1 December 2016
Draining the swamp or stocking it?
As one wag suggested today is Donald Trump draining the swamp or stocking it with alligators. That’s the question posed by a commentator after reading out the list of billionaires who have been appointed to Trump’s Cabinet. The questions are about Mnuchin and Ross as two examples of billionaires who possibly could further gain after their appointments. Trump has assembled a Cabinet that possibly contains the largest number of billionaires possibly in US history. Mnuchin is a former Goldman’s Partner and this appointment goes a little against Trump’s stated ambition which was to break up the banks and investment banks such as Goldman Sachs. Mnuchin is the second former Goldman’s executive that Trump has appointed. Calls have been made again for Trump to remove conflicts of interest, and this issue remains a concern for many members of Congress.
On the day bonds once again continued their declines with the 10 year treasury trading back to about 2.37%. Equities continued their rally as investors looked to the strong Payrolls Data. The equity market closed towards its highs on the day but failed to break the current record.
US Home sales are poised for their best performance in a decade and the Beige Book release suggest that the economy is stirring with incomes rising and people being able to spend more. This is leading to the view that the US economy is growing and that pressure is mounting for the Fed to begin the tightening cycle.
Aussie Market Today.
I expect the Aussie equity market to be slightly stronger on the day as a result of stronger commodity prices. Bonds should be weaker as a result of weaker US Treasurys. The US Dollar Index was strong again and this probably underscores some risk off trades in Europe.
30 November 2016
Round and round we go.
That’s how the markets felt today. With little in the way of news flow and with the Payrolls Report Friday and with the expectation that the Fed will tighten in December markets were slightly better. Barring a collapse in Europe post the Italian Referendum this weekend it’s hard to see how or why the Fed won’t tighten.
Investors are suggesting that they have factored in the Italian Referendum but my feeling is that perhaps not as everyone expects the Banks to be recapitalised. This possibly means that the market has taken it all for granted and if the vote goes the wrong way then we could see the resultant volatility.
So what do we expect over the next few weeks? The main issue is the Trump factor. Markets like consistency they don’t like variability or inconsistency. Trump’s policies or at least the one’s he has twittered are inconsistent. The trade policy is inconsistent and appears to be made up on the run. The internal policies referring to tax, benefits one group but not others and we still don’t know what the policies will be. To me this sets up a problem in the future unless we are provided with a clearer understanding of the policies.
What we do know however is that the dollar is stronger and likely to get stronger. If Trump follows through with his plans then there could be a funding crisis in a number of areas. Much of the recent issuance in markets has been dollar denominated a strong dollar makes it harder to pay coupons and redeem debt and especially hard for struggling or emerging countries. Something in the order of $10 trillion has been issued over the past 10 years (Societe Generale). EM countries and Corporates have issued $3.2 trillion over the period. Evidence of the problem is starting to emerge in places like Korea, Philippines, Malaysia and India.
The other issue is for places like Asia where 30% of funds have flowed out of the region (Deutsche Bank Research), that’s approximately $15 billion. Further, lending spreads and cross currency spreads are likely to come under pressure thus exacerbating the problem. Another risk factor is the repatriation of corporate earnings. According to Deutsche Bank AG, Singapore is sitting on about $100 billon of funds that could be repatriated. Should a major quantum be repatriated this could lead to liquidity challenges for the region and the Central Banks, placing pressure on swaps, cross currency swaps, spreads and weaker currencies.
On the day equities were stronger, bonds were better and commodities were mixed to weak.
Aussie Market Today.
The Aussie Market equity market could be mixed. Commodities were generally mixed to weak and this does not auger well given the US equity market drifted. I expect bonds to be a little better as US Treasuries continued their rally.
29 November 2016
Markets take a breath.
Equity markets had a small retreat today. Some said it was to do with stretched valuations, others, that Trump’s policies are yet to be announced but in my view it was a combination of all the above plus a little bit of profit taking after what has been a fantastic month for equities. Bonds had a small recovery today with commodities also having a better day.
What strikes me about this equity rally is that two companies that probably are at an elevated risk with Trump’s win have had significant rallies. H&R Block a company that Trump vowed to put out of business and Boeing which would be severely impacted by Trump’s trade policies have rallied significantly.
The bonds have staged a good rally and a lot of that is because Trump’s policies are yet to be announced and there is rising skepticism that many of Trump’s comments won’t be able to be enacted. The devil will be in the detail and as yet the markets are yet to see any policies fleshed out. The Jobs Report is released this week and this number will be hardly noticed unless there is a significant deviation from the norm. The markets have fully priced in a Fed Rate Hike in December. The Fed Fund Futures has this as a done deed as the Futures have an almost 100% probability.
Friday was Black Friday and it appears as though the numbers were down a little. Sales for the Friday and weekend were about $27bio. Today is Cyber Monday and the turnover today is expected to be about $3-4bio. These days are not the biggest retail days that is expected to be Saturday Dec 17, seven days before Christmas. Of late this is the biggest day now for retail sales.
This weekend could be an important weekend for Europe. Italy has a referendum over the weekend on whether or not to support the banking system. Should the populace vote to not support the Financial System then there are possibly up to 8 Banks at risk Bank Monte Paschi would definitely be one at severe risk. A risky banking system in Italy could lead to volatility next week and that could be quite severe. Given the importance of the vote it’s hard to explain the lack of interest the Referendum is generating.
Aussie Market Today.
Even though the equity market in the US weakened today I expect that with stronger commodity activity and a stronger AUD that Aussie equity can rally today. Bonds should also improve on the day and that’s more a US related sentiment. Bonds over the past month have had a bad month generally with The Barclays Aggregate Bond Index down about 3% and the Bloomberg Composite down about 1.15% for the month. I expect to see some squaring into the end of the month and this should lead to some improvement in prices.
24 November 2016
It’s really all about Trump
Today marks the beginning of the Thanksgiving long weekend. Well shortly at least. Friday we have Black Friday, Monday is Cyber Monday and Tuesday is shopping Tuesday, so what does this all mean? Probably not a lot. The importance of these days cannot be underestimated as far as shopping trends and as a possible insight into the fourth quarter. Apparel and Department Stores could gain because, well it’s been a tad chilly of late and that bodes well for people to buy new warm gear. However amongst all this joy many of the retailers are not really expecting that much. Sure a lot of CEO’s commented that now that the politics is over people will spend. That does not appear to be happening.
The Trump effect however is firmly entrenched in markets. The markets have rallied in expectations of a pickup in growth. However without any policies announced and given that many in the GOP don’t or won’t approve spending that is not paid for then perhaps Trumps policies may come unstuck.
The Fed also plays an important part in all of this. Yellen knows her tenure won’t be extended, the FOMC Minutes suggest that a rate hike in December should happen. The only pieces of economic data are labour and GDP revisions. What could bring things unstuck is if the Fed overestimates the Trump’s Fiscal effect and tightens quicker than expected. The Fed also has the problem of juggling a strong dollar and rate expectations.
As of Thursday the market will be slowing for the long weekend and hopefully people will be queueing in droves t purchase goodies. At this point it is worth considering that 50% of toys are bought between now and Christmas, so it is an important period for many Retailers.
Looking ahead we have the Italian Referendum and elections in Germany and France. Next year promises to very interesting.
In the meantime the Dow hit a new high and bonds returned to weakening, partly in response to strong durable goods orders and the Fed FOMC Minutes. Gold traded sub $1200 today and oil was a little weaker.
It is worth considering the shape of the US yield curve which is probably a little flatter than you would expect for a period of strong growth. Commodities were weak and oil was off a little.
Spare a thought for the ski resorts in the West that were due to open this Thanksgiving weekend, that’s Colorado, Idaho and Utah. Many are closed or have limited runs for skiers due to unseasonable warm weather.
Aussie Market Today.
The green ink continues however we are getting close to a long weekend so expect some book squaring. This possibly means the Aussie equity market could start strong and end a little weaker Friday (Australia). Weaker commodities could mean weakness. I do expect bonds to continue the weak trend.
23 November 2016
Markets up again, what’s next?
Today we continued to hit record highs and the holy trinity of US benchmarks continued to soar. But who is making money and where’s the money being made since Trump took office. What we do know is that many hedge funds and funds were not positioned for a Trump victory. This means that the rally is a catchup, and probably means we require more information for the rally to be justified and sustained.
To give a list of down trades one only look to emerging markets, IT, manufacturing and Industrials prior to Trump’s win and post his win financials, industrials and some manufacturing stocks have gained. The movements are due to Trump’ announced policy of spending $1 tr over the next ten years, and this is a dilemma to the hawks within the Republican Party who see the purse being further stretched. So who wins? When one does not know any of Trump’s policies other than he plans to cut the TPP on the first day. The impact in the Asia Pacific Region will be resounding especially for many Asian countries GDP when Thailand’s exports to China account for 15%, Korea exports about 10% and Taiwan a similar amount. So with little knowledge of any policies equity markets may be ahead of themselves.
Within the maelstrom of the bond market we have seen some cathartic movements. Tips are now trading close to 2% in July they were 1.34%. The 2 year bond is now about 1.09%, the ten years had a reasonable night last night they are now about 2.30% and the 30 year is now 3%. The yield curve has flattened over the last couple of days. Fed Fund futures are now 100% certain that the Fed goes in the December 13/14 meetings. Some are calling for a 50 bp movement and if this were to happen markets could be in for a hard period especially emerging markets.
And something to watch. Trump is not willing to prosecute Hillary Clinton and this could cause some unease to his supporters who used the chant” lock her up” as a rallying cry. Given Trump’s distaste for the popular press, Trump is using alternative methods such as YouTube and Twitter. Twitter may become Trump’s point of press releases.
What we are looking at is a period of uncertainty. In a period of uncertainty expect a strong Dollar and strong capital flows to the USA. This movement will cause further confusion. China has already told Trump that a trade war will hurt both and Russia has further embraced Trump. For the Republicans I wonder how they can live with this change.
With little in the way of understanding any of Trump’s policies the markets are set up for quite a fall should there be disappointment with his changes.
Aussie Market Today.
Green ink continued to flow today. This bodes well for the Aussie equity market. Oil was weaker today based on comments suggesting that OPEC had not reached consensus. This may weigh a little on markets.
Bonds were slightly better and that would allow a small rally in the Australian Bond Market. Commodities were mixed. The USD will continue to strengthen and this probably means a weaker AUD and probably the gap between the Euro and Dollar could move to parity.
For the moment bonds look little oversold so expect bonds to perform a little over the next few days.
22 November 2016
What’s the buzz tell me whats a happenin.
With the Thanksgiving long weekend rapidly approaching one could expect the market to slow down, however we hit a record high today and the equities market is expected to really take off soon. So why is this likely to happen?
Let me digress just for a moment Stanley Fischer the Vice Chairman of the Fed came out today swinging. Stanley made the comments that the economic data was within the Fed’s band and that makes a hike likely. The Fed Funds Futures now has the probability of a rate hike at 98%. The second but importantly most important aspect of Fischer’s comments were that Trump needed to find a way to raise productivity, which has fallen well short over the last few years. Based on the behavior of Corporations in 2004, if Corporations were to repatriate funds there is approximately $2.5tr sitting in offshore accounts. Of this about only 40% is available. About $1.5 tr is likely to remain offshore but $1 tr may be repatriated. Of this number the majority is likely to be invested in corporate buybacks if the behavior of 2004 is any indication. In 2004 when $300 bio in cash was brought back buybacks on the S&P 500 rose by 84%. (Goldman Research) This is exactly what Fischer does not want to happen. He feels the US economy has a real need for productivity growth if the economy is to remain competitive. And this is probably much of the reason why US equities are rallying, investors are expecting a significant number of buybacks. And in many ways this may just exacerbate any reaction when markets readjust.
Fischer in his comments today is advocating infrastructure spending, education and private investment if the USA is to lift living standards. Fischer continues to cite a fall in productivity which according to Fed data has been cut in half since 2006 compared to the average since World War 2.
On the day, equities have had a little rally. Oil has firmed on comments suggesting that an agreement within OPEC has been reached to limit output, hence oil rallied and bonds staged a small rally. The yield curve 2/30’s flattened a about 4 points with the 30yr now at about 3.01% and the 2 year at 1.08%. The 10 year is now at 2.33%.
However amongst all of this, the game has changed. Investors are now no longer looking as much to the Fed rather they are looking at the political aspects and commentary around the Trump Camp. The relevance of Trump’s comments and his soon to be release of economic policy will be closely scrutinized.
Aussie Market Today.
Lots of green ink today on the board so that with a better commodity outlook the Aussie equity market should rally. Goldman’s have recommended commodities and this is the first time in four years. Such a release could have a significant impact on the AUD and many Australian equities. Bonds may improve on the day. Be aware that we are getting close to a long weekend so expect some covering of positions and this may lead to some choppy behavior between now and the end of the week.
21 November 2016
Markets remain Trumped!
News of the day is that bonds remain trumped. Over the course of the week bonds have weakened as bond investors have sold and continue to sell down their holdings. This week has produced one of the worst weeks and months for bonds in over two decades as the Bloomberg Barclays Global Aggregate Index (Bonds) has fallen 4% since November 4. “This is the biggest rout in data going back to 1990.” (Bloomberg). Yellen has also contributed to the decline by stating that the Fed could raise rates soon. I would suggest that she little choice as bond investors have already raised rates by their actions and any Fed actions would be simply confirming those actions. Mortgages in the US have risen by some 20 points and look likely to continue their rise.
Meanwhile the US Dollar just keeps getting stronger. The dollar is now tipped to trade on parity with the Euro such is the demise of the Euro and strength of the Dollar. The weakness in the bond market is expected to continue. Equity markets on the other hand at some point will have to take account of the Dividend Discount Model and what that means for equity valuations. However with December rapidly approaching and with end of year squaring markets probably have one last gasp before settling into the holiday season and awaits Trumps policies which will become more apparent in January.
Aussie Market Today.
The Aussie market today will be mixed. Commodities were a little weaker and this could set the trend for equities today. However I expect that equities will be a little stronger on the day and Australian Bonds to continue in their weak trend.
18 November 2016
Yellen, yellin rates up!
Janet Yellen had her day today before the US Congress and was quite clear in her thoughts that the economy was ready for a rate hike. Economic conditions appear to be rebounding and the workforce appears to be at close to if not full pareto employment. In that meeting Yellen was asked if she was going to serve her full time to which she replied a resounding yes.
The upbeat commentary from Yellen has helped the Fed Funds Futures rise to a probability of 90% which is a far cry from where we were this time early last week. As a result bonds tracked a little higher. The UST 10 year moved to 2.29% up about 6bp, the 2 year is trading about 1.03% up about 3 bp and the 30 year is tracking about 2.99%. The movements certainly have an implication for US mortgage rates and mortgage rates will rise as a result. The pickup in housing is thought to be as a result of people feeling they need to purchase before rates rise.
Banks had a great day as equity investors piled into financials. The reasoning being a steeper yield curve and higher rates are good for banks. On banks Neel Kashkari made some interesting points today about the future direction of bank regulation. His thesis was that Banks need a strong balance sheet and that once Trump moves beyond the populist views that the easing of the regulatory environment may not be as great as the market is expecting. He made a comment that according to the Fed’s research the probability of a major collapse in the banking environment over the next 100 years was about 67%.
Equities rose as a result of an optimistic outlook for the Financials sector. For most of the day equities were tepid but closed stronger. Commodities were weaker on the day.
And one for the Chicken conspiracy theorists. Chicken in the USA is sold based on an index compiled on numbers supplied by chicken Farmers. It would appear the Chicken Farmers have been cooking the numbers with the result the Index is heavily overstated. The result is that Tyson Chickens sold in Walmart will see significant falls in price.
Aussie Market Today.
Weaker US treasuries probably means weaker Aussie Bonds. Expect bonds to be a little weaker. Equities will be stronger on the day despite weaker commodity prices. The economic outlook in China is improving a little and this should assist our equity market rally.
Credit was a little weaker in the US however credit in Australia appears to be tightening as demand is outstripping supply.
17 November 2016
Politics to determine direction.
The big news out of the Big Apple is that Jared Kushner is turning out to be a powerful adversary for Christie. Chris Christie is certainly losing influence within the inner sanctum of Trump Tower as yet another Christie supporter has left Trump’s team.
The bond market is currently looking to Trump’s team and especially his Treasury pick Steve Mnuchin to provide guidance, as the current outlook is rather contradictory. Mnuchin has revised Trump’s view on an Infrastructure Bank after ridiculing the idea. Steve has also been quite vocal on his views regarding the Fed and believes that the Fed’s actions have hindered credit growth and as such wants the Fed to reduce its balance sheet. Little wonder why bonds are selling off, although on the day we saw a flattening of the 2/30 year curve by about 5 bp.
If the Fed were to reduce its balance sheet by selling bonds that could cause a significant amount of stress within the markets. It is hard to think that just one week ago that Fed Funds Futures had the probability of a rate hike at around 60% today its 94%. Why the change? It’s simple, Trump is looking to spend on infrastructure that means borrowings, some inflation and greater employment and hopefully if the Keynesian philosophy is correct GDP growth. Yellen appears before Congress next week. Yellen should get the opportunity to address the issue of infrastructure. Yellen has been saying the Fed cannot do anything more and that Government has to step up to the plate.
On the day the Ten year traded to around 2.21, the 2 year to 1% and the 30 year traded 2.91%. These movements are important as they are setting the level for mortgage rates, with the 30 year mortgage benched off the UST10 year and the 15 year benched off the 5 year. Bond funds have had a horror month to date with a number down in excess of -3% and this could lead to further volatility as many people now are invested in bond ETF’s and are not used to these type of movements.
Manufacturing output for October was out today and was flat. The real point of interest was that output from manufacturing has stabilized however energy usage fell and this was attributed to warmer weather.
And the absurd happened today. At least I thought that it was absurd given Trumps comments regarding his wish to limit trade. Shipping companies rallied significantly on the day. Equities on the day were a little weaker as bonds were a little stronger, no doubt rallying as a relief rally. Don’t forget 10year Treasuries have moved up to 60 bp in tis weakness.
Looking ahead watch the bond markets greatest fear inflation. To date inflation has not featured in the bond movements to any extent but it won’t be long. If the Bond Market starts to believe that inflation could rise quickly then bonds could be in for larger selloffs.
Bill Gross has waded into the economic argument by announcing that he feels that Trumpenomics is flawed and unlikely to lead to growth. Bill suggests that with lower taxes could lead to higher deficits and this has the potential to produce lower earnings. Bill also cites that the populist idea within the Republicans that a lower tax rate would enable the repatriation of trillions of dollars is a false god.
Aussie Market Today.
The trend appears to be a little weakness for equities and a slightly better bond market. Commodities were weaker and this will weigh on the Aussie Dollar which is weak today.
Expect equities to be weaker and bonds on the day to be better, but use this as an opportunity to lighten on Governments.
11 November 2016
Trump trumps markets.
Today was for bankers the day of the Don. Banks are one of the groups that stand to benefit from the removal of Dodd Frank and for the Regulators they are on a short fuse to try and get as much regulation in place before Trump is sworn in.
A change in Dodd Frank means less capital required and means Banks can go back to trading activities that they had to relinquish. And for Elizabeth Warren her broom cupboard awaits her, at least that’s what a Hedge Fund manager thought.
Banks will benefit from a repeal of Dodd Frank and rallied accordingly today. Banks along with Pharma were the reason for today’s rally in the equity market.
And for the Bond markets Trump continues to play his misère hand which means that bonds continue to sell and the yield curve steepens in response to anticipated bond issuance to fund both the budget and infrastructure that Donald has promised to build.
The retailers also had a good day. Macey’s sales improved and it announced that they are using Brookfield to assist in extracting greater value from their real estate assets.
So on the day the bonds continued to sell and that is expected to continue for a while yet. Bonds will have to contend with the uncertainty of Trump and who his replacement of Chair Yellen.
What will be interesting to watch is how the Regulators in Europe and Asia/ Pacific view a change in Dodd Frank and less regulation. This places just about every major bank I a better capital position than their US counterparty should the repeal of Dodd Frank occur. This should mean European Banks and Asian Banks and Australian Banks are in no danger of downgrades versus their US peers, but we will see. Guess the argument will now be that US Banks will be more profitable than their non US peers.
Aussie Market Today.
As they say the trend is your friend and why upset the apple cart. Iron ore was up again, and commodities have a bid tone. That said means another up day in the land Downunder for equities. Bonds should continue to be sold but not as hard as yesterday as the UST10 year was only off by 4 points. As we move to the afternoon session expect a little buying activity on the bonds as traders square their books for the weekend.
10 November 2016
I think Icahn
For Quite some time I had the belief that Trump could win the election as the intellectuals and party apparatchiks were too smart to take Trump seriously. Well Donald won and that’s great for equities! Infrastructure building and banks should all benefit and so too any business that is highly regulated under a Trump presidency. And that’s exactly what Carl Icahn did last night when he left the Trump party early in the evening after seeing the stupidity of the Asian time zone selling equities. He liked what he saw and wade in to buy by his own admission about $1 bio of securities, and most likely through the SPI Futures. The activist investor certainly put his money where his support was and bought the dream.
For the rest of us though we have to ponder what lies ahead. Certainly the era of low interest rates in the USA could be coming to an end and that may ruffle some feathers. I expect Yellen to go and probably be replaced by someone who has an ethos of normalizing rates. For the Fed they must be sitting there quite bemused as the Fed Funds Probability of a rate hike fell yesterday from 81% to barely 50%. Remember the Fed said just a month ago that a Trump victory would lead to higher rates. Why because Donald wants t spend. He is a visionary looking to fix US infrastructure which is in a very poor shape whether you talk roads, Airports Hospitals power lines etc. He wants to cut taxes all this is good for Corporate America, yes he wants a trade war with China, perhaps? Or maybe this is just rhetoric.
So on the day equities rallied about 1.4% bonds were trashed and so they ought to have been. The ten year has moved about 20bp which is huge. The 30 year also was sold heavily and the yield curve looks a little healthier. I expect that maybe the Fed will hold back a little given recent volatility and market will be volatile for a while but THE Fed will inexorably hike rates.
On the analysis of the election, Clinton was trashed by what should have been her support base. Union workers, non-college educated white males and non-college educated white women. If only the polls had polled these people. Hence power to the People.
This is a cathartic moment, equities will do well for a while and bonds will be ugly and especially Government Bonds which are in their own bubble. The Trump policy will raise debt to GDP to over 100% and it will be interesting to see how the Ratings Agencies cope with this level of debt, will the USA remain a Triple A country.
Aussie Market Today.
The Aussie market in my view got it wrong and badly wrong yesterday. Equities were trashed and bonds rallied. Expect that to reverse today. Bonds will inevitably be sold today especially the Governments and Semis. Floating rate notes will be the bond of choice and expect those to be well bid for some time. Credit will tighten as equity rallies.
9 November 2016
No that’s not the date when Columbus discovered America it’s the number of days till the next US Presidential Election.
On a day when the USA could become unhinged Markets were generally quiet and were watchful. The equity markets gained a little and bonds aka the UST 10years weakened a couple of basis points to finish the day around 1.86%
The Vix traded lower today as equity traders took their bearish bets off with the expectation that Clinton is a likely winner. Watch the Polls in Florida and Virginia as these will provide a strong guidance as to who will be President. At this stage the news services are favoring a Clinton victory.
Looking ahead a Clinton victory provides the opportunity for a rate hike by the Fed of 25bp and the probability of such a hike is about 81%. A hike could cause a dislocation as the last time the Fed raised rates the equity markets fell 12% but that was an unusual period because that was when China had to stop trading a couple of times on its exchanges. I don’t expect this result this time.
There were a couple of earnings out today and Hertz was disappointing. The earnings numbers continue to be volatile.
Aussie Market Today.
The Aussie market will be a reactive market today. As the result of the US election becomes known and that could be as early as midday today expect markets to react. I expect that we could see a reasonable amount of trading out of Asia and early European time as traders try to get the jump and position their books. The day could be a little volatile however I expect bonds to weaken and equities to be better bid.
8 November 2016
Better the Devil you know.
Well folks the election is Tuesday and markets believe that Trump is a certainty to not win the election. This could be a stretch given 40% of people who vote have already cast their vote and these typically are Democrat supporters. Clinton has a 3% lead and the standard error is 3.5% hence this is still a very close call. Anyway markets reacted strongly and that’s all that matters.
Equity markets were up 2% making up for the previous losses, bonds were sold because there is strong chance the Fed will go December (all things being equal) and commodities weakened. The Mexican Peso strengthened, the Aussie dollar climbed once again to heady heights and all is good with the world.
Let’s hope that Clinton does win the election because if she does not then there will be a significant sell off.
So for markets the real issue is the election and markets will react according to who they feel has the best chance of winning. At this stage the betting is Clinton but it is a two horse race that is very close
Aussie Market Today.
The Aussie market will be a reactive market today. Equities will rally significantly as iron ore keeps getting bid and the US market was white hot today. Bonds will weaken in expectation of a US rate hike and because US bonds were sold. Commodities generally are weak and especially Natural Gas.
7 November 2016
Just sitting here at the dock of the bay.
Markets are beset by the slumber that one experiences on a languid summers day. What is there to do? But wait for the election result which has the potential to polarise even more an already polarised political scene. And not only are the politicians at odds but so too the voting public. We will elect Congressmen and women whose sole purpose is to thwart anything that Hillary may wish to do and if Trump is elected they may also believe that thwarting Donald is also part of the contract. This really is madness and the US political scene has descended into something resembling a bad dream.
And what can markets do about this. Nothing because markets are now realizing that there is a chance that Donald could win in the same manner that Brexit occurred almost by default. Markets will stay quiet until Wednesday after which there will be a gage as to the scale of whoever wins the US election.
As this drama unfolds there is a strong possibility that the Fed will finally raise rates in December. The Jobs report although soggy yet again, shows sufficient growth, inflation is slowly edging up, the third quarter GDP was slightly better than expected and Company earnings were slightly positive. The economy is now in a position where it may just be possible to raise rates if and only if (IFF for the maths students) this trend of improving economic conditions continues.
On the day, bonds enjoyed a respite from the selling and rallied a few points, and equities continued their weak trend and sold a little. The Vix is finally living up to its name sake, the Fear Index and is finally showing some fear. The Vix was 21.7 and is starting to push out of its typical level and showing the market has some concerns over the election.
Aussie Market Today.
I fully expect markets to be quiet between now and Wednesday when we have a clearer guide on who will be President of the USA. If Trump, trumps Hillary he would have defied all odds and his victory would herald a lot of uncertainty. Equites will jump and bonds will be trashed as Trump stands for significant spending. If Hillary wins expect more blockages in Congress and a USA that is lowly descending into the abyss because nothing can get done. What I find intriguing is that the US citizen is so concerned about being able to have a gun they don’t give a toss about their economy the state of infrastructure and legislated lethargy.
Expect bonds over the next day or so to be better bid in a quiet market and equities to weaken just a little more. Otherwise go to lunch and come back Wednesday when the Fun starts.
3 November 2016
Back to the future or is it simply history repeating itself?
Today the Fed as expected did not raise rates and their guidance was somewhat dovish but pointed towards a hike in December. If it did raise rates in December this would be consecutive years when rates rose in the same month and coincidentally in December. So what we learnt was that the Fed was focused on jobs and we see Octobers Job’s Report Friday and then we have the US Presidential election next week.
The screw has turned, and yet volatility still appears to be holding steadily almost eerily so. The Fear Index or otherwise the Vix which has now risen to 18.5 but this is still below the levels where markets tend to sit up and take notice. The Mexican Peso has however taken the likelihood of a Trump victory to heart and has weakened. And as I have been warning for some time the likelihood of a Trump victory is extremely real. Trumps numbers have trended higher this week and he looks a real possibility of winning the much needed state of Florida. For the election record, Latinos have turned out in good numbers to vote early as have a number of other nationalities however the Black vote is missing and the Black vote is a much needed segment for the Democrats if Hillary Clinton is to win.
The test however going forward will be how the markets react next week. The equity market recorded its 7 consecutive down (longest losing streak for 5 years) and treasuries were slight better as bond investors feel that there may only be one rate hike next year. The markets will react strongly however should Trump win the Fed will have to adjust for a significant change in policy as Trump stands for significant Fiscal spending and. Currently the tens trading around 1.8% investors are nibbling as the magical 2% is the level that attracts significant investment especially from Japan.
On the day the equity market is showing a degree of nervousness. The probability of a rate hike increased on the day from around 70% to 80% if one uses Fed Funds Futures as a guide. The CBOE 7-10 Bond Vix has fallen slightly to 6 indicating a lessening of fear. In other words the treasury market is rather comfortable at these levels and the risk is for a rally suggesting that the bond market is looking for a slowdown in economic conditions.
Commodities were a little weaker and the dollar remains buoyant.
And on a sobering note, small businesses in the USA are indicating that their employment intention outlook is declining and this is a concern as small businesses are the driver for employment in the USA.
Aussie Market Today.
Expect bonds to be better bid on the day and equities are likely to fall as commodities continue to weaken. However with the US elections due on Tuesday (USA) I would expect traders to slow activity and then react once it is known who has won the Presidential election.
2 November 2016
Countdown to the election
Markets have now settled into a holding pattern as they await two pieces of information. The Fed reports shortly and investors will be looking for guidance to the next rate hike and any hawkish comments if any, and then we have the US election.
A week ago Hillary Clinton looked to have the game sewn up well some pundits did, and then there were those like myself who thought it was still very much a two horse race. And guess what our fears could still happen a Trump victory. Trump has closed the gap and now the discussion is revolving around will Hillary accept a Trump result and that my friends is looking decidedly undecided. There is some talk that Hillary will actively look for vote counting and challenge results and ask for recounts
One great guide for an upset is the Mexican Peso. The peso has weakened significantly over these past days thus indicating a strong possibility of a Trump victory. The reason why I am dwelling so much on this is that in my view markets have not factored in a Trump victory and this could be a real concern. The Vix is a little higher indicating elevated stakes but still remains around the long term median.
The economic indicators suggest that the Fed will have a reason to go in December, although with the doves replacing the hawks next year it is hard to see many more rate rises in 2017. The caveat is of course is a Trump victory. Trump has already suggested that Yellen goes if he wins and a Trump victory could also change the balance of the Fed in the short term. This would be unsettling for markets.
And all this is happening with just a month to go before the end of the year, as traders leave for holidays, and books are squared, making for potentially a very volatile next few months and especially into the new year.
Aussie Market Today.
Equities were weak in the USA and part of that weakness was commodity driven. I expect the Aussie Equities to be a tad weaker but maybe the iron ore price can spur some optimism. Bonds will be better bid.
28 October 2016
Yet another twist in the never ending story
It appears as though for different reasons many of the major bond markets had a bad day today. The rot started earlier in the day with the selling of UK Gilts, this was followed closely by Europe with Bunds trading weaker by about 7 bp.
So what is driving this selloff? Some of the selloff is certainly attributed to a change of attitude by Central Banks as in they are winding back their buying programs. Some of the selling is on the fear of Government spending on infrastructure and some seems to be on the bad of inflationary fears. Whilst no one expects inflation to rebound sharply investors are being cautious. Commodity prices are rebounding I particular oil gas and coal. As an example “the Bloomberg Commodity Index fell by 58% from its April 2011 peak to January where it has since rebounded by 9%” (WSJ).
What is confusing still is that there are a number of economists that are quite concerned about a recession given the growth phase has now been growing for 7 years. These economists point to flagging retail sales, household debt, Medicare payments and falling commercial rents in places such as 5th Avenue and also falling demand for retail commercial spaces. I am sympathetic to this outlook as inflation has remained low and much of the wages rise is technical in that legislation has increased the minimum wage. High wage positions are becoming scarcer.
On this day which saw a bond rout and where equities fell one could surmise that some investors have fears for the future or it could simply mean that with 12 days to go before the US Presidential election investors are happy to wait for the result. What is interesting is that the polls are exhibiting strange behaviours. Some are showing Trump much closer to Clinton than thought and this is very reminiscent of what happened to Trump at times when running for the Republican nomination. Most investors are seeing the result as closer than expected and as such are prepared to wait.
Watch the comments from the Fed next week as this will provide some guidance for what lies ahead.
On the day commodities were a little stronger and the Dollar Index was higher, and hence the dollar was stronger on the day. Iron ore was strong rebar steady Baltic freight slipped a little and zinc was off.
Societe Generale announced today it will no longer fund coal fired power plants. It intends to double its lending to renewables.
Aussie Market Today.
The equity story in Australia will be interesting today. Commodities were stronger and in particular iron ore and this bodes well for Aussie equities. I expect that the equity market could be a little better however watch the Aussie. The weaker Aussie is more as a result of the dollar index being strong.
Bonds will be weak on the day. It’s worth watching the spread between the AUD 10 year and US ten years which is at 52bp. Normally this spread hovers around 100 so expect some movement sometime.
27 October 2016
Tick tock the clock is ticking down
So it seems set that US rates will rise for the first time in quite a while come December. Fresh economic data suggests that the giant is stirring that inflation is now steady and spiking up a little and overall the economy is in a better shape than where it was a year ago and even 6 months ago. The FED Funds Futures suggest that the probability of a Fed rate rise in December is 74% and the CBOE Vol Index on 10 year treasuries is about 60%. So it is set rates will rise, well maybe they will we will have to wait.
What we do know if we look at the CBOE 10 Year options we find that the skew is protection. The CBOE option prices suggest that bond investors are expecting a tightening however they are well prepared for a tightening. Any tightening may, well cause a minor adjustment in bond yields and hence we could see a rather stable market. Equities are a little different.
I heard an interesting theory today about blue chip shares that are paying high dividends, and companies that have solid earnings. As we know these type of investments have rallied hard and some of this rally is due to quant funds. There is an investor that we have forgotten about and that is the ETF. Many of these style of investments are core portions of various ETF’s that have rallied significantly. The rub is that if there is an adjustment these so called solid investments could be in for a run and be sold down and this will have a strongly negative impact on the market as a sale of an ETF means the index is sold irrespective and as many are geared or held by professional investors this could be a significant issue if everyone tries to hit the exit door at the same point.
On another matter Tudor Jones is about to list an ETF with a twist. They are in talks with another company that will provide a sustainability index where each of the Russell companies is ranked in order of environment, how they treat their workers etc. According to Jones, those companies that have looked after their workers been environmentally aware have performed better over the long term. The ETF will be launched early next year.
Aussie Market Today.
Equities were mixed last night bonds were weak so we expect that should continue. Crude oils’ fall appears to be the catalyst for mixed performance in equity markets globally. Credit was a little tighter. On the day I expect weaker bonds and a slightly improved equity market.
26 October 2016
News deprivation prevails yet again.
It would appear as though the lack of news profile has claimed yet another Fed Board Member but this time the non-voting member from that charming windy city Chicago’s Charles Evans. Mr Evans a persuasive dove suggested today that the Fed could tighten in 2017 three times and each an increment of .25%. Eric Rosengren the President of the Boston Fed commented that the Fed would adopt a more aggressive stance to raising rates if the new President adopts a stimulatory fiscal policy. It would appear as though the US does need some form of fiscal relief because monetary policy is barely working. To Evans comments he worries about inflation and the tight labour market, the thing that people forget is that workers at $10 per hour that are hired piece meal don’t contribute significantly to GDP growth.
The Fed’s own research show consumer expenditure is falling this could be because more resources are being used to pay down college debt or that people are saving for the college fund for their children or for health care. Either way there is no suggestion of a significant expansion of broad money.
However on a day when markets had every right to be jittery given the comments from various Fed officials markets were rather benign. The equity market fell about 0.3% and bonds barely skipped a beat, when the bond market had every reason to sell. The reasons why markets were so benign were that Consumer Confidence fell and the big 3, reporting earnings today were bad. Sherwin Williams fell hard and this reflects badly as Sherwin Williams is somewhat dependent on Home Depot, Caterpillar’s earnings were weak and 3M also reported a bad quarter.
Commodities on the day were weaker.
Markets will be in a holding pattern until the Presidential Election but the new President will have to deal with the Politics of anger as many economies are struggling in this pattern of low growth low inflation and flat wages.
The chart of the day is worth a good look today, as it highlights an anomaly in Corporate USA as company insiders are not investing in the company’s that they are managing. Previously company investors have been significant investors.
Aussie Market Today.
The equity market was a little weaker on weak earnings however the equity market proved resilient given some hawkish comments from Fed officials. Commodities were weaker and the USD a little stronger, on the day I expect the Aussie to drift a little weaker, equities to be slightly weaker and bonds steady. Markets will be in a holding pattern for much of the next two weeks as we run into the final countdown for the US Presidential elections.
25 October 2016
Hi Ho hi ho it’s up and down the market goes.
Equity markets rallied today as the good news from improved earnings was released. In general the earnings data has been somewhat favorable. Numbers continue to remain mixed with focus to remain on companies such as Caterpillar.
Oil retreated today on two fronts, one reason was skepticism being expressed by Iraq that the OPEC deal can hold and oil inventory remaining high.
Bonds retreated a few points today as the market weighed various Fed officials comments and improving economic outlook. The Fed Funds Futures now has a probability of 70% for a rate hike in December. Bonds will continue to be stressed if the recent stretch of better economic data continues.
Markets could get a little jittery however if investors focus on the US deficit or if Trump looks to be able to snatch victory from the Democrats a result that markets have not factored into their calculations.
Aussie Market Today.
The trend is your friend as they say. Equities to be steady on the day and bonds to be a little weaker. The dollar index was strong overnight and I expect the Aussie to struggle to improve over the day. Credit has been tightening and that trend should continue as equity markets continue their rally.
19 October 2016
Has the worm turned?
Markets turned somewhat today as solid bottom earnings are to date mostly better than expected. Of course some of those companies that have reported are worse than expected i.e. Intel but others have beaten expectations such as Netflix, Goldmans, JPM and Citibank.
Equities had a reasonable rally and bonds held steady. The general outlook is that the Fed won’t move just yet, that the US economy can withstand some rate rises but importantly the Fed is in no rush. The CPI was out today and the result was mixed. Medical services were up but other segments were a lot weaker such as food and energy which could be described as volatile at best.
So on the day US 10 years were slightly better, equities were up about 0.4% and commodities were improved on the day
Aussie Market Today.
