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MS | CNY s Inclusion In SDR Prompts Little Reaction In World Markets | The International Monetary Fund s announcement Monday that the Chinese yuan would be included in its Special Drawing Rights basket was well heralded and prompted little reaction in world financial markets
Analysts had long stressed that being part of the SDR basket had not had much benefit for other currencies such as yen and sterling and that the IMF move to include China was largely symbolic
However at the same time the yuan s inclusion in the basket is historic and does open other doors for China they said
The key medium term benefit is that China will be able to issue liabilities in its own currency which will help to mitigate funding risks Morgan Stanley strategists said Moreover the benefits of further financial reform and improvement of capital allocation will also be clear positives
Still in the near term the continued liberalization of China s capital account financial markets and interest rates coupled with the anticipated Fed lift off in December will likely intensify the challenges that policy will face in managing the trilemma which could mean that real Chinese interest rates stay higher than warranted the strategists said
In terms of CNY assets becoming a greater part of global indices Morgan Stanley N MS noted that SDR status while not a criterion for CNY bonds joining GBI EM or A Shares joining MSCI ACWI the yuan s inclusion in the SDR basket could help on issues like market access and liquidity factors which index providers consider for membership
MS expects partial inclusion with a low initial inclusion factor of China A shares in the MSCI benchmarks by May 2017 with A shares making up 1 of the MSCI EM index at that time
On fixed income the strategists pointed out that while the volume of CNY onshore bonds outstanding is sizable with China debt securities ranking fourth in the world in terms of outstanding amount the ultimate share of CNY bonds in global indices if when they join the benchmarks is likely to be small given the market s relative size
Paul Gruenwald Asia Pacific chief economist at Standard and Poors sees SDR inclusion as only a critical first step for China and the yuan
The big task facing the Chinese authorities is to convince the private sector to hold yuan for reasons other than trade facilitation he said
Currently the yuan is primarily a trade currency with minimal private holdings for store of value reasons he said
And while global central banks do hold yuan sometimes in sizable amounts such as the Bank of Korea not a surprise given that China is Korea s chief trading partner liquidity is guaranteed for official sector trades under the PBOC s bilateral swap agreements with various central banks Gruenwald said
No such guarantees exist for the private sector which is therefore at the mercy of any market interventions by the authorities he said
As for the yuan potentially being increasing used as a reserve currency going forward reserve currencies are seen as safe havens with traders flocking to such currencies in times of market stress Gruenwald said
So if the yuan is perceived as a reserve currency it will strengthen during such volatile times much like the Japanese yen in Asia does now while the rest of the currencies either weaken and or their central banks sustain reserve losses he said
The notion of the yuan as safe haven seems far fetched at the moment with private markets needing a much greater degree of trust in the PBOC Gruenwald said
In the wake of Monday s IMF announcement market players continued to watch yuan trading action against the dollar with many expecting a weaker yuan going forward as the currency becomes more freely tradable and Chinese investors move monies abroad
The People s Bank of China set the yuan central parity rate versus the dollar at CNY6 3973 Tuesday compared to CNY6 3962 Monday and USD CNY saw a range of CNY6 3973 to CNY3 9999
Overnight PBOC Deputy Gov Yi Gang said at a press briefing that it is not necessary to worry about yuan deprecation following its inclusion into SDR and repeated there is no basis for continuous yuan depreciation
I will respect the decisive role of market demand and supply as possible But when volatility exceeds a certain range then the PBOC will intervene decisively and appropriately said Yi who is also the head of the State Administration of Foreign Exchange
He said two way yuan movement is inevitable during exchange rate reform noting the yuan s volatility against the U S dollar has been small when compared with the euro British pound yen and emerging economy currencies
It will be normal to see bigger two way volatility Yi said See further details on MNI Main Wire at 7 16 am ET
Stephen Jen managing partner at SLJ Macro maintained his view that USD CNY should move higher from current levels but has become less sure about the timing
He offered three reasons for why Beijing might want to keep the currency relatively stable against the dollar
President Xi while visiting Washington DC late summer already said that the RMB would remain stable and If he said so I doubt that he would go back on his words during this calendar year Jen said
Also with the IMF Board just approving CNY inclusion of the CNY in the SDR basket it would be strange for BJ to then devalue the currency as soon as they get into the SDR he said
Finally China s trade balance is running at its historical highs and capital outflows have been stopped so What is the rationale for a deval right here right now Jen asked
In a statement on Monday s board discussion the IMF said Directors noted the substantial increase in the international use and trading of the renminbi RMB since the last review across all the indicators used to inform the assessment
They agreed that the RMB can now be considered in fact widely used to make payments for international transactions and widely traded in the principal exchange markets the IMF said See MNI mainwire story at 12 31 p m ET for further details |
MS | What Has Gone Wrong With Eurodollars | To this point I have refrained from presenting Morgan Stanley s balance sheet reporting on gross derivative exposures because quite frankly it fits too perfectly The bank follows the wholesale dollar narrative so closely that it almost seems too good bad for the financialized economy to be true and thus almost diminishes the value of the evidence by extension Because of that I have focused mainly on the other dealers as they mostly apply and thus largely present compelling corroborative anecdotal evidence
Morgan Stanley N MS has now forced itself into the conversation and again it is almost too perfect Yesterday the Wall Street Journal reported rumors that the bank is about to tear into what else FICC deeply
Morgan Stanley plans to slash hundreds of jobs from its debt and currencies division people familiar with the matter said revealing that the Wall Street firm believes that a months long slump in trading revenue may persist
It wasn t necessarily a surprise given that the firm reported 42 drop in FICC revenue in Q3 Thus as with all the other dealers cutting resources dedicated to bond trading is a statement about the state of eurodollar money supply and the profitability that once dominated each firm These banks will ride out temporary revenue shifts and macro environments that may leave income statements gashed in any particular quarter or two but to offer huge reductions across the firm s global trading platform is a nod toward permanency
As per usual the Journal is quite careful to note the role of regulations but CEO James Gorman was far more perfectly blunt This is as always about profit opportunity and that ship has sailed for the foreseeable future
The trick for us is to size our business appropriately to what we think the fee pool is he Gorman said at the conference While trying to gauge that the investment bank needs to keep the unit credibly sized to complete globally and make sure we have enough flex or leverage that when the markets recover which we do think they ll recover you ll be able to participate in the upside of that he said emphasis added
