. With option expiry tomorrow, we won’t get a clear read on what the ‘real’ clearing price is until then or maybe even next week. Having said that, I want to reiterate my medium term views on equities, which have been unchanged this year, and which has been reinforced by the BAML survey published yesterday. I still think that equity upside is capped in the near term because people are loath to buy new highs in P/E. And I still think people are sitting on higher than average cash balances. And as a result, I think corrections will continue to be shorter or shallower than usual, a view that seems correct so far this year. Having said that, we will likely need some sort of catalyst for a move higher year; equity managers likely need a rationale to buy an equity market that they believe to be ‘rich.’ (Note that I continue to believe that they are cheap) Such catalysts include better earnings, (potentially next earnings season) lower bond yields, better growth, a turn in seasonality, (I’ve noted the bullish tendencies in 4Q of midterm election years) or simply momentum as managers have to chase new highs.

Finally, these charts relating to Russia from GS are interesting:

Also interesting is this Wikipedia chart of Putin’s (red) and Medvedev’s (blue) Endorsement Index. Note how low they were prior to the Crimea invasion: (The publisher of the index, the Levada Center, is legit, although of course the standard disclaimers around opinion polls apply)

Notable:

  • BoC:
  1. Inflation in Canada remains low. Core inflation is expected to stay well below our 2 per cent target this year and it will take close to two years for it to return to the target.
  2. Competitiveness challenges continue to weigh on Canadian exporters’ ability to benefit from stronger growth abroad.
  3. Recent developments are in line with the Bank’s expectation of a soft landing in the housing market and stabilizing debt-to-income ratios for households. Still, household imbalances remain elevated and would pose a significant risk should economic conditions deteriorate.
  4. With underlying inflation expected to remain below target for some time, the downside risks to inflation remain important. At the same time, the risks associated with household imbalances remain elevated.

Yellen:

  1. I will refer to the shortfall in employment relative to its mandate-consistent level as labor market slack, and there are a number of different indicators of this slack. Probably the best single indicator is the unemployment rate. At 6.7 percent, it is now slightly more than 1 percentage point above the 5.2 to 5.6 percent central tendency of the Committee’s projections for the longer-run normal unemployment rate. This shortfall remains significant, and in our baseline outlook, it will take more than two years to close
  2. At present, wage gains continue to proceed at a historically slow pace in this recovery, with few signs of a broad-based acceleration.
  3. I will mention two considerations that will be important in assessing whether inflation is likely to move back to 2 percent as the economy recovers. First, we anticipate that, as labor market slack diminishes, it will exert less of a drag on inflation. However, during the recovery, very high levels of slack have seemingly not generated strong downward pressure on inflation. We must therefore watch carefully to see whether diminishing slack is helping return inflation to our objective.
  4. the FOMC is well aware that inflation could also threaten to rise substantially above 2 percent. At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2 percent

US Housing Starts grew 2.8% MoM vs 7.0% exp UK Employment declined to 6.9% vs 7.1% exp and 7.2% prev. Jobless Claims were also down, declining -30.4k vs -30k exp. Weekly Earnings improved to 1.7% vs 1.8% exp and 1.4% prev, though real growth remains flat: NZ CPI declined to 1.5% in 1Q vs 1.7% exp and 1.6% prev China Data:

  1. GDP declined to 7.4% YoY vs 7.3% exp and 7.7% prev
  2. IP YTD YoY improved to 8.7% vs 8.8% exp and 8.6% prev
  3. Retail Sales YTD YoY improved to 12.0% vs 11.9% exp and 11.8% prev
  4. Fixed Assets YTD YoY slowed to 17.6^ vs 18% exp and 17.9% prev

Bridgewater: 85 percent of public pensions could fail in 30 years. -CNBC Alibaba is expected to file prospectus for its IPO next week. They could list for "well in excess" of $150bn. Reuters The ongoing conflict in Ukraine escalated overnight with Ukraine’s army launching an operation against pro-Russian protesters in at least two cities in eastern Ukraine Upcoming Data:

  • Thu: Canada CPI, Jobless Claims, Philly Fed,
  • Fri: Good Friday,
  • Mon: Europe Holiday,
  • Tue: US Existing Home Sales, EU Consumer Confidence, Australia CPI, China HSBC Mfg
  • Wed: EU PMI, BoE Minutes, Canada Retail Sales, UK Markit PMI, New Home Sales

Written by globalmacrotrading

April 16, 2014 at 4:15 pm

Posted in Daily Recaps

Recap : Positioning Still Driving Price Action, BAML FMS

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Commentary:

There’s a fixed income love fest going on. We saw 9 month yield lows in 30y Treasuries, almost all German sovereigns, 10y French OATs, 30y Gilts and more. Culprits include Putin and disappointing DM data, (chart of G10 economic surprise index in white vs avg of 5y US and EU swaps in orange below) but positioning is likely an important factor also. The fact of the matter is, the spring data bounce has just not been as strong as people have hoped, and fixed income shorts are still in the process of capitulating: (also note the BAML survey comments below)

In equity space, low volumes due to the holidays this week on top of option expiry seems to be driving the strange intraday price action. After breaking below the key 1840 support level last week, the S&P has failed to make any head way lower, and despite 30pt intraday ranges, are now above 1840 again. There is a cluster of options expiring with an 1825 strike, so we could get this type of price action again tomorrow:

BAML published its April Fund Manager Survey today. Highlights:

Over 2/3 investors expect higher short-term rates, highest since Jul’2011; investors overweight cash close to 2-year high (cash levels dipped from 4.8% to 4.6%); highest % of investors since Jul’2000 thinks stocks “overvalued”…and yet asset allocation to equities actually rose in April.

On a related note, CFTC data shows that extended bearish positioning in commodity and EM currencies have been unwound. AUD and MXN positioning has shifted substantially. Short positioning in US treasury futures was either stable or ticked higher in some cases. Spec positioning in NDX has unsurprisingly fallen sharply, and is now at the lowest level since Jan 2013.

Separately, 538 notes that Pulitzer prices don’t correlate with increased readership. It appears that either readers don’t care or can’t tell the difference between high and low quality journalism, or both.

Finally, this interesting chart from the Economist gives a nice overview of the change in Military spending over the past 10 years:

Notable:

  • RBA Minutes
  1. In particular, a strong pick-up in dwelling investment was in prospect
  2. Indicators for exports remained strong, while those for business conditions were generally higher than they had been in 2013. However, many businesses appeared to be waiting for an increase in current demand to occur before they were willing to increase investment spending.
  3. members noted that the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected. Developments over the past month had not changed that assessment.

UK CPI declined to 1.6% YoY as exp vs 1.7% prev Germany ZEW declined to 43.2 vs 45 exp and 46.6 prev US Empire Mfg declined to 1.3 vs +8 exp and, 5.6 prev US CPI jumped to 1.5% YoY as a result of base effects vs 1.4% prev and 1.1% prev. The core measure improved to 1.7% vs 1.6% exp and prev NAHB Survey improved to 47 vs 49 exp and 46 Investors expect mediocre 1Q 2014 results following poor weather conditions and negative guidance from companies following 4Q results. Bottom-up consensus estimates imply 2% earnings growth and 5% revenue growth. Trailing-four-quarter margins are expected to remain near historical high levels. Only half of S&P 500 sector forecasts imply year-over-year earnings growth. Investors will be scrutinizing management commentary for indications of improving business conditions now that the negative weather effect has passed. Goldman Yellen: the Federal Reserve is “actively considering additional measures” to address risk from the short-term wholesale funding markets, including requiring firms to hold additional capital buffers based on their use of short-term wholesale funding. BOJ Governor Haruhiko Kuroda said on Tuesday that Prime Minister Shinzo Abe did not bring up additional monetary easing during a meeting over lunch. Upcoming Data:

  • Tue: NZ CPI, China GDP
  • Wed: UK Employment, US Housing Starts, BoC, Yellen Speaks, Kuroda Speaks
  • Thu: Canada CPI, Jobless Claims, Philly Fed,
  • Fri: Good Friday,
  • Mon: Europe Holiday, US Existing Home Sales, EU Consumer Confidence, Australia CPI, China HSBC Mfg

Written by globalmacrotrading

April 15, 2014 at 4:43 pm

Posted in Daily Recaps

Recap : The Longer Term Outlook

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Commentary:

It’s been no secret that it’s been a surprising, low volatility year. Despite the fireworks last week, the YTD moves in most major asset classes has been broadly limited, and mostly against consensus expectations. Rather than focus on where consensus could be surprised further, I thought this would be a good time to sketch out a broader and longer term view of global asset price dynamics.

We can be reasonably sure that we’re currently around the middle part of the business cycle. The Fed has not started hiking yet, credit markets remain open, and economic uncertainty is low. However, it’s now been 5 years since the end of the last recession, and imbalances have been starting to build. From a strategy perspective, global macro is likely to continue to lag returns in long risk strategies like long/short equities or credit. The reason is simply that with macro volatility and uncertainty low, there will be fewer mispricings for asset prices as a whole. The chart below of the Citi G10 economic surprise index highlights the narrowing range of economic surprises – a phenomenon that we also saw during the previous cycle:

US treasury yields may go lower, but will be due to falling potential growth expectations and/or a later fed hike. In other words, movements will be limited in both directions. 30y yields are not far from ‘fair,’ with the risk to the downside as every growth spurt we’ve gotten thus far in this cycle (including the current one) has been disappointing – which are leading people to downgrade their estimates for potential growth. In addition, risks to the longer term growth outlook are also to the downside. In addition to slowing & aging demographics, the math around entitlement financing is mostly red colored.

With High Yield spreads near historical tight levels, spread compression as a source of return is probably over for credit holders. (Barclays 10y HY Yield to Worst chart below) HY companies are likely to continue raising debt, but the trend toward lower carry per unit of leverage will continue, but via increased leverage and worse fundamentals, rather than lower spreads.

This leaves the most junior part of the corporate capital structure, equities. The most important observation is that the equity risk premium is still very high. Next year earnings estimates imply an earnings yield of 6.7%. This is a real yield measure, since earnings usually grow in line with inflation. The real yield of 30y TIPS, by comparison, is just 1.2%. The ~550bp return differential priced in between asset classes is very, very wide by essentially any metric at this stage in the cycle. (It arguably SHOULD be high during recession / early recovery periods – but not mid cycle) Certainly, the high levels of both corporate profit margins as well as earnings as a percentage of GDP suggest the potential for some mean reversion. But with the risk premium at these levels, a mean reversion in corporate profits, IF it occurs, is already more than priced in. Yes, PE ratios are not low anymore, relative to history, but NOTHING is cheap relative to historical prices. Unless you think 30y yields are well below where they should be, AND are willing to sit on cash until all financial assets re-price, the current P/E ratio should NOT be a reason to be out of the market.

Furthermore, the deterioration of credit fundamentals mentioned earlier are likely to occur to the benefit equity holders. Corporate balance sheets remain healthy, especially at the banks, which suggests ample room to re-lever. In addition, the differential between credit and equity yields make such re-leveraging an easy call for most CFO’s. Corporate share buybacks are likely to continue while the risk premium remains this wide, and is likely to continue to be an important source of returns for equity holders.

To summarize, given where we are in the business cycle and given where we are given relative asset prices, equities are by far the best asset class to own on a risk/reward basis, in this writer’s opinion.