As they say the trend is your friend. The equity market will continue its drift higher as US equities rallied and commodities were better. Bonds improved on the day and that probably means that bonds in Australia could drift a little better on the day.
17 October 2016
Confused by Fed double talk markets are
The Fed Vice Chairman Stanley Fischer waded into the markets today to contradict a little of what he said last week. Fischer doubled down on the Fed not being able to assist with further employment growth as the US economy is pretty much at full employment. Stanley also suggested that the US economy could be allowed to run hot for a little while. This commentary was not too dissimilar to Fed Chairman Yellen’s comments last week. For an inflation hawk the comments from Fischer are a little strange.
So in this confusing double speak, equity held to its plus or minus 40 pts and was down 0.30% and because bonds now know that the Fed is not so much worried about inflation the 10 year bonds tightened back to 1.76%. Frankly all this is a little confusing as we have the CPI (USA) due out later this week. The CPI is not the CPI the Fed is watching as it has its’ own measure. I guess what we have to think about is that given rates are so low and growth so tepid, money supply has to expand significantly to become an issue, and that’s probably what the Fed has been trying to tell us.
Globalisation of business has become somewhat of a target for populists and for populist politicians and this could be a problem for many multinational businesses. There is now a steady stream of reports and articles highlighting various countries approach to globalization. The USA is not immune with many large US retailers really pushing the America made tag line at the expense of other non USA product. This approach is interesting because when US companies find themselves in this position they generally cry foul. Watch the headline on Globalisation as it could have a major impact on earnings for multinationals.
Commodities were a little softer, based on gold and oil. Oil was off because inventory is somewhat larger than expected. Perhaps the softer oil price weighed a little on the equity market.
Of course we cannot move too far away from politics. Markets don’t have a Trump victory in mind however I still draw caution that Trump supporters are enthusiastic, Clinton’s support is rather circumspect. The unexpected can happen and markets have not factored a possible Trump election. Expect more volatility around the mean as we draw closer to November 11.
Aussie Market Today.
Bonds were stronger in the US and that gives a good signal. Equity was weaker, however we did have some good results today. Banks have been great and Netflix reported a fantastic number so I don’t think long term at least the next week that equity will be soft. I expect equities over the week to be a little stronger and this holds for Aussie equities. Commodities of course play an important part in the Aussie Market and this could have an impact.
On the day bonds to improve a little with equities steady. No major direction is expected at this point.
14 October 2016
Why are we waiting?
Bonds had a bad day Friday and that had more to do with comments from Yellen that suggests the Fed could let the US economy heat up before applying the brakes. This left the bond market with little option other than to sell, and sell it did. Equities were resilient and gained confidence after the Retail Sales number was released as the data points to a happier consumer. Bonds as in the ten year treasuries finished the day at 1.80%, that’s quite a movement over the last 30 days.
And in amongst this backdrop markets are starting to question globalization and whether corporates can sustain global earnings as countries around the globe come under pressure from a range of factors including nationalism.
The Fed over the weekend raised concerns over the level of corporate debt and the increasing use of corporate debt to fund dividend payouts and buybacks. However with only a few more days to go before the Presidential elections it is hard to see any real direction in markets as the real focus will be on the US Presidential candidates and what happens to the polls.
Aussie Market Today.
Bonds were soft in the US, and I expect that trend to continue in Australia. Comments from the Reserve Bank and newspaper headlines alluding to a Coal Recovery in all likelihood means no more easing and rates are likely to rise.
I expect equities to be a little stronger on the day in response to the improvement in US equities. Commodities were a little weaker and this could weigh on the equity market here.
12 October 2016
The dance continues.
What did we learn today? Frankly not much. There were two economic releases today both of which are considered minor data releases but nonetheless they both are showing a swing in sentiment and outlook. Optimism appears to be waning. This may be the Hillary effect or maybe it’s the hangover of overly optimistic earnings reports.
The economic data out today were the Small Business Report and Jobs Survey. The Small Business Survey shows a diminishing return with pessimism growing and we see that in the inventory. Inventory has been falling and this could be because of the Hanjin business failure or falling demand. The jobs survey reiterated what we already know, steady growth in the service industry, a small increase in wages but how much of this is actually due to Corporations increasing wages to their lowly paid workers it’s hard to say as no economists or commentaries address this point.
Markets had a bad day. Equities were off as the commencement of the earnings season began and once again earnings have disappointed. I hate to be a party pooper, but if earnings are falling, wages remain low, growth tepid at best (there are some economists downgrading their growth forecasts into 2017 and fourth quarter) how can the Fed raise rates. If it did that would be an act of foolishness. Alcoa reported earnings down, Illumina which is a gene technology group announced their earnings down and the shares were slashed by 26%. The analysts’ expectations are that earnings will be negative for a sixth consecutive quarter. This being the case how can one justify the current level of prices where there has been a massive erosion to business in general. Let’s not forget the only things holding this market together are low borrowing costs and CEO’s borrowing to buy back their company’s shares and pay increased dividends. The equity market is rapidly becoming a bubble with nothing to back prices. Oh and we have forgotten that productivity (a key component of GDP) has fallen because CAPEX has fallen considerably.
Bonds weakened because they could. Some of the weakening is technical as new initiatives come into the Money Market weakening the demand for bonds, and because for some bizarre reason bind traders think the Fed could raise rates. We do have the Minutes due later this week so expect a rally. Maybe the markets are now just sitting back and are watching two heavyweights slug it out until the election, and in quiet markets as is often the case the markets drift weaker. The Fear Index (VIX). Fed Funds Futures have a pretty high probability of a rate hike in November approaching 89% which is interesting. I cannot see this with the recent economic data. There was an interesting comment on Bloomberg about household debt rising causing a strain on mortgage repayments.
Aussie Market Today.
Markets were weaker, I would expect Australia to follow suit. Bonds will retreat a little and the equity market will weaken. Commodities were softer so unless there is some latent buying from China the soft commodity outlook will impact the Aussie Market. The Aussie Dollar will probably be softer as the USD has been quite strong overnight. Credit will be a little softer as weaker earnings and soft commodities will have an impact on sentiment.
11 October 2016
Much of today was spent looking inward. Traders were rather circumspect as they dissected the entrails of last night’s Presidential Debate. The score being Donald did not lose too many voters but reinforced his base, whilst Hillary was boring.
The real news appears to be that equity managers are becoming a little more enthusiastic. Why? Because expected earnings are slightly underscoring reported earnings. Given earnings growth is still about negative 3%, this is interesting. Markets are looking to the Retail Sales figures due later this week and this number I expected to be strong. What all this means perhaps is finally we are seeing a thaw, well maybe. The FOMC Minutes due later this month will provide an insight to the Fed’s thinking however I still don’t believe that we will see rate rise anytime soon based on current economic data.
Oil rose based on a comment from the Russians which was they could work with OPEC and slow production. Oil rose as a result. Bonds were quiet and basically unchanged on the day. Stocks rose on a positive outlook from a stronger oil price.
Aussie Market Today.
I expect that the Aussie Markets will be quiet and the current trend to continue. Bonds slightly weaker, currency a little weaker and currency mildly stronger. Markets will probably become quieter for periods until we get past the US elections. Expect periods of extreme volatility especially if Trump looks like winning the US elections. The Canadian Dollar and Mexican Peso are proxies for gauging Trump’s candidacy.
10 October 2016
The final countdown
All eyes were looking towards the jobs number which confirmed a certain amount of employment was happening, however once again most of those jobs come at the expense of higher paying jobs. In other words employment growth seems to be rather muted in those positions that pay well whereas there still appears to be many jobs unfilled in the service industry i.e. lower paying wages. Once again the jobs number highlights the bifurcation happening in the US Economy. It is very much an economy of haves and have nots.
In response to a weaker Jobs Report markets were somewhat muted. My theory perhaps is a little simplistic but here goes. With the Final Countdown to the US elections in November, it is my belief that markets will not try to get too far ahead of themselves until they have more certainty. Despite Donald Trump’s peccadillos the masses still love him, he is seen as rallying against the Establishment and that is what many want, an anti-establishment voice. So don’t discount Donald just yet. The election result is far from over and will make for an absorbing period until the Election. Markets currently are still searching for certainty. The election of the President of the USA is far from certain and expect volatility over the coming 30 or so days until the election.
What is interesting is how markets have become stagnant. Stanley Fischer the Vice Chair of the US Fed has once again made some interesting observations about growth and the likelihood of a rate hike and markets seem to have become a little wary. He does point to a loss of productivity, however this should not surprise as companies have been borrowing to pay dividends and do share buybacks both of which are distorting equity markets and valuations.
The loss of productivity is no surprise as Capex has steadily fallen over the last few years. Until we see a restoration of Capex at the expense of buybacks and borrowings to pay for increased dividends the US will struggle to grow above its current tepid level.
Aussie Market Today.
Markets were relatively quiet. The Presidential debate today could swing the pendulum. China returns from Golden Week so maybe the Chinese will have a bullish effect. My view is that markets will be a little stronger and markets to be fairly thin. Aussie Bonds look great value unless you compare them to Canadian Bonds which have taken a hammering over the past month, and that’s probably because Canada stands to lose a lot if Trump is elected. Credit was a little better on the day.
7 October 2016
Today was interesting for really just one reason – not much happened. Why this is important is because markets are waiting on data from the for September Jobs Report which is out Friday. The Job’s Report will set the tone for a possible rate hike. It will also set the tone for the looming Presidential Election in about 30 or so days.
Central Bankers are flying for a conference in NYC and the discussion table appears to be focusing on the inability of monetary policy to work and falling world growth.
A strong job’s report will no doubt cause bonds to sell off and more than likely equities to sell. The participation rate will determine, in all probability, market views.
We also saw what happens when politicians start talking about borrowing to invest in infrastructure. UK Gilts were sold as politicians debated using borrowing to fund projects. This is also worth considering for the US. A victory by Trump would mean a significant spike in bond rates as he is pro infrastructure and his policies are likely to pass through Congress. A victory by Hillary probably means more gridlock and not much change.
So on the day US equities hardly moved and bonds were slightly weaker.
Aussie Market Today
Commodities were weak today, equities a little weaker, and bonds weak. For Australia this means a down day. I expect the market to be relatively quiet and be a little listless. Traders won’t be looking to make a move ahead of the Job’s Report and are more likely to square their books.
6 October 2016
Hitting a wall
Markets had an interesting day today. Bonds were trashed on the basis of the US Service Sector Activity Report which showed some life in orders going forward and the manufacturing outlook looking better. Equities had it’s typical up day rising about 0.6%. So why is this happening? The best that I can think of is that we have growth outlook at about 2% for 2016 and probably 2017. For equities to see some demand we would need to see a revision of growth prospects both for the USA and for global growth. This would spur an increase in the earnings growth outlook, which frankly are anemic.
Until we see a change in growth especially with the prospect of a rate hike to supposedly slow an economy which is already in the matured part of the cycle it’s hard to see how equities can break out of this cycle.
In my view the Fed is still unlikely to raise rates before December. Greenspan added weight to the fact rates need to rise but with inflation non-existent, and growth weak and little global growth one wonders just what the catalyst will be.
Bonds were trashed because the bond traders are a little worried about a rate rise as a result of an improving outlook, however with 10years around 1.72% they are looking rather attractive and could see some buying. The outlier is how the markets will react if Trump’s numbers improve.
Aussie Market Today.
Commodities had a better day so it could be a reasonable day for Aussie equities. Bonds should be weak given the link to US treasuries. Credit was a little weaker on the day so we could see a mild widening.
5 October 2016
A Central Banker speaks and markets weaken.
Gary Richardosn the Philadelphia Fed President made comments today about inflation and voiced his concerns. The only problem was that markets perked an ear to what he said and then responded accordingly by selling. I am not sure why the Fed President is so concerned about inflation because over the last four years inflation has been virtually non-existent and has failed to come close to the Fed’s target levels. The result was equities were down and bonds were in tatters, retreating to close about 1.68%. The Bond curve flattened. The real issue in my mind was more the case the ECB suggested that it could cease corporate bond purchases before ceasing quantitative easing.
What we are seeing is a return to volatility. The Fed Fund Futures now has a rate hike probability in December up 11% to be a 65% chance. This is weighing heavily on markets. Markets may also be factoring in a possible Trump victory as the media amps up his profile and the inability of anything damaging to stick. Donald remains a real chance.
Also there may be further bad economic news for the US. It appears as though there is a major super Hurricane brewing off the Florida Coast and that is expected hit the Carolinas and Florida and this could cause disruption to the oil and gas industry. Remember these areas have already been devastated this year by floods and abnormally high temperatures (the second highest year on records). The storm could have serious implications if it moves further north and hits NYC as Sandy did several years ago.
On a political note Russia and USA relations have slid significantly today as diplomacy has slumped to new lows.
For those who are interested there is an interesting quirk occurring in the FTSE 100 and 250. The 100 securities are large multinationals which benefit from global trade and a weak pound. The FTSE 250 are domestic companies. A weak pound and a weak economy should see a widening of spread between the two indices.
And on all things UK, Theresa May made some interesting comments today relating to immigration and the Banking Sector which accounts for 15% of the GDP. May wants to concentrate on trade and not Banking. This has real implications for the UK.
And in my mind the markets have still not factored in the unlikely chance of a Trump victory. This is concerning as much of the bad news surrounding Trump such as taxation issues, his treatment of women just is not sticking and the news cycle keeps focusing on Hillary’s weaknesses and that’s a worry.
Aussie Market Today.
Given offshore markets are twitchy and lacking a little confidence, I expect that the Aussie Equity market should be weak. Bonds will be weak as we see a selloff as the fear of rate hike increases.
Credit will probably be a little weaker
4 October 2016
The roundabout continues.
Just when one thought the market was becoming difficult it has morphed into the similar trading patterns that we have seen so far this year. Once again we have had an up day, all good news, hurrah the Fed is not tightening we had a down day because hey wait a minute the Fed may tighten. The problem now is all timing, which day do I go long and which day do I go short.
So Monday we had a Manufacturing PMI that was strong well relatively at least it was slightly above 50 at 51.5. The PMI suddenly caught the market off guard and markets then focussed on when will the Fed tighten again? If as Loretta Mester of the Cleveland Fed suggested that the Fed could tighten in November this caused a slight shift in sentiment and over the course of the day equities fell and bonds weakened. Realistically I don’t believe Mester had anything to do with the weakness it is more speculation that rates could rise by the end of the year as seen in the Fed Funds Futures that have a rate rise of around 61.4% in December.
The US also still appears to have no success for Donald Trump winning the Presidency. This could be a problem if Trump does win. A Trump success does mean a period of high volatility for markets. So what we have now is a market that has no uncertainty built into pricing. What we have is a market that has a low volatility, low interest rates built in, any change in the status quo will have an immediate effect.
Aussie Market Today.
The Aussie dollar was strong and so too commodities had a reasonable period. With China out this week the Australian Markets will be a little quiet as we search for information and direction. I think the equity market will be a little choppy but expect a slight improvement. Bonds may be a little weaker. Credit was a little stronger over the period.
30 September 2016
And the round-about continues
The equity markets were soft today predominantly on two factors. One factor was Deutsche Bank and the rapidly deteriorating financial position weighing heavily on Banks which were then sold in both Europe and the US. The other reason being a selloff in biotech. One interesting factor for Deutsche is that it has been reported that Hedge Funds are moving collateral away from DB (DB are large in the Prime Brokerage space, 10 Hedge Funds moved their listed derivatives) DB reproached the market by saying that 200 Funds have not moved collateral. DB like CS have become heavily dependent on trading and both are now suffering. The market is not necessarily concerned about the quality of DB’s assets as generally they are regarded as pretty solid being predominantly swaps, FX and Bonds it’s more how DB can improve profitability. CS has similar issues as well and is struggling to improve profitability.
The other factor is political based. There is concern of event risk if Trump wins. The issues that the markets have to grapple with are what the Fed does, will it maintain its views on monetary policy or could that change. A Trump victory means Yellen goes and that creates uncertainty. Markets do not like uncertainty.
The recent rounds of oil talks and OPEC’S recent release of cuts in oil production by the Saudi’s as no more than an opportunity to sell into a short covering rally. The OPEC release allows Iran to increase production however Russia a non-member of OPEC is and will continue to increase production. It will only be a matter of time before the agreement collapses. The real winner in all of this is the US Fracker who through having to survive a shock have come home stronger with better technology, greater efficiencies and these have combined to allow profitability at a much lower oil price. The real treat here is that Iran, Russia and Saudi are all involved in Syria but on different sides. Very interesting. Also of interest is that as reported ARAMCO which I about to list is apparently having difficulties in paying workers, is not paying bonuses and contractors are having problems getting payment.
On the subject of energy the Paris Car Show commences and the real interest is not what the next Aston or Bentley looks like it’s all to do with electric cars and that’s the real excitement. Peugeot has apparently another 4 new electric models for release between now and 2019. China is considered to be a massive market for electric cars as the Chinese are keen to introduce more technology and keen to exchange more technology for market share. This is an issue going forward for car manufacturers stuck with petrol engines.
Texas is cutting production of 8GW of coal fired plants in fact it is shutting down those plants, and replacing them with a mix of alternative energy sources. Texas is adding another 11GW of wind, and solar. The drivers being alternative energy sources are cheaper to build and maintain, and are carbon neutral. Coal plants whilst being somewhat inexpensive to operate are costly to maintain and the cost of production for alternatives is becoming significantly cheaper as more capacity is being added.
Patrick Harker made some comments relating to the Feds actions today. Whilst bullish on the economy he still has reservations however he was hawkish in his outlook.
Several US officials including the Treasury’s Lew have commented that we are in a commodities glut. Lew was peddling Free Trade Agreements as well which may be at odds with his new boss after the US Presidential elections. The outlook for commodities are weak. One official also made the point that many African countries need greater diversity and need to move away from pure commodities if their economies are to prosper.
Commerzbank announced that it is cutting its workforce by 20%.
At this point equities are weak, credit soft and bonds strong.
Aussie Market Today.
The US equities market appear to be back in a pattern of up 1% then down 1% and may continue for a while. This is a step up from the 50bp spread that we saw the previous few months. So much for the chart suggesting that on a breakout means a rally of 4% if the pattern over the last 6 six times this has occurred.
With this in mind the Australian Equity market will be a little disjointed. I expect bonds to rally and equities to be soft. Credit could be a little weaker.
29 September 2016
The round-about continues.
Durable goods orders were out today and they were sluggish and it would appear that retailers have built up a lot of inventory and have not been able to sell. In fact without mincing words too much the number is quite weak.
Yellen helped perpetuate the round-about theory by saying that the Fed would really like to raise rates but cannot at this stage. The Fed Chairman also suggested that a rate hike could be a way off yet. At the front of her mind was not the falling employment or inflation which is almost non-existent. Productivity is falling and has been falling for some time. For the Fed to think about raising rates it needs to see productivity rise. It’s this lack of productivity that is a real conundrum for the Fed. Meanwhile CEO’s are borrowing to repurchase shares and borrowing to provide steady dividend growth. One wonders how long this can be sustained.
Julian Robertson (legendary investor) and Anshu Jain Former CEO Citibank and Tidjane Thaim all weighed in today on the logic of negative rates and mused about its logic and sustainability. All are concerned about bubbles and the impact on a fragile economy as and when the bubble bursts.
So on a day when theoretically Oil Ministers from Iran and Saud agreed on something, equity markets had a rally and bonds were a little weaker. The logic is that without an imminent rate hike valuations are fair and equities continue their rally. On this I point to the earnings growth outlook which is still negative but not maybe as negative as it could be.
On the subject of politics well Christine Lagarde and the President of Ford Motor both provided Donald Trump free kicks in the Midwest swing states. Lagarde suggested trade barriers would hurt world growth and for the guy in Ohio this further enrages him because he sees the old order continuing and Ford announced a new plant in Mexico, deftly explained but for the simple logic for the guy in Ohio, this just further consolidates Donald Trump’s position. It would appear that CEO’s and politicians are not listening.
Aussie Market Today.
The big news of the day was that Yellen really has no idea when the Fed may execute a rate hike, and as such equity markets had a great day. I expect that trend to continue in Australia with equities rallying because of the US outlook and a better day for commodities.
Bods were marginally weaker and that’s because the durable goods orders suggests a slowing rather than a speeding up of the US economy. I expect bonds to be a little mixed. Probably the shorter maturities rally and the long end holds steady. Credit appears to be drifting a little wider, which means a bit of profit taking or is it flight to safe havens until the Deutsche Bank settles, either way this could be an opportunity for taking on a little more credit in weakness.
28 September 2016
Another Day but get ready for the tantrum
Last night we had the debate between two Presidential candidates and if you listened to either side they claimed an easy victory. The markets certainly thought that and as a consequence the Mexican Peso rallied, equity markets rallied and bonds were not too bad either. Commodities had a slight fall, but that was not entirely unexpected. The Mexican Peso for those who are unaware is currently the proxy for markets as to which candidate is likely to be nominated for President. A strong Peso means a Trump victory is unlikely. Anyway in my view the markets are still pricing in a risk the wrong way. What happened last night was pure theatre and there was nothing that changed Hillary’s odds. Yes she was eloquent, yes she knew her stuff and yes she was prepared but will she change how someone in the Mid-West votes? No. Markets and CEO’s love Hillary, they know what they are getting. Donald is an unknown quantity and simply put markets dislike uncertainty and that’s why we only saw a meek rally in equities. Hillary’s flash is simply not resonating with a large group of voters and yes she has had a number of years to do things with little to show for the years at least in the minds of the voters. Hillary was smooth and cerebral, Donald was rough and gruff and that’s what appeals to many voters.
The important factor here is Hillary’s voters are apathetic, Donald’s are enthusiastic and simply put I don’t think markets are preparing for a Donald victory in the same way the Republicans gave the merest thought that he could be the Republican nominee. A buffoon that confounded and broke all the odds and rules. That’s why the market will have tantrum, they have not factored the unlikely win for Trump and with just 8 weeks to go, a Trump victory or a close election will send jitters through the markets.
Otherwise the next big news is Germany and what will happen with Deutsche Bank. There appears to be a real problem evolving and it’s a fire that the German Government needs to quench quickly, it’s that dire. And I don’t think the US regulator will be all that sympathetic despite the contagion risks involved. The Deutsche Bank problem could be pivotal so watch developments closely.
We had some nice news in the US, consumer confidence up and housing prices up but that’s largely a technical issue. For me I would be watching the retailers’ performances for the quarter and they appear to be weak, and the logistics company’s performances. Travel is down, advertising muted ex election material so be wary.
Aussie Market Today.
Markets felt good today and I expect that trend to follow into the Aussie market. Commodities were little weaker so that will hold back the rally a little if a rally occurs. The UST 2/10 CURVE now 81 points. That’s a significant flattening of the curve. On the back of this it may be worthwhile placing some local flatteners as well. Credit was weaker but that’s probably a function of being forgotten rather than anything else. I would be a buyer of credit in any weakness at the moment.
26 September 2016
Back to the Future.
The markets were looking backward to look forward. Bonds rallied because of course the Fed is not tightening and won’t tighten at least until the election results are finalised or maybe because equities weakened.
Equities weakened supposedly because of Deutsche Bank. Deutsche Bank is a real issue for the Germans especially as the ECB was unimpressed with the Italians Bailout of Monte Paschi. Simply put Deutsche Bank a systemically important Bank in Europe has had its capital trashed by fines imposed by the US Regulators. Deutsche was once one of the largest Banks and now is smaller than US Bank a middle sized Bank in the mid-west of the USA. Deutsche Bank’s share price is 90% less than where it was in 2008. Concerns over banks in general also weighed heavily on equity markets.
The equity market is concerned about Deutsche Bank and its need for capital. Also the equity market is reacting to yet another quarter of poor results for corporate USA. On the theme of logistics, the sluggish profit outlook is borne by the movement of containers and shippers. Both are falling and Hanjin’s woes is just the tip of the iceberg. It is also worth thinking about the US traveler. Air travel is down about 5% for the last quarter according to data reports. This brings into contention the strength of the economy.
On the subject of oil, the oil companies are asking for time as the market adjusts expectations. The point of reference is the Oil Fracker. Fracked oil at $60-$80 was the norm, the market is currently adjusting to a regime of $30 -$60 and its managing these expectations that are important. A somewhat different result as investors adjust their expectations.
On the subject of investors, Perry Capital is closing his flagship fund. The Perry Funds were once considered a significant performer in the Hedge Fund space.
But for me the reason for the fall is the Presidential debate today. A Trump victory would be bad for markets if he follows through with his rhetoric. And a Trump victory at this point is very possible. On a recent drive through the North East States, that’s Maine, Vermont, Vermont’s Hidden Kingdom, New Hampshire and Massachusetts I did not see a single Hillary flag but I saw many, many , many Trump Pence Flags. (Coining a little of Trumpisms)
Bonds had a great day rallying a couple of points but that’s possibly because there is a degree of negative correlation at work. The bond curve 2/10’s flattened a little more. Credit was firm over the day.
Aussie Market Today.
The equity markets were weak, but commodities were stronger. The strength of commodities is good for Aussie equities and the market will have to weigh up the influence of a weak US equity market and strong commodities. I will go for a stronger equity market. Bonds were a bit better and bonds should be relatively strong today. Look for a little bit of strength. Credit should improve on the day.
Remember the markets will adjust after the Presidential Debates, so caution is the key word.
The Aussie was a little stronger but that is because the USD is somewhat weaker against a number of currencies.
19 September 2016
Lazy hazy Friday afternoon
The market on the US was somewhat muted. After seeing the T Bond/ Equity correlation move the way it normally behaves, as in equity buys bonds sell all seemed right with the world. So in the morning we had equity better, and bonds selling. The afternoon session finished with bonds a little better and equity a little worse.
The US market has a bit to ponder. Inflation is pointing in the right direction but the test is for how long and can it be maintained. The Vix appears to be pointing towards less fear and that means better equity markets. Bonds appear to be fixated with the Japanese Bond curve as an indicator and that market is changing its mind regularly. The Bund market was trading a little above zero a few days ago and appears to have dived sub-zero again.
So on a quiet day the equity market sold down a touch and bonds were slightly better. Moving forward the markets will be quiet until we move past the 21st September the day that the Fed won’t hike, however markets will be looking for conformation that it won’t. Moving into October the market movers will be the US Presidential election surveys. A Trump victory which is quite a possibility if Trump can avoid answering any substantive questions and Hilary keeps finding controversy. Trump victory will upset markets given his stance on Free Trade and his criticisms of Germany, China and Canada. Keep watching the Polls as they will be important.
There also has been a bit of discussion surrounding Brexit and Regulation 41. Consensus appears to be forming that 41 won’t be enacted just yet as next year the Germans have their elections and with so much to discuss and agree no one will want to enter negotiations if there is a change in Leadership.
Aussie Market Today.
Credit was stronger today and bonds marginally better. The key to the Australian market is the commodity outlook and for the moment commodities look a little weaker, meaning equity to be a little weaker. Bonds to be a little better bid.
16 September 2016
Ho hum ho hum it’s off to sleep we go
Much was made about how important today was going to be and if you were waiting up late to trade your futures position off the data releases today you would be sorely disappointed. Motor Vehicle sales did not provide much of a guide and the all important retail sales showed that whilst sales were weak they were not as bad as previously however they were still bad! So hurrah, the equity market rallied because the stalling sales growth whilst still negative was not as bad as expected.
Macey’s the world’s 3rd largest online store’s sales was underwhelming. Yes Macey’s who would have thought? The expectation is that sales will remain subdued throughout the holiday season which is generally the season for a boost.
On another line Golfsmith, one of the USA’s larger golf specialty store filed for Bankruptcy based on flagging sales. Apparently the millennials have not taken to golf as they see it as an old fogey sport that takes too long. The number of youth playing golf apparently is rapidly declining.
Oil rebalanced today. The USD was stronger and crude was stronger. Bonds barely ticked weaker on the day.
Markets appear to be realigning for news out of japan, however with growth being so sluggish it’s hard to see why today’s excitement in today’s equity as bonds said it all. Low growth and that’s what we expect from the current data.
Aussie Market Today.
The US equities had a great day. I expect that with a boost in commodities due to a better oil price we should see Aussie Equities improve on the day. US Treasuries were marginally weaker on a day where they ought to have rallied given the weak data. That suggests that caution is the overriding emotion and I expect that trend to move into the Australian market especially as the Australian Economy does not appear to be all that bad.
On the day, the Aussie Bonds should be slightly weaker and that trend may continue for a while. Credit was a little weaker overnight.
15 September 2016
Back to the same old same old
A low news cycle day, low volatility and low volumes and it’s as if we have stepped back in time. The market started with a little bit of a bid tone but as the day wore on the sellers gradually returned. Bonds broke their correlation with equities and rallied.
The market is really looking towards tomorrow’s economic numbers and the question that seems to be hanging around is will the Fed go next week? In my view no. The data just does not support a hike.
Retail sales, jobs report are amongst a number of statistics that will be released tomorrow.
Aussie Market Today.
In a quiet market commodities slipped and that will weigh on the Aussie Equities. Bonds had a bid tone and probably should continue into the Australian Bonds. The Aussie was a little better towards the NY close but remains vulnerable.
14 September 2016
Markets tumbled across the board today as investors weighed up the possibility of a rate hike or what the next move will be for Draghi. There was not one single factor that caused today’s slump, rather it was a combination of fear, doubt and the future direction of interest rates. The bottom line is just what are the Central Bankers thinking and what are they going to do!
If the reader remembers about 1 week ago in Chart of the Day there was a chart that looked at volatility and markets moving in a 50 pt band, and warned that when there was a breakout to expect about a 2% decline before everything goes well. Perhaps we needed to pay more attention to the chart and maybe we have little further to fall before we see a decent rally. Either way, markets have reverted, or prices are looking more attractive.
Valuations and perceived value are driving market conditions. This month a number of larger funds have increased their cash holdings and after today this may well continue. Oil joined the sell off and fell 2.9%. Iron ore fell 1.1%. The dollar index was also stronger as a result of today’s activities a signal that would not bring joy to the manufacturing sector. The Vix is just under 17 hardly a portend of fear.
Bonds had a bad day. The 2 year versus 30 year spread widened to most since June 30, to 167 bp.
Aussie Market Today.
It’s hard to see how one could be positive today after watching today’s price reaction. Commodities were weaker and bonds were trashed whilst equities were sold. Iron ore was weaker, oil was weaker and that probably means it will be difficult for equities to rally. Bonds should be a bit weaker as well as expectations are currently changing. It appears as though investors have become nervous about what the Central Banks will do next and that the possibility of rates falling further is unlikely. This does not mean rates go up anytime soon but it does change sentiment and that’s important.
Otherwise nothing has changed significantly.
13 September 21016
Hooray for Monday.
Markets rejoiced somewhat today as the savaging that markets experienced Friday came to an abrupt stop. Equities had a good day after Federal reserve Governor Lael Brainard commented caution with respect to rate hikes.
Her comments were exactly what the equity markets were hoping for and completed a 180 degree turnaround. Equities had a good day amid a slight pickup in volumes and why? Because rates are unlikely to be raised just yet.
Bonds after developing the yips on Friday turned around from a rout on Friday to be only down slightly. The ten years were marginally stronger today by about 1/16th and appeared to be far more settled. Markets will now be watching for further comments from the Fed and more importantly comments from the ECB. It was a comment from Draghi that unsettled markets Friday and Draghi will continue to provide a lead to markets. Comments and actions by the BOJ will also provide guidance for markets.
Aussie Market Today.
The markets rebounded today. Commodities, bonds and equities had a better day. Expect that trend to continue into today’s trading in Australia. The US Dollar Index was steady but the gainer on the day was the Aussie Dollar. The Aussie rose in my view because traders are not expecting a rate rise this month.
I expect markets to have a bid tone today
12 September 2016
Let’s call Friday Rosengren’s Day!
Because Eric had the most profound impact on Friday’s markets. Friday was a down day across most markets and the reasons given are contradictory. For example oil was down because of the glut and slowing demand. As a forward indicator a slowing down of sage generally points to slower growth.
Bonds and equities in the other hand were weak for several reasons and the weakness was all due to comments relating to Central Bank Figures. Draghi set the ball rolling by saying negative rates were not going much lower, and the markets took this as a signal of rates going up. What they forgot to read was the fine print which was more Fiscal policy was required. Eric Rosengren (Boston Federal reserve) threw his hat into the ring by suggesting that the Fed could raise rates gradually. Bonds and equities took this to mean rates are going up soon and sold their respective markets.
This sell off could prove to be a boon for investors. US 10 years near 1.70 start to look like great value and a selloff in equities is something the market has been expecting for some time. What we did see was a shakeup in volatility although the Vix is still well below its median, and as such the Fear Index is hardly fearful. Volumes remain low but Friday did see a pickup in trading activity. All this activity is very interesting given the likelihood of rate hike in September is very low. The economic outlook in the US is still weak. Large retailers like Whole Foods and Spouts Markets (pioneers in the organic and natural foods and products) are struggling in their marketplace. Partly due to competition, partly drought and partly because food has become cheaper so they are not making as much margin. Corporate America is not adding jobs through CAPEX, it is adding jobs through sales and these tend to be lower paying jobs, and that’s its problem. Productivity has fallen and the outlook remains weak. Fiscal initiatives are required but Governments still have to act.
Markets will continue their volatility and weak volumes until Investors get a clearer picture on the economic outlook and policies.
Aussie Market Today.
It was interesting that the Aussie Market anticipated the US selloff and Draghi’s comments by selling Friday. Given we have weak bonds, weak equities and weak commodities I expect we could see a weak market in Australian Time.
I expect credit to be a little weaker, bonds to weaken a few points and equities to be weaker.
9 September 2016
Draghi Day today
Today was all about the ECB’s actions, hence what was it that Draghi said? Simply put – Draghi commented that he was happy with what was being achieved and no further easings were required.
The markets then decided this means less demand for US Treasuries so they sold and equity thought perhaps the Fed could now tighten so they sold as well. Oil had a great day as the largest drawdown of reserves for some 18 years.
Given the market was so quiet today one does have a chance to ponder the fallout the Hainjin Shipping Company is creating. Currently there is about $9bio of goods on their vessels but the issues are some are finished and some are raw materials required to complete finished goods. What this means is that supply chains are at risk, goods for retailers are stretched and a number of companies that require goods to sell or be paid for are delayed and some will inevitably spoil. This is a something to watch and could have an impact on growth if exporters worry over other shippers. Either way prices have to rise and who will wear that cost?
It is also worth noting that the level of IPO’s this time last year had seen about $130 bio, this year only $69 bio of IPO’s have been launched.
The news cycle is somewhat quiet and this possibly explains the reaction to Draghi’s comments.
Aussie market today.
The US market was weak across both bonds and equities. The Australian markets will be quiet but probably drift weaker over the day. The AUD is holding its own at present and with the boost in oil and a bid tone on commodities the currency could drift higher.
Bonds continue to look like fair value.
8 September 2016
Beige is the colour of the economy
The Beige Book was released today and it’s as if the colour of the book is representative of the colour of the US economy. No surprises in that the Fed Districts report moderate growth and benign inflation. The report almost categorically removes any limited chance there is of a rate hike in September. I don’t mean to labour the point but there is virtually no chance of a hike in September. What we do have is the ECB meeting tomorrow and the ECB could choose to do something as they have a few more tools than just buying and selling Government Bonds.
Interesting talk today in that perhaps the US needs a dose of negative rates.
What the Fed has to contend with is a tightish labour market with diminishing corporate pricing power. Many US corporates have the issue of corporate largesse, weak capex spending, share buybacks, using debt to increase dividends any of which could hinder economic development. The JPM Securities Economist commented today that low rates were not hurting corporate USA rather many corporates ere not seeing the opportunities. And if all these issues were not bad enough then this year has seen the worst revenue growth for some 80years.
Aussie market today.
The US market was relatively subdued, and still looking for a direction. Credit had a bid tone and US Treasuries were slightly better bid. I expect that tone to continue for Aussie bonds. Equity appears to be range bound so expect a slightly weaker market and no convincing direction.
Bonds continue to look like fair value.
7 September 2016
I hate to say I told you so!
If anyone has actively followed my commentary you would know that for some time I have been in the camp of no tightening and that the US economy whilst seeing employment growth, is not employing people in positions that matter and hence is growing at a tepid pace. That makes one question just what are the Fed Governors looking at, and especially Fischer. The ISM Index was out today and predictably that was weak. Within the US economy there are a number of agents of weakness, the election, a possible Trump victory, slow world growth, slow US growth, weak export sector and the list goes on. I hate to rant but employment growth which is in the lowly paid services sector can hardly be expected to lift a First World economy.
With the release of the ISM Report, the obvious conclusion was that there is little to no chance of a rate hike in September and now there is about a 35% chance of a hike in December if Fed Funds Futures are a reliable indicator. With expectation that rates are unlikely to rise for some time equities rallied and Bonds had a great day. The curve saw the 1/10 at 97bp, 2/10 at 80 2/30 at 148. The curve is relatively flat. What is interesting is that there are a number of Republican Congressmen raising concerns over inflation because of the low level of rates. With Broad money weak and a relatively flat yield curve the Bond market is not looking for inflation. And with no squeeze on wages, and a strong dollar it’s hard to see where this inflation is going to suddenly appear from, in other words this may well be a political ambit.
Equities rallied because rates are not going up which means free money for a little while yet. When the party stops it will leave a nasty hangover but that could be sometime yet.
There is a study on Bloomberg that looks at the relationship of Presidents that have run 2 terms and the relationship on the next recession. Barring Reagan since the War typically there has been a recession towards the back-end of the 2nd term president. If there was not a recession, then a recession was inevitable within 13 months of the new President’s term.
Aussie market today.
Big moves today on the back of a weak ISM. The USD slipped hence the strength of the AUD. Expect stronger AUD as it is unlikely that the US will tighten on the strength of the recent data. I expect bonds to have a bid tone and equities also to be better bid.
No matter how much I hate it at present it seems that it is better to be long than wrong
5 September 2016
Labor Day Blues.