In other words leaving little doubt when the upside of that does happen a big if as these cuts more than suggest Morgan Stanley as Deutsche Bank DE DBKGn or Credit Suisse VX CSGN won t care about regulatory charges and capital efficiency so much as that profit opportunity Those regulatory hurdles and greater inefficiencies will all still be there and apply but won t deter the bank or any bank for the trouble What is lacking then is that profit opportunity i e the recovery
Since this is Morgan Stanley s actual view of the situation that brings upon monetary policy As stated at the outset no firm has traversed monetary policy and Bernanke QE s quite like MS The firm s gross exposures in especially interest rate swaps leave no ambiguity they have clearly been betting on monetary policy with their balance sheet size Again it is honestly almost too impeccably compliant such is the obvious nature of their interests
At each QE the bank responds by opening the derivative spigots only slightly metaphorically only to find them slammed shut at each intervening market rejection The most dramatic was the huge increase after QE2 began as total gross nationals exploded by nearly a third in Q1 2011 alone only to find that a serious miscalculation once the eurodollar euro world just a few months later in 2011 turned rather dangerous once more The balance sheet contraction thereafter was temporarily solved by QE3 and then QE4 only to be dismissed yet again later in 2013 particularly with whatever happened about November 20 2013 and the dealer upheaval of that day It has been steadily downhill ever since with an obvious intensification of the retreat in Q3 last year
That general trajectory extends at least partially into credit derivatives except that after 2011 there was truly no going back QE only worked once for CDS
If Morgan Stanley s FICC units can only make money when QE is pressing on prices and spreads or so everyone might believe then what does it say about QE in Morgan Stanley s behavior after Q3 2013 especially now when by cutting a quarter of the staff that places an exclamation upon the withdrawal QE was supposed to create a recovery and thus great profit opportunity but the absence of QE leaves banks to only leave meaning no profit and thus truly no recovery This financialism becomes the economic misimpression that unexpectedly showed up this year to spoil the self congratulatory party as the FOMC tries over and over for a lift off
As this point is pressed home over and over as each bank cuts back and restructures against FICC the dollar only cuts deeper and deeper into the financialized global economy and makes it only less opportune for what balance sheet resources remain and round and round we go The media cannot grasp as to why swap spreads would not only be negative but quite negative and quite widespread and persistent yet here it is staring them right in the face A negative swap spread holds no meaning except to say that there is great imbalance in balance sheet factors on offer to carry out the financial factors necessary for the wholesale system to remain at least steady You don t have to know anything about interest rate swaps or dealer activities to see that plainly from what these banks report on their off balance sheets and in their own words
But because economics works only backwards starting from next year s absolutely certain recovery and boom none of this makes sense to it and its practitioners There is rather no recovery because the QE bursts of eurodollar ism were not just temporary they were in fact a lie The banks themselves are blatantly declaring it as such and are quite open and honest for once in calling these shots There is no mystery here no unsolvable and complex financial puzzle to tangle about the eurodollar system is increasingly drifting away and there is no stopping it You have no need to take my word for it |
MS | Markets Continue Their Push Higher | Euroarea HICP inflation is expected to rise from 0 1 y y to 0 2 y y in November with core inflation flat at 1 1 y y in line with consensus markets are still very much expecting that Draghi will pull a rather large rabbit out the hat tomorrow
There is naturally a risk that the ECB will disappoint with inflation expectations on the up with the 5Y5Y forwards rising steadily to 1 80 and recent manufacturing gauges looking stronger This was borne out yesterday with the euro rising back through 1 06 as traders readied themselves for the possibility of a less than aggressive eventuality
Crude oil having failed to break higher over the past number of days despite a small fall back in the greenback does look set to make another move lower this morning
The weakening of oil prices is currently the most important factor in the ECB s analysis the drop in oil prices 60 per cent since mid 2014 and certainly while we have often seen longer term inflation expectations react to short term movements in oil prices this may well be a temporary elevation so it s likely that even this won t prevent Draghi from doing whatever it takes Time will tell whether Mr Draghi in pushing deposit rates into deeper negative territory and extending QE has acted erroneously Later sees the release of US oil inventories The consensus estimate for the EIA report is currently for a stock draw of 668 18K barrels A greater drawdown could bring about a squeeze higher particularly with the OPEC decision on production this coming Friday
Janet Yellen is also due to speak later this afternoon but we have Lockhart prior to this so we can expect to see a degree of choppiness in both the FX space and equities as traders do their utmost to derive some sense from the rhetoric
Equity indices are all a touch higher this morning in preparation with the usual suspects energy and basic resources all underperforming Anglo American L AAL has seen its share price fall below the 400p marker this morning Already down 70 this year and fresh from a downgrade from HSBC the mining firm has also lost its battle with Irish billionaire John Magnier and Dubai s ruler over the firm s attempts to expand an Australian coal mine near their stud farms
Shire O SHPG 2 24 AstraZeneca N AZN 1 55 Financials may have boosted the FTSE yesterday but healthcare seems to be in vogue this morning with the sector outperforming the broader index by a wide margin Morgan Stanley N MS is behind the move higher for N GSK Shire etc It also gave an upgrade to AstraZeneca yesterday The broker believes that US pricing volatility in EM and possible US rate hikes may offset supportive M A and pipelines in EU Pharma next year It also said the sector is fairly priced
Away from base metals Fresnillo L FRES 1 25 and Randgold L RRS 1 47 continue to add gains as the gold price steadies somewhat having bounce doff the 1050 oz support earlier this week
Other equity highlights
Zoopla L ZPLAZ 1 34 results for the year ending September 30 it is announcing a 34 per cent rise in revenue for 107 6m plus a 20 per cent increase in profits to 25 4m Zoopla bought price comparison business uSwitch in June for 160m
Greene King L GNK 5 4 recorded pre tax profit was up 17 9 to 72 0 million pounds 108 2 million compared with GBP84 9 million the previous year as total revenue rose to GBP614 9 million from GBP917 7 million a year earlier In November last year Greene King agreed a GBP773 6 million offer for Spirit Pub
Sage Group L SGE 4 77 An 8 rise in organic group full year operating profits to 380m Pre tax profits were down slightly to 275 8m from 278 7m Software subscription contracts grew to over 690 000 an increase of last year s 450 000 achieving 28 growth in the annualised value of the software subscriber base to 344m up from 268m The shares hit an all time high this week so we are clearly seeing some profit taking set in
N IAG 1 82 Raised to buy at Charles Stanley Majority brokers bullish on the stock with average 12 month price target at 727p |