In terms of timing and seasonals, unfortunately the outlook is less bright. Beyond the ‘sell in May’ bias, the historical pattern around mid term elections are bearish through September, but turn sharply bullish thereafter, according to GS: (we are currently 29 weeks away from the midterms)

I ran the numbers myself by month and found a similar result for equities, and also unsurprisingly a bearish bias for 10y yields. I calculated both sample medians as well as averages to adjust for outlier effects. There wasn’t a significant difference, with the possible exception of Aug returns for equities:

Special note on EM:

A lot of bearish talk that the adjustment in FX and real rates may not be sufficient, and this recovery may be only temporary. This is certainly a risk. There are some other considerations, however. First, unlike DM currencies, the long term fair value for EM currencies are much less certain. For DM currencies, some measure of PPP or the equivalent, such as the Economist’s Big Mac index, are pretty reasonable measures. But for EM, due to increases in productivity relative to DM, the ‘fair value’ metric increases over time. This is further compounded by the fact that there is substantially more uncertainty around the measurement of inflation, which is a key component of both the fair value for FX as well as real rates. Furthermore, there are often substantial uncertainties around the measurement of the current account. Transfers between parent and subsidiary companies, for example, could be counted as part of the trade balance or as FDI or as something else altogether. This makes claims such as ‘the C/A deficit of this country is X so the currency must rebalance by Y’ subject to substantial amount of uncertainty. The point is – yes, the EM rebalancing story may have more to go – but since there is substantial uncertainty around the data, one shouldn’t be putting big bets on it either way. What IS clear, however, is that EM currencies and fixed income products (but not necessarily equities) have cheapened substantially over the past several years, especially relative to DM counterparts.

A key source of uncertainty for the poorer countries, however, is food prices, which is obviously dependent on the weather. And J.P. Morgan meteorologists have been repeatedly upgrading their probability of an El Niño later this year. It is still early to be sure, but there are strong signs we will see one. There have only been two in the past 15 years. The implications of this are likely to be bullish agriculture prices, although more so for some crops than others. North America is unlikely to be meaningfully affected but South America and Asia are at risk of adverse weather.

Notable:

  • US Retail sales improved to 1.1% vs 0.9% exp and 0.3% prev. The Control group was also strong, improving to 0.8% vs 0.5% exp and 0.3% prev.
  • ECB has been trying to ‘verbally’ ease. Nothing substantially concrete… but the hard references to the exchange rate is new and suggests that the ECB is getting more concerned:
  1. Draghi noted that further EUR strength will necessitate additional easing: "In a sense, if you want our monetary policy to remain as accommodative as it is today, a further strengthening of the exchange rate – I don’t want to give you a level where we will act or not, I am giving you an orientation – would require further monetary policy stimulus.”
  2. Coeure spoke about “Asset Purchases as an Instrument of Monetary Policy.” whether reducing term premia would in turn be effective in reducing real interest rates for firms and households depends on complementary policies, in particular the continued repair of the banking sector. For example, the sizeable reduction of spreads we have witnessed since July 2012 has not in itself translated into higher credit volumes and lower bank lending rates. This is largely because the restructuring of the euro area banking sector remains ongoing. Thus, an essential complement to any monetary policy strategy is a strict implementation of the ongoing Comprehensive Assessment of euro area banks and swift corrective action to bridge identified capital shortfalls.

Citi: (via GS) core EPS of $1.54 vs. our like estimate of $1.36 (beat mainly on fee income in the Institutional Securities Group). We think investors will like today’s results (especially given how out of favor Citi was after failing CCAR) Upcoming Data:

  • Mon: RBA Minutes
  • Tue: UK CPI, Germany ZEW, US Empire Mfg, CPI, NAHB Survey, NZ CPI, China GDP
  • Wed: UK Employment, US Housing Starts, BoC, Yellen Speaks, Kuroda Speaks
  • Thu: Canada CPI, Jobless Claims, Philly Fed,
  • Fri: Good Friday,

Written by globalmacrotrading

April 14, 2014 at 4:32 pm

Posted in Daily Recaps

Recap : Some Chart Observations

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Commentary:

Not much has changed fundamentally of late, so I thought it may be worthwhile to peruse the charts. Of course, one can interpret charts every which way to Sunday. But here’s what I see:

The S&P is back to the 20 week moving average that has been support since early 2013. A clean break lower suggest that we could visit the 50wk moving average region in the mid 1700’s:

Market participants may be hesitant to allocate money to equities due to the fact that we are back to 2007 valuation levels. (Fwd P/E in brown below) However, the trend of higher PE ratios remains intact. It is also worth noting that we had a similar pause in the PE trend last May, which was ultimately resolved late in the year. (purple box)

A very interesting movement, in my opinion, is happening at the long end of the yield curve. The 30y yield has broken below the 200 week moving average and the key 3.50% level. It may be just getting ready for a bounce, but…

The real yield component has staged a clear break below the 1.25% level that has held since last June…

And the 20 year monthly chart shows that the up move in 30y yields failed just as it hit strong resistance at the 4.0% level which was close to the 20y downward trend line and 100 month moving average:

This is interesting because a move in 30y risk free yields back to 3.0% (my base case, actually, but over the long term) would make other financial assets appear quite a bit cheaper. Not only other DM bonds, but also EM Bonds, (currently yielding 4.5%) equities, (6.7%) and real estate. (REITs yielding 4.5% and physical houses even more)

Despite my expectations for a further corrective move lower, USDJPY remains above the 101 level that has provided support all year. A break of that, however, could take us several figures lower easily, especially if US yields continue to move lower:

In EM FX space, USDCNH momentum has stalled and we saw the first weekly lower low since February. This may continue to provide a tailwind for other EM crosses:

Notable:

  • US Consumer Sentiment rose to 82.6 vs 81 exp and 80 prev
  • US Core PPI (Final Demand) increased to 1.4% vs 1.1% exp and prev.
  • Turkey Current Account improved to -3.19Bn vs -3.0Bn exp and -4.9Bn prev
  • Moody’s lowered the country’s outlook to negative
  • JPM missed: Rev $23.86bn vs $24.5bn expected. EPS $1.28 versus $1.40 expected. GS: Almost the entire delta was attributable to revenue, with minor misses across the board adding up to 7 cents (2c NII, 5c fees). We attribute a fair portion of this to negative seasonal impact (weather, day count, etc.), but with reserve release slowing we expect the focus on the call to be around loan growth (-2% YoY), the capital markets revenue outlook (-14% YoY) and remaining cost leverage (-3% YoY on a core basis).
  • WFC beat: $1.05 versus $0.97 expected. Net interest margin was 3.20% versus 3.23% expected.
  • Fast Retailing earnings disappoint and full year guidance slashed. Management lowered its full-term consolidated operating profit guidance by ¥10.5 billion,

Upcoming Data:

  • Mon: US Retail sales, RBA Minutes
  • Tue: UK CPI, GermanyZEW, US Empire Mfg, CPI, NAHB Survey, NZ CPI, China GDP
  • Wed: UK Employment, US Housing Starts, BoC, Yellen Speaks, Kuroda Speaks
  • Thu: Canada CPI, Jobless Claims, Philly Fed,
  • Fri: Good Friday,

Written by globalmacrotrading

April 11, 2014 at 4:23 pm

Posted in Daily Recaps

Recap : Drive-by

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Commentary:

What happened today? There isn’t really a good answer. (That I know of, anyway) I think a lot of market movements are just noise, but big moves like today usually have some sort of catalyst. But there wasn’t an obvious one today. The China trade data was weak, but it is a long stretch to make a fundamental case that this noisy data series is likely to drive weaker US corporate fundamentals. Jobless claims were strong, hitting the lowest level since May 2007.

One possibility (h/t JL) is that people are selling ahead of earnings season, which is kicking off. In addition, we are approaching the seasonally weak period. (Sell in May and go away, etc) People may be jumping the gun there. Further position unwinds by equity hedge funds were likely a contributory factor, given that the Nasdaq Composite underperformed by ~1% today.