The best analysis that I can come up with for Friday is Labor Day Blues. To the south we have Hurricane Hermine winging its way up towards the Jersey shores threatening a deluge. Then we have the Labor Day weekend which is a long weekend and signals the last hurrah for summer, the climax of the Burning Man Festival and back to school for many. So for me the reason for the bond selloff on Friday was a book squaring exercise and for equities it was the same reason.
The labor number from the Jobs Report was weaker than expected, thus casting a shadow over the Fed’s ability to raise rates this year forget about September. (The Fed Fund Futures have the probability of a rate rise of less than 20% at this stage.) In fact I would say given the weakness in the economy and the lack of inflation, and a weak GDP outlook starting to be factored in there is little likelihood of a rate rise this year. If the Fed had a chance it was September and I don’t subscribe to the theory that there would be no repercussions if the Fed were to raise rates in the middle of Polling.
For me looking ahead the next three months the important thing to think about is where will the growth catalyst come from? The recent storms will have a minor impact, however, recent flooding has had an impact and the lack of water in the west is starting to have an effect on produce and employment.
On the employment side some manufacturers are complaining that there are a lack of skilled workers available and this may well be true. However, that means that skills shortage will take time to adjust and that is why we need more emphasis on education. That means this problem will persist for some time and that the US requires immigration and for many without the right skills their employment opportunities lie in part time employment in services and that is exactly where most jobs are being created. That is why there is no serious wages growth and it is the reason why you can have employment growth and the economy at a standstill. It’s a dilemma that many economists cannot rationalise as employment economics does not address real world issues.
Aussie market today.
Markets will be quiet until Wednesday as Monday is a holiday and that means the US won’t be trading until Tuesday. That being the case I expect the next two days to be relatively quiet unless there is an unexpected movement caused by an unexpected factor. Hybrids will be bid and so too credit and bonds. At this stage Australian markets look cheap on a G20 basis and over time will continue to have a bid tone.
2 September 2016
We get what we reap.
If we are looking for gauge on how accurate Fischer’s case for a rate hike then today provided a good indication where the economy sits. The ISM Manufacturing Index was out today and that was somewhat disappointing. As a guide for growth the weakness of the number imperils the economic outlook. Realistically the number should not have come as a surprise. Capex spending is down significantly so we should not be surprised that productivity slipped. Please don’t forget that we have a number of Corporates that have borrowed to pay for share buybacks and the latest trend that cannot be sustainable is the borrowing to raise the dividend payouts. If you take these practices out then where does Corporate America really sit?
The issues within the ISM Index were a fall in new orders, and the employment index was weak. The number does not auger well for second half growth. Car sales by the big 3 was off leading to comments out of Ford to suggest that pent up demand had now passed, meaning that perhaps we have seen the zenith of car sales.
While we wait for tomorrow’s jobs report and the lead into the FOMC on the 21st September. Consensus has the jobs increasing by 177k.
The 20th is a witching day for the CDS index rolls. For what it’s worth leading into the rolls cash usually suffers. Generally most traders like to go long risk. So going into the roll traders should look for cheap volatility and steep smiles, and pay for spreads.
On the day equity was mixed, it was weak earlier in the day but as we moved towards the close equities improved to end the day a little up. Bonds were steady on the day. Oil was weak and is now hovering close to $43.00 a barrel. The dollar fell in response to the ISM.
Aussie market today.
The US market was soft for most of the day and interestingly stage a nice rally into the close. To me this suggests that the markets are expecting that the jobs number could be weak or around consensus. A number around 177k would most likely ensure that the Fed would not raise rates on the 21st September. So beware selling too hard on the day. I expect that the markets will drift and be directionless. Expect slight gains on the day.
1 September 2016
All eyes on Friday’s Jobs Reports.
Markets turned weaker today as they look to Friday’s Job’s Reports. Treasuries were a little weaker and quoting a US Portfolio Manager the suggestion was that if one were to ascribe a P/E to the 30 year that equated to a P/E of 70.
The Shiller Housing Report today showed housing up 5% which raises an interesting contrast with income up 2%. Roughly half the cities showed a decline suggesting a slowdown in housing.
Jacob Lew (Treasury Secretary) made an interesting observation today suggesting that the actions by the EU could lead to major tax reform and cause Congress to change the current practice of delaying or rejecting reform bills. There is also now a suggestion that Starbucks, Amazon and McDonalds may also find the EU taxman on their proverbial doorstep serving a Tax Bill.
As an indicator of how world growth has slowed or maybe how logistics have changed Hanjin Shipping a behemoth Logistics Company filed for Bankruptcy Protection. The cause provided was a slowdown in container traffic and slowing trade.
Also it is worth reading the result of the fires in Canada and how that dampened the economic outlook. Weather related slowdowns are becoming more frequent. The fires in California may have an impact as they were quite extensive and disrupted a number of communities.
Aussie market today.
In a quiet and drifting market equities are likely to be a little weak until we get to Monday following the release of the Jobs Report. Why is the report so important, because a strong number could cause a strong market reaction one way or the other. Bonds should be a little better as equity drifts off. Credit to be resilient but could maybe move a point weaker.
31 August 2016
Fisher confuses the day
One has to ask just what is on Vice Chairman Fisher’s agenda. A day after Yellen made some dovish comments Fisher commented that rates could rise at least once depending on data. Accordingly the equity market failed and weakened, bonds were slightly weaker and the Dollar was slightly stronger. This all happened in pretty thin markets as volumes remain persistently low. Fisher did say that markets should not think of one hike in 2016, really? August traditionally is a weak month for growth and with an election and winter weather rapidly approaching then one could easily believe that the economy will grow at the rate required to justify two hikes. For starters inflation is low, growth is 1.1% the target is 2% and world growth is weak.
If the Fed is data dependent then the jobs report on Friday is important. Issues still remain for the economy and these are if the jobs market is so strong why aren’t wages rising? The economy remains persistently dependent upon consumption or consumer demand and corporate profits at best are weak. For confidence in the US economy to remain profits must increase for the consumer to remain confident otherwise if profits remain weak then new jobs hiring won’t continue and people will be laid off.
The day was relatively quiet, volumes thin and most investors/ traders are looking to Friday for guidance. What did catch the Markets attention was the EU tax bill to Apple. This is causing the US great angst as Treasury believes that US taxpayers will be shortchanged. Apple stands to be taxed about $14bio + interest. A number of US companies are it would appear to be in the sights of the EU and that is causing great concern to the US Authorities.
Aussie market today.
In a quiet and listless day, markets were generally weaker. I expect the AUD to slip and for equity and bonds to weaken ahead of the jobs number. I am not expecting much action this week. As usual new issues will cause a mild selloff in the hybrid space, otherwise it will be a quiet week.
30 August 2016
What a difference a day makes.
As expected today was an up day. Equities rallied, bonds rallied and commodities were slightly weaker. Market turnover was thin. So why today’s rally? Several reasons one being that we saw the release of Consumer Spending which was up and this helped the equity market improve. The second reason being that not too many investors believe the Fed will tighten September 21, and a number probably believe that we may not see a rate rise this year. The third reason was that with lower yields higher yielding dividends become attractive and this helped drive the stocks into green on the day. With no expected pressure on rates, bonds were slightly better on the day and commodities were a little weaker.
What is relevant however is that despite all the noise the creation of credit is not helping the economy expand, rather demand and hence expansion is being purely driven by consumer spending. And if we look at the economics of household debt that has been slowly increasing despite a lack of wages growth.
The hawks on the economy keep pointing towards jobs creation, and the markets are looking toward wages growth as a main accelerant. The US needs to create more high value jobs not low grade jobs. I remain somewhat bemused as to how an economy grows significantly when the accelerant is someone being paid $8 an hour to possibly being paid $15 per hour that’s $30k per year. It is unlikely that Bill will be passed and the jobs that create real wealth are steady or being lost.
Other developments on the day include a possible disclosure of helicopter money investments by the BOJ to include loans to sewerage companies, road construction companies, electricity providers, or in other words infrastructure loans.
Aussie market today.
Equities and bonds as expected were better on the day. I expect this trend to continue especially if the prospect of helicopter money in japan continues to evolve and develop as a story. I hate banging on this but AAA securities trading at around 2% is somewhat unique and will continue to be attractive for European and Japanese investors. And the story is even better for the investment grade credits.
One thing to be aware of is the prospect of another rate cut. The Aussie dollar remains strong and the RBA will want to get the AUD down so that the mining sector remains competitive and can become stronger.
Expect bonds to be a little better and equity to have a good rally. Credit will be better on the day.
29 August 2016
Confused, you have every reason to be!
The Jackson Hole gabfest has now finished and if markets were looking for some divine intervention they have been sorely misled or perhaps delusional. In anticipation of Yellen’s comments the markets rallied. Janet in her oft whimsical way waxed lyrically about how the Fed could lift rates if the data supported a stronger economy. Bonds were slightly better and the world was good because there was nothing to fear.
Then the dark lord of the black arts Stanley Fisher divined a stronger economic outlook and that supported perhaps two rate rises. The market spat the proverbial dummy and sold. Had rationalism finally on through. Rationalism did not win because the thought of reason by Dudley after the market came through steadied the onslaught or most likely will when markets open. Dudley was the lead voice amongst several Regional Fed Presidents to express concern over economic conditions.
But one does not need to even listen to Fed to decide the probability of a rate rise. Fed Fund Futures remain persistently around the 50% mark, GDP growth is tracking about 1.1% now, capex spending is at an all-time low, borrowing to pay dividends and support share buybacks is not symptomatic of a strong economy. Worse still is in many ways balance sheets are expanding without being noticed.
In many ways unless we see a sudden spurt of global growth and growth in the US economy it is hard to see where the US economy is going to get the impetus to grow at 3.5% which what the growth rate for the next two quarters has to be to get to the Feds target of 2%. This is delusional. Then remember we have the floods in Louisiana Texas and elsewhere and weather related turmoil. All this slows growth. Yes there will be claims to purchase white goods and rebuild but that all takes time and remember most of those recently affected in Louisiana did not have flood insurance as those parts had not been flooded before. We have a tight labor market in the US but that primarily in employment such as making pizza or waiting tables very little is going into value add. The US has lost its mojo, Silicon Valley is still vibrant but there are only so many ways one can shop online or post ones selfies on the Net. As the US is suddenly discovering there are a whole raft of internet social apps appearing globally. Once again social media whilst important in helping to advertise one’s goods is not the only outlet. Very little new employment is happening where it makes a difference, in things like research, engineering, bio tech, and making stuff.
To think a rate rise could happen by year end in my view is spinning wheels. Alternatively the Fed has access to data that is not available.
When all said and done Friday was quiet, volumes remain low, conviction remains low and the market traded around a 50 point range on the Dow and a 4 pt range on the 10 years. And probably will stay in this range for some time until economic conditions force a change of view.
Aussie market today.
The lead is the US market which was softer. Given Dudley’ comments I expect a rally to occur in the Asian time zone, that being the case expect Aussie equities to be stronger. The AUD fell but that was because of Fisher’s comments suggesting a rate hike however this is likely to reverse Monday. The Dollar Index was higher as a result of Fisher’s comments.
The interest rate differential is no longer at risk so therefore the bonds can probably rally a touch into the end of the month. Trading wise Monday should be a green day.
26 August 2016
Waiting why are we waiting?
The markets were slightly confused today following Fed President Kaplan’s comments. Kaplan is a centrist so what he has to say is of importance. What Kaplan had to say was that the Fed would adopt a softly softly approach. His comments urged caution and that more data was required. His comments now make Yellen’s comments on Friday important.
As a result equities were slightly softer and bonds were soft. The dilemma for the Fed officials will be when they disassociate themselves from the slavish belief in the Phillips Curve. Inflation and wage inflation continues to remain persistently low.
Thursday was quiet, and volumes thin. What is interesting though is the pickup in volume in the fear index (aka Vix). The vix is steadily rising, perhaps pointing to volatility in the future. Vix short levels are at historic lows (and that’s a worry long term). Meanwhile we wait Yellen’s comments and wait to see what the Fed may be thinking.
Explanation about the above comment.
VIX short positions are at historic lows.
Valuation and VIX level extremes are seemingly being ignored by the market.
The search for yield is the main cause of current market distortions.
Cash VIX has been crushed since June’s Brexit result to sub-teen levels. And, as expected, the VIX futures curve has likewise shifted down. Traders in search of yield have been the main culprits driving the VIX to near historic lows through short selling and other strategies, justifying their actions mostly on technical levels that have been broken in the S&P 500 as it passed the 2,134 level.
The simplest way to understand what is happening is to look at current market yields. The 10 year treasury is at approximately 1.5 6% while the S&P 500 yield is just over 2%. This level for the S&P is near its all-time low of 1.1% reached in 2000. It has historically averaged over 4%. While the S&P yield is better than the benchmark 10 year treasury, the two are not comparable risk investments. In other words, the market is comparing apples to oranges in order to justify stretching for yield. Recently, institutions have been employing various strategies in their hunt for yield that seem downright dangerous given current market complacency. (COURTESY SEEKING ALPHA).
Aussie market today.
The market was very quiet. I don’t expect any excitement in the Aussie Fixed Income markets or equity markets. Certainly there won’t be too many investors implementing strategy ahead of an important speech and a possible change in policy or for that fact, no change.
It will be quiet, but maybe Monday will be interesting.
25 August 2016
I can see the light! Or did I?
The one certainty out of Jackson Hole is uncertainty itself. As every month passes by the Fed’s credibility diminishes but perhaps that’s why a light has shone. The takeaway to date is that Central Bankers are suggesting at least that Fiscal Policies have to be implemented if economies wish to grow. Monetary policy has run its course. Now the interesting part to see will be whether politicians engage with a fiscal response. And that is the light.
So once again markets continue their drift as we await Yellen’s commentary at 10.am in Jackson Hole on Friday. The Equity market continues its 20 point range trend that has continued throughout August. Lack of certainty, holidays, concerns over a Trump presidential victory, security and any other reason one can think of is holding markets in this holding pattern. Bonds were steady equity was slightly weaker and commodities were softer.
To give some colour on what is happening. Volumes are down approximately 62% from this time last year 2015. And for the tech savvy algo traders, 28% of Quantitative Funds exceeded their benchmark whilst 52% of traditional managers exceeded their benchmarks. This suggests and is a good reason why analysis pays. The reason is that the traditional managers were buying value based names whilst the algo funds were largely trading momentum.
So markets at the end of the day are looking for certainty and one of those pieces in the jigsaw is Yellen’s comments.
In the meantime the dollar index was a little better on the day. The technicals suggest that moving average is tilting lower while the stochastics are pointing higher. It’s as confused as everyone else.
For the cheese lovers, the average consumption of cheese per person in the USA is about 35lbs that’s almost 16kg per person. Yet there is a huge surplus. The current level of cheese stored is at a 30 year high and the US Government is about to purchase about 1% of the cheese surplus in an effort to help alleviate the surplus. The surplus has been attributed to Russian Government’s response to US imposed sanction by banning the imports of US dairy. And that’s a cheese moment.
Aussie market today.
In a quiet listless day I expect the equity market to be soft and the bonds to be steady, maybe improve a point or two but no real action. The volatility and excitement comes next week after we get to dig through the entrails of Yellens speech. In my view expect more of the same, but I don’t expect any change in policy simply because the US economy is sluggish and at 1.5% growth and hardly any inflation there is no real reason to raise rates in the US. Expect then the Aussie to be a little stronger and bonds to be stronger coming into the quarter end. Equity may perform over the next month as well.
24 August 2016
And time rolls on.
The markets were once again quiet with little volatility and it seems waiting for news from the Central Bankers gabfest in Jackson Hole this week. In thin listless trading equities rallied slightly, long bonds were steady however the yield curve flattened as new bond supply was announced. 3/10 years were 69 bp and the 1/10’s were 96 bp in spread terms. Mixed data and conflicting Fed Presidents comments seem to be leading to the malaise in the markets. Not with standing concerns over the asymmetric risks is leading to bond market cautions. Simply put policy risks and growth concerns are holding markets and causing the bond market to be very cautious at this stage.
Credit was about 1 pt weaker.
Aussie market today.
Bonds were steady equity was slightly up and commodities were slightly better, this should translate into equity gaining slightly and bonds steady. The caveat as always in a drifting market securities are often sold. May be better to buy early and sell later in the day.
23 August 2016
The roundabout continues.
Today was different. Instead of rallying and then selling, the market chose to sell first, then buy, then sell. After trading down about 0.25% the equity market then rallied to 0.20% before closing down 0.12% or flat.
Bonds had good day. The 10 years traded down to about 1.54% but the big mover was the 30 year bond. The 30 year traded down to 2.23% which is almost a full point improvement as investors continue to seek yield. And all this happened on a day when Fed President Fischer suggested that data targets were getting close to the Fed’s target levels. However what I find intriguing is that if growth is accelerating and given growth is so muted it’s hard to mount a case for many rate hikes, in fact, it is somewhat hard to raise a case at all. As I fully expect some slowdown as we head into the Fall and Winter.
Municipal Bonds were the talk of the day. Munis for those that don’t know are like the semi governments in Australia, except broader. Munis cover Puerto Rico, Town Councils, and States for example. There have been reasonable flows into Funds and it is now something like 40 continuous weeks that Muni Funds have seen net inflows. And this is a problem as the investments in the funds are diluting returns as yields are being driven down because the funds are investing.
On a sober note for those who are strong believers in this rally, borrowing by companies is causing a distortion. Some 44 companies in the S&P have paid out more in Dividends than what they have made. This shows the extent of CEO’s looking to bolster company performance artificially and the deteriorating financial position. For example Pfizer is one of those companies that has paid out more in dividends than what it earned.
Yellen speaks at the Central Bankers Conference on Friday at 10 am Central Time. The BOJ ‘s Kuroda suggested that there could be further easings and this helped stimulate the US bond market. Coincidentally the day the BOJ meets is the same day the Fed meets which is September 30.
Oil shed about 3% today.
Aussie market today.
A rather quiet day in the US today and this trend looks likely to continue into Friday. As such in quiet markets expect a touch of weakness in the equity market. Bonds will be bolstered by demand and that should see bonds improve on the day.
The Aussie dollar was a tad weaker and that’s probably to do with Fischer’s comments, however, the dollar index was if anything a little weaker on the day so maybe international investors don’t believe Fischer.
I expect bonds to rally an equities to drift a little weaker especially as commodities were softer on the day.
22 August 2016
What is the new normal?
On Friday and over the weekend we have had a number of comments from Fed Governors as they jawbone markets that are waiting in anticipation of comments regarding future Fed actions. So what’s new? And why the interest anyway as these gabfests have failed to provide guidance rather the Conferences have been huge distractions.
So the chances of a Fed Rate hike in December using Fed Fund Futures is about 50% and that means the market is somewhat neutral. From my perspective we will need to see some very strong numbers. And on an economy dependent on strong numbers where are these going to come from and how will the numbers leap to 3.5% growth to hit the Fed’s target of 2% growth.
For those not aware there are some very significant weather related issues in the US and that may be a concern to those holding US insurance companies and Reinsurers. It’s not been a good month. We have major flooding in Louisiana, massive wildfires and drought in California, some flooding (minor) in Texas and an abnormally hot summer in the North East. These weather related problems have a strong dampening effect on the economy. Then we have to remember we are moving into the Fall shortly and that means snow, and snow has a strong disruptive effect on logistics as much of the transportation in the US is truck related. Generally Fall/Winter sees growth slow not accelerate.
But what happened Friday? Friday was slow, volume was low as too trading. Markets backed back a little as they reacted to Fed commentary, however the selloff was rather muted on a very quiet day in a market that was looking for news before committing. Unfortunately I see this process hanging around for a while yet. Yes markets will hang onto every word the Fed President’s say but will it have much long term affect, I think not. For the Fed to react it needs growth and that’s not happening. Some commentators are suggesting that given the depth of where we are in the current cycle the Fed has to raise rates because when the economy moves into recession which it will inevitably the Fed can then cut rates to stimulate an economy. I don’t subscribe to this wishful thinking. Unfortunately the new normal is a market place where rates are low and Governments won’t spend on infrastructure because they are obsessed with reducing Government debt. The other issue is that Central Banks have done a fantastic job of saying they are the only people who can fix economic malaise. Unfortunately that assumption is not too appealing at present. Central Banks are creating problems they have no idea they are creating.
So with that in mind all one can do is invest, but be cautious.
Aussie market today.
In a thin listless market prices usually fall. With commodities being stronger and iron ore stronger the Aussie equities could be a little better. Bonds should be a touch weaker and credit a little stronger given spreads tightened a tad. (1 pt). The US dollar index was slightly stronger and that most likely explains the weakness in then $A.
What is interesting on a long term perspective is that the forward curve for iron ore is roughly half the price of spot. This backwardation position could become problematic in time if the Chinese economy continues to remain weak.
19 August 2016
Asleep on the job
In a day that could be best described as quiet in fact eerily quiet one can only speculate what lies ahead. So equities ran up and then fell then rallied into the close. The market was almost like the US Women’s 100m relay effort in today’s heat. Started strong, had a low when the baton was dropped then a reprieve allowing them to race in the Semis.
Bonds were a little different in that they had a steady improvement over the day. The market seems to have readjusted its chances of a rate hike in September to lower that chance and betting appears to be evens for a rate hike in December. Bullard continues to cause issues with his view that there may only be one rate hike between now and 2018 and that probably is based on the lack of inflation and that’s something the whole Fed Reserve Board agrees on, there are no inflationary fears. And just when the Fed is comfortable with no inflation the man who invented “irrational exuberance” is back warning that inflation could accelerate out of hand. With slow global growth, money supply slowing, and inflation currently falling rather than rising one wonders how Greenspan arrives at this view. Perhaps he believes that inflation can be spurred by $8.00 jobs transitioning into $11.00 perhaps but that paycheck is being crushed by student debt and rising rents.
Crude traded above $50.00 today.
Aussie market today.
Commodities continue their steady gains and that is a good signal for Aussie equities. Expect equities to rally. Bonds will rally as well as there is little negative news to push bonds weaker. Expect a rather quiet day. Credit was stronger on the day so I expect a little bit of spread contraction.
18 August 2016
We have the FOMC Minutes now we wait for Yellen’s comments next week
The markets were waiting for today’s release of the FOMC Minutes to divine when the next Fed Rate hike could happen. The Fed Presidents were split in their decision and the nuance of inconvenience remains securely in place. Yesterday Bullard threw some accelerate onto the fire of uncertainty and first up markets reacted accordingly, and sold earlier in the day and then after the release of the Minutes. Bonds were initially strong but then weakened as Traders wound back positions. What was noticeable in the Minutes were lots of jobs were being created and no output. But business investment remains persistently low and that’s the problem. Jobs being created in restaurant chains and as porters in hospitals does generate the necessary growth required to stimulate the US economy. The lack of business investment comes as very weak investment in capex, however much of the gains on the exchange has been business buybacks which account for 6 times more than real investment by investors.
So now that we have the Minutes the market is looking towards what Yellen will say in her address at Jackson Hole on August 26. Equities could rally because a rate hike would suggest the economy is growing and bonds should then weaken or at least the curve could flatten. The bottom line is the US economy is in a state of flux, growth is disappointing and the one factor keeping the US economy alive is the consumer. The rub is simply if the Fed does not raise rates in September (polled economists have that as a 40% chance) then they won’t raise until December. Credit was a little weaker on the day. Home loan applications were weak this last week according to the Mortgage Bankers.
Aussie market today.
With the markets focused on the result of the FOMC Minutes the upshot was a slightly stronger equity market and a slightly weaker bond market and commodities were slightly better. The markets are now looking forward to the Conference in Jackson Hole next week to see what Yellen is thinking, so with that in mind markets will in my view remain quiet, disjointed until if possible Yellen provides some clarity.
Given my outlook equities in Australia today could be a little stronger, bonds to be a little weaker and the Aussie will be slightly weaker.
17 August 2016
I think I can I think I can
Markets today remind me of that story one is told in kindergarten about the huffing and puffing train, at least that’s what I think the Fed is saying but whether it can be like the train and reach the top of the hill by raising rates is anybody’s guess. Equity markets weakened because it believes that the Fed could tighten. Surely a tightening by the Fed has to be a signal to the market that the economy is robust, resilient to the Global Outlook and growing so why would it be selling? Well markets did not go that way. The dollar is weak if you look at the dollar index. A rate rise when everyone else is weak should mean a stronger dollar. Bonds were weak because the Fed could raise rates and equity was weak because the Fed could raise rate. Once again fact is stranger than fiction.
A take away if the Fed were to raise rates should be pivotal in a confidence boost. Earnings remain weak and still are not hitting analyst’s expectations, so maybe markets don’t believe the Fed whilst economists do, which will be correct? The curve flattened and that’s an expectation thing. Dudley the New York Fed President waded in today and said that rates could rise. In the old adage I think this is jawboning, but when one looks at economic conditions it’s hard to argue that the US economy is growing at anywhere near pareto. Under the new normal perhaps the target rate is 2% not 4% as the case used to be.
I listened to Carl Icahn today and what this investor had to say was interesting. Apart from railing against the EPA, Carl’s major insight was his concern for market valuations and suggesting that valuations were too high. His spin was, think of a rich family sitting by the pool writing out IOU’s (because they have good credit) to purchase stuff and to keep writing IOU’s till they go broke. Carl seethed at low rates and the issue of minimal capex spending which in his view was unparalleled, suggesting the low capex spend was lower than if the US was in a bad recession. He also commented about his support of Trump and perhaps starting a Superpac, allowing him to push his agenda against the EPA. To date Carl has donated 100k to Trump and he did seem rather reserved in his support. The reason why Carl is against the EPA is because it would seem he has not amassed as many carbon credits as he should have and as oil prices have fallen these carbon credits has soared in price. Some people believe Carl missed the boat and is making the EPA responsible.
There was a dinner last night with the Fund, Market and Hedge Fund luminaries discussing all things business and the macroeconomic outlook. The interesting points that came out was that Clinton was expected to be the next President and most expressed concern over the state of the Global economy. Brexit was not seen as having a major impact as yet and there was concern over the low levels of capex and the distortion of P/E’s caused by company buybacks, so what’s news? Pretty much the same old same old and people are left scratching their heads, but markets continue to rally.
Aussie market today.
Equities were weaker on the promise of comments from Dudley, the USD was weaker as a result and that weakness has meant the Aussie Dollar is stronger. A stronger AUD probably makes Glenn Stevens weak at the knees and if the strength continues this means in all probability a further cut in rates. Commodities were stronger on the day and this should help equity markets.
Bonds were weak and the Aussie stronger this probably helps Bonds on the day so we could have a day where in the Aussie time zone we see equity bonds and commodities all positive on the day.
16 August 2016
Fact is often stranger than fiction.
We have had several speeches from various Fed Presidents over the last week and importantly, the market is looking to Yellen’s comments later this week but what really caught my attention were comments from the Fed President of San Francisco John Williams. What Williams said was interesting. Remember last month and to date, Williams has been a hawk and was for some time the one member consistently looking for a rate hike. Williams today said that Central Banks need to change their orthodoxy with respect to inflation and monetary policy. Williams suggests that CB’s have lost their way with inflation and having a neutral interest rate just is not working. Williams believes that CB’s are having an issue trying to understand inflation and probably don’t understand inflation. He believes CB’s need to rethink their strategy otherwise persistent low interest rates will remain and that will be a depressing factor for growth. In the speech Williams also commented that rates in the US could go negative and that’s really interesting. William’s speech is in sync with Fed President James Bullard who in a recent speech commented that he no longer has any faith in long term forecasts and even short term forecasts because of factors not well understood that are distorting economies and interest rate outlooks. With all this commentary it is hard to think that the Fed can go anytime soon especially given recent economic data. And on the subject of data the Manufacturing Index for New York released today was weak.
So what happened in the market today? Bonds were weaker because in some ways they want to see what Yellen has to say, and Yellen talks on Wednesday. Equity markets rallied because commodities were stronger and equity markets appear to be of the opinion that given Friday’s weak data set, the Fed won’t tighten and therefore equities look like a good bet. Equities, despite another poor quarter (although results are not as bad as they could have been) appear to be reasonable in value as dividends for many of the S&P 500 are higher than bonds and in an income poor market the dividends are better than bonds and therefore are attractive alternatives. And that is probably what is driving markets today. When the nexus breaks is anyone’s guess but it is unlikely to occur until rates start to move up and we see reasonable growth across the globe. Credit was out by half a point.
Aussie market today.
The Aussie market on the day should see bonds a tad weaker as the rally in equities continues. I expect bonds to be out by a couple of points, however rates cannot move too far otherwise they start to look attractive. The RBA could add further fuel to the bonfire by looking to ease rates further due to the strength of the AUD. The dollar index was weak again and this is partly driving US equities but also causing concerns for Central Bankers where the currency is rallying when they (the CB’s) were expecting the currency to be weaker.
15 August 2016
The answer my friend is blowing in the wind.
And that’s the way the market is reacting. The retail sales numbers were out, and they were somewhat disappointing. The sales numbers suggest that once again there are wobbles in retail land and that all the purchases in the previous month were related to the major sales that were occurring and not a case of consumers opening their wallets. Online sales predictably were stronger and that explains Walmart’s takeover of Jet at a valuation 3 times more than what Jet was priced at in December 2015. Online sales are the way forward, but it does mean there will be many restructures still to come, and the first of which is Macey’s announcement of closing 100 stores. Nordstrom, Kohl’s, Saks and a number of large Retailers will have to restructure over the next year or two.
So as a consequence of this weak retail number and weak inflation number the equity market weakened and the bonds had a nice rally, rallying some 8 bp. Credit remain tight and it is worth noting that Westpac’s recent international issue attracted $10 bio of bids globally, highlighting the demand for yield. This trend is driving US rates lower, driving Australian Bonds lower and any other bond market that provides yield. Even emerging markets are seeing heavy buying including places such as Turkey, a place with its own distinct problems.
The markets will continue their dance in a manner that defies logic. Bonds will stay bid even if there is commentary suggesting otherwise, because where else can one get yield. Equity will rally if markets believe a tightening is not going to occur and that is what is driving markets its all hot air. The economics suggest growth in the US around 1.5%, 3% growth to me over the next two quarters is unattainable. Shipping, logistics, and heavy truck sales suggest even 1.5% it could be a hard ask, however, equity markets continue to rally as economists cast their runes and pontificate about the economic entrails they attempt to understand. The simple fact of the matter is that the US economy has a heartbeat but it is weak and is likely to remain that way until world growth picks up. The other factor slowing the economy is the pessimism exhibited by the GOP as in the USA under attack by way of trade deals, terrorism and stolen technologies. This attitude may well change once we pass November but it will take time before the patient (US economy) is well again.
Aussie market today.
US equities were weak however with commodities mixed to better, the Aussie Equity market should rally. Bonds probably will have a reasonable day as well, because their US counterpart had a strong Friday and there is significant demand for yield assets especially triple A securities that are close to 2%. Most European 10 year bonds are hovering around 0.5% or less. Australian bonds continue to look cheap when compare to Spain at 0.91%, Italy at 1.053% and Portugal at 2.7%, all countries with substantial economic issues.
Given the demand for the recent Westpac issue, this demand will continue to exist for bonds and even at 1.90%, Aussie Bonds look good value and so too Aussie Credit.
Credit was a little tighter and demand will continue to tighten spreads.
Hybrids depending on issuance are subject to issuance problems. A lack of issuance will see continued demand.
12 August 2016
Let’s party like it’s 1999
The first time since 1999 that’s when all three stock indices were at record highs simultaneously. Oil rallied about 3% and led the way for the equity markets. So why the rally? It’s hard to say. Oil is up on reports from the Saudis that supply is dwindling. Was it Macey’s? Certainly Macey’s had a great day, up 17%. Sales were a bit better than feared however it seems strange that markets rally hard because something is not as bad as expected. Kohl’s also had a good day. Restaurants falling revenues continue with Wendy’s stating they are finding hard to compete against Supermarkets. Personally I think some of the rally is due to the Job’s Report from the other day which suggests that the Fed could raise rates in December and if that is the case the economy must be steadily growing. I still believe that there are lot of issues to be addressed before a rate rise becomes inevitable given the current global outlook.
Bonds were a little weaker on the day and that was more because equity had a great day. Credit was better on the day and continues to improve as equities improve. The US dollar index was a little stronger on the day.
As a note of caution, beware the weather impact later this year on the US economy. The US weather bureau is expecting a pretty big Hurricane season out of the Atlantic. Bad weather can have a material impact and if combined with a wet winter this could have a significant impact on the US economy.
And on the Olympics our Men’s sevens side continued its dismal competition run losing to Argentina in the last couple of minutes when they had the game in the bag.
Aussie market today.
Expect a better day on the equity markets given that commodities are better on the day. Bonds to drift weaker, and credit should tighten further. I cannot get too enthusiastic as I believe markets are still in a holding pattern.
11 August 2016
Another slow day at the shop.
Thank god for the Olympics because in some ways there are the parody of the markets. Upsets a plenty, some predictable wins and some expected results. So we learnt today that the Kiwi men’s sevens side fortune in the Olympics was dependent on Fiji beating the US by more than 4 points. All was in the balance if the US converted in the final seconds of their match, unfortunately for the US they missed, so New Zealand does battle with Fiji in their quarter final match, Australia replays South Africa, Japan the King killer plays France and Britain plays Argentina. Mostly predictable results but one upset, and this is just like the markets.
Equity markets fell by about 0.3% whilst commodities drifted sideways and then lower. Bonds were treated to a nice rally of about 10 bp in the 10years closing about 1.50%. Credit was a little better. Bank shares suffered because investors are expecting that the Fed won’t raise rates. Shake Shack the fine purveyor of gourmet burgers saw a sales slump this quarter and is following the theme of falling earnings in the Fast Food sector.
The sceptic in me however has me thinking about Ginnie Mae. Remember the G stands for Government and these are Government backed MBS. This market once was a strong preserve of the Banks and Investment Banks, the market was highly liquid and spreads tight. This market is now all but dead. There is hardly any liquidity, the market is predominantly non-bank and there is a real concern that the slightest trigger could set off a tsunami of stressed selling.
The Fallout of the jobs numbers continues. The number of people quitting their current job to move to a new job is declining, which is confusing because hiring is continuing. M&A activity remains strong and is up on 2015. The driver is that for many Tech companies the valuations today are lower than in 2015 and as such investors are finding the prices palatable.
Aussie market today.
The equity market in the US was weak but importantly commodities were weaker. For the Australian market and given the causal links between iron ore, the Aussie dollar and the equity market the view should be a weaker market. The Aussie was stronger on a weaker Dollar index. Don’t be surprised if equities rally.
Given the demand for bonds in the US, this should translate to demand for Aussie Bonds. I expect that the listed debt sector should see demand.
10 August 2016
A day of upsets.
Sorry to boor you folks but with the markets being so quiet the respite from the boredom are the Olympic competitions in Brazil. Do we shed a tear for the Kiwis as their much vaunted Men’s sevens side was beaten by Japan by the slimmest of margins and the best news although it is distressing for the player concerned, is that SBW won’t be available for the Bledisloe this year after partially rupturing his achilles tendon. Maybe Australia has a chance just perhaps. The Aussie men’s sevens side was thumped by France. So far we should expect the unexpected which is exactly the opposite of the US equity and bond markets.
The US markets are poised to do something but what I am not sure. The Vix contracts now have the largest short position since 2013 and are being squeezed. Hedge Funds and Investors are concerned and are betting that with the sluggish growth outlook and lackluster economy combined with falling revenues means these investors are betting that equity markets cannot remain buoyant for much longer. Adding fuel to this comment, Worker Productivity fell 0.5% making this 3 consecutive quarters of declining growth. This fall adds further fuel to the fire that US companies are not investing as much as they should in technology and brings into focus that much of the growth in price for the S&P is related to share buybacks not improving company positions such as revenue growth, improving profitability or opening new markets.
Aussie market today.
An interesting trend that I am starting to see develop is the relationship with the ASX 200 and the Aussie Itraxx. One should expect these two indices to be somewhat correlated, after all there is a minor correlation between 5yr bonds and the ASX. The correlation that I am picking up between the ASX 200 and Aussie Itraxx is running at around -60%, I would have expected this relationship to be positive. The only explanation that I can offer is that credit widened dramatically several months ago and has since rallied considerably, where the equity market has tended to trade in small increments around a mean with standard deviation rather low, hence it’s a volatility argument and importantly warrants more investigation before drawing a conclusion.
So today the US equity market barely moved sideways and the bonds were thinly traded for a few points. Commodities were slightly weaker and credit was stronger.
Expect the ASX to drift and bonds to be a little better on the day. Credit should be better on the day.
9 August 2016
On a quiet day let’s go for gold!
As a parody albeit a poor one for markets may I indulge on a pet passion. Rugby. The Aussie Women’s 7 ‘s side had a great game against Canada to move into the Final v the Kiwi Womens team. Let the grudge begin. If you can see the game versus Canada it was a good one, and hopefully our women can prevail and beat the Kiwis. This will be played at 8am.
Markets. The Labor Conditions Report was released today. This is a report that Yellen initiated and watches closely. The report today was up 1% and this is the first positive number for 7 months and to date it has been in step with GDP growth. This report may be suggesting that finally some growth may be occurring but to hit the Fed’s GDP target we need to see the US economy growing at something like 3.5% and we have to move through the election cycle. I remain indifferent to a rate hike this year in the US. The rate of growth in the US has to be seen to be increasing at an improving rate. The data at present does not support the proposition for a Fed rate Hike in September nor in my view December.
What numbers currently suggest is that the US economy is still somewhat slow. The earnings reports are showing 5 straight quarterly declines in earnings, this has to change if we are to hit the implied growth targets.
Aussie market today.
Once again markets are generally drifting aimlessly. I expect equity to rally based upon improving commodity prices. Bonds were a touch stronger in US time however I think Aussie Bonds could drift slightly weaker depending upon the strength of the equity rally.
Bonds will come under attack if markets believe that the Fed could lift rates. I don’t believe that there is sufficient strength yet in the US market.
8 August 2016
Markets are like the Mad Hatter’s Tea Party
The jobs number was strong and predictably the bond market weakened as the equity market had its first decent rally for some time trading up 1% on the day. Bonds weakened and the 10 year benchmark finished the day just under 1.60%. The equity movement broke the unusual sequence of +/- 0.50% that we have seen over the past 6 weeks.