C | Citi names head of EMEA commercial banking | Reuters Citigroup Inc NYSE C on Monday named Raymond Gatcliffe as head of commercial banking for Europe the Middle East and Africa EMEA
Gatcliffe who joined the company in 1994 will be based in London
He will report to Sunil Garg global head of Citi Commercial Bank and David Livingstone chief executive officer of the bank s EMEA unit |
C | HSBC axes CEO Flint after only 18 months in role to speed up growth | By Sumeet Chatterjee and Lawrence White HONG KONG LONDON Reuters HSBC L HSBA ousted John Flint as chief executive after just 18 months in a shock move the chairman of Europe s biggest bank said was needed to speed up progress on priority areas such as the turnaround of its U S business The CEO s exit was a result of differences of opinion with chairman Mark Tucker over Flint s more tentative approach to cutting expenses and setting revenue targets for senior managers to boost profit growth a person familiar with the matter said HSBC disclosed the departure of Flint 51 alongside its half year results on Monday as it forecast a gloomier outlook for its business with an escalation of a trade war between China and the United States an easing monetary policy cycle unrest in its key Hong Kong market and Brexit HSBC which makes more than 80 of its profit in Asia said that its global commercial banking unit head Noel Quinn will be interim chief executive Shares in HSBC which fell nearly 14 during Flint s tenure were down 1 7 in London at 1111 GMT even though it reported a 16 rise in profit and a revealed a share buyback of up to 1 billion Flint who previously ran London headquartered HSBC s retail and wealth management business was chosen as CEO in February 2018 in the first major decision by Tucker who told Reuters It s the right time for change and doing it clearly and decisively from a position of strength is very important A key difference with Tucker was over Flint s efforts to turn around HSBC s under performing U S business the person familiar with the matter said HSBC declined to comment Tucker who became HSBC s first externally appointed chairman when he joined HSBC s board in late 2017 said that the search for a new CEO which will include both internal and external candidates could take up to a year HSBC will also cut around 2 of its workforce or around 4 000 jobs this year as it seeks to reduce costs Chief Financial Officer Ewen Stevenson said adding it will pay out a total of around 650 700 million in severance costs and the reductions will be biased towards senior managers HUAWEI HEAT Flint s exit also followed weeks of adverse Chinese media coverage over HSBC s role in the arrest of Huawei Chief Financial Officer Meng Wanzhou China s Global Times ran an editorial on Friday saying it feels heat on Huawei CFO case suggesting HSBC had erred in cooperating with U S authorities and it could face penalties Our business operations in China continue as normal Tucker told analysts on a conference call when asked whether the bank faced blacklisting in China over the Huawei situation HSBC executives at the time of his appointment saw Flint as a safe pair of hands and a natural successor to mentor and previous CEO Stuart Gulliver Outlining his strategy in June last year Flint set out plans to invest 15 17 billion in the next three years in areas including technology and China We have been uninspired by the business as usual strategy analyst Ed Firth at broker KBW said We suspect that any new CEO is still more likely to be internal but will need a more dynamic approach to improving underperforming areas of the business he said U S WOES HSBC said it no longer expects to achieve the targeted 6 return on tangible equity ROE by 2020 in the U S where it has struggled for years to build scale and compete That missed U S goal is still below the overall group aim of getting to more than 11 ROE by 2020 HSBC hired Citigroup NYSE C veteran Michael Roberts in July to head its U S business in a renewed effort to turn it around The U S business is not getting the proper returns HSBC s CFO Stevenson told Reuters adding the unit has also been hit by the change in the monetary policy cycle HSBC s investment banking business has also struggled in recent years as it lost a string of senior executives and saw U S rivals cash in on booming domestic stock markets Revenues in HSBC s global banking and markets division fell by 3 in the first half compared with the same period last year REVENUE RISK HSBC s pretax profit for the first six months of 2019 rose to 12 41 billion from 10 71 billion in the same period a year earlier helped by a surge in retail banking and Asia revenues Interest rates in the US dollar bloc are now expected to fall rather than rise and geopolitical issues could impact a significant number of our major markets HSBC said The U S China trade war has taken its toll on trade focused banks like HSBC and rival Standard Chartered L STAN which last week warned of an impact on its business customers from the escalating tensions Tucker played down the impact of protests in Hong Kong against an extradition bill which have evolved into a broader anti government backlash and said HSBC remained confident about the future of the Asian financial center Analysts had been watching closely to see whether the bank would announce a fresh buyback as a failure to do so would have been read as a sign of mounting caution by HSBC s management
Prior to the latest buyback announcement HSBC had purchased more than 6 billion of its own shares since 2016 |
C | Fears of China Capital Flight Hang Over a Newly Sliding Yuan | Bloomberg The biggest slide in China s yuan since 2015 threatens to revive concerns about the capital flight back then that helped spur the country to spend 1 trillion of its reserves
For all its perceived success in tightening regulations and strengthening scrutiny of funds moving abroad the trauma of that period poses a big reason to avoid any continuous depreciation An even more important financial consideration could be the stockpile of Chinese dollar debt which has more than doubled since the end of 2015 to 729 8 billion according to data compiled by Bloomberg Issuance so far this year is a record 138 billion
Capital flight is still a major concern said Fraser Howie who has two decades of experience in China s financial markets and co wrote the 2010 book Red Capitalism They are not going to be doing anything foolish
Indeed even as the People s Bank of China on Monday blamed the yuan s tumble on the market reacting to the U S plan to impose fresh tariffs on Chinese imports the central bank said it would fight against short term speculation and stabilize market expectations And the yuan could still return to trade stronger than 7 per dollar it said in a statement
That suggests limited appetite for the kinds of market driven overshoots that regularly occur in other exchange rates China is playing with the margins unless it lets the yuan sink to 7 5 per dollar Howie said It closed at 7 0430 in Shanghai Monday reaching its weakest since 2008
The slide in the currency was met with accusations of manipulation from U S President Donald Trump
China dropped the price of their currency to an almost a historic low he wrote on Twitter on Monday morning It s called currency manipulation Are you listening Federal Reserve This is a major violation which will greatly weaken China over time
PBOC Governor Yi Gang said China won t use the yuan as a tool to deal with trade disputes I am fully confident that the yuan will remain a strong currency in spite of recent fluctuations amid external uncertainties Yi said in a statement published Monday evening in Beijing adding that the bank will work to ensure reasonable and legal demand by companies and the public for foreign exchange
Unlike Russia which has aggressively sought to reduce its economy s ties to the dollar China remains strongly entwined with the U S currency Any unrestrained yuan depreciation could make it tougher for Chinese companies to refinance as well as incentivize firms and individuals to secret money outside the country