Another possibility is that the equity market is reacting to declining growth expectations. There has been some commentary on the decrease of potential growth by the Fed recently, and the 30y real yield, a market proxy for potential growth expectations, declined sharply today and is now at the lower boundary of a range that has persisted since July:

This may be relevant because 30y real yields have (possibly spuriously) been leading equities by ~2 hours over the past several days. Perhaps there are some large asset switch flows happening:

Whatever the reason, equities are in a tough spot technically. Having broken and closed below the 1840 level that has held for a month and a half, shorts are likely to press further here, although whether we get a real breakdown or a head fake (like the upside break earlier this month) remains to be seen:

Notable:

  • US Jobless Claims declined to 300k vs 320k exp and 326k prev
  • Australia posted a strong employment report with 18.1k finding work versus 2.5k expected. The participation rate declined to 64.7% from 64.9% which impacted the unemployment rate. It declined to 5.8% (vs 6.1% expected) from 6.1%. The employment mix was strong with 40.2k finding full time work and -22.1k leaving part time jobs.
  • China’s trade balance swung to a surplus of $7.71bn versus $1.80bn expected. The move was from a deficit of $22.99bn last month. Exports dropped -6.6% y/y versus +4.8% expected. Imports -11.3% versus +3.9% expected. The data partially reflected the over-invoicing / fake exports problem from this time last year, but not all of the drop can be explained away..

Upcoming Data:

  • Fri: TurkeyCurrent Account, US PPI,
  • Mon: US Retail sales, RBA Minutes
  • Tue: UK CPI, GermanyZEW, US Empire Mfg, CPI, NAHB Survey, NZ CPI, China GDP
  • Wed: UK Employment, US Housing Starts, BoC, Yellen Speaks, Kuroda Speaks
  • Thu: Canada CPI, Jobless Claims, Philly Fed,

Written by globalmacrotrading

April 10, 2014 at 4:23 pm

Posted in Daily Recaps

Recap :

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Commentary:

Another sign that HY credit spread tightening is almost finished: the returns are more impacted by duration. As this chart from Business Insider below shows, the correlation between treasuries and HY have swung back into positive territory for the first time since 2007:

Notable:

  • Fed Minutes Highlights
  1. participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions… Participants also noted the debate in the research literature and elsewhere concerning whether long-term unemployment differs materially from short-term unemployment in its implications for wage and price pressures
  2. several participants mentioned trends that, if continued, could become a concern from the perspective of financial stability. A couple of participants pointed to the decline in credit spreads to relatively low levels by historical standards;
  3. Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee’s objectives. In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit.
  4. A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants’ outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function.
  5. Most participants favored providing an explicit indication in the statement that the new forward guidance, taken as a whole, did not imply a change in the Committee’s policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance.
  6. It was also noted that the postmeeting statements, rather than the SEP, provide the public with information on the Committee’s monetary policy decisions and that it was therefore appropriate for the postmeeting statement to convey the Committee’s position on the likely future behavior of the federal funds rate.
  7. Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period. As a result, the staff’s medium-term forecast for real GDP growth also was revised down slightly

German trade Balance improved to 16.3bn in Feb vs 17.5bn exp and 15bn prev.

USDA Report – April End Stocks:

  1. Corn: 1331M vs 1404M exp and 1456M prev
  2. Soybeans: 135M vs 138.5M exp and 145M prev
  3. Wheat: 583M vs 578M exp and 558M prev

WSJ: Investors are bracing for a raft of weak earnings reports, another factor that is adding to nervousness in the stock market.

Goldman is considering shutting down its Sigma X dark pool according to the Journal. Executives are weighing the revenue generated by the business against the risks associated with maintaining the platform.

Japan’s PM Abe said he will mobilize all possible measures to accelerate reforms and said Japan’s effective corporate tax rate around 35.6% is considered high compared with the global standard.

Upcoming Data:

  • Wed: Australia Employment
  • Thu: BoE, US Jobless Claims
  • Fri: TurkeyCurrent Account, US PPI,
  • Mon: US Retail sales, RBA Minutes
  • Tue: UK CPI, GermanyZEW, US Empire Mfg, CPI, NAHB Survey, NZ CPI, China GDP

Written by globalmacrotrading

April 9, 2014 at 4:20 pm

Posted in Daily Recaps

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