So why is this like the Mad Hatters Tea Party, because like the Mad Hatter the markets appear to be inhaling vapours leading to unusual behavior. The equity market could rally because the jobs growth suggest that there is growth still left in the US economy. Bonds weakened because the number was stronger than expected. But nothing has really changed, and I will explain why.
The Jobs growth was 255k for July and this translates to approximately 186k per month. For 2015 jobs growth was about 228k and for 2014 jobs growth was 241k. The share of Americans employed essentially remains unchanged , and long term unemployed still remains higher than short term. The US economy is still heavily dependent upon services. Services account still for about 80% of jobs growth. When the US economy has been strong, jobs growth in mining and manufacturing were much stronger.
The other issue with the number and will surely play out in time with the equity market is earnings. Corporate earnings remain weak and if as the number suggests wages are increasing albeit slightly, this will have an impact on earnings and earnings growth. (See the chart in Chart of the Day courtesy D Wilson Bloomberg.) Earnings have yet to break out and with the economy dependent upon the consumer as the last great hope, this is a tall order. The average consumer is spending however their debt burden is rising and with a strong US dollar many US export firms will struggle for sales. Many businesses are now service businesses and growth can only move forward in these sectors for so long. For example the Restaurant sector is slowing as people look for different experiences. The Banking sector is contracting and this takes away many high value jobs in many services such as accounting, legal etc.
So yes the equity market had a good rally but it remains to be seen how long this belief can be sustained.
Aussie market today.
Equities had a great session Friday and I expect this to continue through into Monday. Commodities were better and this augers well for the Aussie market.
Bonds on the other hand should be weaker as the equity market gains strength and momentum.
5 August 2016
Wake me up when there is something to do.
The market today was quiet despite the easing by the BoE. The Dow and S&P barely raised a movement. Bonds were quiet, and oil was up about 2%. The S&P is on course for the worst week in six weeks.
Market estimates of payrolls is about 180k, however we need a slightly higher growth rate in jobs if the economy is to grow at the 3% required to hit the Fed rate growth targets. Many of jobs are in low value and that’s proved by the Personal Income Report which has fallen from heady heights of 10% to 4% in 2015 and looks on trend for 2016 to grow at 3%. Current growth of the economy if personal income was growing at normal rates would have the economy at something like 3%. Watch the jobs report for construction hiring as an early indicator. A fall in hiring would not auger well. A number between 160k to 180k will be within expectation and no great movement expected. A number on the upside will draw attention as to why and a number lower is expected and will see a little movement but nothing exaggerated.
For those of the equity persuasion a recent study by Morgan Stanley where they looked at value stocks versus growth stocks was interesting. The outcome was that value stocks are more dependent upon interest rates whilst growth stocks are not. What is worrying however is that when the ratio is low the equity bull market rally is close to the end, and that is what we are currently observing. The last time the ratios were similar was 2007 and more recently this January past.
And if we are talking all things markets, Pershing Square one of the better regarded Hedge Funds is down 17% ytd. New Jersey has cut its allocation to hedge funds by 50% after hedge fund returns barely exceeded 1% when the S&P was up 2.3%.
MetLife’s results are showing the toll that low interest rates are having on the insurance industry. The Insurer had to allocate $2 bio to its guaranteed bond product as low interest rates mean that the insurer is finding it difficult to meet their bogey.
Aussie market today.
All eyes are focused on the US Payrolls Report. Markets were quiet and usually in periods as such markets drift weaker. Bonds should be a little stronger while I expect equities to drift weaker.
Credit was slightly stronger.
4 August 2016
Just another mundane day in paradise.
The markets today were range bound and remain thin. The quiet interlude makes one feel that markets are waiting for the important payrolls number due Friday.
On the day we saw a big drawdown of gasoline by the US leading to a spike in oil prices by 2% to close just over $40. Spreads on the day tightened past five years and the front end 0 to 5 years widened.
The equity market on the day was up slightly bonds were marginally weaker and commodities were mixed.
One gets the distinct impression that markets are looking for clarity and direction. The economic indicators are mixed, Brexit has created some confusion and clarity in the US election is rapidly disappearing. The Trump is vocalizing at every opportunity how the system is rigged against him and that the Democrats are likely to pull a swifty and elect Clinton whom he sees as being unfit. That message certainly was the message Christie was rallying the party faithful at the GOP Convention. The GOP is becoming alarmed at some Trump comments, we have seen HP now endorse Clinton (HP are traditionally a big donor to the Republicans) and party donors are keeping the money. The GOP is preparing for what happens if Trump withdraws and how they then elect a new candidate or sacking Trump as their candidate. If either happens it could get rather ugly.
Aussie market today.
Given the quiet tone of the market expect a quiet Aussie market. If iron ore continues its advance the $A will strengthen and so too the equity market.
Bonds should drift in a quiet market.
Credit will be relatively stable, perhaps a tad weaker but no major movements are expected.
3 August 2016
Markets go up and markets go down, it’s a roundabout folks.
The markets were weak today across the board. Bonds were weak, equity was weak and commodities were weak. So why the weak day? Simply put the markets don’t believe the Fed and don’t believe central banks. I will discuss this later.
The price action for equity is becoming more interesting. Currently we have 12 consecutive sessions where the movement of the day was less than 0.5%. We have an equities market with an oscillation that is very consistent. The big deal here is the reference points of price movement for 2013, 2014 and going back some 20 years suggest the breakout could mean a fall of 3% the following month if the market moves to the downside. Also if we look at the range between 2014 through to 2016 the market has moved 11%.
Everyone is concerned about growth and maybe that’s going to force investors to weigh their decisions and decide their next move. Simply put, people are dipping into savings to spend and that’s the one point of activity in the US and the one hope for the US economy. The payrolls number on Friday will provide a very important guide for markets. The two points to watch are the number of hours worked and the change in pay rates. This information is important as it will give a strong guidance as to the strength of the economy. Also remember for the second half of the year the economy has to grow at 3% to hit the Fed’s target. From my observations this is a near impossible result, so if my assertion is correct then there will be no rate hike based on current economic data. For the US to grow at 3% will require another very mild Autumn and Winter which is probably unlikely.
Other indicators as to the sluggishness of the economy are car sales for July. GM sales were down 1.9%, Ford 3% and Toyota down 1.4%. Nordstrom sales for July were slow and Macey’s are reporting a soft July. It is also worth noting that apparently buybacks in 2015 were 6 times more than investor purchases.
Frankly the US economy is in a mess. There are twigs of growth but there is a lot of brown on the tree. Bonds look the best value if for no other reason that in any pullback they offer both a safe haven and potential capital. All bets off of course if Donald Trump wins because as any corporate treasurer knows if I say I want to renegotiate debt to cents in the dollar, my credit rating falls dramatically, and that’s the game Donald wants to play with US Treasurys. Credit was weaker on the back of a weaker equity market. Commodities were weaker also pointing to possibly slower global growth.
Aussie market today.
The Aussie dollar ran to 76c and that points to either a bit of flow or a weak US dollar and a weak US economic outlook. The dollar index was weak and that’s possibly why the Aussie is so strong. Either way a quiet day should see some weakness in the equity market.
Treasurys were weaker so I expect that the bonds will be weaker however at 1.8% they do offer great value especially as a Triple A economy. Canadian 10 years are trading around 1.08% and Germany about -0.33%. Aussie bonds look cheap and will look cheap especially if the US descends to negative rates which is a possibility if the US continues its downward spiral.
2 August 2016
After a burst into positive territory for both the equity and bond markets both retreated a little as the day wore on. Volumes remain thin and investors still appear to be sitting on the sidelines increasing their cash positions as they become more confused by weak earnings and the implications low cash rates have on valuations.
According to Bloomberg, Price/ ebitda are at highs, eps numbers look good however operating profits continue to fall. Crude oil prices (WTI) fell below $40 for the first time in several months and was seen as a mild catalyst for the selloff.
The Chinese PMI was down slightly 49.9 down from 50. Credit was better bid on the day.
Hot Gossip on the US Elections
Mark Cuban, the owner of the Dallas Mavericks and technology entrepreneur has endorsed Hillary Clinton for US President. Hillary is working with Warren Buffet in Nebraska to electioneer in that state. And on all things Hillary, Hillary received a bounce of 4 pts following the Democratic Convention and has eased past Trump.
And Trump continues his feud with Khazr Khan (the Son a Captain in the US Army won a posthumous Bronze Star and Purple Heart in Iraq) and has expressed a concern that that the US elections are rigged. Really? Are there no bounds?
Aussie market today.
The Aussie market could see some selling of equities although I think we should see the market slowly improve. Credit will be better bid on the day. Bonds after staging aa brief rally should be steady perhaps weakening half a point in a thin market
29 July 2016
Looking for answers?
The equity market grappled with further releases of quarterly earnings. Some were good some were bad and some were well somewhere in between. Ford being an example, a good result but not as good as the market expected. After trading for most of the day down, the afternoon saw some buying creep back in, and if I were to think about this it is probably because we are not expecting a robust release of GDP DATA on Friday and that means rates are not being raised anytime soon.
The Atlanta Fed gave its guidance and their expectation is that the GDP is running at about 1.8%. Bloomberg Consensus is running at 2.5%. There was new index released today the first of, and it is called the US Consensus Report. The report suggests the economy could be running at closer to 2%. This is based on inventories being low and exportable goods being weak, and that is possibly because the dollar has been strong over the quarter.
On the day the equity market after hitting positive territory late afternoon succumbed to selling pressure and closed slightly down. Bonds were slightly mixed closing a little mixed in flat trading.
Aussie market today.
I expect that equities will be mixed on the day. The Aussie retreated to 75c and I expect that investors will continue to buy both equities and hybrids as they search for yield.
Bonds could be a little weaker as the market is thin and directionless. Credit was improved in the US so I expect that, that trend will continue.
28 July 2016
Another day another Fed non decision.
The market today was somewhat fixated on what the Fed would do today and more importantly would the Fed provide any juicy information regarding its next move. The Fed comments after the decision not to raise rates was probably as expected. Risks are diminishing and the general tone was a little more hawkish. Nine out of the ten voting members voted for no change.
So on the day, equities were range bound and slightly higher ( 1 pt) and bonds ( 10 years) tossed the hawkish view out the window and rallied 7 bp to close around 1.50%. The bond market obviously has to be convinced.
Once again oil fell and earnings results today were disappointing.
Aussie market today.
Equities to continue their rally today although the weak Aussie could suggest equity weakness. I also expect that bonds will rally a little on the view that the Fed may not be hiking anytime soon.
Hybrids to be well bid and credit was a little better
27 July 2016
And it’s all quiet on the western front.
The markets today were in a holding pattern as they wait for tomorrow’s Fed meeting. The equity market started the day with a burst but ended in a whimper. Corporate earnings continue to be volatile with some companies reporting an improved outlook whilst others are not so good. McDonalds, reported falling revenues, whilst Verizon was marked down because of recent M&A activity. Around 11.30 the equity market turned weaker and that appears to coincide with some large selling. From that moment the market turned weaker.
The ten year bonds traded slightly better on the day however my belief is that bond investors are waiting for the Fed outlook. I still believe a tightening is a little way off and for nay tightening to be considered we would need to see jobs growth of 150k per month for a couple of months. The dollar index appears to be ticking higher and a stronger dollar will hurt exporters and hurt the equity market.
The economy though in the US still appears to be sluggish, but one does get a sense that something is stirring. Rentals for high end accommodation is slowing however there is real demand for low end accommodation and that sector is growing aggressively.
Aussie market today.
The equity market may be slightly weaker on the day. I expect bonds to be slightly better but with the Fed commenting tomorrow, bonds could drift weaker. I am not expecting major movements either way.
Credit was slightly weaker. I expect hybrids will rally for the time being as investors hunt for yield.
26 July 2016
The markets today were a little topsey turvey. What mattered most was that the USD was stronger and this strength impacted negatively on the equity markets. Over the course of the afternoon session the market dipped.
Bonds started the day quiet and better bid and finished a little weaker.
The big news of the day was that Trump is ahead of Clinton in the polls by 5%. A Trump victory could cause quite a stir. Trump’s comments range from leaving WTO to ending NAFTA and the TPP to building a wall and possibly reneging on outstanding debt. His comments need to be watched quite closely as any chance of a Trump victory will have a significant impact.
Aussie market today.
The equity market weakened on dollar strength and that may not necessarily translate to the Australian market. The bonds were a little weaker but the Australian bonds should rally a little.
Credit was stronger on the day so I expect a little upside.
25 July 2016
Each way bet.
Friday saw a return to the each way bet. Oil was off a little, equities rallied a little and bonds also rallied a little. So what was the catalyst? The catalyst this time was that Central Banks are a little less likely to keep reducing negative rates or rates generally. So if Central Banks are not easing this month there must be shoots of growth right? Perhaps not, I think it’s more the psychology of the market at present. Because Central Banks are not easing, investors are getting the opportunity to reappraise what is happening.
Corporate profits at this stage are not as bad as expected. The major Banks have had a boost from the Brexit factor and for much of Corporate USA for at least those that have reported the outcome, is not as bad as first feared. So whilst the results are not as bad as expected this must mean that corporate USA has turned the corner, perhaps? And that’s why equity market has been rallying, the results are not as negative as expected. Equities may also be rallying in part because finally the GOP has had to embrace Donald Trump the savior of the USA. Perhaps Donald’s inspiration is the Hoover Dam and the building of a wall across the Border with Mexico is a huge infrastructure project leading to massive growth. Or maybe the endorphins are expressing themselves as the equity market looks to a close election with the prospect of a Republican victory. What also is intriguing about the rally is just what is rallying? Many of the larger companies are not breaking new highs.
The bond curve however is offering a very different point of view. The curve is flattening over time and this can only suggest that the status quo is changing and probably not for the better. There was some discussion about the fall of the Yuan and the Chinese economy. Watch the news on China as this may well turn into a developing story.
Aussie market today.
The equity market drifted along on Friday and I dare say the Aussie equity market may well drift. The only caveat for a drifting market is that usually they tend to be weak rather than stronger. Much of the improving outlook for equities is growth and demand and if the IMF reports are close to being plausible, growth outlooks are generally weaker, so perhaps with time the current rally will run out of steam.
Bonds to remain a little tricky. I expect the 10 years to be a little better bid and the front end will be dependent on news from the RBA as to their insights on the strength of the Australian economy and if there is prospect of another rate cut. On the day however I expect bonds to be a little better bid.
Credit has had a great run to date, so expect a little more profit taking. One should look to any selloff of significance as an opportunity to buy into that weakness.
22 July 2016
The equity market took a breather today as investors questioned whether earnings can justify current prices. After starting with a rush the market turned and softened throughout the day. The 10 year treasuries started the day weak, trading to a high of 1.62% before closing about 1.556% improving as equities weakened.
Crude oil was weaker by about 2.6% and given the recent link between oil and equity markets it probably comes as no surprise as that oil weakened as equities declined.
Focus remains on the reporting season which is underway. To date the results have been somewhat mixed and cautious tone noted.
Other news was the recent comment by Trump and his view on NATO. This view has caused some consternation in Europe.
Aussie market today.
Equity markets took a pause and declined over the day. In a soft market I expect Aussie equities to be soft. The bonds should be better bid on the day. There was a report I understand released by the IMF (I was unable to confirm) who see an uptick in Australian growth and that may cause a pause, in which case if the market is reacting to the IMF view expect equities to be better bid and bonds a little weaker especially in the front end of the curve. This means the yield curve will flatten.
21 July 2016
And the records keep tumbling.
Another up day and another record day. The rise can best be attributed to earnings not being as bad as expected and maybe just perhaps the Fed could raise rates later this year. A rate rise would signal stronger growth and that’s driving the market. This is an expectation that may yet elude the Fed allowing the Fed to raise rates. As a growth skeptic we would need to see growth, wages growth which is still stagnant and a change in sentiment and growth outlook in Europe. Markets both equity and bond markets are susceptible to wild swings as sentiment swings from positive sentiment to negative sentiments. The rally is all based on helicopter money out of Japan and cheap money in both Europe and the USA.
Markets currently are range bound by sentiment. There have been wild swings in sentiment from very bullish to very bearish and this sentiment swing can occur in a matter of minutes. This wild behavior underscores just how nervous the markets are and just how uncertain people are of their views. Currently we have markets that are rallying on the basis of expectations of stimulus. For example helicopter money in Japan, and further QE in Europe are driving equity markets currently. The question is how long can this stimulus be maintained?
Growth is questionable. And yes I know I have been ranting down this line but when you look at falling durable goods orders, declining car sales, declining truck sales, falling service data, falling demand for steel and significant reductions in rail transport, it is very hard to see the growth required to raise rates.
On other matters it will be interesting to see how the ECB bond purchases go. For those that don’t know the ECB can only buy 30% of any country’s outstanding debt and the debt has to be better than -0.4%. This means the ECB can purchase the Italian yield curve and that’s great for Italy. For France the ECB cannot but anything prior to 4 years and in the biggest European Market Germany, the ECB can only buy bonds longer than 7 years as their yields are higher than -0.51%. Markets are expecting further easings next month. The Eurozone Consumer Morale Index for July fell to -7.9.
Aussie market today.
Equities had a good day so expect a rally in equities. Bonds were a little weaker and are likely to be weaker on the day. Credit was weaker and is probably due for a correction as credit has rallied significantly over the last few weeks.
I expect that over the day the market will be relatively quiet unless there is a significant news release.
20 July 2016
Another day another record.
Equities rallied to a new high today albeit in thin trading to close at 18,559. Bonds were slightly better and oil was down 1.4%. What stood out today was the trend of mixed corporate earnings continues and the equity market continues to rally.
The IMF has revised its Global Growth forecast to 3.1%, a level of 3% is deemed by the IMF to be a Global recession. The USD Index breached a major support line and is back at 97.05 and this should be of concern to the equity market. A strong dollar has a tendency to be a negative influence on the equity market.
There were two articles of note today, one the GOP championing a return to Glass-Steagall that may have had an impact on Goldman’s share price today and a comment from the Fed that they could raise rates in December. For a rate rise we would need to see a pickup in corporate earnings and economic growth. The Fed Funds futures are suggesting that there is a 60% chance in May 2017 and little chance of a hike this year.
On the day the big news was Melania Trump’s speech and that it was Hillary’s fault that Melania was caught out for plagiarizing Michelle Obama’s speech in 2008. The GOP are in somewhat damage control but Trump’s stocks rose as a result.
Aussie market today.
A quiet day in the markets and bonds were little changed on the day. The two year bonds were slightly worse and the ten years were better by 1 bp. Credit was slightly weaker.
I expect that equities will drift on the day with a chance to weaken slightly. Bonds will be steady to slightly weaker.
Hybrids are likely to improve as the demand for yield continues, with the caveat as always weakness if there is an issue of Capital notes by a Bank.
19 July 2016
Lazy hazy summers day.
The market was quiet with volumes light. The bonds were weak again today, equities languid, and oil was weaker on the day. Equities started the day reasonably strong before finishing barely up.
The Bank of America result spurred the equity market today, improved trading positions assisted the bottom line and much of that improvement was due to Europe and Brexit. The market is currently of the view that corporate earnings can sustain valuations. However one still has to remember that earnings are still lower than previous and they are simply not as far down as expected by the analysts.
Aussie market today.
The market today I expect to be reasonably quiet given the state of the market in the US. Bonds were a bit softer so expect slightly weaker bonds today. Credit was stable and the Aussie dollar is closing in on 76c again.
18 July 2016
Confused? You should be!
The US Markets, predictably started the day strong before succumbing to the languid summer’s day. The US Treasuries started the day with a mild soft tone before a rout set in and it’s hard to think that bonds have now retraced 25 bp since the beginning of the week on news that at best is neutral and in any other time would barely have conceded a point.
Equities continued their rally on the quarterly report from JP Morgan. Revenues and profits were stronger than expected but are still declining. We still have to remember that markets rallied because these results were not as bad as people could gave expected. And the reason was that the last few days of June were extremely profitable because of the volatility that arose from the Brexit vote. Adding further spice both Wells Fargo and Citibank reported Friday and their news was not too dissimilar to JPM, falling revenues but not as bad as analysts had predicted. Once again share buybacks and low interest rates and unreasonable expectations are spurring the equity markets and this is exacerbated with low growth.
The US economy is starting to exhibit a few green shoots, but some of these shoots may well turn brown because a lot of work has been brought forward because of an extremely mild winter and very favourable weather. Technical jobs are not being filled and this is causing some hints of inflation but with a closed mind on immigration should the Republicans win this could be a disaster for US business as these jobs will demand a real premium.
My own spin is that the US economy has seen a little jump in demand and that has spurred some spending. My concern though is the demand for trucks, trucking services, logistics and rail and ship transport are all falling. Remember too that whilst LA is seeing a lot of container traffic, much of that are empty containers returning to China or elsewhere.
The jury is still out on a tightening by the Fed, but given the amount of jawboning globally by Central Bankers as they try to stimulate economies one suspects that any commentary is exactly that a comment with no real foundation to fact. Brexit will have an impact and it’s hard to know by how much. A casual glance at the UK property market in homes over GBP 1.5 mio shows a decline of 43% since Brexit and very limited stock. Simply put no bid and sellers are taking distressed prices. There is little demand. The Nice attack may have put paid to Paris’s ambitions to be the Financial Centre of Europe and I suspect that Frankfurt is now a clear frontrunner. All this means volatility will continue, I am somewhat confused by the equity rally because it is based on a house of cards but it can continue. But when the music stops beware. In the meantime US treasuries look particularly attractive versus their European counterparts and I am certain over the coming weeks that rates are likely to improve marginally rather than get too heavily sold. In the meantime credit has rallied significantly as investors hunt for return.
Aussie market today.
The equity market in the US finished flat and bonds were trashed, I would expect that if the off risk party continues then we could see this play out again in Australia. The caveat is with the Turkish Coup and the Nice Bombing whether investors have an appetite for risk.
I expect bonds to weaken, and credit to continue its rally.
Hybrids will rally because the returns look good. Just be aware though about the recent changes in US tax law regarding Convertibles. This is an interesting development (I have included the story today), but this could really make a meal of bank issued T1 capital securities or CoCo issuance, this may well be a regulatory event should the IRS get its way. The IRS is looking at taxing retrospectively 2 years and forward coupons paid on convertibles. Citibank has sent notes to their customers suggesting they may have to make allowances for taxes. My point is that tax authorities are now tending to work together, and there is a lot of money to be garnered by taxing convertibles.
15 July 2016
Let’s party like its 1999.
That’s exactly how this strange market feels. In 1999 for those that don’t remember we had just lurched from the Derivatives Crisis (RMBS/Options), the commodities crisis of 1995 led by Sumitomo’s ace copper supremo, Hamanaka, then into the Asian Crisis to be followed by the Y2k bugs/fear.
This year is weird as well and there is a lot that can unfold over the next few months if not years. Hillary Clinton appears to be losing steam, not because her campaign is weak it’s just a matter of trust. The Republicans have done a great job on her credibility after the email scandal. The polls have moved aggressively Trump’s way and despite Trump’s comments the recent polls show the two candidates are now level pegging. This being the case I have not heard a single Ratings Agency comment on what to expect with a Trump victory. Remember this is a candidate who has said debt is negotiable. I wonder what would happen to Italy’s rating or Australia’s rating if Turnbull said debt was negotiable. The Ratings Agencies would precipitate a crisis. Having a President who believes and has stated that debt is negotiable according to circumstances cannot have their rating underpinned as Triple A. Any debtor that states that debt may or not be paid is usually sub investment grade. That is the reality we are facing and business too needs to play a part in this because much of the belief in financial stability is underpinned by investors being repaid.
The markets seem to have a feel that yes, we are all swimming along, but something sinister is lurking. Think 1987, bonds, equity, property, commodities and art were all great investments. Today we have the same situation, except this time we don’t have rampant growth, high inflation and high interest rates. This time we have declining earnings consistently quarter on quarter for the last few years and about $11 trillion of bonds that have a negative interest rate. The growth outlook is for lower growth yet we have equities at record highs, bonds at record low yields, a relatively strong commodities market and a robust property market, something is wrong.
The markets look weird at present. Equities rallied because the expected cut by the BOE did not happen ergo the UK economy must be strong. Bonds fell because equities rallied and so too oil.
Aussie market today.
Equities rallied, bonds were weaker because investors are expecting further rate cuts to stimulate world growth. A little bit of a fillip came as a result of JPM’s results but that was based on increased trading activity as a result of Brexit. To me this rally looks like a façade but markets can continue and will continue to rally for some time yet.
Credit continued its strong rally and looks like returning to levels last seen a year and half ago.
Bonds were weaker and that was as a result of the equity rally. I expect Aussie equities to rally and therefore bonds weaken.
14 July 2016
I have a cunning plan
When Baldrick of Black Adder said he had a cunning plan the usual response was oh my god how awful. And funnily that’s where the UK is at present with Brexit. Theresa May the new PM for the UK has come up with a very cunning plan by placing the two sharpest tools in the exit cause in prominent positions and made them responsible for implementing the exit at no cost to the UK.
So we find Boris Johnson and Davis the two promoters of the clever plan to keep the benefits that the UK enjoyed under the EU responsible for coming up with a clever plan to keep those benefits. The most telling position is Boris Johnson who is now the Minister of Foreign Affairs.
Remember that during the period leading up to the vote Boris went to great pains to insult his European counterparts so it will be interesting to see how he is received and what the plan is that will prevent the UK from being disadvantaged. For Theresa May this is a very cunning plan where neither, Johnson or Davis can criticise her efforts as they are solely responsible for the outcome. Watch this space for the Clever Plan!
The markets today were quiet. We looked to the Beige Book for direction and we saw the same old concerns, tight labour markets in specialist fields such as IT, Biotechnology and Healthcare. A dose of Donald and his anti-immigration stance will only exacerbate this problem.
The bonds had a nice rally equities were subdued. Bonds rallied on the back of European results and the German 10 year Bund auction going off with a negative .17% handle. World growth is still suspect and European growth is at best very muted.
And for another piece in the puzzle Freight on rails is falling and so too the price to move goods.
Aussie market today.
We had a subdued day today in equities so expect a muted day. Bonds had a good rally and that had much to do with Europe and Japan and the hunt for yield. I expect Aussie bonds to trade better on the day.
Credit was strong so that trend should continue.
13 July 2016
Another day, another dollar, just what am I doing right?
On a day when we saw equity approach new highs and the bonds were sold, it’s hard to pinpoint just what was the catalyst that caused these actions. Oil rallied, equities started the day very strong but that excitement was damped as the day wore on. Volumes were finally up and this will excite the technicians, and this also is a positive for equity markets looking into the future.
The enthusiasm for equities is based on the mistaken belief I believe that the US economy is strong and that the Fed may tighten this year. To me this beggars belief. Once again looking at a major barometer of growth, the supply of logistic services, logistics and truck manufacturing have all fallen. Railways for instance have sacked 29,000 people over the year. Ground transportation services are down 6,000, and manufacturing jobs are still 42,000 fewer jobs since the beginning of the year. The US requires significant growth rates to employ those people who have recently lost jobs. The other reason for the rally goes back to Abe’s sweeping electoral victory on the weekend. This result paves the way for further economic stimulus and that’s inspiring the market at present.
The 10 year bond auction was not well subscribed and that probably set the tone for the bonds. The demand for the ten year auction by all accounts was the worst result for 10 years and went at 1.513%. The 10yr bond finished about 1.511%. The news of the day and this probably goes someway to explain the rally in the equity market was the issue by Verizon of their securitized sub-prime receipts. The securitisation was over customers with a FICO score of sub 708. The issue of about $1.6bio rated AAA with a 2 year tenor went off at swap + 55 bp, this was 10 to 15 bp tighter than expected. In other words investors want yield, any yield and that’s also driving the equity markets as dividends by many of the S&P 500 are higher than bonds.
Aussie market today.
This will be a good one. Equities will rally on the back of the US rally, however the UN court result could have a slight impact on confidence. However as they say the trend is your friend, and I will back equities today. Credit had another great day so expect spreads to tighten.
Bonds will be interesting, but having seen the Aussie today around 76c I am betting that there are investors moving back into Aussie. Some will be directed towards equities, however bond rates are relatively high compared to Europe and Japan, the higher dollar may be suggesting that there are buyers. If the bonds weaken on the day, I am not expecting too big a retracement.
11 July 2016
Summer holiday malaise.
Summer holidays are here in abundance. With so much news and the fallout from Brexit, it’s hard to imagine that markets are as they have become. Equities rallied today, oil weakened and bonds weakened. Bonds may be retracing and we had a refunding today with the cover being a little less than expected.
Equities rallied on the basis of the jobs number, however, it’s a long stretch to think that Friday’s number will be repeated anytime soon. Abe’s increased control of the Upper House also led to investors taking the decision to put risk on their books. This decision is based on the belief that Abe will continue to pump prime the Japanese economy.
It is interesting to note that whilst we are seeing equities rally, Analysts are expecting that the S&P 500 will show a 5% revenue fall for the second quarter. If you strip out energy the fall in revenue is expected to show a 2.2% decline. Either way these figures hardly provide a confident outlook and a justification of current prices. It is my belief that what we are seeing is the chase for return and this means that investors are quite prepared to take a lot more risk. The risk appetite has increased significantly however I don’t believe investors are fully pricing the risk reward tradeoff.
Bonds were weaker because of profit taking. I fully expect the current rally to continue. Credit was stronger and like equity has enjoyed solid gains.
Aussie market today.
Bonds took a pause today and I fully expect some weakness in Australia. Equities rallied hard and that’s part of the reason for the fall in bonds. Equities should rally on the day. Credit was strong overnight and that strength should continue into today. Hybrids remain vulnerable to Bank issuance.
8 July 2016
Excitement plus, nah more of the same old same old.
So the markets received a present by way of a strong labour force number, but was it really? In my opinion not really, and until we start to see a positive trend emerge then markets will lurch to and fro in the same way an addict reacts when they get their next hit.
So why my pessimism, firstly the growth trend is actually falling not rising so there is no reason to be overly optimistic at this stage. The Fed won’t be tightening this week nor probably in September. Janet Yellen will be watching her Labor Market Condition Index, this number is released Monday and is a number the Fed watches closely to obtain a gauge of activity. For those interested – the statistical error in the Labor Force is in the order of 117k. The number of people employed some 15 years ago was 195 mio and today that number is 203 mio representing a 6% growth. Over the same period the population has grown 13%.
Wage growth is not gaining any traction. Most of the new jobs were once again service related, and too few jobs were being created where there is value add or specialist skills required. Productivity continues to fall and has been doing so for 10 or so years and with no new technological advancements may well continue to do so. Perhaps the obsession of social media will be recognized for what it is a distraction that adds very little to national productivity. Capex continues to fall and productive contributions continue to fall.
So the markets rallied, the US10 year is now at historical lows and it’s hard to quantify the recent gains in the equity markets. Dividends are driving the gains in equity prices however without increasing revenues it’s difficult to imagine that this trend can continue unabated. The dollar continues to be seen as a safe haven particularly for the Europeans as they struggle to understand the developing banking crisis that appears to be happening in Italy. How the Italian saga pans out is anyone’s guess however it may well end up being a something akin to a Greek tragedy.
Markets can continue to rally until investors no longer feel comfortable. The current economic conditions are new territory with negative rates, tepid growth and asset prices based on a simple algorithm, can it continue, yes it can, but when it stops that moment may well be cathartic.
Aussie market today.
Equities rallied, bonds rallied, and credit rallied. That’s pretty much all we need to know for today. With Bill Shorten conceding electoral defeat, the Australian Share markets no doubt will rally. The bonds may have a chance to rally as the prospect of a hung Parliament has been removed somewhat and the warnings from the Ratings Agencies are less dire, the Banks will come under scrutiny as a Downgrade of Australia will mean a downgrade of the Australian Banks but with the markets the way they are, any yield increase for what still are good credits will be seen as an opportunity especially for offshore investors.
I still believe that the Australian markets are somewhat cheap so any selloffs for the time being may prove to be good buying opportunities.
Hybrids remain captive to bank issuance so that market will rally until someone announces an issue. There is something in the order of $12bio or so to be raised as part of the increasing capital requirements and as such this will put strains on current issues.
7 July 2016
Lazy summer holidays.
Today in the city it felt as hot as Hades, however the Markets were far from hot. Taking a brief pause post Brexit, today seemed like everyone was out to lunch. The day saw a bit of risk off activity as we await Friday’s Payroll Report, with economists looking for 160k jobs.
On the day we saw a sharp fall in the oil price, gold retreated, bonds were slightly weaker and equities were weaker. Oil is possibly down because we found out today that the Nigerian Oil Pipeline was functional again.
Bonds and equity investors took a little risk out of their portfolios and the market weakened marginally. The test for the markets will be how the markets react if the number is outside the expected boundary. No matter the result it is highly unlikely that the Fed will react and hike rates next week if the number is a strong number.
Looking forward if the US 10 year falls much further to say 1.25%, then overseas Central Banks and apparently Japanese investors lose interest in owning the bonds. Perhaps we are close to the limit. In my view bonds can fall further if for no other reason than the bonds provide income and are still providing a healthy capital gain.
Aussie market today.
Book squaring ahead of tomorrow’s Payrolls report led to today’s fall in prices. The US market is looking for a number between 150k and 170k any number outside that range will move the markets.
With the important payroll number tomorrow, I expect that Friday will see book squaring. This means the market probably weakens a little and the direction will be taken from what happens with the number.
I expect Friday to be quiet with book squaring.
6 July 2016
Just what is happening? It’s only getting stranger.
On a day when the Fed was releasing its Minutes, equity markets rallied and so too bonds. Equity rallied because the Fed is unlikely to hike rates anytime soon. Technicals remain in place whilst bonds rallied because the Fed was not hiking rates anytime soon and global growth is slowing. The probability of recession is now roughly 60%, if the compression of 2/10 years is to be believed. The flatness of the curve is slightly lower than in 2007.
Global growth is the concern for investors. The Brexit fallout is slowing growth in the UK and the secondary effects are being felt as far as New York City. UK visitors to New York are an important component of retail sales in the city and a slowdown of visitors because of Brexit is having an immediate impact.
British commercial property and the REITS are taking a real hit, as buyers evaporate. Property Funds are closing and to date 6 have closed and that’s due to stressed property prices. It will be sometime before the property funds open and confidence returns.
In my view the equity markets rally was a short covering rally, however, dividend paying equities are now seen as the new bonds, but that can only continue as long as dividends are paid. With declining revenues for many stocks it’s hard to justify current dividend payout rates.
The takeaway from the recent Brexit vote is that the unintended consequences are often not discussed or measured. UK property is taking a hit and if the City of London were to be no longer the International Centre that it has become then that will have a real impact on the UK and global growth, despite the UK only representing 3% of the global economy. Volatility will persist for some time yet. For investors it’s important to understand how liquid the investment is that you are investing in. For investors in property funds the mismatch will be an issue for some time.
Aussie market today.
The equity market rallied because the Fed won’t be tightening any time soon and further rate cuts are expected. The Aussie equity market may well continue that trend. Bonds will be bid because investors require income to some extent and as a safe haven.
Aussie bonds look relatively cheap and for that reason alone I can see the rally continuing.
Hybrids will be bid but will soften on any announcement of further Bank capital raisings
5 July 2016
Stranger than fiction.
US treasuries finished the day around 1.35% and the question must be asked – how much lower can US 10 year treasuries fall in yield? If Yellen is to be believed then the Fed have been discussing negative yields and who knows? Perhaps we will eventually see negative yields in the US. If we look at the US economy at best it is very tepid, and the indicators such as logistics, heavy machinery, trucks, demand for containers and retail are all slower or much lower.
Equities fell today and the only thing holding the S&P 500 together is that the dividends pay a higher level now than the US 30 year treasury. The S&P 500 average dividend rate is 2.10%. And whilst on this rant I still remain confused as to how equity is even at this level when we have now almost 3 years of falling revenues yet higher prices. The Dividend Discount Model is obviously supporting prices but at some point the model won’t be the catalyst for higher prices. US companies have been borrowing to support share buybacks and I suspect that they are doing so with dividends as well, however, money may be coming from the capex allocation and long term this is not good.
So the real issue of the day is just how bad is the Italian Banking sector? And it looks very bad indeed. Banks such as Monte Paschi and Unicredit appear to be in a very bad place. Monte Paschi holds for instance a lot of property but much of that property is highly illiquid. The support for Italian Banks could lead to further uncertainty as it would involve a Referendum and could mean the resignation of the Italian President. Hungary wants a Referendum to decide the fate of refugees on its territory.
A major oil trader has raised doubts about the current oil price. The thesis is that oil has reached its high and much of the rise can be attributed to China stockpiling oil for reserves. China has almost no capacity left and in all probability only has a little more buying to do. The Oil trader is seeing a falling demand despite higher demand in the US in the vehicle sector, but they are seeing less industrial demand. If the explanation is correct then the US economy is slowing.
Brexit is causing volatility and according to Bank of England Governor Carney the impact is clearly visible. There is heightened uncertainty for example the property sector has been slashed, and we have political uncertainty such as who will be the PM in the UK. To understand just how hard the exit could be, the Swiss Banking sector took 7 years to negotiate a Euro Passport for its sector and employees. The UK has 2 years, the clock is ticking and Farage for example decided to humiliate the EU Parliament. I cannot see the Europeans playing favourites with the UK.
Aussie market today
Bonds rallied and that’s all we need to know. I think the Australian Bonds can rally further and this is because he US rallied. The US equity market was weaker but any pickup in commodity prices will assist the equity market. Given the level of uncertainty I think the equity market will be weaker. Credit was a point weaker, and is due for a correction, I would not be surprised if we see a little retracement over the week. The Aussie Dollar was a little weaker and this trend should continue. The lower level of US interest rates could be a stimulus for the Aussie to rally however we will need to see how Asia reacts to the level of US treasuries.
1 July 2016
Feel like a holiday?
That’s certainly how Friday felt. This weekend is the Independence Day long weekend and many people left the office early to embark on the traditional travel exodus. Cape Cod, The Hamptons and the Maine beaches all beckoned. So what we were left with on Friday was a quiet trading day where profit taking and book squaring was the order of the day.