Read about Russia s pledge to ditch the dollar
We still expect the People s Bank of China to tightly manage exchange rate expectations and prevent the yuan from depreciating significantly Wang Tao chief China economist at UBS Group AG in Hong Kong wrote in a note Monday We do not think a significant depreciation would offset fully the trade war impact and more importantly the authorities also worry that a large depreciation could be destabilizing
China is already contending with a record series of defaults in its onshore bond market the world s second biggest A sinking yuan exchange rate could then force officials to organize financing for some offshore borrowers and fold a few given industrial overcapacity in the view of Sebastien Galy senior macro strategist at Nordea Investment Funds SA
Back in 2015 and years prior Chinese found a variety of ways to squirrel money out of the country Fake invoicing for overseas trade or services was one favored option Regulators clamped down by stepping up scrutiny and taking measures such as curbing purchases of overseas insurance products and stopping friends and family members from pooling their 50 000 a year quotas to get large sums of money out
Liu Li Gang chief China economist at Citigroup Inc NYSE C in Hong Kong is among those signaling confidence in the tighter regulatory oversight
The risk of a repeat of large capital outflow associated with the 2015 2016 depreciation episode could be contained Liu wrote in a note Monday Even so there will be leakage as the uncontrollable errors and omissions type of capital flight will continue he wrote
For now officials may want to take a breather on yuan depreciation which China can affect through the fixings of the exchange rate in the onshore market as well as controlling the cost of borrowing in offshore yuan and ultimately outright intervention in the view of Jason Daw head of emerging market strategy at Societe Generale PA SOGN SA in Singapore
They may want to see the impact on capital flows before permitting another leg higher in the dollar yuan rate Daw wrote Monday Still he sees a rising tail risk of a slide to 7 50 to 7 70 per dollar |
JPM | JP Morgan Launches Long Short ETF | JP Morgan launched a new fund on Jan 25 2018 JPMorgan NYSE JPM Long Short ETF focused on providing long short exposure to equity factors with a dynamic beta
Long Short ETFs have come to the spotlight as the global stock market rout deepens The Dow declined 1 175 points 4 6 at closing on Feb 5 2018
The surge in bond yields is driving fears that inflation will rise further as a result of which the Fed might have to raise interest rates at a faster pace Interest rate fears have resulted in a sell off in markets across the globe and long short ETFs are garnering investor attention owing to their potential to benefit in a stock market downturn as well
Fund Characteristics
The fund seeks to employ a bottom up rules based methodology to offer investors exposure to a diversified portfolio of long short equity positions depending on the fund manager s view of the markets The fund tries to profit from pricing inefficiencies by maintaining long and short positions to equity factors namely value quality and momentum
The fund has amassed 25 1 million within a few days of trading and charges a fee of 69 basis points a year It has 536 holdings in its portfolio and has top long allocations to Deckers Outdoor Corp Ingersoll Rand PLC and Eastman Chemical Co with 0 5 exposure to each
How Does it Fit in a Portfolio
This ETF is a good play for investors looking for some risk mitigation in a market downturn It has the potential to serve as a diversifying investment for investors With JPLS we are proud to contribute to the democratization of hedge fund investing by offering our clients access to institutional quality products which helps them build stronger portfolios said Joanna Gallegos U S Head of ETFs for J P Morgan Asset Management
This ETF seeks to provide diversification to a traditional asset portfolio by exposing investors to long short strategies This they can do by simultaneously going long on equities that the fund manager believes have the potential to generate positive returns and going short on those that lack the potential to generate positive returns
As a result we believe this ETF has good potential to diversify investors portfolio of traditional assets
Competition
The fund faces immense competition from other funds focused on providing exposure to the same space Below we discuss a few ETFs that seek to provide exposure to this corner see
First Trust Long Short Equity Fund
This fund offers long short exposure to the U S equity markets It had 98 6 long exposure and 27 0 short exposure netting to 71 6 as of Feb 2 2018 From a sector look it has high exposure to Consumer Discretionary Technology and Financials with 19 7 19 5 and 13 4 exposure respectively as of Feb 2 2018 It has AUM of 147 8 million and charges a fee of 96 basis points a year It has returned 12 9 in a year
WisdomTree Dynamic Long Short U S Equity Fund
This fund offers long short exposure to the U S equity markets It seeks to generate returns for investors irrespective of market direction
From a sector look it has high exposure to Technology Consumer Discretionary and Health Care with 26 4 14 4 and 13 2 exposure respectively as of Feb 5 2018 It has AUM of 119 0 million and charges a fee of 48 basis points a year It has returned 14 7 in a year
Hull Tactical US ETF
This fund is an actively managed ETF that offers long short exposure to the U S equity markets It seeks to achieve long term growth for investors irrespective of market direction by taking long and short positions in ETFs that track the S P 500
It has AUM of 96 6 million and charges a fee of 92 basis points a year It has lost 2 2 in a year
Want key ETF info delivered straight to your inbox Zacks free Fund Newsletter will brief you on top news and analysis as well as top performing ETFs each week |
MS | AXA s U S insurance asset management unit files for IPO | NEW YORK Reuters The U S unit of the French insurer AXA has filed for an initial public offering IPO according to a U S regulatory filing on Monday The listed company AXA Equitable Holdings would have more than 600 billion of assets under management which will come from two existing American channels AXA Equitable Life and AllianceBernstein according to the S 1 document published on the website of the U S Securities and Exchange Commission AXA currently holds approximately 63 percent of AllianceBernstein across three entities ownership of which will be transferred into AXA Equitable Holdings prior to the initial public offering No valuation for the new business in which AXA will retain a majority position after the flotation was given in the document but a source familiar with the matter said it could be close to 13 billion euros 15 16 billion AXA Chief Executive Thomas Buberl outlined plans in May to overhaul the group s U S operations ahead of a spin off IPO in 2018 in order to free up capital and pursue takeover targets elsewhere JP Morgan Chase NYSE JPM and Morgan Stanley NYSE MS have been chosen to coordinate the IPO the document said A number of other banks will assist as bookrunners on the deal bankers aware of the matter said As part of the reorganization process ahead of the IPO AXA s U S property and casualty business would be transferred to the parent firm Reinsurance currently in place for AXA Equitable Life would also be unwound the document added Total pro forma revenue of AXA Equitable Holdings in the six months to June 30 was 6 99 billion according to the SEC filing A number of insurance companies have spun off their U S life insurance businesses or are considering such an action as the low interest rate environment continues to stymie growth in the sector In August Metlife split off its U S retail business Brighthouse Financial and distributed shares in the company to its own shareholders The Chief Executive of Canadian insurer Manulife Financial Corp said last week that it was considering all options for its John Hancock unit |