Equities started the day strong but as the afternoon session wore on it ended in a whimper – barely up. Bonds were however better bid and in all probability will remain that way for some-time as markets are expecting further rate cuts from Central Banks.
Brexit will be the focus for both the US and Europe for some time. The aftershock will take some time to dissipate and for the UK, Brexit will mean a change. The City of London looks to be on shaky grounds as Dublin, Frankfurt and Paris compete to become the European Financial Centre. The EU has already stated that London will not be able to clear Euro Bonds. If London thinks that all business remains the same that is naïve. Building market share in other economies will take time and the UK appear to have forgotten the benefits that the EU provided.
The Brexit vote has also allowed Far Right in a number of European Countries to question their participation. A number of those countries are direct beneficiaries and to be frank the EU would be better off without some of those Countries such as Poland, and the other Former Soviet satellites. But all these actions create uncertainty and markets like certainty, thus we will continue to experience volatility for some time yet.
Aussie market today.
Friday saw book squaring and bonds rallied to record lows. I expect that Monday will be quiet given the holiday long weekend in the States and that any direction will probably come later in the Day as Asian and European markets open.
In all probability the day will be quiet because I don’t expect that the lead from either the Asian Markets or European Markets will emerge. The USA will be out until Wednesday and usually traders won’t make large bets without all markets being open.
Aussie bonds will trade positively with the caveat of a hung parliament downgrade in the offing. However such an event is a few days off at least. The US 10 years were strong and will remain this way for some time. Market participants are certainly looking at lower levels and the Fed is not expected to hike for some time. The global outlook is weak and this adds further fuel to lower bond rates, but all in good time.
30 June 2016
Perplexing markets are the norm.
After a slow start markets generally rallied on the day. Equities had yet another good day and that’s because Central Banks are once again looking to ease. The BOE Governor Mark Carney commented on the difficulties now faced because of Brexit and how he expects to see slow growth and a spike in inflation. Post his speech the pound was pummeled and the FTSE rallied because rates would be lowered. This would be I believe the first easing since 2012.
On a day when equities rallied hard, one could have expected that bonds would be sold, when in fact they rallied. The rally once again is being driven by a negative outlook for growth and an expectation that the BOE is looking to ease shortly. In his speech Carney discussed his concerns about the labour market slow growth and a potential spike in inflation.
The IMF added further fuel to the fire for the US Fed for not tightening with a negative outlook for the US economy. Mortgage rates are now heading towards low levels with the 30 year Mortgage average rate now carded at 3.48% as indicated by Freddie Mac.
S&P downgraded the EU to AA from AA+. This appeared to have no effect on bonds.
What is unusual about the last couple of days’ actions and in particular today is that we have seen equity rally, bonds rally and commodities rallied over the week but were slightly down today. This is rather unusual price action. Normally when equity rallies we see bonds retrace. And this price action appears to be because of rate cuts. What we have to watch for looking ahead for clues such as when will the revenue and EPS gap close? Because if it does not then prices look extremely stretched.
Today was also the end of month end of quarter and end of half year. By way of recap, the S&P has put on about 2.6% for the half year and treasuries have rallied from about 2.2% to 1.48% and look likely to go further. Today pundits were talking the UST10 year falling to 1.25%!
An extremely confused day by way of actions and I believe a lot to do with balancing for end of month, quarter and half year.
Aussie market today.
Equity rallied, bonds rallied so flip a coin. Price actions suggest Friday should rally. Remember the US has the Independence Day long weekend this weekend and many traders, Investors and Fund Managers will be heading off to their summer vacation or long weekend. With that in mind they will look to run square so the shorts will be bought ahead of time and the longs will be sold going into the weekend, tomorrow in the USA.
In my view, bonds will rally because everyone is cutting rates. Australian 10years at 2% with a triple A tag look very attractive so the rally continues.
Equity may rally but I am not thinking too hard. Expect some book squaring. Credit tightened about 5 bp today so expect that trend to continue.
Hybrids look interesting and post the Westpac issue, the hybrid market looks attractive.
29 June 2016
The Hunt for Return/ Yield continues.
The conundrum continues and the only conclusion one can make is that there is currently a real interest in finding returns, which means that investors are taking more risk for lower returns and that’s never a good situation. So on a day with little news relating to Brexit, equity markets rallied and bonds were slightly weaker. I don’t believe that the market believes that all is good with the world but rather in an era where returns are low, investors are willing to risk it all for a return no matter how low that return may be. Remember there is something in the order of $8trillion of binds that have negative interest rates.
Even the safe trades look rather scary. If UST10 years were to retreat 10 bp from 1.47% that’s a significant movement. What I think markets are focused on are Central Banks. UK investors are expecting perhaps a 50bp rate cut with some even suggesting 75bp, taking rates close enough to zero. In the US we have a headline on Bloomberg where a Former Fed Governor from Minneapolis suggests that the Fed cannot hike and rates may remain where they are until 2018.
Brexit will continue to create problems and I suggest vigilance. There are a number of secondary effects that have not even been thought of. Please see my clipping of Turtle Bay. There are defense issues such as Security Council seats, centres of influence, the ability to project ones point of view without the expense. If the UK believe that they can exit the EU without any secondary effects it is naive at best and especially so when the EU Parliament is insulted. Then we have the issues of those states that voted overwhelmingly to stay such as Scotland and Northern Ireland. If those two entities were to exit, then the UK would be England and Wales and most likely the ratings would be cut to a single A at best and the influence that Britain can project would be limited. The oil that the UK uses comes from the North Sea via Scotland, everything is delicately poised. The sad fact is that people like Farage and Boris Johnson think that one can leave the EU and everything remains static.
On other matters this is the first time in 30 years that the State of Alaska won’t be paying its inhabitants their oil dividend. The dividend which is paid to all inhabitants of the State and is usually about $1.4bio won’t be paid because the State has a $3 bio deficit. This reflects how the revenues have fallen due to low oil prices. And if the commentary today suggests that natural gas has much further to fall, this bodes badly for oil.
Aussie market today.
With the risk on trade continuing equities rallied and the US10 year weakened a few bp. I believe most of the rally can be linked to expectation of rate cuts and we also saw the US$ a little weaker on the day. I expect that Aussie Bonds will weaken a little with perhaps a little steepening of the curve. Equities will be stronger following the trend of other international markets.
Hybrids will probably be a little weaker as equities rally.
Credit had a good day and I expect that trend to continue.
28 June 2016
Brexit what next? Breathe a sigh of relief.
What did we learn today about Brexit? Probably not that much, except that Nick Farage managed to display a degree of hubris at the EU Parliament that failed to recognize the British position. One does not gain concessions through insults. Politics in the UK remain under scrutiny with a no confidence motion being made against Jeremy Corbyn the UK Opposition Leader. Focus will remain on the UK economy and much work is required given its external debt issues and the exit strategy from the EU and what deals are cut.
So uncertainty remains, unpredictability remains, however today the Equity Market breathed a sigh of relief and rallied in what could best be described as a relief rally. This is nothing more than technical as we are seeing shorts being squeezed and that’s why the market rallied. The US 10 year was probably a weaker by 1 bp and equity rallied about 1.6%. The market position has not changed too much. The First Quarter GDP was revised upward and that’s not a bad sign for markets, however, when one looks at the underlying economy it’s not great. Logistics are under stress, people are buying less fast food across the sector and what the reader may not understand is that many people in the US buy their daily food intake from Fast Food Restaurants.
This weekend we also see the biggest long weekend holiday which celebrates the 4th July Independence Day. Many traders will leave their desks for the holiday Thursday, hence todays’ rally.
Aussie market today
Todays’ market reaction in the Equity Markets was in my view largely technical. With this in mind the trend for today will be to rally, however one should not get too excited as volatility will remain for some time.
Bonds hardly deviated despite the rally and credit was little better on the day. In my view I think bonds will be steady. There are not many reasons to sell and with Australia still a Triple A economy the Aussie Bonds look great value.
Hybrids on the day will be mixed because the equity market will rally and buyers are likely to rotate out of hybrids into equity.
The Aussie Dollar had a mixed day.
27 June 2016
Ooops What did we do?
That’s the question many British are still asking. After the referendum the most goggled topic in the UK was “what was the EU?”, and what it meant to be part of the EU. David Cameron was certainly gracious today in Parliament today and all eyes are focused on the what next moment. The UK is not being forced to invoke Law 50 which is the Law used when one exits, however whilst Merkel was gentle today, she still said that she wanted the UK to invoke the Law as soon as possible so as to bring predictability to markets. Italy, France and Germany want the EU to start trade negotiations and what needs to be done.
The big question is can the EU survive and that is why markets are so volatile. The pound was hit again and is at its lowest levels since 1985. And to rub salt into the wound the UK was downgraded from AAA to AA by S&P. Interestingly the Israeli bond market was the worst hit today. The EU is Israel’s largest trading market.
The Italian Government has decided to inject funds into the Banking system today to recapitalise the Banks. Whilst this action would normally not be allowed, with the Brexit vote it the recapitalization is expected to be allowed. Talking Banks, Goldman’s released a report where they expect Investment Bank revenues could fall by as much as 30% over the year.
With all this activity, it is highly unlikely that the Fed will tighten this year, in fact it looks more likely to see a cut! A strong dollar will undermine exports and hurt emerging markets and other developed economies. US indices weakened across the various sectors.
First Quarter GDP update for the USA will be released tomorrow.
Aussie market today
Looking at what happened today a number of interesting things happened. The yield curves continued their flattening, the UK 10 yr dropped below 1% an the dollar strengthened against the pound. Expectations are that the Bank of England will cut by 25bp and another 25bp shortly after the first cut with the UK heading to negative rates. The UK 10 year gilt closed around 0.93%. Rates are going to stay low for a while.
So why am I telling you all this? It’s because the Aussie Bonds comparatively look very cheap. You can still buy 10 year Aussie Bonds almost now with a 2 handle. Yield curves 2/10yrs flattened. By comparison the Aussie market looks like the front end could rally. By way of comparison the AUD 2/10 curve is 43bp. US 2/10 Treasuries is 88.5 and the UK gilt curve 2/10 yrs is 78.
So in my view, bonds continue to rally, equities in Australia should take the lead from Europe and the US and weaken. However given the low level of rates there will be demand at some point. Currently with the risk off trade being the way the market is trading, expect further downward legs, however, one should be thinking of buying into weakness if you have cash. Markets can and should go lower however there will be good buying opportunities. Low levels of rates will remain for some time yet so in time the current levels could be seen as very good. Given the Brexit outlook and the current trend, the RBA cold choose to ease rates.
23 June 2016
In or Out? And it’s not the LA burger chain.
With little or no information to work with markets were relatively quiet, however, equity markets rallied on the expectation that the UK won’t exit the EU. We will know a little later today what the outcome is.
Bonds were weak as risk on trades meant that investors switched from bonds to equity. As such the equity market experienced the strongest day for the month. Credit was strong on the day.
Aussie market today
With so much riding on Brexit expect the market to have some volatility depending on the outcome.
The Aussie Dollar had a strong day, equities were strong and as such the betting appears to suggest that the UK won’t exit. That being the case, expect the day to be a risk on day with a strong equity rally and bond weakness. Although this all turns on its head if the Brexit vote is to leave. We will know more later today.
22 June 2016
Make America great again mmm that’s tough.
Fed Chairman Yellen had her final day today in front of the House Senate Committee. What struck me was her outlook which was based more upon hope than actual expectations. The major about face continues as Yellen has moved from a headwind or two to serious headwinds, yes folks it’s all in the rhetoric. In her own words “I don’t want to send a message of pessimism”.
So what is driving her pessimism? I suspect that the labour market is one that is of concern especially when the bias for jobs growth weakens by 2018 due mainly to technical reasons. Business profits continue to fall and we will get further guidance shortly in about two weeks -time. The Outlook looks weak as the guidance from Fedex yesterday was poor. I also note that the ECB at present is raising concerns with the banks over their exposure to shipping. There have been some significant haircuts on loans to shippers. Such haircuts have been 50c in the dollar. Other headwinds appear to have originated with regulation, a slowing labour market, disparity between those with and those without, commodity prices, student loans and the list continues and of course Brexit! To add salt into the wound the IMF have downgraded US growth.
What her comments suggest is that an interest rate hike this year appears unlikely unless there is a significant rebound and the data is not supporting such a rebound.
Yellen’s appearance at the Senate Committee did however raise some interesting doubts about what the US can do to allow more robust growth. Many of the questions and remarks directed at Yellen were not within her direct control but shows some frustration by the lawmakers but also their lack of urgency. For instance Yellen was quizzed over Fiscal Policy and whether Fiscal Policy should have been used instead of monetary policy and what the Fed was doing about this. The Congress and Senate control Fiscal Policy. A senator from Virginia commented on coal prices and what studies were being done if coal fields’ close and what the Fed will do. I am not sure but I don’t believe that the Fed has much to control over coal prices. Another question she was asked was “when will workers in the USA obtain a pay rise”? Other questions were the impact on taxes and regulations relating to Dodd Frank. But the one question that I have to say took my breath away especially if you believe that the Fed is an independent Central Bank. The question was “was Yellen aware of the Moody’s model’s results on Trumps policies and had the Fed used the Moody’s study to input the assumptions and numbers and confirm the result obtained by Moody’s. And will the Fed publish those results?”
Over the course of the day, the market was relatively quiet as traders look towards the Brexit vote tomorrow which looks delicately poised. Depending on what happens Thursday I expect the market to be rather volatile. Certainly we are being warned by the major investment banks to expect wider prices, potential periods of no pricing and liquidity issues.
Bonds started the day weaker and traded better late in the day. Oil was weaker on the day.
Aussie market today
With the specter of Brexit tomorrow it’s hard to see too much activity in Australia today. Equities weakened marginally and bonds rallied which points to a view that traders took a little bit of risk back off the table. I expect that to continue into the Australian time zone. Credit tightened a little over the day so expect that trend to continue.
Hybrids should be a little better if equity weakens.
21 June 2016
Another Yellen moment.
Yellen talked to the Senate Committee today and her language was one of uncertainty and dovish comments. The Fed is unsure of negative rates, growth and Brexit. The slowdown of labour is expected to recover but without conviction. What is striking is the change in language from “when” to “whether”. A July rate hike appears to be off the table, so looking to September that probably is off the table as well because that’s in the middle of electioneering. December perhaps? But who knows, what is known is that the economic data is not supportive of a hike.
The economic outlook currently appears to be an economy stuck at 2% growth, and it has been this way since 2009. Is this because of the Asian deleveraging, who knows? What we are seeing is a delivery from Central Bankers asking for fiscal relief as there is only so much one can do with monetary policy, buy sell bonds and lower or raise rates. While Yellen’s plea for fiscal is muted, Draghi has been far more aggressive and this call for fiscal relief is a task all of the G20 Central Bankers have at present.
Getting those with money to spend is difficult. For the wealthy adding an extra car after you already have 5 is probably not going to happen. Spending needs to drift lower to the middle and lower classes and they simply don’t have the savings or spending capacity. This is a real wealth effect with a polarisation of wealth with more being controlled by less. Sixty six million citizens have no emergency funds and that’s a significant portion of the working USA.
On another note Donald Trump’s campaign ergo the Republican campaign, appears to be running into trouble. May which is a month when candidates should be raising cash proved to be fruitful for Hillary and Bernie, despite neither being the nominee. Yet Donald raised very little. To give an example Hillary raised $26 million, Donald raised $1.6 million. Donald’s campaign appears to be in tatters, as he was unable to purchase advertising time because he had no money yet the Democrats are now running an advertising campaign. The press is rounding up on the Republicans given his stance of banning the Washington Post. Ted Cruz and Ben Carson raised significantly more than Donald and both those pools are now dissolved. Unless Donald contributes or Carl Icahn or someone else…the campaign could be in tatters. Apparently the campaign currently owes $40 million but has only $1.6 million.
So on the day with all this known the UST 10 years weakened about 3 bp, credit was slightly tighter and equity was a little stronger. It seems as though the shorts were covered, some risk on trades led to bonds being sold, and everything rests on the Brexit outcome.
Aussie market today
Given today’s price action and with Brexit getting closer, I would expect the Aussie market to drift, and usually when a market drifts it tends to weaken rather than rally. I expect equities to be a little weaker and so too bonds.
Hybrids should drift a little weaker and credit FRN’s to be little stronger.
20 June 2016
Hip Hip Hooray risk on today!
The one thing that markets want is predictability. Predictability helps investors make investment decisions and this leads to improving market conditions and today we received that in spades.
The first piece of news was that the most recent poll on Brexit has the UK remaining in the Euro. Consistent with the poll we have seen bookies lower the odds on a non-exit. The other major piece of news was the sacking of Corey Lewandowski, the press manager for the presumptive republican nominee Donald Trump. His sacking throws the Republican electoral campaign in disarray, diminishing the chance of a Trump presidency. Many of Trumps policies would cause a significant recession if the likes of Moody’s are correct. So the market is factoring in a Clinton win and this means stability (because we know what she is basically going to do, no surprises) hence stability, hence a good reason to invest.
So with these pieces of news the equity market had a good rally and bonds were pummeled backing to a close of 1.68%, up about 7 bp. So on the back of today’s results markets will return to a slavish observation of the Fed and look to the tea leaves to decide on Fed Policy and the direction of interest rates. My point of view is that markets will be a little skittish going into September. Unless we see some good economic numbers forget about July and the next meeting is September and that month will be the focus for investors.
For what it is worth the Nigerian Naira has had a significant fall. This may be heralding things to come but for emerging markets this is not a good signal. Nigeria is a major exporter of oil and such a fall in the currency may be linked to the outlook in global growth and oil.
Aussie Market today.
It’s a risk off day. Sell bonds buy equities and that is how I expect today to play out. The global markets appear to have taken on the latest Brexit poll as sacrosanct and rallied. Expect weakness in bonds.
Hybrids will most likely weaken a tad because equities are rallying. Credit will be better bid, having tightened about 2 points overnight. Floaters will be well bid or in demand today.
17 June 2016
We sit and we wait.
Well Friday was a day of risk off and go away day. Equities continued their spiral lower and treasuries saw a little bit of profit taking. And why not, the UST 10 year over a week had fallen 12 bp in yield, time to take profit prior to a major or possibly major period of volatility.
The yield curve remains persistently flat and thus highlights that the bond market is very much at odds with the equity markets. At some point companies will either have to see increasing revenues and profitability or the equity market will have to retrace. Simply borrowing to pay dividends and finance buybacks to bolster share prices overtime will not be a successful strategy.
To other major piece of news concerns Apple. It will be interesting to see how the ratings agencies deal with Apple’s problem. For those not aware, Apple is no longer able to sell its iPhone 6 in China because it violates a patent held by a little known company. This means that Apple which requires significant Chinese purchases to drive profitability cannot sell its latest product in China, and no doubt if it wishes to continue to operate in China will have to reach agreement with that Chinese company. The situation could be very costly for Apple.
The Aussie Market today.
With so much that could possibly go wrong I don’t expect that too many investors will be adding to positions. With that idea in mind, I think on the day, equities will drift lower unless someone hits a stop loss order in which case levels could tumble.
Bonds apart from a little bit of profit taking should rally into the Brexit vote, if for no other reason that in periods of uncertainty, bonds are the go to choice. I expect bonds to rally into Friday (Thursday for the Northern Hemisphere), as the vote occurs on the 23rd.
Hybrids will continue their dance. Expect the hybrids to rally when there is no issuance and sell off when an issue is announced. The Banks still have much issuance to complete and as such the Hybrid market is captive to the Big Four’s intentions.
16 June 2016
To Brexit or not Brexit?
Markets today took their cue from the BOJ which was to not raise rates. European trading was thin and weak. The market in the US saw equities down by up to 0.75% at one point before the market closing up 0.5%. The 10 year treasuries fell to 1.55% before closing around 1.57%.
The talk was Brexit and that is leading to risk off trades and traders not looking to add to positions and being content to hold their current holdings. Hence markets were quiet and thin.
Looking to next week and it will be big. We have the Brexit vote and we also have the release of the new set of Stress Testing for the banks. The timing could turn out to be a blessing or unfortunate depending on the Brexit outcome.
The Aussie Market today.
With so much at stake next week and with most traders doing the risk off trade I expect bonds to continue their rally. Credit was marginally weaker and that’s because swaps have moved out slightly as bonds have rallied.
Hybrids will see demand, although, I still see the mixed conditions continuing. Bank issuance will ensure that market volatility continues, however at some point I expect to see some demand. Ahead of Brexit I think next week will be quiet unless a number polls are released that show the UK will not exit.
15 June 2016
Glass half empty?
Gradual just became more gradual.
The hypothesis of the day is that Chair Yellen has now changed her stance and following on from last weeks’ dovish comments is now a confirmed dove. As the data suggested, the US economy has slowed and the Fed has reacted to that slowdown, by moving their view of 4 tightening’s to perhaps one this year. Jobs have slowed, capex is down and manufacturing is slowing so the Fed’s commentaries should come as no surprise.
This means that a rate hike in July has a low probability and unless we garner a significant increase in economic activities, a rate hike later in the year may be a distant hope. As I have nagged continuously, watch the shape of the yield curve as the Bond Market knows all!
For me I would be an avid watcher of the 10years as this is the best indicator of economic activity and the 2 year then becomes the probability of a hike. So maybe we will get a hike in 2017/ 2018 but the pace of hikes is slowing and the Fed’s comments suggest that there has been a revision of expectations and that’s lower. Talking Fed there was no dissent in todays no hike. There were 6 members that voted for no hike, from 1 last month. This means that Yellen is now firmly entrenched in the Dove camp.
Looking ahead investor perceptions and financial developments are important. Yellen is now of the opinion there are strong headwinds and these headwinds will persist. So watch the data, be really aware of manufacturing, truck sales and advertising as lead indicators and of course watch the 10 year.
Yellen did leave the door open to lowering the rate to zero should economic conditions warrant that action. Brexit is firmly and squarely on the Feds list.
Equities over the course of the day were a tad stronger, 10 year bonds traded in a range between 1.57% to 1.611%.
Don’t forget that the BOJ meets today and no doubt Brexit will play to their fears.
The market for British assets appear to be drying up with liquidity risk a concern. Ahead of Brexit with significant tail risk most market participants are holding back. The goal currently is not to lose money and the risks are especially high and the yields do not reflect the inherent risk.
The equity market in late afternoon trading weakened to turn negative and bonds were better. Oil was off.
The Aussie Market today.
The Fed’s actions and the ten year reaction to no hike suggests that Aussie bonds will trade stronger. Expect a 3-5 point rally. Equities will be a little weaker on a global perspective and the risk off trade remains the best alternative.
The tail off in equities came after Yellen finished talking and taking questions. That’s because the outlook for growth is lower.
Credit was weaker on the day and that because swap widened slightly. Hybrids to remain mixed and in my view to remain weak.
14 June 2016
A strange day indeed.
The equity markets were weak today based on concerns for global growth and Brexit. Brexit appears to be dominating the newswires. The weak run continues for equities and this is the longest Bear run since February.
The postulation is that an exit by the UK would lead to a slowdown. More importantly, many other countries could choose to follow. What many people need to think about is that porous border is no longer and that if say I want to go from Northern Ireland to Southern Ireland an exit would make that simple crossing more than just a walk through. People would need to go through customs, customs would need to be paid on goods passing through the border and this is just the beginning of problems. Many workers would require visas to work in areas that previously there were none required. This is much bigger than you think.
So equities weakened, bonds momentarily traded to 1.58% however they finished slightly weaker on the day around 1.61%. Credit was slightly weaker on the day.
Liquidity and trading volumes remain thin and one can be but hopeful that once we get through the Fed meeting and commentary Wednesday and Brexit then perhaps we can see a pickup in volumes and trading.
The Aussie Market today.
Brexit and Fed talk are dominating the airwaves. I expect that equities will be quiet on the day if not maybe we could see a slight retracement. Bonds will take a pause and I expect that they could weaken a little. In my view we should still see demand for credit as it has retraced about 3 bp over the past few days.
Hybrids should be mixed as people sell other hybrids to allow purchases of the new issues.
13 June 2016
No news is good news.
It is hard of what to make of the day’s trading. Equities were weaker earlier in the day but recovered as the day wore on, but then rolled over towards the close. The story of the day was the Microsoft takeover of LinkedIn. The question is how Microsoft will use LinkedIn, will it integrate it with Outlook? How will it be used? What the real story is however is how much growth is now being driven by M&A activity. If a company can only grow through takeovers and borrowings then the question remains, how sustainable this model is as it comes with significant risks. A well capitalised company like Microsoft is probably ok but for many this model of M&A activity could well end in tears. Despite the tepid performance of equity markets and low volumes, the Vix has moved back towards bearish territory and this change could become a concern.
Bonds, ten year bonds are now 1.6%. That’s 0.2% tighter than two weeks ago! This is a major move and more importantly displays the bond market’s contempt for the global growth story. The market is now pricing about 5% for a July tightening and 0% for June hike. More importantly markets both in the USA and elsewhere are looking later this week to the Fed Meeting and what Chair Yellen has to say about the state of the US economy, global growth and their concerns over a Brexit exit. Demand for US bonds remains high and that probably holds for any security that has a positive yield. Credit blew out 4 or so points today but in my view this is because of a movement of swaps rather than a deterioration of credit.
The Aussie Market today.
I expect that equities will be softer today and that for fixed rate bonds the rally continues. Demand will continue to drive yields lower and the same for credit. I expect credit to continue its rally, however, today may be a little muted. Commodities were generally positive and this helps equities, however China will be the key to any equity performance.
The Aussie was weaker and that’s a little commodity and a little stronger dollar.
Brexit may weigh on Asian markets and it certainly will weigh on Europe. Recent polls suggest that the UK may exit but what is worrying is the developing trend that many other Europeans are starting to query their involvement with the Euro. On an outlook I would be particularly wary at present!
9 June 2016
Tail wagging the dog or dog wagging the tail? Which?
Lots of talk today about the jobs and claims numbers that have been released over the past 7 days. Much of the focus, however, was on the lack of follow through for the equities market and the rally on the 10 year treasuries. The most attractive part of the curve is the belly of the curve and that’s 5-7 years. Ten years remain attractive because when compared to Germany or Japan or the UK the yields they are very compelling at 1.68%!
Equities failed to follow through because investors believe that perhaps the market has run too far. Credit continued to tighten and if you believe the credit rally then equities have to run further.
My own spin on all this is far less optimistic and I worry that markets are due a massive fall. Why? It’s because I think the rally is very technical and its negative rates, rather than, real demand driving investment in credit. For example the ECB has been buying Telefonica (Italian version of Telstra). Telefonica has two ratings agencies that rate it sub investment grade and one that has it just investment grade at BBB-. Under the rules that the ECB operates, it can buy Telefonica because, Telefonica is rated investment grade. Should Fitch downgrade the company to sub investment grade, it can still hold the company because it was investment grade at the time of purchase. Given Central Banks are skilled in other Government Bonds and not skilled in credit particularly, low investment grade this could become a real issue in time.
Hence my tag is the tail wagging the dog or the dog wagging the tail.
The Aussie Market today.
Demand for bonds continue to drive yields lower. That trend should continue. Australian markets are largely commodity driven and with the US dollar strengthening then Aussie Bonds look cheap and attractive. I expect the bonds to continue to rally.
Credit will trade tighter simply because demand remains high for quality issuers.
Hybrids will continue to be choppy based on issuance by Banks and market liquidity.
8 June 2016
Here we go again.
So yesterday we learnt that in the light of Fridays jobs numbers that the Fed would continue to monitor economic data and that any rate hike in all probability won’t happen till at least September or maybe later. Accordingly equity rallied because rates are not going higher and treasuries rallied because rates were not going higher for some time. The implied futures probability is around 20%, however, Goldman’s have the probability at 40%, I don’t believe that Goldman’s have as strong conviction on the trading desk.
Commodities were a little mixed with oil trading above $50.
So what do I think is happening? The cheap money is allowing companies to continue their policy of borrowing to buy back shares or to pay out higher dividends. Either way the share prices rise. This tactic is attracting investors as they seek higher returns. As such traditional bond buyers are chasing high yielding dividends, whilst US treasuries as one of the highest yielding bonds are attracting investors. Hence both markets can rally.
This to me is rather concerning because at some point companies will have to repay debt that was used to bolster share prices. Without increasing earnings and profitability at some point this must be a concern.
Talking about low rates, the German 10yr Bund was issued at a record low at 0.045%. Bunds are now getting close to negative rates. According to Bloomberg, $2.7trillion or 42% of securities in the Bloomberg Eurozone Sovereign Bond Index are now trading with negative interest rates.
Toyota once a triple A issuer but now a AA- issuer, issued 10 year yen bonds today at 0.001%. YES you read that right.
P Kraus the CEO of Alliance Bernstein (manage about $480 billion) commented that Active Managers have to shed assets by a third if they are to beat their benchmarks. He cites too many positions, many of which are there purely for diversification and have little to play in the overall strategy, are causing a drag on performance. This comes as no real great surprise. As far back as 2004 there were a number of papers written by academics suggesting that most indices can be replicated with as few as 15 securities.
The Aussie Market today.
Equities and bonds both had a rally of sorts today and as such I expect Aussie Bonds to rally. Equity will be dependent on commodities and as such will probably rally. Credit was tighter so I expect credit to continue to perform. Hybrids will be mixed as we see continued issuance.
7 June 2016
Dr Yellen gave her Philadelphia speech today and what struck me most was how dovish Janet was in her address. So what were the takeaways? The global economy was of concern especially with the Brexit vote due shortly. Janet expressed a view that should the UK exit the Euro, this act will slow the global economy. Jobs were addressed as to be viewed as a trend but not as a one-off, and low inflation. What was interesting was that Janet referred to inflation hitting the Fed’s target in 2-3 years. This was not said once but several times.
All said and done, Janet’s comments today suggest that a rate hike next week is off the table. A rate hike in July also appears unlikely. During her speech, equities fell and treasuries rallied. Post her comments equities rallied and treasuries fell away a little.
What was interesting was Yellen’s comments on jobs. Importantly she side stepped Friday’s Jobs report. If the normal use of seasonality was used the jobs report on Friday would have been negative. Yellen was extremely cautious and in my view the Fed is unlikely to hike rates anytime soon.
So what’s driving markets? I guess that’s resilience. Investors are chasing returns and the USA provides exactly that – a place to invest. Europe as we know provides little in the way of return and the UK with the Brexit vote looming, provides little return. Talking Brexit, polls out today suggest that in 2 out 3 polls the UK is likely exit.
We also heard the head of Commodities for S&P discuss the outlook for commodities. According to S&P commodities have or are close to bottoming and they are expecting a robust recovery. The news is not China. India is driving the next push for commodity prices and has overtaken China as the major purchaser of commodities. Oil also finished at its 7 month high in London.
The Aussie Market today.
Trading today was mixed and confused. With this in mind treasuries were mixed weakening slightly and I expect that Aussie bonds will be slightly weaker and that’s more on the back of stronger commodity prices and the suggestion that the Australian economy is starting to recover.
Hybrids will remain mixed as the calendar for issuance impacts on bank hybrids.
6 June 2016
The credibility of the Fed could once again be drawn into question. With so many voting and non-voting Governors (Regional Presidents) suggesting at least one tightening, if not, several to be orchestrated this year, this Job’s report was a disaster. The number even allowing for the Verizon strike in many ways is a disaster and that combined with many more people now discouraged to search for employment suggests a fundamental shift.
If you have been following my notes you would notice that I often link economic activity with trucking. Trucks are the lifeblood of the USA and one of the few areas that are not easily outsourced. The May numbers for heavy trucks fell significantly and this suggests that whilst some elements of the US is operating that the manufacturing sector has some difficult times ahead. These numbers may be affected by the looming US elections but I would think you cannot attribute the total slowdown to the elections.
World growth remains in my view the reason why the US economy is struggling. Europe has slowed ahead of the pending Brexit vote. The UK economy has stalled ahead of the vote and with central bankers and prominent bankers across the globe all talking a disaster scenario should the UK exit then it’s hard to see how the UK would have growth ahead of the vote.
As a result of the poor employment number, the probability of a Fed Funds rate hike in June has fallen to about 2%, July has a probability of 25.5%. The next vote after July occurs in September and that has a probability of 38.9%. November is 44%, and December is 58.4%. All this means is that the bond people have been correct. They have been quite skeptical of growth for some time which is why the yield curve has flattened and why the US Treasury 10 years have persistently been unable to break through 1.9% with any conviction. The US ten years closed about 1.7%. The Treasuries can fall further should the US garner interest from European and Asian investors alike.
US equities finished down slightly, buoyed by the probability that rates won’t be changing anytime soon. With continuously lower numbers and ever higher P/E’s one wonders how long this disconnect can continue.
The Aussie Market today.
The big news for the Aussie market is that the Fed won’t be tightening anytime soon. This allows the AUD to rally and any pick up in commodities or Chinese growth will spur higher levels.
Australian equities will most likely stall a little based on the global growth outlook. Credit drifted a little wider and that was more because Treasuries rallied hard. For Australia I expect the bonds to have a solid rally, swaps and credit to drift and hybrids will be mixed due to issuance concerns.
And something worth thinking about, volumes in the US markets for both equities and bonds remain persistently low. Before any significant price action can occur we need to see a pick-up in activity and volumes.
3 June 2016
Double or nothing?
With little over a week to go until June’s Fed’s meeting when the Fed could hike rates, (I don’t believe they can) markets remain poised to act. Volumes in swaps, credit, treasuries and equities remain persistently low, which suggests that investors are waiting for news.
The equity market saw a solid selloff before staging a recovery in the afternoon session. Treasuries had a good day with the 10yr falling to 1.79 before moving back slightly to close about 1.80%. The curve in the 5-7 ‘s looks very attractive with a reasonable pickup going from 2 to 5 yrs or 5 to 7 yrs.
Oil was the talk of the day with a number of analysts showing interest in the draw of oil in the OECD Countries. Analysis suggests that stocks may be lower and if true this means oil can rebound a little further. Canada has had a significant draw due to the wild fires, and the USA is poised to expand production if oil trades above $50, with the wildcatters commencing drilling operations. OPEC failed to reach any agreement.
Talking all things oil, oil is now up 80% since January. Dynamics are changing and expect a pickup in USA inflation linked to oil.
What the Governor said.
The Dallas Fed Governor Kaplan made a few interesting comments today. He expressed concerns about inflation picking up and noted that the labour force was close to full employment. Tomorrow’s important labour numbers is expected to come in around 160,000 with a read about 4.9%. This raises the interesting question, why are wages not growing? Unfortunately most jobs still seem to be in the service industries.
Kaplan also raised doubts over a tightening in June. He felt that the weight of data is still not compelling and thinks that it would not hurt if the US economy ran a little hot for a while. This raises an interesting point because any tightening in September / October could be seen as too close to the US elections.
We saw some firsts in Auto’s today raising some concerns over Auto loans and Asset backed papers because of lending criteria. The firsts were:
- Average loan above 30,000
- Average monthly payments is $503 slightly above the magical $500 mark
- Average tenor 68 months. The most preferred tenor is 7-8 years.
The average retirement age in the USA is increasing. Those people who are thinking of retiring in their 70’s has increased over the last 5 years from 16% to 23%. Those people who expect not to be able to retire at 65 has moved from 50% to 70%.
Odds and sods
In my view and a lot depends on timing, if the Fed moves in July the initial treasury market is likely to sell but that will only be short term. I expect with the stronger dollar and the treasury market could easily rally. The reason is simple, rates are very high compared to other countries in Europe. The same also holds true for Australia. Rates very high in a triple A country look very attractive.
The UK economy is suffering partly due to a fall in commodities. IP is down and the Brexit only raises concerns. Europe will should the UK exit look then to appoint either Paris or Frankfurt as the trading capital. It’s hard to see if Ireland will receive that gong. A Brexit exit on recent polling looks very plausible.
The Aussie Market today.
Given the strength of the Treasury market today, I expect that trend to continue. Equities could be a little better because commodities were stronger. Credit was slightly wider so expect some width there, and hybrids will continue a soft trend.
2 June 2016
Is the screw turning?
The day started like most over the past few weeks, slow, volumes low and a weak start. That all ended with the release of the Beige Book and Manufacturing Index. The news for markets was good news! The Manufacturing Index shows manufacturers are growing at a more rapid rate than expected and this trend has been slowing improving over the last 5 consecutive months with the index reporting a read of 51.3.
The Beige Book was encouraging and suggests an improving economic outlook predictably those states that are dependent on oil, mining and drilling were weak whilst the other states were improving. Wages appear to be nudging higher.
As a result the equity market turned from down approximately 100 points to end slightly higher. The 10 year Treasury bond finished the day slightly better. The yield curve remained steady with no major movements. The Aussie Itraxx was slightly better and that probably is on the back of higher commodity prices and improved Chinese numbers. The Australian Dollar looks to be heading back towards 73c.
Auto sales were unexpectedly weak. In a month traditionally known as being good for the Autos, Ford saw a 6% decline and GM saw an 8% decline. The big winners were the Koreans, and especially Hyundai with its latest CSX offers (crossover SUV).
I still remain skeptical of a rate hike in June, preferring July. It is worth noting that the Governor of the BOE is ramping up concerns should the Brexit vote lead to the UK leaving the Euro. The concerns are that a Brexit exit will lead to economic problems and a Fed rate hike will only exacerbate those problems. However given the BOE’s concerns, one feels that the Fed may simply wait, given a few weeks will make little difference.
The Aussie Market today.
Equities were subdued and bonds were not much better. The mover was credit so I expect that trend to continue. The Aussie is stronger on the back of improving commodity prices and especially oil so with this outlook expect equity to have a reasonable day.
Bonds on the back of stronger equities should weaken a little, credit to be firm and hybrids will have a softish tone due to Bank big 4 swamping the capital note market.
1 June 2016
Waiting for the Fed.
The day started as expected, equity stronger and treasuries slightly weaker. As the economic information filtered through, the markets became somewhat confused. Bonds rallied a tad and equities retraced, oil rallied then fell and credit was slightly weaker. The S&P continues to languish around 2100. The equity market seems unable to break one way or the other.
So what was it that we saw? Personal Income (Consumer Spending +1%) showed that the economy was growing and was in line with the Fed’s expectations. Could this be the stimulus that boosts the economy to grow at 2.2% for the year and provide growth of roughly 2.8% for the rest of the year.
Consumer confidence was not commensurate with a strong economy. It appears as though the labour differential is stalling and this could be of some concern. The differential is the difference between those looking for a job and those that are discouraged.
So on balance the markets are basically sitting pretty and waiting for certain actions. Looking into the week, Friday we get the jobs report, then we have Yellen talking next week, then in 2 weeks we have the Fed meeting to decide on a hike. With Brexit a week later the balance of probabilities suggest that the Fed will wait until the vote is taken.
Talking about Brexit, the vote appears to be in favour of an exit. If the vote is to leave the Euro, then expect some volatility. The pound weakened today.
The Aussie Market today.
I expect more of the same. Quiet markets looking towards the important Fed meeting in mid-June. That said equity sentiment will be set by events in China and US data.
I expect bonds to be a little better on the day. Hybrids will be affected by recent issuance of capital notes by the major Australian Banks and this seems likely to continue for a little while yet.
The Market will remain choppy up until the Fed meeting mid-June and post that meeting the Brexit vote will have an impact if the British decide to leave the Euro.
30 May 2016
Friday was to be a quiet day a restful day, ahead of the Memorial Day Long Weekend. The hoi polio had packed their Rollers , the surf boards were mounted on the Porsches and we were all waiting to head up the Long Island Expressway to the 495 and then drop down to the 27 on our way to the Hampton for some much needed R&R, surf sun and wine. Alas though we had to wait for Janet finish her talk at Harvard on Friday. Doting on every word Janet said markets moved on every pause and sought guidance for where interest rates were going.
Alas like all her speeches markets were barely moved and travelers to the Hamptons were all condemned to the inane traffic jams as we headed to the Hamptons. Nothing moved, Janet just soothed the markets back to the deep slumber it’s been this past week and we wait for more guidance next week.
So what did we learn? Janet was somewhat dovish. Janet suggested that we monitor productivity. That’s still low. Inflation is key and by the Fed’s model should start to increase. The same reasons that caused inflation to plummet will help restore inflationary expectations. A strong dollar has hurt emerging market countries but has helped lower US inflation. Yellen believes that the dollar may retrace and this will help inflation. Oil has returned to $50 a barrel this should help inflation. And then there is the big if, with a tightening of labour market wages are expected to increase. This is possibly a long stretch given most new jobs are not being created in positions that require significant skills or training. I wait with bated breath for when wages rise. There will be some wage expansion because of Obama’s deal to increase the minimum wage, which may fall once Donald Trump becomes President. (Don’t underestimate Donald).
Friday say the release of the revised growth numbers for the March Quarter. The quarter was revised to 0.8% which was the neutral number the Fed and the markets were looking for.
So we wait for Janet’s next speech, that’s June 6 in Philadelphia for guidance.
So on the day, equities traded marginally higher on a day where volumes were down about 20%. Treasuries were relatively unchanged. Oil rallied a little.
In my view the Fed does not go in June. The economic numbers are still pointing to a prevailing weakness within the economy. The overriding concern though is Brexit. The Fed remains concerned over world growth and events. An exit by the UK will cause instability and the Fed would not want to appear to burden world growth by tightening ahead of Brexit, just in case it actually happens. The Brexit vote is June 23.
The Aussie Market today.
I am not expecting a lot out of Australia, Monday nor probably for the rest of the week. The USA is out Monday and this means that nothing happens until Tuesday, meaning Wednesday is the first day that Australia will get direction. Given the USA was quiet I expect the Australian market to be quiet unless we receive some strong data out of China.
Bonds will be relatively stable and will trade in a tight range. Credit tightened and should probably continue to tighten in Australia.
27 May 2016
Yawn – everyone is looking to the weekend.
The equity markets today were quiet and this tone flowed into the US treasuries as well. The equity market had several pieces of good news – first jobless claims were lower than expected, and the 7 year treasury auction saw strong demand. The auction saw the bond issued at 5bp lower than Wednesday at 1.82%.
The day saw investors roll out of banks and energy and back into utilities. This stock rotation suggests that maybe investors are not quite as bullish as one may believe. The market was tin and quiet ahead of the Memorial Day holiday. The lack of activity could also be because Yellen is talking at Harvard on Friday and markets will be poised to act on what Yellen has to say.
The bond curve continues to remain flat and looks to flatten at every opportunity. What is interesting is the High Yield curve. The high yield curve is inverted and can remain such for extensive periods. The drivers of this market are credit availability, industrial production, capacity utilization level of interest rates and recovery rates. The current recovery rate is lower than expected given the current default rate.
The Aussie Market today.
Credit had a good run today so I expect credit to continue its tightening phase into today’s trade. Equity was quiet and US treasuries had a reasonable day. What is important to remember is that Friday is a big day in the US. Yellen is talking at Harvard and we have the Memorial Holiday long weekend. Trading is thin, the roads are already quite busy, and the airline queues are getting longer. That means that many who might act Friday are most likely to be away so traders in Australia are aware of this. I think today’s market will be quiet and drift unless we see some important economic news. That means most major markets will remain quiet until probably Wednesday looking for the US to react to Yellen’s comments Friday and then recommence trading Tuesday.
Traders in all likelihood will look to square their books.
26 May 2016
All is good? Right?
Today was a risk on day and the equity market was the main beneficiary. Crude had a strong rally as it appears as though US stocks have fallen. The restructuring of Greek debt led to a more buoyant tone and the US market appears to be in the mindset that the economy can withstand a rate hike. The market appears to be reacting to “it’s not how good things are but rather how bad they are not!” – If you believe this statement then you can accept that a market can rally when each quarter over the last two years have seen diminishing corporate revenues.
The market continues to be range bound and these ranges are held because of low rates, something in the order of 20% of developed bonds are trading as negative rates, and policy uncertainty. Some of this weakness is being caused by a strong dollar and weak growth. European flash PMI for Europe looks strong. Germany is strongly rebounding.
Bonds were the big news today. The yield curve continues on its bias to flatten. Today’s 5 year treasury auction was particularly interesting. When issued the bond traded inside the yield and the coverage was 2.6times. Primary dealer participation was the lowest on record, however, non primary dealers won 66% of stock. The non-primary dealers include other central banks and funds. The equity market was up almost 1% and bonds weakened by about a point in the 10 years. This suggests once again that bonds are somewhat skeptical about the US growth story.
Looking forward we need to watch Yellen’s comments on Friday. What I expect is that she will discuss the checklist and there are a few boxes that she can tick this time. This could mean she may be getting close to the trigger point to hike rates.
Aussie market today
The equity market had a good run today with a positive tone. I suspect that the equity market in Australia will continue that run. Bonds look to be slightly better bid so I expect that tone to continue. Credit had a strong rally so that should continue into Australia.
Hybrids will remain choppy as the 4 majors continue to announce new capital issues.
25 May 2016
What a difference a day makes.
So all was good with the markets today. Of course the surge in prices was due to optimism about the US economy and that the economy can withstand the shock of an increase in interest rates. The beneficiaries for the day were banks and IT. Banks shares rose because it means theoretically more profit. Oil surged and that’s probably more the reason.
Housing provided some strong data today being up 16.5%. This surge gives equity investors some confidence about the growth outlook, as this was the strongest number for 8 years. The real movement in sales was in the top end of the market, in other words, homes in value above $2.5 mio.
So why am I so bearish in my statements?
The Pew Report out today referenced millennials. Apparently 1/3 of millennials still live at home, that’s 18-34 year olds. Apparently this is the highest level since records began in 1880. Some reasons include lack of jobs, poor salaries and low marriage rates. Millennials still living at home is an important reason why the First Home Buyer is missing from home sales and is also distorting the housing market because the parents of those children are unable to sell and this limits the available stock. Limiting the available stock hurts the market as turnover falls, houses are not being renovated and people are unable to upgrade due to low stock levels, thus taking money out of the cycle.
Next we have just had the March GDP number which was up 0.5%, the estimate for the June quarter was 0.8%.
For markets to be returning to strength we would need to see this estimate move to over 1%. The yield curve remains persistently flat! A flat yield curve is never a good harbinger of strong growth cycles and the flat yield curve is at levels not seen since 2007.
To do or not to do – that is the question.
The Fed has suggested they want to see more data. This week we will see some important data and Friday’s labor number will be an important factor. The markets are estimating a rate hike at around 38%, that’s up 8% from Monday and up from 12% this time last week. What is more interesting is the probability for a July rate hike has moved to 45%. The market still remains skeptical about any hike as the probability is less than 50%.
The other factor that the Fed has concerns, is the Brexit vote. If the Fed were to hike it would have barely a week between its hike and the vote. There is concern that a hike would have a profound impact globally and if the UK votes to exit, hike with the expected slowing of the UK economy could tip global growth into recession.
The Brexit vote is important for a number of reasons. First the UK economy is a major force in the European economy, a slowdown would definitely impact Europe. There are also a number of projects, and commercial property transactions that have a clause inserted that allows for parties to walk away from the transaction if the Brexit vote is yes.
The Brexit vote also could mean countries such as Greece and more importantly the Netherlands could decide to exit.
The Aussie market today
The equity market in the US was strong and no doubt this positive tone will feed through to the ASX. Government bonds should be weak on the back of a more positive equity market. Credit should be slightly stronger. The currency to be a little mixed and probably remain lower.
24 May 2016
Direction? Which way?
The markets today were somewhat confused, directionless and waiting for confirmation of economic data to anticipate the Fed’s actions in June. The equity market moved up and down to finally finish slightly down. US Treasuries staged a small recovery with the 2/10 flattening about 2bp. Oil was down slightly.
To distill today’s movements, its best to look in the context of a confused market. The probability of a change in Fed Funds for June has risen to about 35%, however, that probability rises to about 45% in July. This suggests most pundits believe that a rate increase will occur in July. This event may change however once the market hears Yellen’s speech in Philadelphia scheduled for June 6.
This critical speech by Yellen will certainly drive sentiment, however with the Brexit vote due late June many economists believe that the Fed won’t move until after the vote. The Issue is that with an uncertain European economy a hike by the Fed ahead of the vote will destabilise an already nervous market.
As a result of the Fed’s actions and low interest rates we are observing some interesting behavior. M&A activity has been very active, however new issues and IPO’s have been slow, with 31 year to date. The level of interest rates means that many risk averse investors are taking a lot of risk in the chase for yield.
With all the uncertainty investors are happy to wait. John Williams, the San Francisco Fed President, added fuel to the fire by suggesting that the Fed could move three times this year. His comments may be quickly forgotten as the steady stream of data due later this week is released.
Aussie market today
Markets were quiet waiting for some guidance as to the Feds actions next month. Credit was slightly weaker, bonds slightly stronger and I expect that to be reflected in Australia today. With a number of new issues due later this week, swaps will dominate the market activities and I expect bonds to gradually drift in once the issuance of corporate debt finishes.
Hybrids will continue to be affected by the issuance of bank capital products.
23 May 2016
To rally or not to rally?
The market on Friday despite its advance was rather lackluster. The conviction trades were not evident and for every high, trading volumes remain decidedly thin. The market rallied for two reasons: apparently one being a lower oil price which went contrary to how markets have moved of late and the other reason being that maybe, just maybe, the economy is robust enough to take the hit of a hike in rates by the Fed. Equities rallied and US treasuries appeared to be steady with credit just tightening in a little.
Equities returned to a somewhat buoyant mood because with about 95% of the quarterly reporting now completed the earnings decline is not as bad as first thought. The market was expecting a decline of about 8.5% compared to the March Quarter 2015, and was only down 6.8%.
The markets appear to be looking to June for a hike in rates but any hike remains dependent upon economic data and outlook. With the Brexit vote on June the 2rd, in my mind it appears unlikely that the Fed will move ahead – especially with economic data remaining soft.
The big news.
It appears as though a number of hedge funds based in the US have taken a liking to shorting the Australian Banks, based upon a notion of poor underwriting standards for mortgages leading to a significant fall in earnings. For many hedge funds this could become their last hurrah. The hedge fund industry in the US has seen significant outflows over the past few weeks, especially for many that have failed to produce a positive return this last year or year to date. In other words many hedge funds have performed poorly. Betting against the Australian Banks on mortgage failures could be their nemesis.
Why? Very simply many of the hedge fund managers don’t understand the concept of a secured mortgage, and the fact for many of these so called worrisome properties there is already a reasonable deposit. Second, the fact that the vast number of Australian mortgages are fully secured is not well understood and then there is the problem of negative gearing. In the US one pays capital gains tax on your house but you get the interest deduction on your mortgage. Many of the hedge fund managers don’t understand the concept of negative gearing.
Then there is the problem of bad and doubtful debts. The Australian Banks Balance sheets can easily withstand a rise of bad debts to 2% and this would still be well below many of the US Banks. The actual mortgages at risk are not a large component in the Australian Banks mortgage books.
Where the problem will reside is in the second tier developers who may find settlements don’t happen. This could be a bit of an issue for the Banks, but generally for these developers the Banks require collateral.
Aussie market today.
Following the story in the Wall Street Journal, the Australian Banks are likely to open weaker. This could be a boon for those investors looking for franking credits. Where the strategy could work is a scaling back of profits due to regulatory creep. By this I mean that the Banks have to set aside more capital and reduce gearing thus impacting on profits. However as the Banking sector is an oligopoly dominated by four banks I don’t anticipate significant dilution.
Bonds will be a little weaker I think in response to currency falling away, however any significant selloff could be used as a buying opportunity. I expect the market to be a little contrary and the main factors will be the impact of the WSJ article and if the local fund managers buy into the story.
20 May 2016
Another day another slump.
Markets reacted today in a manner that I thought they should have done so yesterday. Bonds were slightly stronger and the bond curve between 2/10’s flattened slightly. Equities after a bad start recovered a lot of the fall to end moderately down, credit was weaker, and oil was lower. The S&P recorded a two month low.
Much of the day’s drama can be traced back to Dudley’s comments which at best are starting to signal that the Fed may be looking to raise rates. Before we get too excited, one still has to look at the economic surprise indicator which is starting to head in the right direction. However, it’s barely at neutral and with all that is happening in the world a strong positive growth story seems like wishful thinking. The Fed Funds Futures for the Effective Rate still have a 50: 50 bet going and the level is 0.37% – hardly a strong belief that rates move significantly.
Today should have seen the equity market stronger. We had a great result from Walmart and then we have the unwanted interest of Bayer looking to purchase Monsanto to create one of the globes largest Agri Business. However, equities struggled and the Dow fell about 0.4%.
My view on markets at present is bearish. I simply believe that once the Fed starts to tighten again then we see a stronger dollar and that will impact commodities and exports in general. Given most of the globe is experiencing growth, this rate rise will have the effect of tightening those economies further. Much of the growth at present is entirely attributable to low rates. To back my point in the WSJ survey the 80 economists surveyed all have their probability of getting their forecasts wrong is that they have overestimated the strength meaning things are likely to surprise on the weak side. Another interesting fact is that Daimler Benz announced that its USA division order book is extremely weak and in places like Brazil their order book is down 20%. DB don’t expect a pickup in orders anytime soon. Gap is closing a number of store (75) and exiting Japan.
What do skincare and Victoria’s Secret have in common?
As I review markets I cannot but think of two anecdotal indicators. One being the switch between skincare and cosmetics. In a bull market skin care can see strong demand. Today we see cosmetics experiencing strong demand, and using Estee Lauder rule, this means we are in a weak market. The other one is Greenspan’s underpants indicator. This indicator focuses on the purchasing decision to buy or not to buy. In a weak market people defer their buying of underpants. So if Victoria’s Secret numbers today are any indication, then we should be worried. There has been a discernible trend in not buying those skimpy pieces of seduction. Wage inflation in the US continues to persistently remain weak.
Aussie market today
The selling of the US equities market today probably means further selling of Aussie equities, although I don’t expect heavy selling. Credit was marginally weaker and a mild weakening of credit in Australia is not unexpected if one sees the bonds mildly positive. Much of the weakness can be found in movements in swap spreads. Hybrids, especially the bank hybrids will be weak, and this is technical. The bank hybrids will come under pressure as the majors continue to issue capital products into an already full hybrid market.
19 May 2016
Rate rise. Really?
Today at 2pm we saw the FOMC Minutes released and as expected markets reacted but reacted to what exactly? The FOMC Minutes suggest that the Fed is about to break out of its slumber and raise rates, but when? What we know is that a number of the revolving Governors have been commenting, but the three permanent members Fischer, Dudley and Yellen have been silent about any pending rate rise. What we do know however is that a rate rise is not a given in June and that before any rate rise a robust discussion is expected. The Fed will be looking for the confirmation of strength within the economy warrants a rate rise. With the Brexit vote due on the 23rd of June, in my view, if the Fed is going to hike rates then it will raise rates in July post the Brexit vote. If you are looking for yet another reason why the Fed may tarry…the Economic Surprise Index is close to neutral. The surprises of late have tended to be positive and the direction towards a stronger economy appears to be a breathe of positivism, however the economy remains fragile. Most of the positive economic activity can be attributed to a lot of help from the Fed however, a subtle change in sentiment would have a profound impact on the economy.
Accordingly the chances on a potential rate rise rose from yesterday’s level of 6% to about 20%. The dollar index was strong and bonds weakened significantly on the day with the curve steepening a tad. The market is also putting a probability of a rate rise in July of 33%, making a rise more likely in July.
Equities were weak and out of the 10 sectors, the financial sector was the only sector that was positive, with the financials benefiting with a greater interest income. The conundrum for equities is how to increase the returns as investors move towards strategies for alpha generation. Over the year however the return for the various US equity markets has been quite muted with the year on year performance to date being -4.4%.
The state of the US economy still remains weak. Business investment remains weak, transportation is slowing, wages are weak, unemployment is falling but most of those jobs are being gained in the hospitality sector. If the Fed were to rise rates then that rise would be in as an expectation that the economy is strengthening without the evidence.
Oil collapsed after the minutes were released after briefly almost touching $49.
Aussie market today
The takeaway for today was that traders here in the US are starting to focus on a rate rise. This means that unless we see a change in direction for earnings and actually start to see as a trend of increasing revenues, equities are vulnerable once the buybacks cease. Bonds will adjust for a rate rise efficiently and then make a decision on expectations of growth.
Trading today I expect equities to be steady. Bonds will adjust a little and I do expect them to be weaker on the day. Credit strengthened a little today so expect some reward in credit. Hybrids will continue to be mixed. With Banks looking to issue a significant amount of Capital notes, bank hybrids will remain under pressure.
18 May 2016
Nervously watching as we jump at shadows
Markets took a tumble today. The tumble can only be linked to the strength of some numbers today and the fear that the Fed will raise rates in June. On the question of raising rates, one has to remember that before a rate rise the Fed signals the change, to date this has not happened. So on this evidence alone it appears unlikely that we will see an increase in June. My caveat is if more strong numbers are released. The CPI was largely driven by the increase in oil and surprise surprise that was strong. The increase comes largely because oil shifted from $35 a barrel to $45. The CPI and IP are heading the right way but we need more strength before the Fed in my mind looks to hike rates. We had a trio of Fed Presidents suggest rates could rise. These signals are often misleading, so I will wait for the trend to unfold. New Homes were also strong being up 6% however, levels remain lower than normal.
So the markets have looked at the numbers and are concerned that a rate rise could happen and as such equity sold, bonds retraced and interestingly credit rallied. Commodities were stronger and that was on the back of oil. The yield curve continued to flatten which suggests that traders expect growth to be muted.
Oil seems likely to continue to rise and that rise may be attributed to the wild fires in Alberta Canada. Fort McMurray remains evacuated and the fires are heading back to where the oil sands extraction is happening. A major power station in the region was shut down because of the wildfires.
What we are seeing in the macro numbers are very choppy patterns with no discernible link.
The economic indicators today were CPI, Industrial Production, and Housing. If we look at housing despite the rise, the number of new homes is still below the normal levels. I listened to the CEO of Lennar (major builder of homes in the USA) and he made the point that new homes growth is weak. The reason for the weakness is because the first home buyers are missing. This is because they cannot get access to mortgage finance because of banks raising the bar. So instead of building new homes Lennar is now concentrating on developing multi housing projects to rent.
I still feel gloomy about the US economy and much of my gloom is because transportation of goods (logistics) is waning. Demand for large trucks is falling and in a recent economic study released by the logistics industry that gloom was quite prophetic. Demand for new trucks continues to fall and fleets are diminishing.
There is a growing concern over the state of infrastructure in the USA with the Engineering Body grading US infrastructure with a D+. It is estimated that some $3.7 Trillion is required to be spent to upgrade US infrastructure by 2025 for a grade of B+. Such projects would include Airports, roads and water. The concern is how this will be funded as there is not enough money in the Government coffers. Taking responsibility is the problem as some of these projects are actually controlled by States or Councils. This would require issuing munis. There is a lot of discussion about Public to Private or privatisation.
Aussie market today
The equity market was very soft and bonds weakened especially in the front end with the net result that the yield curve flattened. Credit had a strong day. On the basis of what happened in the US, I expect equity to weaken allowing bonds in Australia to have a good rally. Credit should have a good day as well. Hybrids will be pressured as we see liquidation of other bank hybrids to make way for the new Westpac Capital Issue.
17 May 2016
More of the same, this is getting boring.
So what did we learn today? The US economy is perhaps not all that healthy and that means that the Fed is unlikely to hike rates and maybe not until September. That being the case the equity market rallied, treasuries were sold and credit rallied in sympathy with the improving equity market. Over the last few days there has been a move towards credit, as credit presently is providing equity like returns with a significantly lower volatility. Oil had a better day today as reports suggest that the glut has been reduced and that the impact of the Canadian Wildfires and the attacks on Nigerian Pipelines have slowed production.
Also released today was the Manufacturing Index by the NY Fed which paints a glum picture of the manufacturing output for the state of New York. What is important is that the NY Fed’s is the first to release this data and it’s the trend that everyone watches. The number retraced about 20 points and went from up about 9 to down about 9.0. (I have added the link to the Report below if anyone wants to read.)
Traders were also discussing the weak Chinese economy and suggesting that the Fed would be unlikely to raise rates whilst the Chinese economy remains weak.
Interesting problems for a Brexit exit
For those followers of the round ball game otherwise known as football or in other places soccer, a Brexit exit will have interesting repercussions on the Premier League. About 100 players will require work permits if the UK exits Europe if they wish to continue playing in the English Premier League.
Aussie market today
Equities rallied, and treasuries sold on the basis that oil improved due to shortages and the Fed was unlikely to tighten for some time. For Australia the rally should not be taken for granted. I suspect that with the weaker Chinese economy, the Australian Equity market will be a tad weaker and there is a good chance for bonds to be a little stronger. I expect credit to tighten and that trend looks likely to happen for some time yet. Hybrids should rally, however, any new T1 capital issues by the banks will cause a retracement.
16 May 2016
Another number, another confused market
So Friday’s retail sales number was released and it was 0.5% better than expected, so one should think that the equity markets should rally and bonds be trashed right? Of course, that’s the way most would think looking at the headline number. The number indicates growth, that’s good for equity markets, the number indicates the Fed will tighten, that’s bad for bonds. So why were the markets out of kilter?
The number whilst optically looks great requires a little more investigation. Remember we are talking a number in nominal terms not growth. Gasoline sales rose 5% but that should not surprise because 2 months ago gasoline was significantly cheaper. In fact over the history of the numbers being published, April’s result was the strongest consumption of gasoline on record for the month of April.
The retailers continue to show worrying sluggish performance. The control group was 0.372% versus 0.4% and this was really bad. Why is this so? The retailers have been since Christmas aggressively discounting their wares. As such there have been increased sales but at a much less margin and at a much less cost. Whilst talking retail, one of the market leaders, Nordstrom store sales for example were down by 7.1%. The big retailers numbers for the quarter just passed have been woeful and the trend does not appear to be changing anytime soon.
The big box stores reports start to be released Monday so it will be interesting to see how they fare.
Commoditisation of goods and services is hurting in much the same way as the Banks are also experiencing problems. Construction materials had strong gains but this trend is not expected to continue.
The Banks are struggling to find ways in increasing revenues. Their balance sheet has become commoditised and some services are being squeezed away from the traditional form. For example, a number of M&A deals have been done without the use of an investment bank. Saudi Arabia’s pending IPO of ARAMCO and bond issue will most likely be completed without an investment bank. Banks are being dis-intermediated and this is a growing trend.
So from the number there is plenty to worry about. That’s why equities fell and treasuries rallied. Treasuries are particularly concerned about growth. The shape of the yield curve says as much. The yield curve flattened again and it will to continue to do so for as long as it believes that world growth remains muted and that growth in the USA remains benign.
The conundrum of growth is all rather confusing why it simply has not happened. This may be attributed to the lack of wages growth and the soaring costs of simply living. Between college fees and rent something like 75% of a salary is spent. Then you have healthcare to consider. For the middle class who are the primary drivers of the economy, are getting squeezed. We are now in the seventh year of recovery, growth should be much stronger, however, that’s not happening. With negative interest rates in Europe and a stalling Chinese economy it’s hard to see where stimulus is going to come from.
Bond markets as a rule are great predictors of economic activity and bond markets are pointing lower, i.e. lower interest rate and slower economic activity.
Aussie market today
With a weaker equity market in the USA and weaker commodities and slower Chinese growth numbers, I would be surprised if the ASX rallied. Given the flattening of the yield curve in the USA and also suggestions of further rate cuts in Australia, there is a strong chance of further flattening of the yield curve and that means bonds rally. I would be mindful that at some point the curve could invert if economic indicators keep pointing towards slowing growth.
13 May 2016
The market today in both bonds and equities reflected today’s weather, languid and lazy. The day was mixed and was dull. We saw a thin trading day with attention focused on the pending Brexit vote. The UK economy appears to be slowing ahead of the vote.
The retail woes continues with Kohl’s reporting and the share price falling a little over 9% at one point. The big news on the day was the announcement of Bayer interested in buying Monsanto. That announcement probably was the main stimulus for the day’s trading. The Farming community is now in the 4th year in a down cycle so a lot of work is needed to return to earlier revenues.
Tomorrow we see the release of retail sales. This is an important input number for determining the GDP. The headline is expected to be up 0.8% but remember this number is a nominal amount, so an increase in oil prices (which we have seen) is a positive contributor. What we have to watch for is the control group and their contribution. The control group is important because their numbers are fed directly into the calculation of GDP. The control group consists of Kohl’s, Amazon, Macey’s and several others. The major retailers are under significant pressure and their guidance has been weak numbers for April. Amazon, however, has gone from strength to strength.
And whilst we are talking about retailers, Nordstrom’s just released their numbers and they are grim. The share price is down 9% in after sales trading. The outlook is for very weak earnings growth. Kohl’s also released their numbers and there were exceptionally bad and worse still, they have just been through a massive reorganization of the business. The fall in sales was considerable and profit fell 87%. Some of these bad results may be attributable to AMAZON but one should not blame AMAZON for the totality of the fall for sales in all the major Retail chains.
It’s not only Australia where Chinese buyers dominate the housing market. The Chinese have since late 2014 been the single largest buyer in the housing market. Prior to 2014 the Canadians dominated the US housing market as the single largest foreign purchasers.
Aussie market today
US Treasuries had a reasonable day and credit weakened slightly. Otherwise the day was rather unremarkable. All attention is clearly focused on Friday’s retail sales number and the markets will adjust according to the number. The afternoon session saw oil rebound and that does not appear to have been the case with the A$. Commodities in general were flat to up so it is a reasonable proposition to expect support for the Aussie.
One point of interest is that there is in the order of $5trillion of European money looking for a home. In the first instance the US is seen as a beneficiary but with that weight of money looking for a return, the Australian markets should see demand at some point. It won’t help today’s trading views but it’s worth thinking about.
I expect bonds to strengthen slightly, credit to be a little wider on the day and hybrids should be mixed.
12 May 2016
2 Steps forward 2 steps back
After four consecutive up days, the various US equity markets retraced. So why the glum day and what was the root cause? Macey’s and Disney’s numbers were the center of attention. Both reported earnings that were not only disappointing but highlighted concerns moving forward. Retailers in general as a result were down significantly today apart from AMAZON which keeps going from strength to strength and has some analysts suggesting by 2020 it could be a $1 tr dollar company. Macey’s was down 14%.
The earnings of both Macey’s and Disney continue to highlight the current market trends which as a generalisation show a sluggish economy and the continuation of weak earnings reports both on an annual basis and quarter on quarter. Weak retail sales are a concern and highlight systemic problems within the US economy. Investors are looking towards Friday’s release of retail sales for further guidance on the US economy.
As the equity market weakened, US treasuries had a good day. US treasuries saw a continued demand and the main reason appears to be that many bond traders and investors feel that the Fed is unlikely to raise rates in June. Once again investors are pointing to economic data which has tended to be weak and without strong data the Fed would be unlikely to move. The reason for this is simple, if the Fed tightens without the supportive data, it will be seen to be aggressive tightening and that would be the wrong signal to send to markets. World growth does continue to weigh heavily on markets.
Hard times for hedge funds
The hedge fund model currently appears to be broken. The returns of the CS Hedge Fund Index vs the S&P suggests that the hedge funds are not making competitive returns with a year to date return of -2.68% and Fixed Income proving one of the better returns of 1.58% year to date vs the S&P up 1.04%. Hedge Funds are losing money through redemptions and are also closing down at the fastest rate for some time. This is the first time for about 10 years where there are fewer hedge funds in December 2015 than were operating in January 2015. (Bloomberg)
Trend is your friend
The equity market rallies are somewhat suspect in that whilst the market rallied, volumes were light, suggesting that investors were not necessarily there for the ride. This trend is noted in a number of trading products and junk bonds is one of those products. As a general rule of thumb, if junk bonds rally then that’s good for equity. Since late last year there has been a notable exit from junk bonds and the equity market rallied. Emerging market debt has rallied and so too emerging market equities, albeit on thin volumes. This begs the question – without any real volumes can this trend continue? A strengthening $US would hinder further asset price growth.
The Aussie Market today
With the fall in equities one could expect that the ASX 200 would have a down day, but with the pickup in commodity prices today I expect the ASX 200 to have a good day if not be a little range bound. Bonds will rally on the back of better UST prices and credit could tighten as well with the Aussie Itraxx a little better on the day. Aussie $ could continue to improve.
11 May 2016
Here we go again
What can one say about today? Investor confidence is what drives markets and today was a confidence thing. Earlier today we had Small Business Confidence (NFIBC) released and that shows a small gain in confidence. The expectation is that growth, inflation and employment are all showing signs of growth but it’s very slow. That’s where we are today, a boost of confidence but can it last?
The equity market today reacted to improving commodity prices and it was positive and to be frank – very positive. Today was a good day. Bonds also had an interesting day, today we saw $25bio of refunding for 3 years and the demand for the new 3 year issue was strong. We have another $40 bio of refunding later this week.
Today optimism reigns supreme, however, we need to see how long this optimism prevails.
It’s worth considering that as the recovery cycle continues, growth has remained muted, and the worry is what will happen if growth slips. To date since Thanksgiving the equity market is flat and since the beginning of the year we are up about 2%.
The prospects of a rate hike in June seems unlikely with the implied probability of a hike being about 4%. It is worth noting that since the FOMC meeting was invented, the Fed has not adjusted rates unless the market has factored a movement. If this relationship holds then the Fed is unlikely to hike rates in June unless the market has a significant change in mindset and that would happen with the release number of very bullish indicators.
Retail earnings numbers start tomorrow. The expectation is not good. The retailers have the highest level of clothing inventory seen for quite some time, thus making investors nervous. GAP is expected to show numbers down significantly and Macey’s are expected to also struggle.
Jobs jobs jobs
Is the Fed behind the curve? Some economists believe so. The evidence suggests that signals are rather mixed. We see the U6 rate falling, some improvement in wages growth but it a very small gain, and the Quit Rate remains steadfastly steady. In my own view I think the economy is slow, however, jobs growth is occurring in areas where a number of skilled vacancies exist but people to fill those positions do not exist. That then means there is a function of skill and education required that many job applicants simply don’t have and if I am right – this means that jobs growth won’t lead to increases in wages because most people are unable to fill the vacancies. As I have discussed previously most jobs growth is part time or going into the restaurant trade, these jobs as a rule don’t pay all that much.
Aussie market today
The equity market in the USA rallied today because of an increase in commodities, the same can be said for Aussie equities. I expect that the ASX will have a good day and most likely the $A should see a strong gain on the day and that’s all based on today’s commodity story. However I don’t expect this to continue.
Credit tightened today on the back of high yield and equity markets generally so I expect Aussie credit to have a reasonable day. Government bonds will shave a few points today.
Hybrids will be mixed, I see demand for higher yielding issues. Bank stocks should lag because of continued issuance.
10 May 2016
More of the same.
Much of today’s discussions were when will the Fed raise rates? Many market commentators remain confused and the tone one feels is that maybe the Fed cannot hike rates in June. Remember that the Fed’s earlier indication was that rates could be raised in June. My own view is that with both the European and Chinese economies weak and manufacturing output weak in the USA, it will be very difficult for the US economy to grow significantly. Logistics in the USA are slowing and so too sales of the trucks that are used in the Logistics businesses.
The Panamanian Papers have just been released, all the data is now available. There could be fallout from this especially in a number of UK Tax Havens.
Volumes remain low so any positive gains are done so without any real conviction. Fear of rate increases supposedly weighed on the oil price today, however I think it had more to do with the sudden departure of the Saudi Oil Minister and Iran suggesting that they will only comply with limits once they have regained their position as a major oil supplier.
Structurally the US economy is one where many people work part time and most new employment is still occurring in the hospitality trade. Unfortunately manufacturing is weak and innovative technologies are proving slow to grow. The business outlook is decidedly mixed especially when cast in the light of the Panama Papers and the recent piece of US Tax Legislation that is designed to slow Offshoring. To date $378 bio worth of M&A deals have been withdrawn this year.
How the day ended
The day was mixed for both bonds and equities. After a weak opening for equities the equity market ended mixed, bonds were slightly better and the Aussie Itraxx was slightly higher
I heard Mr Trump discuss debt today and unashamedly he told the interviewer all one needs to know about debt is all rather simple, you just print more money. So not only would Trump increase money supply by printing more money he also wants to renegotiate the US$ 19tr debt down, so investors now get a Zimbabwean style return should Mr Trump become President. Why is Bowen so worried about Australia losing its AAA rating? Of course Australia cannot lose its AAA because Australia will pay 100c in the dollar and inflation will be low compared to a hyper inflated AAA rated, USA discounting its debt. Where is the commentary from Fitch, S&P and Moody’s. Even more galling would be the response Australia or for that matter France Italy or Greece would receive if any of these countries adopted Trump’s position. Surely the Rating’s agencies and leading market economists have to start commentating on the downside of such policies. Sure it goes against the GOP Agenda but then again the GOP is in disarray and the USA does not deserve misguided policies that are detrimental to its International Standings. Lucky for Trump not one reporter has actually asked him any meaningful questions about his policies.
The Aussie market today.
The US equity market was slightly down, after a rather mixed day. Disappointing trade data and weak Chinese numbers led commodities lower and this will impact on Australia’s ASX. I expect that equities will be weaker. Bonds were better today so I expect bonds to have a slight rally. Credit should be a touch wider. Hybrids will be mixed as demand should continue for higher yielding assets.
9 May 2016
Here we go again
On what should have been a day for bonds to rally the reverse happened. Equities after a weak start rallied because the weak jobs data points to the possibility that rate hike is unlikely in June. Equities were buoyant because the economy is weaker than expected, rates are going to remain low for some time yet, and the Fed is unlikely to raise rates in a hurry. This last point justifies current equity prices.
Meanwhile bonds weakened because institutions were switching from bonds (defensive assets) to growth assets because equities will rally if rates are not rising. All this misses the obvious to me, which is how do you justify high p/e’s based on an interest rate when earnings have been falling consecutive quarter on quarter for at least two years. Credit markets had a better day on improving equity markets.
Still on the news front the Saudis have a new Oil Minister and if the stories are correct, The Saudi’s appear to be losing their shine with Asia as the Russians and more lately Iran are taking market share. Oil also received a shock these last few days due to the massive wildfires in Alberta. Apparently 88k people were asked to evacuate the area around Fort McMurray. Fort McMurray is the centre for the oil sands extraction in Canada. The fires are considered to be a strong reason why oil has rallied these past few days as the total output from the Oil Sands Region has come to a complete stop.
Watch the US election
Whilst Mr Trump is being seen as no chance to achieve the US Presidency given he upset just about every group that he possibly can except for the great disillusioned core, stranger things can happen. I find it unreasonable that our media outlets have allowed Trump to say some really foolish comments without serious questioning. For example Trump on more than several occasions has questioned the independence of the Federal Reserve and has on more than several occasions stated that the Fed should do as it is told. The independence of a Central Bank is at the core of any developed countries monetary system. The other point which I am still trying to understand is that he has suggested that the USA WILL NOT repay in its entirety the $19 trillion debt. He wants to negotiate the payout. Where are our good friends the Ratings Agencies? Surely these sorts of comments require a robust rebuttal.
As a debtor nation any country that wants to renegotiate repayments of less than 100c in the dollar cannot be considered investment grade. I wonder what will happen if Trump should win, specifically because the Chinese are owed the lion’s share of the US debt and therefore he won’t repay the debt in full. Remember this is a man who is railing against the various trade agreements, NATO, environmental agencies and wants to build a wall. If Trump wins, a lot of questions particularly in relation to debt, will be asked.
Aussie market today?
Commodities gained on Friday and I note that on the front page of Barron’s – the headline suggested that with the pickup in commodities it was time to buy Australian stocks, bonds and currency. I expect the equity market to improve and that’s based on commodities, credit should improve as equity rallies. Government bonds should be a little weaker and hybrids may well be mixed, due to the pending Westpac issue and the desire for greater income in an environment where rates are low.
6 May 2016
Burn baby burn
After a promising start in the morning, the equity markets fell away in the afternoon trading session and finally finished flat. The rally in oil earlier in the day led the equity market higher. Bonds returned with a bit of vigour and ended with a bid tone.