MS | JD com gives back gains Morgan Stanley sounds caution on value | JD com NASDAQ JD has given back Monday s strong post earnings gains down 4 6 in U S trading as analyst reactions come in to the Q3 report Morgan Stanley NYSE MS downgraded the stock to Equal Weight from Overweight pointing to hotter competition in apparel and more than 100 domestic apparel brands have left the platform analyst Grace Chen notes The stock s still got a unique value proposition the firm says but investors may want to seek a better reentry point to play the long term margin expansion story Chen writes She cut her price target to 45 from 53 implying just 14 upside Elsewhere JD com got boosted price targets Nomura raised its target to 52 from 49 and held its Buy rating while Pacific Crest raised its target to 51 CLSA reiterated its Buy rating and a 56 price target implying 42 upside Now read |
MS | Pimco s Fels sees U S stuck in new neutral of low rates as fear vanishes | By Jonathan Stempel NEW YORK Reuters A top economist at Pacific Investment Management Co on Tuesday said global markets are stuck in a low interest rate environment that has siphoned fear from investors who may be ill prepared for when the market environment next heads south Speaking at the Reuters Global Investment 2018 Outlook Summit Joachim Fels Pimco s global economic advisor and a managing director said the neutral level for interest rates has fallen as people live longer and the world becomes more globalized and technology savvy Fels whose employer has about 1 69 trillion of assets under management said that leaves central banks with less leeway to boost interest rates without triggering unwanted inflation Markets are stuck in the new neutral we will continue to live in a low interest rate environment for the foreseeable future said Fels a former global chief economist at Morgan Stanley NYSE MS The drawback is that if we were to see a correction central banks have very little room to react Investors have reacted in part by plowing money into riskier assets such as stocks and higher yield bonds while maintaining exposure to safer fixed income securities as a diversifier That appetite for risk could backfire While we think the risk of a recession over the next year is very low Fels said what we worry about most is that the fear is gone that the fear among investors is gone for the first time in this expansion Fels said investors have since the 2008 global financial crisis been climbing this wall of worry over such factors as the stability of U S banks and the euro only to see their risk taking rewarded in 2017 when nothing went wrong The bigger worry is that once the correction happens financial market participants start to realize that central banks don t have enough bullets to fight this he said That may be the Oh my God the emperor has no clothes moment Indeed he said last week s weakness in U S junk bonds could be a taste of things to come Fels worries that such a recession whenever it occurs could be long and shallow because central banks won t have the tools to fight it He said a recession could be hastened in the United States if Congress implemented tax cuts as opposed to more general tax reform that overstimulate the economy and used up bullets that lawmakers could use to fight the next downturn For a tax cut to stimulate demand this is probably the worst time to do it he said It s not a bad idea to cut taxes don t get me wrong he said But in terms of cutting taxes now at a time when the labor market is almost at full employment that raises the risk of a pickup of inflation It could well pave the way for a short boom now but possibly a recession in 2019 or 2020 Follow Reuters Summits on Twitter Reuters Summits
For other news from Reuters Global Investment 2018 Outlook Summit click |
JPM | Cheaper gasoline weighs on U S consumer prices in December | By Lucia Mutikani WASHINGTON Reuters U S consumer prices fell for the first time in nine months in December amid a plunge in gasoline prices but underlying inflation pressures remained firm as rental housing and healthcare costs rose steadily Overall the report from the Labor Department on Friday painted a picture of inflation that was under control with increases in some categories offset by declines elsewhere This likely supports recent statements by Federal Reserve officials pledging patience in raising interest rates this year The Fed will take this as further proof that price pressures are building more slowly than some have feared based on the strong growth of late and tight labor market said James McCann senior global economist at Aberdeen Standard Investments in Boston It certainly seems to justify the Fed s message about being more patient on rate increases The Consumer Price Index dipped 0 1 percent last month the first drop and weakest reading since March after being unchanged in November In the 12 months through December the CPI rose 1 9 percent slowing from November s 2 2 percent gain Excluding the volatile food and energy components the CPI increased 0 2 percent advancing by the same margin for a third straight month In the 12 months through December the so called core CPI rose 2 2 percent matching November s increase December s inflation readings were in line with economists expectations The CPI rose 1 9 percent in 2018 slowing from a 2 1 percent increase in 2017 But the core CPI jumped 2 2 percent up from 1 8 percent in 2017 The Fed which has a 2 percent inflation target tracks a different measure the core personal consumption expenditures PCE price index for monetary policy The core PCE price index increased 1 9 percent year on year in November after rising 1 8 percent in October It hit 2 percent in March for the first time since April 2012 The U S central bank has forecast two interest rate hikes this year but several policymakers including Chairman Jerome Powell have said they would be cautious about tightening monetary policy Powell reiterated that view on Thursday saying especially with inflation low and under control we have the ability to be patient and watch patiently and carefully while the central bank monitored economic data and financial markets for risks to growth Minutes of the U S central bank s Dec 18 19 policy meeting published on Wednesday showed many officials were of the view that the Fed could afford to be patient about further policy firming But with core inflation remaining firm despite a strong dollar and slowing global growth economists say further rate increases this year cannot be ruled out In addition a tighter labor market is boosting wage growth If core inflation holds firm the Fed will continue to consider additional rate hikes this year said Sam Bullard a senior economist at Wells Fargo NYSE WFC Securities in Charlotte North Carolina The Fed lifted borrowing costs four times in 2018 The dollar was little changed against a basket of currencies while U S Treasury prices rose Stocks on Wall Street were trading lower after a five day rally BOOST TO PURCHASING POWER Low inflation is boosting households purchasing power which could keep consumer spending supported While the economy likely posted strong growth in the fourth quarter an ongoing partial shutdown of the federal government is casting a cloud on the economy The partial closure started on Dec 22 as President Donald Trump demanded that the U S Congress give him 5 7 billion this year to help build a wall on the U S border with Mexico According to JPMorgan NYSE JPM the shutdown which has left 800 000 employees furloughed or working without pay and delayed the release of data from the Census Bureau and Bureau of Economic Analysis was subtracting 0 1 0 2 percentage point from quarterly gross domestic product growth each week Inflation adjusted average weekly earnings surged 0 7 percent in December the biggest gain since August 2015 after slipping 0 1 percent in November Weekly earnings increased 1 2 percent in the 12 months to December the most since July 2016 from 0 6 percent in November Last month gasoline prices dropped 7 5 percent the largest decrease since February 2016 after tumbling 4 2 percent in November But Americans paid more for food with prices rising 0 4 percent That was the biggest gain since May 2014 and followed a 0 2 percent rise in November Owners equivalent rent of primary residence which is what a homeowner would pay to rent or receive from renting a home advanced 0 2 percent in December after rising 0 3 percent in November Healthcare costs increased 0 3 percent last month after jumping 0 4 percent in November Apparel prices were unchanged in December after dropping 0 9 percent in the prior month Airline fares tumbled 1 5 percent and prices for used motor vehicles and trucks fell 0 2 percent after rising for two straight months