So why was oil rallying today? Wild bushfires in the State of Alberta is the reason oil is stronger today. The fires were so bad that the town of Fort McMurray was evacuated. The fires are relevant because the area around Fort McMurray is home to the oil sands extraction industry. The shutdown means a reduction of around 800,000 barrels a day and that could grow to 1 mio barrels a day.
Global growth is still weighing heavily on markets and with China’s services sector seeing slower growth that reinforces the view that global growth is sluggish.
I listened the Robin Kaplan (Dallas Federal Reserve President) discuss the outlook for rates and oil. Rob, commented that the Fed was looking at trends rather than raw numbers. Continued progress is the key point. On oil Rob made the point on Texas having a diversified economy. In 2016 energy accounts for 9% of Texas’s economy and in 2014 energy accounted for 14%. Rob thought that global supply exceeds 1 mio barrels a day. He sees demand later in the year returning to about 1.2 mio barrels. Rob felt that 2017 would see the oil market normalise.
Rob also pointed towards the yield curve, noting the 2/10’s have been flattening sometime and views this as a pessimistic outlook. The Fed sees a number of country’s yield curves flattening and hence global growth is seen as weak. Rob is a believer of fiscal reform and sees that monetary policy is not the only way to go.
All eyes are focused on Fridays Jobs Report.
Aussie market today
The US Treasuries led the way today as economists revised their forecasts lower, all things being equal, Aussie Bonds should rally. Equities I expect should be mixed, with the banks rallying and commodity based businesses a little weaker. Today we saw Barclays upgrade their rating on BHP to equal weight vs underweight. Credit will be slighter weaker as the Aussie iTraxx was slightly weaker. Hybrids can rally as demand for higher rates could spur demand. I expect a little bit of weakness however, once Westpac completes its new Capital Bond.
5 May 2016
Why does equity never learn?
Today the equity markets continued their weak streak. The concern for the equity market was due to indications that the labour market is slowing, some commentary about the maturity of the business cycle and growth. This is the fourth down session in five sessions. So why is the bond market so right? For some time the yield curve has been flattening whilst the equity market has been trying to rally on growth expectations. Simply put the shape of the yield curve dictates a growth outlook and a flattening yield curve is not commensurate with improving economic conditions. The yield curve was telling us that growth was slowing and that’s exactly what we are seeing in markets currently. In fact the yield curve is rarely wrong in evaluating future expectations and that’s probably because we bond traders generally have a bearish outlook and if we think growth is there we are quick to cut positions and alter our expectations, unlike equity traders, we are not overly optimistic.
If we look at growth currently in the US we saw a tightening in terms of trade. The tightening was because the US was exporting less and also because it was importing a lot less, and this slowdown in imports is best seen when one views through it the prism of retail. Simply put – retail in the US is going through hell. Many discretionary retailers and non-discretionary retailers are having problems. Yesterday we saw Aeropostale, going stale, and entered chapter 11. This will mean about 100 stores closing. Today we had one of New York’s finest supermarket chain file for bankruptcy, Fairways Markets. Fairway’s (as it is affectionately called) was a dominant chain the Tristate region and listed on the New York Stock Exchange in 2013 after being bought out by Private Equity. When it listed it was seen as the most profitable supermarket chain in the USA and had an ambitious plan to roll out 300 stores over the next 5 years. Sadly that bold vision has fallen flat and since 2014 the share price has collapsed. There are problems in retail across the spectrum. Macey’s, Saks, and even Nordstrom have had their issues.
The growth cycle is now fully mature and at a time when real momentum should be happening it is simply not occurring. This nuance has a number of economists concerned. I keep coming back to jobs and job creation. One cannot build a strong economy based on hires in restaurants and programmers writing apps for social media. An economy needs more. Also I do think the US labour market needs to have a good look at itself and stop blaming others for their problems. When I look at how easily Virginian Coal miners rolled over for Trump, perhaps that explains how out of touch people have become. The coal miners of Virginia have forgotten it’s not the Governments fault that they don’t have a job, it’s because oil, gas and alternatives have taken away demand and the price of coal has collapsed. The mines in Virginia are also older styled mines, and as such are expensive to run. Some people just don’t get it and unfortunately pandering politicians hoping to gain votes help to prolong the myth and agony.
Where to now?
Two subjects caught my attention today. One was Credit Suisse’s change of direction and the other were comments on the housing market by Glenn Stevens.
Credit Suisse the powerhouse in distressed debt and corporate bond trading is downsizing significantly. The distressed debt platform has been sold off to a hedge fund. The Head of Debt and his Head analyst I understand have left and the business is going to concentrate on more stable income made in the Private Wealth Management area. Thiam is citing the UBS model as his standard and that’s a problem. UBS’S woeful performance came about because their Wealth Management Division did not contribute anything meaningful to the bottom line. Credit Suisse was a powerhouse in trading and it seems after one bad quarter and misguided restructuring (in my view) has left CS vulnerable.
The comment by Glenn Stevens the other day that low interest rates will not lead to further increase in house prices and erode savings is absurd. Given the current tax structure in Australia one increases wealth simply and easily by borrowing as much as one can because the tax system rewards you to do so. Australia desperately needs to restructure its economy if it does not want to end up on the scrapheap. Remember in the 30’s the wealthiest country was Argentina – look at that country now.
Aussie Market today
The bond market said it all, buy, buy, buy. For the moment and it is crazy at present because it’s hard to bearish or bullish given the gyrations of prevailing sentiment. Commodities were weak, equity was weak, ergo bonds to be stronger. Equities to fall away on weaker commodities and I do believe that hybrids will start to see demand because a 5% fully franked preference share looks a lot better than a 3% bank share.
4 May 2016
RBA says rate cut won’t boost house prices – Are they for real?
It appears to be a classic case of “They would say that wouldn’t they?”. The risk of there being an Australian housing price bubble is apparently a concern for the RBA as it is for many market commentators and investors. In an attempt to deflect criticism that yesterday’s rate cut would further push home prices, up the RBA claims it will not. Tighter lender standards and restricted lending for foreigner are said to fix this. Really? From our observations many Australian home buyers and investors will simply borrow the maximum they can afford to service. And that maximum has gone up as banks slashed mortgage rates once again. The graph below tracks mortgage rates and Australian house prices. There is a clear long term connection. Perhaps this time is different. We fear, though, that the RBA now resembles US central banker “maestro” Greenspan in the pre GFC era. He did not mind rising debt levels as long as housing prices were rising in tandem! The obvious circularity on that argument looks increasingly lost on our RBA.
3 May 2016
I was listening to John Williams (President of the San Francisco Federal Reserve) and was somewhat surprised by his dovish tone. According to John, global growth is somewhat muted and the US economy, whilst growing, is not creating the sort of jobs it should be. These comments probably should not surprise given most of the jobs growth to date in the USA has been in the hospitality sector. To date these positions are paying $8-$10 per hour. His comments today probably reflect what happened in the markets today. Inflation remains below target.
The US equity markets were weaker and this was based on several factors. These factors are weak growth, the trend of weak quarterly corporate earnings and oil price decline. The nexus of oil price movement and equity market movements continue.
The treasury market had a strong day with credit a little wider on the day. The strong treasury market was in response to concerns over global growth and especially the growth outlook in Europe. The risk for markets is that the Treasury curve is vulnerable to further flattening and if the bond market is correct, then a slowdown should be expected.
Bank bailouts are still an issue in Italy for instance (see story on UniCredit). European Bank earning have been mixed with BNP posting a reasonable result however, UBS had a poor result. The trend amongst the European Banks has been more of disappointment.
Car sales for April were very strong with most growth in the SUV sector. Ford cannot make anymore F150 SUV’s but had a great month. The winner for the month was Toyota with their RAV 4 having a 32% increase for the month. The only car manufacturers that saw declines were GM and Volkswagen.
Major layoffs continue. Halliburton is expected make about 11k workers redundant and Aerospatale (a retail clothing group) is preparing a Bankruptcy filing. Aerospatale have a number of stores across the USA and a restructure would lead to a number of jobs being cut.
If you like soybeans and want organic then think about this. Monsanto is involved in a bit of spat with the major grain traders over its placement of a new soybean seed that is more tolerant of Roundup (a strong herbicide). This seed is not approved for distribution in Europe. The seeds were distributed to many US farmers and Monsanto expects that these seeds will comprise something in the order of 80% of all farmed soybeans. That does not leave much for the organic market or those wishing to use non GMO products. For example think brewed soy milk products, soya sauce, oils, organic sausage fill, in fact many products use soy beans in their manufacture.
The Saud Bin Laden Group announced they were sacking 25% of their workforce. This is a very interesting development because in the past SBG has almost been considered an extension of the Saud Government. Within the Kingdom of Saudi Arabia, SBG is classified as a systemic business and ‘Too Big To Fail’. SBG of late has been unable or been late in many payments and has been blaming the Government for delaying payments as the reason why it cannot pay for services performed or construction materials purchased. Not all is good in the Saud Kingdom. The Saud Government is also starting to operate in SGB’s market place and this is very interesting. SBG was the construction company building and refurbishing the Grand Mosque in Mecca where the overhead crane failed causing numerous deaths of worshippers attending the Hajj.
Aussie market today
Today’s market should be interesting. I expect the equity market to rally because of the lower cash rate. Commodities will act as a drag on the day, however, I think with the demand for returns, the equity market should perform. Hybrids should be stronger as investors hunt for yield. I expect bonds to have a reasonable day as the yield curve continues to adjust while credit will lag.
2 May 2016
No news is good news
When the Prozac wears off I sure hope the market does something. That’s at least how everything feels at present. The news cycle is slow. No one cares about the Commonwealth of Puerto Rico defaulting on a payment today and it appears as though no one really is all that concerned when the big repayment in July comes up. The US Congress out until May 10 have suggested that they will do something, but no one seems to care. I guess that’s because most of Puerto Rico’s debt is held in Puerto Rico and a few hedge funds. To put this in perspective Puerto Rico is one of the largest issuer of Muni’s in the USA.
The other piece of major news today is the weaker manufacturing report which showed a further slowdown in activity. As a result the equity market rallied because the Fed will not be in any great hurry to raise rates. The rally has nothing to do with business activity, improving results it’s all about the interest rate.
At this point in time it is worth reiterating that for the last four quarters company revenues have been less than the previous quarter. Today’s rally also is questionable as once again volumes were light suggesting there is no strong conviction in the rally. The nexus between oil and stocks also appears to be breaking down. High yield had a good day and some are suggesting that was a good reason for equity to rally.
Treasuries were weak but I believe that’s because equity rallied. Credit appears to be in a good space as demand continues despite the Ratings Agencies bleak reports. Investors want yield and are happy taking the risks involved.
Aussie market today
The equity market may be slightly better today mirroring the gains in the US equity market. Caution may prevail as commodities were weaker and I would expect that this weakness will drag on the ASX.
Bonds will be a little weaker but do have the capacity to rally if one believes the equity rally cannot continue. Personally I would prefer to be long bonds. Credit should be a little better and hybrids will trend sideways to weaker as the calendar is heating up with some sizable issues coming in the next few weeks.
30 April 2016
More of the Same
The trend over the last 3 years has been to forecast a strong 1st Quarter, and an improved outlook, and 2016 has been exactly the same. However, this time around, people are not so sure about forecasting stronger growth over the remaining quarters.
Friday was an interesting day. Commodities had a good day and equities weakened and bonds exhibited some life. The month did close however with US Treasuries weaker over the month and equities also exhibiting weakness. Commodities had one of their better months of late.
Economic news continues to disappoint. The markets are looking for robust performance and at best all we are seeing is tepid growth. Housing ownership is at a 48 year low, jobs growth whilst good, continues to be in those sectors where pay scales are low – industries such as cleaning and hospitality. Wages growth is anemic and this is in my view is what is holding back the US economy.
I also believe that the US market is now really starting to question the very slow start to the year. The first quarter results at best for most companies have been poor. What many outsiders forget is that while the numbers are not disastrous the trend is for lower revenues, weaker sales, minimal capex, falling net income and share buybacks to counter poor results. The commentators appear to be unwilling to address this, and I believe the traders have, they are skeptical and at any opportunity are more comfortable being bearish rather than bullish.
The two scallywags of the last 5 years Stephen Cohen and Stephen Rattner both this week have been allowed back into trading markets again. Both men were fined and barred from running/managing securities businesses and both now are able to manage money again. It will be interesting to see how these gentlemen fare in the coming years.
Aussie market today.
With the weakness in equities in the US, I think the nexus today may be weaker and we will see the ASX stronger as a result of stronger commodities. This in my view means bonds should be weaker and credit will widen a touch. I expect hybrids to be weaker on the day.
28 April 2016
Are the drugs wearing thin?
Oil rallied and that means that equities if the correlations have any meaning, should have rallied…but did not. Bonds did rally however.
So what is causing the negative tone? The best link that I can provide is the GDP number which is at 0.5% (meaning the Atlanta Fed forecast was exactly correct). Slow growth and some are now calling it a growth recession (a recession you have when growth whilst not negative is very limited) is what is spooking the market. And once again the bonds were correct. Yes bonds did waver a little over the last few days but in the end the shape of the yield curve and the skepticism of growth was a good call.
So what are the bonds telling us now? If I were to look at the yield curve the bonds are saying they don’t believe what the equity analysts are saying. The bonds are saying sluggish growth will persist, yes the Fed may hike in June, but bond traders want to see some real growth before changing their minds. I am of the view that many traders want to be long because the opportunities elsewhere are limited. Equities have rallied but have rallied because of low interest rates and this has allowed high p/e’s to be sustained. The hedge funds have had a disastrous year, even for those with neutral strategies. Commodities have burnt the Funds as well. The one asset class that has hurt at times but has generally performed has been bonds and to a limited extent credit.
Maybe today is just the culmination of a number of disappointing results. Apple’s earnings certainly have shaken the market but so too the fact that vast majority of corporates that have reported thus far have seen net income fall. At some point valuations must come under pressure. The alternative view is that equity traders believe the Fed will tighten in June and they are lightening up ahead of a hike. This may be possible. We also have the electioneering as to who will run for the Presidency of the USA, and for both the policies being expressed there is a lot of confusion. Perhaps this too is affecting the market today.
I listened to the Head of Equities for Standard Life provide an insight as to how they identify investments. Standard Life use a technique called change investment. What this means is that they look for industries and companies that are undergoing change. It’s a technique that has served well in a period of high valuations and sidewise price movements. Investments that he identified were related to the Defense Industry and that’s because the valuations had fallen, however, spending in that area was expected to increase.
Aussie market today
Bonds rallied in the US and with the weak inflation number and a higher interest rate than most countries, I expect Aussie Bonds to mirror the improvement in the US treasuries. Equities have the opportunity to rally based on the improvement in commodities. With a dearth of issuance of late in the hybrid market there is the opportunity for hybrids to perform.
27 April 2016
Been there done that!
So the US market was waiting for today’s Fed’s Market Policy Statement for direction on where interest rates are going. Early on bonds were rallying and equity was selling, post the statement the initial response was to reverse direction and towards the close both bonds and equities were positive. So what were the takeaways? Interest rates to stay put. The commentary still pointed towards global growth, and that a rate hike may not happen till the second half of the year. No mention of preparation for a rate hike in June was discussed in today’s release. A number of economists still feel that a hike could occur in June. The US in my view is sluggish. I find it hard to get too excited because when one reads about slowing container usage, falling expenditure in manufacturing, company revenues negative and weak R&D, I find it hard to reconcile that within the US economy there is anything other than sluggish growth.
It appears as though the Fed does not want to move too soon and requires more economic data. The bottom line is that the Fed wants to see inflation commencing to rise.
So where are the weaknesses within this scenario? Corporate profits have continued their steady decline, company buybacks have supported the share markets steady rise and the bond markets have reacted according to Fed policy, however the bond market still points to a weak economy. And maybe this is why the hedge funds are having such a hard time, the signals are conflicted, however, macro rules are dominating market movements rather than micro effects and this possibly explains why neutral strategies at this point are not working.
So the day ended slightly better for both equities and bonds. Credit is slightly weaker on the day. The Aussie Dollar continues its weaker run on the basis of a low inflation number and the possibility that the Reserve bank may have to ease.
An interesting story today from Bloomberg about Venezuela caught my attention. Venezuela is an economy which is one of have nots. The economy is one of shortages and have nots. Basic staples considered normal such as diapers are in short supply. The Country is experiencing runaway inflation. So it came as a surprise that the Country looks set to run out of notes. How does a country run out of bank notes?
Aussie market today
Both bonds and equities rallied today however for Australia the big gainers were commodities and that should encourage the rally in equities to continue into Australia. Bonds in my view will drift toward a more positive tone and credit will be marginally weaker in line with a slightly weaker US credit market. Hybrids to continue to rally.
26 April 2016
The news cycle today was somewhat limited. Traders are waiting for news from tomorrows Fed Governors meeting and were somewhat reluctant to do much if anything at all.
So what happened today? Commodities rallied and so too the dollar. With time this could hurt the emerging markets. A green shoot appeared today and that was in the form of yet another day where we expect a drawdown of gas and distillate. This is seen as a bullish signal at present, however some of this drawdown is attributed to more use as we approach the spring break and holiday seasons.
Equities continued to rally on the back of a solid commodities outlook. Bonds on the other hand were weak as equities rallied. I find this interesting as numbers such as consumer confidence and manufacturing were released today and these numbers are indicating a weakening outlook. So if anything bonds ought to have rallied. What I think is holding up the bonds is tomorrows commentary from Yellen. As the traders expect and that’s a comment suggesting that rates could rise in June, then bonds are a sell at these levels. On the face of a selloff I would expect equities to weaken because with poor end of quarter numbers, the equities market is reliant on low cash rates to justify current p/e’s. If Yellen suggests that the Fed tightens further in June then I expect markets in general to be weaker.
Aussie market today
I do have reservations on the DEFAULT by 1MDB, given its link to the Malaysian Government and the link that it’s a Fund that was established to assist in the development of Malaysian business. I find it serious that an instrument of Government defaults and the signal this sends to the market.
Equities rallied today on the back of commodities and as such the equity market in Australia should be stronger. Credit probably will tighten further. Hybrids as such should be a little weaker and bonds will be weaker as a result of UST weakness. The market will be careful today because there could be a significant headwind should Yellen suggest that rates will rise in June. My own expectation is to expect a benign comment that leaves the door open to not do anything. I suspect that this is the reason why equities and commodities rallied today. If the Fed does nothing, bonds should rally and equities may continue with their strength.
25 April 2016
Lackluster no bluster.
In an otherwise lackluster day markets were very quiet. Even today’s news cycle was minimal. Consumer confidence in Europe appears to be slipping and this led to erosion of confidence in the USA.
The equities market was weak and much of that weakness was due to concerns over the Japanese Central Bank actions and a flow through of ECB actions. The equities market was weaker for most of the day but improved into the close. Lackluster earnings continue and investors are looking for earnings growth in time.
The US treasuries had a weaker day and so too commodities – especially oil.
Aussie market today
Markets were drifting weaker as the day wore on, and I expect that this trend could continue in Australia. The AUD was weaker as commodities drifted weaker. I expect bonds to be slightly weaker and credit will drift tighter. Equity to be slightly weaker as the market drifts and hybrids can probably rally a little based on some profit taking.
I do expect that after the weekend we may see some buying as positions are established however, without any significant economic reasons, the market will drift and in drifting markets prices generally trend lower.
22 April 2016
Today the equity market looked at the continuing negative earnings results and acted probably the way it should and sold. And sold on a day when jobless claims indicated the best result for some four decades. The market should have rallied today!
Oil weakened on the day, Bonds had a better day and credit tightened, so maybe…just maybe equities weakened on the basis of oil weakness and from that we can assume the nexus of oil and equities has not been broken. And if you thought the US Equity Markets have been quiet then you are correct. IPO’s launched this year have been low. Twenty IPO’s have been launched to date and this is the worst result since 2009 (according to Bloomberg).
Bond traders in Europe appear to be betting against Draghi. Many traders believe that Draghi will ease in June despite his protestations suggesting otherwise. The traders simply believe the purchases of Corporate Bonds and lending won’t be enough to stimulate demand in the broader economy.
Aussie market today
Bonds were stronger, equities and commodities were weak so I expect the equities market today will be weaker. Aussie dollar is trading lower in the afternoon session and that’s most likely because commodities are weak.
I expect bonds to be better bid, credit will continue to tighten and hybrids will be better bid. Bank hybrids will remain pressured but today, banks have the opportunity to rally.
Bonds will however, over the medium term produce some interesting results. If global growth remains muted, then bonds in Countries like Australia with positive yield curves will see huge demand. Understand this, there are about $7 tr of bonds trading sub- zero (Bloomberg), and many investors are required to own bonds. Those bonds are owned by Insurance Companies, and Banks. This means that at some point there has to be cash put aside to buy bonds in places such as Australia where at least some cash is earning interest rather than paying interest for having cash.
21 April 2016
The great oil conundrum
The equity market moved higher and many pundits were pointing towards earnings results. Mmm Maybe. Or was it because oil rallied. In my view it was about oil. The energy sector had a good day. Market luminaries were pointing once again at the correlation between oil and markets but to me the big news was that today was the first day for quite some time that both crude and distillate had a draw. What this means is that today was the first time when more goods were used than was stockpiled.
This is important because what is being postulated is that a number of suppliers have wound back production and this is possibly true. Venezuela and Brazil have both slowed production and we also know that a number of deep sea oil rigs have been mothballed.
The conspiracy theory is that there will be a meeting of Oil Ministers next month or maybe June and that an agreement may be met. Saudi Arabia has launched a bond issue which was originally touted to be $3 bio but with so much demand the issue will be $10 bio. A number of oil specialists are speculating that this is being done to have cash so as the Saudis can effectively wage a price war with Iran and other producers, drive prices lower and see some foreclosures (there have been 60 in the USA according to CNBC). The Saudis would then be well positioned when the market eventually picks up as they will have increased their market share and be in a position to capitalise on demand.
So oil rallied, markets rallied, the nexus that was broken is undone and once again we watch oil to see the direction of markets.
Are Bonds a liquidity trap?
I listened to Susan Ester (CEO of Open Door Trading) talk about the US Treasury market and how its changed. What Susan had to say was disturbing. With the onset of electronic trading and fewer market makers, Susan commented that $150 mio of 2 years would move the marker 2/32nds. This is staggering, given once a trader would need a couple of billion to move the market even a point. The point that Susan was trying to make is the UST market is the director of global markets. It’s the bellwether – investors use the market in periods of stress for market direction. If the UST market loses its liquidity – what happens if global markets face a large hiccup? The impact could be nasty.
What Paul Krugman said today.
It’s always interesting listening to what Paul Krugman (Economics Nobel Laureate) has to say. His main takeaway was with Congress blocking Bills the US economy is suffering and not taking the action that is needed. Central Banks alone cannot do the heavy lifting towards stimulating an economy. He believes that the Government should be taking advantage of low interest rates and use cheap money to invest in building infrastructure and renovating the US’s creaking infrastructure.
When questioned on Government debt his point was the ability to service debt is what is important. He used examples such as the US debt after WW2 or the UK at times where Debt/GDP was two times and how as economies grow and these debts are serviced, that over time the loans are paid down and eventually the ratios diminish.
One interesting point that caught my attention was on the independence of Central Banks. Paul made the assertion that he thought the Fed was not intending to tighten but that they succumbed to the GOP and raised rates as a result of political pressure. He was critical of the Fed and their race to normalize rates.
On the economy he felt that manufacturing had drifted away and that incentives were required to revive manufacturing. On D Trump and some of the populist rhetoric, Paul thought that this was a result of various phobias, and didn’t make a lot of sense because the policies were not addressing any problem. On employment, Paul felt that it was strange that the US was trying to create jobs and they have done a great job with unemployment about 5.5%, but sustainable employment growth cannot be achieved if you don’t have global growth. All interesting stuff and worth a thought.
Aussie market today
Bonds had a bad day on the back of a happier equity market. So expect weak Government Bonds today. Credit should tighten further on the basis that we have an improved equity market at present. Hybrids remain vulnerable as investors switch back to equities. Bank hybrids whilst offering good value and remaining cheap, may drift weaker. Bank hybrids remain vulnerable because of continuing issuance.
20 April 2016
Oops I did it again
So what did I learn today that I did not know yesterday? Not much. The markets were generally quiet, oil improved on an assumption that oil prices cannot fall any further, and equity markets which I am told started to decouple with oil yesterday seemed to be paired with oil again. Commodities improved and commodity producers had a great day. The Nasdaq was down and the Dow and S&P had reasonable days. Copper had a better day today however, the base metal is under pressure, and this confirms global weakness.
I guess what I am trying to say is that the market rallied because it could and not because there were any major significant reasons. Earnings reported, continue to be not as bad as expected but then again – earnings are down from the previous year. Everyone is in cost control mode however many companies and especially the Investment Banks are banking on (please excuse the pun) increased trading flows leading to revenue growth and share buybacks (which require Regulatory approval) to improve share outlook, however the latter, are outside the company’s control. I am currently reading the market as in a hiatus. It is boorish at present so bored traders are buying. Unless we start to see growth, or inflation or something to change the status quo, markets could end weaker over the medium term.
Surprises surprise IBM had a weak result. I guess when you spend all your money doing share buybacks and spending little on R&D then these things happen. Costs are under control but with revenue slumping Big Blue requires a killer product or two.
Just out (Bloomberg) 1:20 home in New York State under foreclosure. If this is correct that’s a worry for consumer led stocks.
It’s a weird, weird world.
So today I hear 1MDB had failed on its payment of $1 Bio to its business partner International Petroleum Investment Co (IPIC). What I find interesting with this, is IPIC was guaranteeing 1MDB’s debt and was due a payment of $1 bio which did not materialize on the designated day. What is bizarre is that the Malaysian Ministry of Finance was guaranteeing the payment and they were disputing an amount of $50Mio that IPIC was to pay the Malaysian Government. Now this is the weird bit, Governments don’t usually hold back loan payments of $50 mio willingly. In some circles this could be seen as a default and (will need to be remedied quickly). Where are Moody’s and the other ratings agencies on all of this as 1MDB issued bonds and the Malaysian Government issues bonds if this is a realistic default, then I would expect some action from the Agencies. Where are the comments from the underwriter of the bonds issued? I would think GS need to say something in this instance. The bonds are currently trading around 82c. A bond with a big D should be a lot lower. To me this is just bizarre.
Aussie Market today
Bonds were weaker and that was largely to do with equities rallying. Volumes remain muted with the Banks not playing the major role of trader. This role continues to be Hedge Funds. So I expect that in Australia, bonds will be a touch weaker. Equities will rally, and credit may drift slightly tighter. I expect Bank Hybrids to bounce around as these securities are vulnerable to further issuance. One certainly needs to follow the unfolding commentary of the Ratings Agencies responses to the Budget. The Budget could be a make or break moment.
19 April 2016
The main news for the day was the failure of Doha. After a brief bout of weakness the equity market rallied. Why? Many theories exist. One theory goes that with the low oil price, the dividend will be spent this summer’s holiday and hence the return of the consumer. Banks rallied and so too non-discretionary. To me it’s one of those special days where markets breathe a sigh of relief. The reality is though, that markets are stable and without global growth the US economy will struggle. The US is dependent upon global growth.
The US experienced major flooding last night in Texas, this could have a small impact on growth.
Doha was a bit of a flop. It appears as though some games were played. If the Nigerian Oil Minister is correct, apparently there was an agreed position on Saturday evening and the draft of the agreement was to be circulated on Sunday. The draft that was circulated on Sunday was very different. So without the Iranians in attendance, it would appear as though some political gamesmanship was being played out.
I listened to Harold Hamm of Continental Resources and his views on oil. Harold was more optimistic but then again, he has oil to sell. He commented that the Chinese had slowed production but were buying oil from the Saudi’s. In his opinion it would be interesting to see what happens when Iran starts selling its oil to Asia and how much it cuts the price. Any significant price cut would be detrimental to the Saudis.
I heard Kitty Nixon (CIO) of Northern Trust comment on consumer confidence. Apparently Northern Trust in their risk models now use as an input, populist politicians and their influence. Their research indicates, populist politicians weaken consumer confidence and they have a definite material effect. What these populists do is influence people and make people dissatisfied. The effect of dissatisfaction is that it dampens confidence and hence demand. Northern Trust give this factor a significant weight in their model.
Aussie market today.
Bonds were slightly better, equities were better, so expect some improvement in sentiment for equities. Bonds will be marginally weaker in my view, and that’s because I am expecting no major news and in low news weeks, markets tend to drift slightly weaker. Credit will maintain its drift tighter and hybrids will be mixed, however Bank hybrids should be weaker.
18 April 2016
Markets on Friday were languid and uneventful. The big news on Friday was Citibank’s results. Whilst the result was better than markets expected, the nub of the result was that the result was still weak, just not as bad as everyone expected. And that is behind the current rally. Results on average have been worse than their previous results, yet equity markets rally because cash is cheap and what else can one do with their money when many G20 countries have cash rates and bond rates at zero, close to zero or negative.
The IMF once again made comments about sluggish growth and the impacts of weak developing countries upon the developed world and how this weakness has led to disinflation being exported and created a closed loop where the feedback loop causes further weakness.
Bond rates generally have fallen because of weak economic conditions. This fact seems to be missing from equity valuations.
Within the US, retail is still very weak and most job creation is in the Restaurant trade.
Within the read today there is a comment from JP Morgan (a bond powerhouse) where the spokesperson makes the argument that bonds will be the bet for 2016. Somehow I find it hard to disagree especially if many equity markets are not rallying because of things such as profitability or new products providing market share, rather, it is all to do with cheap cash and very low bond yields.
What I do find interesting and no one as far as I can see has made any commentary about is, if the corporate sector is so healthy then do Moody’s drastically revise their forecasts for bankruptcy upwards, why are equity markets so buoyant? Generally we see bankruptcies increase with rates rising, in this market we have interest rates at all-time lows. The prospect of rates rising are low, the prospect of rates falling are much higher. I don’t understand why with rates are these levels why so many companies are going broke. Over the week we had Peabody go into Chapter 11 (a global behemoth within the coal industry), Sun Edison and a number of other energy companies seek protection. Retail is rapidly turning into a disaster waiting to happen.
Aussie market today
Australia will rally or fall based on much of what comes out of Doha. In my view, I think Australian equities will drift weaker, bonds will drift slightly higher in price (yield to rally), and credit to be better. Tuesday in my view will be where the week’s direction starts. Friday probably will be weak as traders square their books ahead of the long weekend.
15 April 2016
Bear, bull or rabbit markets
Today markets were relatively benign. Equities were lukewarm and treasuries were slightly weaker and the news flow appears to focus on the banks and their under-performance of explanations for their “living wills” (how an orderly breakup would occur for their default). So why the title? When markets get near an inflection point they tend to move around in discrete movements without any clear direction. That’s the market we have at present and the markets generally lack any clear direction. Markets appear range bound and this worries me. Equities are now interest rate junkies as improving revenues and earnings are a distant memory. To make my point – the average trailing P/E is about 16, the market is currently running on 21. How much better can the equity market be with earnings growth being so sluggish, unless you believe that world growth will best the IMF’s forecasts by a significant margin.
Bonds on the other hand in my mind are undervalued. Currently about $7 trillion of bonds trade are trading with negative rates. There are $9 trillion of bonds trading above 1%. Demand for positive rates will push prices higher and yields lower.
What the Fed said today
Dennis Lockhart of the Atlanta Fed, provided some interesting insights today. When questioned on the chance of a tightening in April, the stock reply came and that was we are watching the data. However on reflection Dennis is dovish. The reasons are simple, inflation is not a problem and global growth is weak. He felt that with the strong dollar, the weaker economies are exporting deflation and this is helping to drive inflation lower in many developed economies. Dennis did provide his view on what the Fed will be discussing at the April meeting.
The Fed will be examining the following:
- Is growth sustainable? What is the trend?
- He is looking at a threshold of about 200k jobs a month however as the economy continues to expand this number will contract.
- What is core inflation? What is the trend to mean?
- Inflationary expectations. What is the direction of expectations, what is the break-even?
In the light of the release of documents from that Panamanian Law firm , some recent property purchases are being investigated, especially properties purchased by South American citizens where criminal links or corruption charges exist. It may come as a shock but for the luxury property market in Florida (defined as any property over $1 million) 65% were paid in cash. And 56% were purchased by a private company known as an LLC. In 2011 only 33% of houses were purchased by cash.
And this is the statistic that really gets me. The average price for property on Palm Beach Island is guess what…$65 million!
Luxury products have now caught the retailer flu and so too the high turnover clothes retailers such as H&M, Zara, and others. Burberry had a weak quarter and so too Prada, and LVMH who also are finding times tough. So where are people spending their money? It appears as though people are spending their money on experiences and uploading those experiences to their friends via the various social connection programs. Such as Snapchat, Periscope, Facebook, and Instagram.
What surprises me is the comments by Moody’s concerning Australia’s credit rating. By way of comparison, the USA has consistently run a deficit since 1776. The debt to GDP ratio in Australia is about 30% versus 115% in the USA. Australia is dependent on offshore funding but one could argue if the Chinese, Saudis, Japanese and Europeans stopped investing in the US treasury market the USA would be in a difficult position. The other part of the equation that concerns me is the fact that the big 5 US banks failed a basic Dodd Frank requirement, that being able to provide guidance how they (the big 5) would be unwound. What is interesting, is that the regulators are upset about this leak rather than being concerned that the Banks are unable to provide a list how their respective entities would be broken up. After all, the US citizen has put these Banks in a privileged position by ensuring that they will be protected by the US tax payer.
Aussie Market today
Treasuries were weaker in the US and credit is a little ruffled on Moody’s comments about corporate defaults rising. Strong investment grade credits remain positive. I fully expect today to be a bit of a nothing day. Yes equities may be slightly stronger and yes, bonds may be a fraction weaker, but that’s it. With the OPEC meeting this weekend, markets will be quiet in my view. Investment grade credit should be steady and hybrids in a quiet day usually drift weaker, so expect a slightly weaker day.
14 April 2016
Can’t touch this!
In the words of that famous rapper MC Hammer, “you can’t touch this” expresses my feelings about markets at present. Logic appears to have been thrown out and bad news is now good news. Why do I say this? The USA had a flood of data today and it was not pretty. Retail sales confirmed the weak quarter by falling. What has become a worrying feature is that retail sales continue to fall. March should have been a strong month because it contained Easter and Easter usually brings in elevated sales. The PPI was weak and the sub component of the PPI that many economists pay attention to is health care and that sector fell. Health care was supposed to have risen. We know the transport sector is weak and that’s a leading indicator along with retail sales. (See the chart below to view the relationship between income growth and consumer spend).
So why did the equities market rally and rally hard? That could be attributed to two theories. China was the word for some and with an improved economic outlook, it’s possible that world growth could rally. The other theory is that with the leading indicators demonstrating weakness in the economy, the Fed would be unlikely to raise rates anytime soon so cheap money prevails and as such equities rally. JP Morgan released its earnings today and the results were a little better than expected, I will come back to this point later.
Normally equity markets rally when an economy is strong and we see earnings growth, at least that’s what I learnt at school. This theory is sadly failing. Equity markets rally now when we have cheap money and economic conditions are irrelevant. I also feel this rally is but a brief respite and that one should be looking at bonds. This is because much of the positive sentiment is attributable to investors believing that Doha will provide a positive outcome for oil. Can someone please then explain why Iran and many other countries that require cash flow will slow production?
Today we read about negative rates in the USA. This is interesting because it would appear as though even though the Fed has suggested it has not considered negative rates to any degree, someone within is. The discussion of how negative rates would impact the US economy has begun and my feeling is that it won’t go away too quickly. If economic activity in the USA is growing why are we even considering negative rates. It would appear as though the Atlanta Fed’s forecast of economic growth for the quarter of about 0.1% is being viewed as a very real possibility.
The big banks in the USA as part of Dodd Frank provided details to the Regulators as to how in the event of a wind-up, how the Bank can be unwound. They failed. Whilst this is technical, one could question why equity markets rallied when the Regulators may end up requiring downsizing of the organisations for more capital. At issue were the Bank vehicles e.g. the Asset vehicles, how these can be dissolved.
Peabody one of the largest coal producers filed for bankruptcy protection. The reason had nothing to do with greenies, it was based on the low price of coal and the outlook. With natural gas prices continuing to fall it’s hard to see how coal can compete other than push the price lower and that hurts many coal producers.
Aussie market today
Equity will be strong on the basis of US equity market strength. Bonds will be weaker partly because of US Treasuries being weak and also because equities will in all probability rally. Credit will continue to tighten and hybrids I expect to be a little mixed. We may even see the bank capital notes and hybrids have a good day as bank stocks had a great day in the USA.
Remain skeptical as I believe this equity rally won’t last for long.
12 April 2016
What’s up today?
The IMF announced that they had cut the outlook for world growth. The reaction to the news release was if anything – a yawn. Equity markets rallied, commodities rallied, and the rally could best be attributed to the meeting in Doha and perhaps just maybe an agreement being reached between the various oil producing nations. As a result of a stronger equity market rallying on a stronger commodity outlook, bonds weakened. The Aussie dollar continued in strength on the back of strong commodity prices. (See below research http://ow.ly/10AwxW produced by Spectrum Asset Management’s Damien Wood).
There is a strong causal linkage between iron ore prices and the Australian Dollar and that certainly appears to be the case. The other major commodity currency, the Canadian Dollar, also had a strong day. A number of major funds such as Vanguard expressed the view that they expect rates to fall. Once again markets are confused over growth expectations.
What is going wrong in the USA?
When the USA was a strong country its corporates invested heavily in R&D. I understand that over the last few years R&D has slipped significantly. Payout ratios of 100% in some instances are being used for dividend payments. Apparently this number prior to 2004 was in the order of 50%. In my view, this means that other manufacturers are gaining a technological advantage over their USA peers and no amount of trade wars and posturing will fix that problem.
Nuance of the day.