But prices for household furnishings increased likely because of tariffs imposed by the Trump administration on a range of imported Chinese goods New motor vehicle prices were unchanged for a second straight month |
JPM | U S government shutdown may depress January job growth | By Lucia Mutikani WASHINGTON Reuters A partial shutdown of the U S government could slash job growth by as much as 500 000 in January and lift the unemployment rate above 4 0 percent unless the impasse in Washington is resolved before next Friday economists warned Some 800 000 government workers missed their first paycheck on Friday following the partial shutdown which started on Dec 22 as President Donald Trump demanded that the U S Congress give him 5 7 billion this year to help build a wall on the country s border with Mexico The Labor Department which has not been affected by the shutdown surveys employers and households for its closely watched employment report which includes nonfarm payrolls and the unemployment rate during the week that includes the 12th of the month For this month the pay period for most federal employees that includes the week of the 12th runs from Jan 6 to Jan 19 About 380 000 workers have been furloughed while the rest are working without pay Unless the government reopens next week furloughed workers will probably be counted as unemployed as they would not have received a salary during the pay period survey So if the government remains closed past January 19 then furloughed federal workers will not receive pay during the survey week meaning that we d very likely get a big drop in the headline payrolls report something on the order of perhaps 500 000 to 600 000 said Omair Sharif senior U S economist at Societe Generale PA SOGN in New York That could result in the first monthly decline in employment since September 2010 and snap a string of 99 consecutive months of jobs gains But if Congress decides to pay these workers retroactively as was the case following the October 2013 government shut down they would be considered employed You can look at the private sector payroll figure to bypass this distortion but it ll create some uncertainty and prevent us from getting a clean read on the labor market said Sharif The economy created 312 000 jobs in December the most in 10 months Trump likes to boast about the strong labor market as one of his crown achievements The shutdown which on Friday tied the record for the longest in the nation s history could also drive up the unemployment rate in January HIGHER UNEMPLOYMENT RATE The household survey from which the jobless rate is derived would likely consider the furloughed workers as unemployed These workers account for about 0 2 percent of the current labor force so all else equal the increase in unemployment associated with the government shutdown could lead to a 0 2 percentage point increase in the unemployment rate in January said Daniel Silver an economist at JPMorgan NYSE JPM in New York The unemployment rate rose two tenths of a percentage point to 3 9 percent in December as some jobless Americans piled into the labor market confident of their employment prospects While these impacts on the labor market are likely to be temporary they could make it difficult for policymakers to get a clear read of the health of the economy for monetary policy Economists also worry that a prolonged government shutdown could hurt both business and consumer confidence and undercut business and household spending Richmond Federal Reserve President Thomas Barkin said on Thursday that the shutdown which has delayed the release of Commerce Department data including November trade figures could affect the amount of economic data available to the Federal Reserve the U S central bank JPMorgan estimates the shutdown is cutting 0 1 0 2 percentage point every week from quarterly economic growth It said the impact could be even larger if the shutdown led to a significant shift in sentiment The 2013 shutdown did have noticeable negative effects on some measures of consumer and business sentiment but these effects proved short lived against a backdrop of otherwise strong economic data and buoyant equity markets said Silver
It is possible that an extended shutdown right now could interact with market declines and already weakening economic data to produce a larger drag on sentiment and the overall economy |
MS | Wednesday Lower | The Hoot Actionable ideas for the busy trader delivered daily right up front
Wednesday lower
ES pivot 2000 00 Holding below is bearish
Rest of week bias lower technically
Monthly outlook bias higher
Single stock trader N VZ still not a swing trade buy
Recap
Last night I mentioned that the charts were all looking tired and that fatigue came home to roost on Tuesday as all three major averages lost ground with the Dow down 0 29 That leaves us at an interesting juncture so lets go straight to the charts as we figure out where Wednesday is heading
The Technicals
The Dow On Tuesday the Dow snapped an impressive 7 day winning streak and 9 out of 10 with a 50 point loss This move left it teetering on the brink of its steep rising RTC I will add that indicators have already begun coming off of extreme overbought levels which isn t hard since when RSI hits 100 there there s no place left to go but down The stochastic remains threaded out at extreme overbought so there s no telling when it will form a bearish crossover However the overall look of this chart is now quite bearish
The VIX In an impressive show of strength on Tuesday the VIX managed to escape the 200 day MA trap by refusing to sink lower and instead actually gained 9 28 to finish with a green hanging man that started to bring the indicators off of extreme oversold level and left this chart right on the edge of its descending RTC This all looks bullish for Wednesday
Market index futures Tonight all three futures are mixed at 12 29 AM EDT with ES dead even I wasn t ready to commit to a move lower in ES last night considering all the momentum it had going for it However on Tuesday it had a bad day indeed with its worst performance since September 28th That left it hanging right on the edge of its rising RTC and all of the indicators are now descending strongly off of overbought with the stochastic in a nicely completed bearish crossover The overnight is trading outside this RTC so that s a bearish set up and therefore this chart now looks negative for Wednesday
ES daily pivot Tonight the ES daily pivot falls from 2008 92 to 2000 00 on the dot ES remains below its new pivot though so this indicator continues bearish
Dollar index Last night I noted a reversal warning in the dollar but one which required confirmation We got that on Tuesday and while the dollar only gained 0 03 it did it on wide ranging red spinning top However indicators continue to remain quite oversold so it looks like the dollar still has more room to run higher from here
Euro However last night I missed the euro which I thought would move lower on Tuesday Instead it continued higher to close at 1 1395 marking its third day in a row where it just exactly touched its upper BB Indicators continue to rise and are now at extreme overbought levels The stochastic also looks like its trying to form a bearish crossover but it s not quite there yet So this chart is a little too difficult to call tonight
Transportation Last night I noted a classic hanging man in the trend And interestingly on Tuesday marketwatch com also noted it in one of their TA pieces That was the same day that we got the payoff in the form of a giant 2 22 decline with a red marubozu that crashed right out of a steep two week long rising RTC and sent all the indicators lower off of overbought That leaves no bullish signs at all on this chart tonight
Accuracy
Tonight the futures appear to be trying to find some support after Tuesday s big drop but the overall tenor of the charts remains bearish It just seems that overall there s more downside risk than upside potential so I m going to go ahead and call Wednesday lower I ll be happy to be proven wrong
Single Stock Trader
On Tuesday Verizon gained a bit on an upgrade from Morgan Stanley N MS to finish with a small bullish engulfing pattern However indicators continue climbing into overbought territory and the stochastic remains on the cusp of a bearish crossover The stock continues to find resistance around 44 40 and I still don t see this as a swing trade buy right now |
C | FINRA fines Citigroup for loose background checks | By Imani Moise
Reuters The Financial Industry Regulatory Authority said on Monday it has fined Citigroup s Global Markets business 1 25 million for failing to perform proper background checks on thousands of employees between 2010 and 2017
According to the regulator the New York based bank did not conduct timely or adequate background checks for roughly 10 400 non registered employees As a result it said the bank employed at least three individuals with criminal histories in violation of regulatory requirements
FINRA requires most employees at the broker dealer firms it regulates to be finger printed and screened for past criminal history regardless of whether the employee will be registered with FINRA to be involved in investment decisions
Citigroup NYSE C Global Markets Inc is a member of FINRA and self reported the issue to the regulator
While Citi had strict procedures in place to screen employees who were registered or intended to become registered the bank had looser procedures for non registered employees FINRA found
Citi the third largest U S bank by assets neither admitted nor denied the charges A Citi representative said the bank is pleased to have the matter resolved |
C | Citi combines its stock trading and prime brokerage business | By Imani Moise NEW YORK Reuters Citigroup Inc N C is combining its stock trading business with its prime brokerage unit which caters to hedge funds private equity firms and other investors The New York based bank will also lay off hundreds of equity and fixed income traders globally in response to weak revenue trends according to a Bloomberg report that cited sources familiar with the matter A Citi spokesman declined to comment on the reported layoffs The new unit named Equities and Securities Services will be co led by Dan Keegan Okan Pekin and Murray Roos Keegan will also become head of markets and securities services for North America As the industry continues to consolidate and margin pressures intensify clients are looking for solutions that deliver best in class services co heads of markets and securities services Carey Lathrop and Andy Morton wrote in an internal email seen by Reuters We believe that now is the time to create an integrated offering supporting the pre trade execution and post trade requirements of our clients they wrote The combined business will include broad trading and execution capabilities in addition to financing hedging clearing and custody services the memo said In its second quarter results reported earlier this month Citi s trading revenue remained challenged for a third consecutive quarter with fixed income trading down 4 excluding a gain from Citi s investment in Tradeweb and equities revenue down 9 Many other banks already have combined such units
Citi s markets and securities services division has been shaken up in recent months as the bank streamlines businesses to better serve the evolving needs to clients Last month Citi combined its Foreign Exchange Local Markets and G10 currencies businesses into one unit |
C | Citi to Cut Hundreds of Trading Jobs in Bad Wall Street Omen | Bloomberg Citigroup Inc NYSE C is preparing to cut hundreds of jobs in its trading division stark new evidence that an industrywide slump in revenue this year may be more permanent than the tweets and policy moves rattling clients
The New York based bank plans to slash jobs across its fixed income and stock trading operations over the course of 2019 according to people familiar with the matter That includes at least 100 jobs in the equities unit which would amount to almost 10 of the division s workforce the people said About 80 of the cuts will take place at Citigroup s London operations one of the people said
For months as global banks watched their revenue from trading slump industry leaders have said clients were temporarily taking to the sidelines amid unpredictable twists in President Donald Trump s trade negotiations and the Federal Reserve s shifting stance on interest rates Yet a growing number of banks are now cutting staff a sign that executives are worried about more permanent challenges
This won t be the last trading related job cuts story Jeff Harte an analyst at Sandler O Neill said in a telephone interview The rest of Wall Street is thinking the same way
A constellation of factors have been weighing on trading desks aside from this year s market swings Hedge funds typically banks most active clients have suffered outflows while struggling to outperform lower cost funds New rules are limiting lenders ability and willingness to make principal bets with their own money And technological advancements are narrowing spreads in many corners of the market
Trading revenue at the five biggest U S banks on Wall Street dropped 8 in the second quarter following a 14 slide in the first three months of the year setting up global banks for their worst first half in more than a decade At Citigroup combined revenue from equities and fixed income trading fell 5 excluding a one time gain from selling a stake in a trading venture
Deutsche Bank AG DE DBKGn already struggling to overhaul its Wall Street operations made the biggest move earlier this month announcing plans to exit equities trading The Frankfurt based firm is cutting a total of 18 000 jobs as part of its broad restructuring Other major banks in Europe including HSBC Holdings Plc LON HSBA and Societe Generale PA SOGN SA are also eliminating hundreds of workers
It s a tough cyclical outlook after broad revenue declines in the first half and structural client challenges remain said Bloomberg Intelligence analyst Alison Williams NYSE WMB So we could see more staff reductions across banks
Under Pressure
At Citigroup Paco Ybarra has been shaking up the firm s institutional clients division since he took the group s helm this year That s included some hiring
But the bank is under particular pressure to trim costs after promising to improve its efficiency ratio a gauge of profitability measuring how much is spent to produce a dollar of revenue Some analysts have expressed disappointment in Citigroup s progress so far as well as doubts about its separate goal to boost return on tangible common equity to 12 this year
The company whittled its efficiency ratio to 56 5 in the first half a 90 basis point improvement from last year The firm is aiming to cut it by a total of 175 basis points this year though progress can be harder to come by in later months when banks typically generate less revenue Citigroup executives vowed this month to continue cutting costs
We re going to do everything within our power to get to those numbers Chief Executive Officer Mike Corbat said as the bank posted earnings July 15 The firm won t end planned investments in technology or risk its efforts to improve safety and soundness he said But everything else is on the table