MAN Investments launched a stinging attack on hedge funds in a report that was released today. This action is extremely unusual especially as MAN is a major investor in hedge funds. MAN was critical of what it describes as basic mistakes and poor portfolio management where some of the criticized skills were learnt on courses.
Aussie market today.
The equities market was stronger on the back of stronger commodities. Assuming that we receive no negative news from China today, I expect the equities market to be stronger. On the basis of a stronger equity market, credit should be a little stronger. Government bonds will be weaker. (US Treasuries were weaker.) Hybrids should as a rule be slightly weaker.
In my view a lot of faith is being placed on a positive outcome in Doha. We know that there has been a slippage in demand for oil and that perhaps China is not as bad as many pundits think, however if world growth is expected to slow then it is hard to reconcile why commodities will be strong for any period of time.
As always timing is everything so I won’t be selling too hard but I find the whole outlook of slow growth rather concerning. To me bonds look good, credit looks good and equities may well have or are about to see the highs.
11 April 2016
What happened today?
After a strong morning, the equity market gradually drifted lower. Oil was better on the basis that OPEC could come to an agreement over output. This to me seems somewhat optimistic. Bonds drifted weaker over the course of the day.
The news of the day was the lack of news. The market appears to be awaiting the release of the earnings for the 1st Quarter and the results are expected to be down about 7%. If the earnings are this low then the numbers are similar to earnings results in 2008. If the results are down as expected then there should be no real selloff on this weakness.
A date to watch is the 28th of April. Why so? April 28 is the date the BOJ meet to discuss rates. As the yen is strong some market pundits are predicting a further decrease in rates. Japanese rates are negative and this would make rates even more negative. Such a move is expected to weaken the yen which has been appreciating against the USD. April 28 is a day after the Fed reports, and as expected if there are no rate movements, the Fed may feel pressured to hold rates for longer than expected.
Aussie market today
The market will probably be a bit weaker as the US market drifted lower over the day. Commodities will be the trigger and if investors believe commodities are on an upswing then there is capacity for improvement. I expect bonds to be a little weaker on the day and credit to be slightly weaker.
8 April 2016
So what’s happening?
As they say in the classics “another day another dollar” and Friday’s movement typified that comment. The market rallied because Yellen and several other Fed Governors suggested that any interest rate adjustments would be carefully considered and not be rushed. Then the Atlanta Fed provided its forecasts for GDP Growth and the number was not pretty. Not to be outdone by the St Louis Fed at 0.6%, the Atlanta Fed believes that GDP growth for the March Quarter is 0.1%. And what did the equities market do? It rallied of course…because cheap money prevails. Like Australia, the shares offering the highest dividends are rallying the most.
Bonds were weaker of course because equities rallied. Equity markets are rallying because cheap money is driving asset prices higher. Adding to the weight of opinion, GS in their investor letter suggested that negative rates may not be so abnormal. Whilst on the subject of equities, company forecasts for the 1st quarter commence Monday 11 and many companies are revising their earnings lower. Banks are expected to be weaker and that’s partly as a result of regulatory requirements, weak M&A activity, and sluggish trading activity. Economic activity appears to be slowing as logistic companies are seeing slower activity. Manufacturing is also seeing a slowdown.
The New York Fed released a survey on employment prospects for college graduates. In their study the Fed noted that unemployment for graduates has fallen to 4.6%, however, 45% were working in employment where a degree was unnecessary. I guess this last point explains what is happening within the US economy and where most jobs are being created, that is the restaurant trade. For the US to become great again they need to create manufacturing opportunities that take advantage of energy prices which provide a significant cost advantage.
Commodities were strong Friday and the catalyst was the belief that OPEC could reach a quota agreement. (I am somewhat skeptical that any agreement can be reached.) A strong commodities market is good for equities, and I expect equities to be stronger on the day. Bonds will be weaker in the absence of the release of any significant economic indicators. Hybrids to weaken on the back of a stronger equities market.
7 April 2016
What goes up must come down!
Ever since Newton discovered gravity, the truism of what goes up must come down…holds fast. Yesterday, all was good with the world and today everything that was good yesterday, is bad today. So today was a risk off day. Commodities were weak, equities were weak, the yen strengthened to the strongest level for some 17 months and bonds rallied.
In the words of Professor (he was not a professor but that was his title for TV) Julius Sumner Miller “why is this so”? Growth, it’s all about growth. Investors, traders, fund managers and market participants decided that they were worried about growth. Disappointed with the Central Banks’ abilities to reflate economies globally, many market participants shed yesterday’s optimism and became bearish. Most economists are still predicting US GDP for the 1st quarter around 1.5% down from 2% and this is what is disrupting optimism.
Now the spanner in the works. The missing word “if” was omitted by Reuters in a release from Treasury. This sent spasms of nervousness through the equity markets. The reason being is the release as reported by Reuters but since rectified, suggested that Treasury were going to introduce more tax bills without going through Congress. What the statement should have said was that new taxes would not be introduced without an approval from Congress, or in other words, new taxes would be introduced only “if” they get approval from congress.
But the index to watch is the Transport Index. Transport typically leads the markets up and then down as transport is a lead indicator of economic activity. The Transport Index has been the laggard for a number of recent trading days.
JPM gave some guidance today for their expected 1st Quarter results. The bottom line is that this quarter is expected to be weak. This is apparent as turnover levels for equity markets are low, merger and acquisition activity is weak and the number of IPO’s are down. The comments are prescient as the 1st quarter is when most IB’s make about 1/3 of their bonus in this period. The 1st Quarter is important because it sets up the year for many investors and brokers alike.
The office market in Manhattan is slowing.
Sands Casino may have a few questions to answer about its Macau operations. It is reported that there were a number of irregularities in its accounting where people were paid and the cost was allocated as paintings on a wall. There is an ongoing investigation.
Aussie Markets Today
Today is a risk off day. So for today expect weak equity markets and a better bond market. Credit should be slightly weaker and hybrids may improve in response to a weaker equity market.
6 April 2016
So what drove market movements today? Janet Yellen that’s who! Once again the Fed commentary dominated the mood of markets and Yellen and her Fed cohorts’ comments were largely responsible for today’s movements. Jim Bullard of the St Louis Fed let slip that in March the Fed had revised its view of 4 rate hikes to 2 rate hikes. Yippee bonds rallied. But then he said that if the positive jobs growth continues and remember the jobs numbers are out later this week that the Fed could tighten in April. Yippee for equities, they rallied and that went hand in hand with the rally in commodities. But the bonds were completely caught out, and sold in response. Then we had further comments from Jim just to further confuse the situation. So at close of play, bonds were weak and equities were happy. What’s concerning the markets now is whether the Fed is going to tighten if GDP is not growing rapidly or jobs roll over, what now, what then? There appears to be some frustration from traders, who are looking for inflation and inflationary expectations. Fed Funds are pointing to a hike in June.
So what else?
Once again markets are looking toward overseas markets and growth prospects, and frankly these prospects are not that great at present. Once again we are looking for growth and sustainable growth. The question can be posed if the various Central Banks are looking for a different result from the same input over a long period of time is this result not too dissimilar akin to tests for mental health issues?
What did we learn?
There was a study released today by the St Louis Fed where the relationship between wealth and age and income were examined. According to the St Louis Fed, you were more likely to have more wealth over your lifetime if you were born in the 40’s than if you were born in the 70’s. There is a direct link between debt home-ownership and poverty for low income earners. Apparently low income home owners are more vulnerable with home ownership and is the main cause of poverty. With little in the way of savings any shock has a major impact. Education is obviously important. And over a long period of time the demographics have not changed significantly. Whites are doing a lot better than the rest.
Bonds were weak and I expect bonds to weaken today and that movement could be a little exaggerated as commodities improved and some of that improvement spurred the equity market to rally. Credit should be a tad tighter, but that’s a technical response to bond swap tightening and hybrids to be weaker as a result of equity market improvement.
5 April 2016
All talk today centered over how the game has changed for corporate USA after the announcement yesterday by Treasury changed the rules regarding tax inversion. As a consequence the Allergan merger with Pfizer of $160 bio looks at risk of not proceeding.
The equity market received a hit today and that came from the weak German Factory Orders raising concerns that global growth will be much weaker than expected. Bonds rallied as equities weakened. Volumes continue to remain thin and slow, with some commentators making reference to ETF’s being a possible cause. Aby Cohen threw her hat into the ring by suggesting that the Presidential race for candidates is affecting markets. Certainly some policies – especially those suggested by Trump – are having an impact.
There is a big conference on at present on Alternative Energy. What has been interesting is that many major US corporates are becoming more involved. The rationale being that it helps their business and also lowers their cost of production. Such companies include Walmart, GM, Coca Cola, Pepsi, and GE amongst many. For example, the Corvette plant in Arlington is now wind powered. Renewables are also expected to be a boon for manufacturing and provide employment opportunities. Quoting one of the GM alternative electricity managers, the cost of producing 1 megawatt/hr wind power is $29 vs $35 for more traditional methods.
Bonds rallied on safe haven demands, however, I think it was more a case of commodities down, equities down, bonds rally.
Australian bonds will continue to perform unless an economic indicator suggests otherwise. Credit to drift tighter and hybrids should perform on the back of a weaker equity market. Certain elements within the hybrid sector should perform as many have moved wider on issuance concerns and general credit spread widening. First quarter earnings releases commence next week. Watch the releases as this could well change the mood of markets.
4 April 2016
So what’s news?
Nothing really. The market today was somewhat languid, and it was not a hot day. Perhaps with the prospect of I think our 4th snow of the year, many traders sought refuge at home rather than venture into the city and risk snow later in the day.
Frankly it looks as though the markets are looking for direction. Oil was weaker and that’s on the back of the Saudis being unwilling to cut back as long as Iran does not cut production. This pig headedness is doing more damage to the Saudis than anyone suspects I think. On the other hand we have another Fed Governor (Boston Fed) suggesting the market was not pricing in any aggressive movements from the Fed.
Oh and of course there is the release of tax documents from the Panamanian Law Firm that was the choice of your average despot who wanted to hide his stolen bounty. A few leaders have been it appears exposed, for example the Icelandic President, as too people from FIFA and the odd billionaire. If anything this story is by far the biggest news of the day.
What Yellen has actually suggested.
Yellen is your typical PhD economist, thoughtful and respectful of what may be. The Fed wants to see inflation definitely stay above 2%, and is looking for growth rates of 2.5%. When questioned what’s in the toolkit, Yellen has been at pains to avoid any discussions about negative rates. Simply, Yellen does not want to join her central bank counterparts and have to ease after tightening. While negative rates are not openly discussed, one would have to think that within the Fed, negative rates are a hot topic. Why? Simply without world growth and an economy where most employment prospects are still being created in services and in particular restaurants. Growth in hospitality in developed countries rarely leads to significant growth.
Market call today
Oil weakened, equities weakened, and the nexus between oil and the Dow sub 40 has not been broken and that correlation remains persistently high. Weak commodity prices no doubt means weak equity prices in Australia. Bonds to rally on a weak equities market. Credit to tighten and I think that’s more a hunt for yield. Hybrids especially bank hybrids are expected to weaken.
1 April 2016
Hooray for Yellen
Once again the lack of direction from the Federal Reserve has saved the equity markets. The non-movement and the paralysis exhibited by the Fed has inspired markets with blind faith too rally. Why? Well that’s because rates are not rising anytime soon and the Fed is concerned about global prospects and global markets. Maybe the employment numbers had a little to do with the rally a after slightly larger than expected number was reported. The market was looking for 208k and the number was 215k.
On the surface this number indicates that the Fed was vindicated by not tightening and not getting too far ahead of the curve, however, if the Fed really does believe growth is high, then they should be tightening ahead of the elections and this will definitely send a good signal to the equity markets. That signal would be we have growth.
In the morning the equity markets were generally weak, however, the Jobs data gave a boost to a market that was feeling the full weight of weak commodities especially oil which was off a little over 4%. The Fed’s lack of intervention is certainly assisting a buoyant equity market that seems to have shrugged off high PE’s, substantial revisions to pro-formas in company accounts and generally weak economic conditions.
Oil was off because the Saudis commented that they would not slow production unless Iran slowed, and so the gambit continues. One does get the thought that perhaps the Saudis are overestimating their market power. Whilst on the Saudis they announced they want to create a $2 trillion Sovereign Wealth Fund to cover the Kingdom when oil runs out. As in all things the devil is in the detail with a number of market analysts expressing skepticism. With the Kingdom on a downward spiral due to falling revenues and an expected deficit of around $100 bio it begs the question how can they (the Saudis) amass so much wealth in a short time? There was a suggestion that the Kingdom would sell off about 15% of its oil assets, however this means significant disclosure to meet investor requirements and that’s something many observers believe that the Saudis will not do, that is provide full disclosure.
All things economic
My concern however is that whilst the jobs number optically looks good, the number highlights just how bad the structure of the US economy has become and that structural problem sits squarely with the Fed. Loose monetary policy has not found its way outside of Corporate USA into the broader economy. If one goes through the numbers most of the jobs growth continues to be in those areas that traditionally people gain employment whilst looking for something better. For example the service industry was one segment where there was good growth, that’s in areas like barmen and barmaids, wait service in the restaurant sector. Health care was another area of growth however if the growth was going to auxiliary positions rather that to professions such as management, doctors and nurses then there ought to be a few questions.
Manufacturing employment continued to fall, as too positions in freight however logistics saw growth and much of that growth has been attributed to the growth of online shopping.
What keeps me up at night?
The repo market on Friday was very tight. Dealers paid up for repo and the levels were not too distant from where the levels were when Lehman went under. Bonds rallied and flattened somewhat so either some large hedge funds or a large Fund were completely caught out or a market participant had a large short. Either way the lack of liquidity and demand for bonds is an issue. Bonds especially in the longer dated maturities rallied so the bond market does not believe Yellen can raise rates. Bonds continue to rally despite the prospect of rates raising and the bond curve has and continues to flatten. If the bonds are right then the US growth is coming towards the end and rate cuts may be required. Certainly world growth is not aiding US growth prospects. And on all things bonds I could not help but notice that Italian 10 year bonds are 50bp inside US 10 years, and that the Italian curve is negative out to 2 years. Which is incredible when you realise what a poor performer the Italian economy has been of late.
The rally in the US equity market was largely technical and with concerns over China and with weak commodity prices of late, it’s hard to see how the Australian equity market can rally Monday. Bonds will continue their daily struggle to rally but will and credit will widen slightly to bond as swap creeps out. Hybrids should continue their weak trend because of further bank issuance of capital notes. The capital note issuance will continue for a while yet as it’s the main vehicle for the Australian Banks to get their ratios into place to meet the guidelines set by APRA.
Have a good day!
31 March 2016:
Is the nexus of crude and equities broken?
A little while ago we watched the relationship between oil futures and S&P futures were running at about a 90% correlation. The nexus appears to be diminishing with oil at or around $40.00 a barrel. Watch this space, because if oil continues to trade higher, then, the Fed and its commentary will become the lead influence. So for now we watch oil but be wary if oil continues to improve.
Fed speak what next
Evans looking for sustainable economic improvements and is thinking a couple of rate hikes. Thought inflation could move to 2.5%. Friday March employment and market is thinking 205k. Economists currently are of the opinion no rate hike April, most likely June with about 50% economists on board for a hike. Against a hike we have the US moving into the election and that may well cloud the future of rate hikes.
Currently the probabilities are Fed looking to hikes 4, economists 2. And this divergence is causing confusion. The confusion has led to lower turnover than usual.
What to watch for in jobs report
The Jobs report is expected to be 205k and optically this looks like a high number but we need to look behind the headline.
So what should we look for?
- Average hours worked. That was down last month, typically falling hours means less jobs.
- Where the jobs are being created. Last month the growth was in hospitality/restaurant and bars and healthcare. Typically restaurant and hospitality work are not careers and are the most at risk.
- Where job are not being created but should be. These jobs are in construction, mining etc.
View for the day
The markets were stronger in the morning session however as the day progressed equities weakened, bonds rallied and credit stalled a little. So for the opening day the first day of April, in my view equities will be weaker, expect bonds to rally, credit should widen due to a better bond market and hybrids – especially bank capital hybrids should be weak as the market digests the recent CBA issue and looks to further issuance by the big 4. Mind you in my view the bank capital products old format are looking very attractive.
30 March 2016:
Yippee for Yellen
Once again the demi God of central bankers has cast her spell. Market rallied today because all is good in the world. By being incredibly dovish we now believe that a global recession will be averted. So in response equities rallied, credit was steady and bonds…well they had a “not a good day”. However time will tell whether this view is illusory. Bonds were weaker because they are now worried about growth well maybe not growth, more an interest rate hike.
Oils ain’t oils
In response as global recession is to be averted oil rallied. (Watch the continuing correlation to equities, the relationship continues). What we do need to watch out for are signs of the Saudi strategy breaking down. As the Saud’s have discovered to their chagrin they cannot control the oil market, so at some point they will have to go back to the table and reach consensus with the other major oil producers if a collapse is to be avoided. Whilst we are talking about oil, coal prices have fallen significantly and gas continues to tumble placing further pressure on prices.
Too big to fail
Met Life won a case today that means it won’t have to bolster capital because its considered to be one of those companies classified as too big to fail. This is a land mark decision as Met Life successfully argued that it has enough capital and required no bailout funds during 2008-09 unlike its competitor AIG which required significant assistance.
The other big story was Apple and the unlockable phone which has been unlocked. The issue at stake here is who owns data and who has access. Apparently US businesses lost around $9 billion of sales because international companies were left uncertain as to who owned and had access to private data, and all of this happened apparently because of Snowden releasing information about the CIA/FBI’s investigations and activities, some of which could be considered perhaps as being anti-competitive, at least that’s the impression that one could come to as the listener.
Jobs losses today
Blackrock announced 400 positions are no longer required. Boeing announced that they would be cutting 4,000 jobs by mid-year in response to overseas competition. In a market where jobs growth is heralded the main cuts are still occurring in the manufacturing mining sectors, however in the service industry which I am informed is about 80% of the economy – jobs are still growing. This to my mind makes the US vulnerable because it’s very easy to outsource services and generally people in the services are not all that well paid, apart from bankers, lawyers and medical services. By way of interest, many accounting functions are easily outsourced and even radiology and pathology for example are often outsourced.
Call for the day
Equities were stronger and oil was stronger so I expect that the 31st will have a reasonable day, hence expect a rally. Hybrids will be the victim of their own issuance. With a rally in equities hybrids will be weaker and with the CBA issue hitting the market, I expect that the listed Bank T1securities will continue to weaken. Value is in the non-bank securities if for no other reason than less volatility. Bonds I expect will be a tad weaker in response to weaker US treasuries, and especially so in the ten years. Credit had a reasonable day but somehow I think that was more on the basis that swap is tightening to bond thus dragging in credit (Technical I know).
News just in
Macey’s the largest retailer in the US has cut bonuses for their executives to nil as a result of missing profitability targets.
29 March 2016:
Yellen Happy Hour
Just when I was about to start doubting further rallies in equities Yellen changed the market’s course. So what was the take away from Yellen’s comments, simply “The Fed should proceed cautiously”. Meaning that rates will remain on hold for a while yet until we start to see growth and market stability. Bonds were having a good day and well up until 12.30 equities were down. Post Yellen we are back into the land of delusion, equities rallied, bonds steadied and it’s back to happy hour. I still find it difficult to think that equities can rally further to any great significance when what Corporate America requires is increasing revenues and productivity. The days of the buyback are close to finished, remembering it was corporate buybacks that has propelled returns over the last few years. So rates remain steady, rates remain low and equity investors can hope for further growth. If the US consumer does not spend as what appears to be continuing then this rally will come to a standstill. Oil fell again and most likely this means equities will fall again in sympathy with weaker commodity prices. A driver of some excitement today was the reported takeover of Virgin America, its two suitors being Jet Blue and Alaskan Airlines.
As for bonds we saw the yield curve steepen today and that was as a result of the two’s rallying faster than the longer dated issues such as ten years.
Recovery or non-recovery?
Oil continues to remain volatile. And as a barometer of world growth oil’s tentacles affect most trading markets. The limiting factor will be how quickly we can see some recovery in prices and see stability return. Stability presently is constrained by the impact of Iran and how resolved the Saudis are to continue putting pressure on the frackers and oil sands miners. That said I note the correlation between oil and the DJ has increased by a couple of percent, further enhancing the relationship. There is also a nice correlation to the AUD for those that are interested. Barclays issued a report today on Commodities and the context was quite bearish. They see natural gas falling significantly and if that’s the case then expect oil to fall further and for that matter coal then comes under pressure.
However as a trader oil does not concern me so much rather if I am looking for recovery then I want to see movements in the markets that are being exited and movements in markets that are being invested. For example if I hear that global growth is recovering and investors are investing in emerging markets and exiting US Treasuries then if emerging markets are rallying by 8% then I would expect to see a fall in US Treasuries to fall by say 4%. As one market gains then the more conservative markets should fall. Currently we are not seeing this. People are reporting investments in emerging markets yet we are not seeing any significant falls in US treasuries or for that matter sovereign bonds. There are no significant falls.
What to expect today
Bonds will probably move in sympathy with US Treasuries and most likely the front end of the Aussie market will benefit. I expect that equity will stage a recovery but with oil falling any recovery will be muted in my view. Credit will remain mixed with high grade benefiting and the lesser investment grade credits to weaken marginally. Hybrids will be under pressure from further bank issuance and investors rolling out of existing issues into new issues.
28 March 2016:
What kind of animal is representative of the market? A Bunny Market!
We now are being informed that we are in a bunny market. So what’s a Bunny Market? A bunny market is where the market hops around (up and down) with some volatility but at the end of the period appears to have had no significant movement. These markets are often seen as we come to end of an economic cycle (economic recovery). So what is the evidence of an inflection point?
To quote a Deutsche Asset Allocator – the equity markets are vulnerable to earnings downgrades. In other words, corporate USA is not making as much money as it should be. Consumer spending and personal income for February was on expectation, however, January was savagely downgraded. This year’s growth for many including Yellen is premised on the consumer spending much more. If January is to be believed then the consumer has voted with their wallet or purse and it (whichever) has remained firmly shut. Then we also saw comments from the Atlanta Fed which were dovish at worst and very dovish if their scenario of a significant slowdown comes to fruition. There are some economists which are pointing to GDP growth of less than 1% and if this is true then we have real issues with the US economy. For any rate hike the Fed needs to see growth around 2% or better. Whilst on the GDP, the biggest contributor has been Healthcare under the Obama Care programme. Now that’s a problem. A simple knee replacement costs a hospital about $12k, however, the insurance will compensate the hospital for $18k and in a hospital where there is no compensation, that will cost a consumer $24k.
Risk on Risk off
We often hear the story about running diversified portfolios, however, a real risk for investors is the simple fact that with the increase in Regulatory environment and trading activities being wound back, Hedge Funds are now the major investor and trader of US treasuries. This simple relationship has meant that there are far more risks than previously expected. We have the heightened risk that arbitrage trading brings whether it be to swap, CDS or futures. Relationships are changing and with the increase in volatility with fewer market makers, means that with the extra volatility comes bigger movements and what happens when everyone wants to exit at the same time, a bloodbath!
On the side of equities we have now seen the quietest week since the beginning of the year and this week volumes were down 40%. A couple of points to monitor, with PE’s declining (after being boosted by corporate buybacks) rates of return will remain persistently low. This is partly a mathematical relationship because as rates remain low or fall further expected rates of returns decline. And if we combine lower rates of return with lower corporate earnings and fewer buybacks its hard to see multiples rising significantly.
Aswanath Damodaran wove his special magic the other day with a particularly savage commentary about Central Banks and how they have lost the plot. (For those that don’t know Damodaran he is considered to be one of the top valuation experts in the USA. Aswanath is one of the more influential Professors of Stern Business School (NYU) and he consults extensively to Wall Street. His text books are widely used in many MBA programmes.) His point is that with low rates and with negative interest rates what we are doing is creating a savings crisis. So for many as they hunt for yield instead of investing with treasuries or with good corporate credits, these folk are investing in high yielding shares and are thus missing the point. Dividends are not coupons and they are not guaranteed. In the USA there are many companies that are weak financially that are paying higher dividends, the case in point being Valeant. Damodaran is concerned many investors are about to find out the hard way that these investments were probably not that good. And to further explain his point of view of negative rates or even very low interest rates and how unnecessary they are he uses Japan as an example. Twenty years of near zero interest rates has not caused massive expansion or growth. His view is that Governments in order to not upset the constituency have opted for monetary policies rather than use fiscal policies and it is the use of fiscal policies that better redistributes money, not monetary policy. Central Bankers have no special sauce nor are they Rock Gods.
Another pointer that Aswanath brought up was the transition to a cashless society. He sees this as an economic impost. With cashless systems one can allow negative rates to persist and it’s because one does not have to store money. Storing money comes at a cost (bank fees etc) which means people are more inclined to use credit as the value of money is not as valuable. Extensive use of credit is a limiting factor. For example, one can borrow up to a point but once that is done one cannot spend any more until the debt has been largely paid down. This means that we have bursts of economic progress followed by lulls and it is this behavior that we are seeing in the US consumer. It’s Spectrum’s belief that many US citizens carry large amounts of credit card debt and once their card has been maxed out its sometime before they can spend again. On the subject of negative rates and storage, BMW is toying with the idea of storing Euro 10 mio off site rather than lose money because of negative rates, not in a Bank to see what happens. If more Corporates do this then the financial system could become rather distorted, and certainly Banks could see some interesting balance sheet effects.
View of the day
I am going to go out on limb here, and say with the T20 demise of Australia, there is no way markets in Oz can rally! US once again is in lockstep with oil and with the sluggish US equity market, the Ozzie market will most likely be quiet and directionless. With the UST 2-30 years at the lowest since 2008 then we should expect curve flattening in Australia as well, but maybe not as pronounced. Expect volatility. Credit will tighten probably more as a result of swap rather than for demand. Hybrids should be mixed with further bank issuance leading to weaker bank hybrids. The 2Y treasury auction today was a little sloppy in the way it was bid, probably highlighting the divergence of opinion in the Treasury market.
Have a great day!
22 March 2016:
Today’s market was a lottery. Following the bombing in Brussels, markets reacted as you probably expected. Equities weakened, gold rallied, oil rallied and bonds rallied. Post lunch the markets reversed. Equities rallied, oil weakened and bonds reversed about 4bp. Once the bad news has finished filtering out Spectrum expects markets to be challenged and remain volatile. As we head towards the close the equity markets weakened, credit and bonds softened.
News wise there was not much to report. The news cycle was clearly focused on Brussels. Obama gave an inspiring speech to the Cubans, and explained some differences. Note the increased tenor around IMDB and Goldman’s. This could be an interesting story as there are a number of regulators involved and it will be interesting to see whether they reach the same conclusion as the US Regulators which at this stage is that Goldman’s had nothing to answer for. Given a bond deal of $1 bio netted $300 mio and some moneys went to an obscure Private Bank in Switzerland people can draw their own conclusions.
21 March 2016:
Monday has been an interesting day if for no other reason that on a day when housing numbers fell by 7.1% a Fed Governor decided to provide a hawkish view. In many pundits views this diminishes the Fed’s credibility. The statements appear to be on the back of improving equity market returns but when you put some perspective around the US equity market it actually is a sorry tale. There are still a large number of companies that are languishing and given most analysts expect a weak March quarter one wonders what the hype of tightening rates further is all about. The reduced home sales have been attributed to weak pay growth. In other words those who want to upgrade cannot because they don’t have the income to support the upgrade and those that want to move out of home don’t have the wages to justify owning a home. This is now becoming a recurrent theme and goes some way to explain Trump’s rise, wages growth has become stagnant and without productivity rises the US housing market looks set to weaken without international intervention.
I was listening to the CEO of Apache Oil today and there were some interesting observations. For those that don’t know Apache, they are one of the larger US oil companies. There are budgeting for oil at $35 a barrel, and that makes them cash flow neutral and profitable. Anything above is obviously a great result. The CEO did comment that a number of competitors were currently running at 150% of cash flow, this implies that many companies are borrowing to support their day to day activities. Apache has forecast a lower revenue of about 11% but this goes hand in glove with shutting 93 wells but keeping their 4 major wells operational. And the piece de la resistance was that with every $5 increase that means $350 million of extra revenue. When you put this in the context of what the Saud’s tried to achieve by forcing the oil price lower you can understand the roadblock that strategy has run into. The large producers have much lower cost of production than anticipated and this spells bad news for both gas and coal miners. And of course today was Apple’s day where they released details of their new offerings.
Equities had a small advance. Credit was weaker on the day and bonds were weaker after the Vix hit their lowest levels for at least two months. The day in Australia should see the weak trends continue, and of course the Australian Cricket team whacked Bangladesh, just.
18 March 2016:
After the Fed comments have turned out to be somewhat dovish, the bond markets have staged a recovery. Bonds had a reasonable day and so did credit. Equity markets are rallying for the possibility of increasing US growth and with oil improving many Banks balance sheets look a lot better. Of interest too have been the number of rigs that have been turned on with oil improving. These rigs are those generally managed by the wildcatters, and as oil declines those rigs will once again be turned off. What this means however is that for many the real cost of production is a lot lower than earlier estimates and this also means that oil on the upside has a limit. For commodities such as coal and gas this means that there will be a prolonged period of low prices and that’s probably a part reason why Peabody has gone into Chapter 11.
Long term markets will continue to be volatile. I believe that the US economy may be looking to turnaround but will be bound by the electioneering and policies of the party’s especially the GOP which at present are rather opaque and in the vain of trust us. In other words they have not actually revealed any policies other than all immigrants are bad and all the US is good. A trade war is a distinct possibility given Trump’s rhetoric and with the GOP looking to ramp up military spending (which is already at a high) one wonders how any benefits can accrue. What the US needs is a good injection of infrastructure spending and sorting out the vested interests within the healthcare system. What worries Spectrum at present is the number of heavy machines available. It would appear as though construction and mining are some way before they see any improvement.
So on the coming week, with Easter at the end of the week we would expect some short covering, however with little buying, markets are prone to drifting weaker over the course of the week, especially in Australia.
17 March 2016:
An interesting day where equities had a slight rally but to my mind this is a fool’s rally. The reason is that if you look at who has rallied of late its been those companies that pay high dividends that being the phone companies and utilities. This means that investors are not all that confident about the outlook but want the high dividends, they want cash flow. This is particularly relevant because the way the US tax system works. The dividends attract a higher rate of tax than those that investors expect to receive a capital gain. In other words the investors are sitting on the sidelines.
It’s worth thinking about Goldman and Banks – they are down 25% over the quarter and for Goldman’s if this continues this will be the worst period since 2013. Jeffries staggered the market with their sobering release, trading revenue was down 82%. So while the equity markets are rallying, analysts are hopeful of better return in the future, without any reasonable grounds to believe such.
The other drivers for the day were the Swiss Central Bank, kept rates at negative 0.75% and the BoE held rates steady based on Brexit fears. For those growth bulls, capex spending for capital equipment is falling (see attached chart) but even more interesting was Caterpillar’s quarterly guidance suggesting that numbers could be much more than expected. Osh Kosh (another major heavy equipment producer) was also suggesting weaker than expected numbers.
On the positive side the number of people applying for unemployment benefits fell. The USD was weaker and this should help the USA’s growth prospects. An interesting economic release today was made by Oxford Economics. The Economics think tank debunked the views that US manufacturers were at a distinct disadvantage to Chinese Manufacturers. According to Oxford Economics the Chinese have a 4% advantage, that’s all and that has come because of wages and with the increasing wages a weakening productivity gain. I just wonder hw the US worker will feel when his wages are not distinctly different from a Chinese worker and that’s not too far off now.
Spectrum thinks credit will have a reasonable day, look to the Bank securities for a lead. Government bonds on the back of the equity rally will be weaker and that weakness for the moment looks set to continue. Hybrids will suffer as investors move to equity.
14 March 2016:
The Market rally continues. Credit had a good day as investors started to move into high yield seeking bargains. However, let’s not get too far ahead of ourselves. The BOJ announces their interest rate policy and on Wednesday we have the Fed. Trading on the equity markets were generally light, and bonds were better on the day.
Oil will continue to be the harbinger of news, good or bad. For the moment oil was weaker on the day breaking the nexus with equities, however a significant shift in oil prices probably means a shift in equity prices and that too will be reflected in the bond and credit markets. Unfortunately Spectrum thinks that we are still trading oil to trade other financial instruments. If you run regression analysis between oil and the DJ their remains an interesting and curious link.
For those Trump supporters well here is some fun analysis. There is a correlation between the Vix and Trump stories. Apparently the more Trump stories that have appeared in the newswires/ newspapers the weaker the equity markets and in particular the higher the Vix. A curious relationship and not unexpected as Trump has some policies that suggest the US could slide into a Trade War with its partners and markets are reacting to his success.
One concern is the fall away in interest for Venture Capital Firms and the lack of new IPO’s. It appears as though the VC’s are having trouble valuing firms under the current conditions and are simply not investing and this is interesting given many of the new technology firms and even some of the larger Tech companies have been quietly culling their workforce. And one story that caught our attention was a story about a German investor who was due to invest in a UK based company withdrew their cornerstone investment when it was announced that the UK may look to exit the Euro. Strength today is in response to coordinated interest rate easing’s / QE to stimulate economies. The Chinese also announced a major takeover of Starwood and this led to a slightly better mood.
11 March 2016:
Markets Friday were somewhat wary before the Fed announcement this week as to whether there would be any adjustment to current interest rates. Bonds were somewhat weaker especially in the front end of the curve as traders concerns are raised should the Fed raise rates.
Otherwise the saga of the Co Co’s continue with the European Commissioners looking to build some protections into the instruments as a result of heightened concerns of Banks meeting interest payments, as in the recent situation regarding Deutsche Bank. On the subject of DB it appears as though their swaps have become quite popular with JPM and Goldmans, rumored to be large buyers. Credit tightened on the day and equity markets were more confident. Over the month of March equity markets have largely erased the losses of January and February.
10 March 2016:
Interesting day today although trading volumes were somewhat muted. Draghi eased again today but provided Banks with a 4 year facility to ease the burden of investing in Government securities with negative rates. This is thought to be quite useful for the larger banks, however, the smaller banks are expected to see mergers as a means of offsetting rate falls and maintaining profitability as a result of added solvency requirements. Over the day the equity markets started strong before weakening and then squaring for the day. Bonds were mixed but mostly weaker. What was of interest is that the European Central Bank can now buy European Corporates and this will only muddy further the desperate chase for yield in Europe.
What is interesting is the question of why the movements in Europe? Given that oil ought to have provided a good stimulus, this stimulus is not flowing through. This could result in a weaker Euro and a stronger dollar – meaning hard times for US exporters and thus allowing European exporters to benefit from the weaker currency.
9 March 2016:
Today’s take-away focuses on the growth story and what the possible direction is for interest rates and growth. New Zealand unexpectedly dropped rates due to falling inflation expectations.
Oil rallied today. Looking at correlations between oil and the DJ over a year the correlation has increased from 38% in December to 43% currently. However this causal relationship is much tighter if we look daily movements since November with the movements being correlated in the 80’s indicating a much tighter relationship. Presently if oil rallies then we should expect bonds to weaken and equities to rally with credit tightening as well. China once again is a focal point of discussion. Fears centre around how the economy is progressing and the wavering of the economy due to Government controls. A misstep here could send the Yuan lower and the USD much higher with US exports the victim.
Oil rallied the highest for some time however the skeptics remain in that this is an artificial rise. The reason for the jump was a report released by the US Government suggesting demand was higher than expected. My caveat here though is that a good read for the US economy is the transportation industry which has been battered and where sales are lower than expected. If you use Caterpillar and John Deere as proxies then the US economy is in awful shape, and the economy could remain slow or sluggish for some time in the future. In addition if you think that a price fall from $80 to $48 last year would benefit the Chinese economy by 2% and the us economy by 1% then the fall to $30 should have boosted both these economies significantly.
Given the US economy is growing at around 1.8% and the Chinese economy is slower than expected then growth should be much higher and that probably explains why many economies are heading towards negative rates, because economies are slower than we possibly realize. This is especially relevant for the US as this year’s winter has been quite mild and the usual shutdowns have not occurred. The economy should be much stronger.
7 March 2016:
On a day where the news flow was limited, the real news was focused on which candidate was a genuine contender for the Presidential race. The debate at Flint held by the Democrats was somewhat refreshing if for no other reason that both Sanders and Clinton actually provided some policies and insight. On the other hand it appears as though Trump’s initial acceptance of the former KKK Wizard David Duke and his directed comments at Rubio may have a negative impact in his prospects for the Presidential race.
The race is certainly changing course and the Conservatives are certainly coming up with ad campaigns to negate Trump. Romney’s comments also have had an impact especially as he outlined that Trump’s campaign funds were in fact a loan from his company and that the company would then be compensated should Trump prevail. Otherwise it’s a nice little tax deduction. Romney expects Trump to start raising cash once he becomes the GOP nominee. The Presidential race looks likely to remain a centre of attention for some time.
Iron ore rallied strongly today its biggest single day rise. Weekend comments from China suggesting growth would be 6-7% provided a stimulus to an otherwise quiet market. Global turmoil remains a key focus for markets and is the main reason why Yellen commented that no rate rise would be conducted. Global turmoil is also affecting the oil producers, as traders remain skeptical whether the members of OPEC will remain with lower production levels.
27 November 2015:
Friday was really a day that was more focused on shopping. Yes for those shopping obsessed folks Friday was the day of the bargain, Black Friday and the USA retailers were looking for good signals to end the year on a positive note. Judging by the crowds hopefully Cyber Monday will be better.
And a quick note as to why Turkey and Russia’s stoush has been so quickly forgotten. For both Countries they need each other. Russia relies on Turkey allowing it to pump oil to the West, Turkey controls the entrance to the Black Sea and for Russia to send aid to Syria, much of that cargo sails past Constantinople. Russia is also building a $20bio nuclear plant in Turkey.
Militarily Russia is in a bind, it has already large spent its military budget as the budget was predicated on oil of $100 a barrel. It’s all rather complex but economically both Russia and Turkey are dependent on the other.
As we move towards Christmas, we are expecting volatility in markets to decrease, however we may see bubbles of illiquidity emerge causing sharp retracements.
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