A Citigroup representative declined to comment for this story The firm s shares dropped 0 6 to 71 76 in New York on Monday paring the stock s advance for the year to 38
Equities Battle
The cuts to the equities division are something of an about face after Citigroup spent years trying to make the unit more formidable
We ve been investing in talent we ve been investing in technology we ve been allocating balance sheet for our clients and we ve seen the benefit of that Chief Financial Officer Mark Mason said of the business at a conference last month There s more to be done there obviously but we re pleased with the progress we re making
Still the unit has struggled to vault up the league tables Revenue from trading equities at Citigroup tumbled 17 to 1 6 billion for the first half of 2019 That s the lowest total among major U S firms and would place it sixth among global banks according to Bloomberg Intelligence And in March the firm ousted eight equities traders in Hong Kong and suspended three others after a sweeping internal investigation into its dealings with some clients
In the latest changes under Ybarra the institutional clients division announced on Monday it would combine its equities business with its prime futures and securities services unit according to an internal memo that cited industry consolidation and intensifying margin pressures
Those are similar enough businesses they should be run together said Harte the analyst They ve taken a fresh look or a new set of eyes to a lot of the businesses within the bank and you re seeing the changes flow through
Adds scale of cuts in London in second paragraph |
C | What s Next South Korea Braces for Expanded Japan Export Curbs | Bloomberg As Asian markets slid on Friday after U S President Donald Trump said he ll impose more tariffs on China another trade spat between Japan and South Korea is escalating
Japan confirmed Friday it will remove South Korea from a list of trusted export destinations which would expand the number of restricted materials used by South Korean makers of OLED screens televisions and semiconductors The new list comes a month after Japan imposed export curbs on three key materials used in Korea s chip industry
Some of the products to be removed from the white list could become a problem such as blank masks or shadow masks products that Japanese makers monopolize said Yoon Joonwon a fund manager at HDC Asset Management Many people don t expect Samsung will shut down its plants because of this but if the removal from the white list takes effect there will be a Korea risk premium for investors
South Korea s two tech giants Samsung Electronics KS 005930 Co and SK Hynix Inc are already struggling with the earlier export restrictions Shares of Samsung fell as much as 2 in Seoul on Friday while SK Hynix dropped as much as 3
Tensions between the two countries have been flaring over whether Japan has sufficiently compensated Koreans who suffered under Japan s 1910 45 occupation of the peninsula
On the flip side South Korean suppliers have been benefiting from the trade scrap Samsung will keep pushing ahead with a plan to use more local suppliers even if the dispute with Japan is resolved said Kyung Min Kim an analyst at Hana Financial Investment
Shares of Foosung Co surged more than 60 in July on expectations that the firm will win more contracts from Samsung APS Holdings Corp which makes shadow masks for OLED panels jumped 31 Foosung gained as much as 6 2 Friday while APS rose 8 1
Even so most of the top 20 items needed for South Korea s technology industry are highly dependent on Japanese suppliers such as scrap steel medical equipment plastics and some chemical products according to SK Securities Another major worry is chip making equipment which is dominated by Japanese firms the broker said
The problem is most of the components and materials that we need are heavily dependent on Japanese suppliers said Hyo jin Kim strategist at SK Securities Korean products imported into Japan are not that value added or critically important for Japanese makers
The latest trade tensions add to the problems facing South Korea which is already ailing from the U S China trade war The export driven economy a bellwether for global trade posted a slump in exports for eight straight months for July marked by a decline in demand from China and falling prices for semiconductors
A comprehensive resolution between the two countries seems a long shot Marie Kim an analyst at Citigroup Inc NYSE C wrote in a Aug 1 note We still think the two countries would reach some resolution even partially by the first quarter of 2020 at the latest In the meantime the negative impact could hurt not only specific industries but spread to other industries |
MS | Head of U S government financial agency to resign | By Pete Schroeder WASHINGTON Reuters The head of a U S government agency created to monitor financial markets after the 2007 2009 financial crisis will resign from the post at the end of this year Richard Berner director of the Office of Financial Research OFR will be leaving that agency on Dec 31 the Treasury Department announced on Monday Berner helped create the agency as a Treasury official under President Barack Obama and has led it since its creation in 2013 The Treasury did not say who would replace Berner but his exit gives President Donald Trump another opportunity to shift government watchdogs in a more industry friendly direction Berner helped establish the agency as a Treasury Department official before becoming its first and only director He is leaving roughly one year before his current term expires in January 2019 After six years of commuting between Washington D C and my home in New York I have decided that it is time for me to go home to my wife and enjoy time with our grandchildren who have graced our family since I came to D C Berner said in a statement A full time replacement would need to be nominated by Trump and confirmed by the Senate The agency created as part of the 2010 Dodd Frank financial reform law was charged with gathering data and analyzing trends across financial markets in an effort to help sniff out looming threats before they jeopardize the economy Housed within the Treasury Department it lends its expertise to regulators tasked with guarding against such sweeping risks But the agency has come under pressure from Republicans who have argued it is redundant and should not be allowed to compel financial institutions to hand over data for analysis A sweeping rewrite of financial rules passed by the House earlier would have eliminated the agency but it is not expected to pass the Senate and become law And the Trump administration proposed in May slashing its budget by 25 percent and urging a staffing streamlining for maximum efficiency Before Berner s exit existing openings across financial regulators already lingered The Senate has been slow to advance and Trump slow to nominate new officials to fill some roles occupied by Obama officials suggesting it could be some time before a new full time OFR chief is in place
Before joining the Obama administration Berner had spent several years as a Wall Street economist working as the co head of global economics at Morgan Stanley NYSE MS and chief economist at Mellon Bank He previously worked on the research staff at the Federal Reserve |
MS | Sterling down FTSE too | By Kit Rees and Helen Reid LONDON Reuters Will every plunge in sterling lead to an updraft in UK equity prices The mechanical relationship between the two since last year s Brexit referendum may be about to break down Sterling s losses since Britain s vote to leave the European Union have been the blue chip FTSE 100 FTSE index s gain with every fall in the pound down more than 10 percent since the June 2016 poll pushing stocks higher The argument is straightforward With around 75 percent of FTSE 100 firms revenue generated overseas the weaker currency supported sterling denominated earnings projections while boosting export competitiveness It also cheapened the stock price of UK listed multinationals for overseas investors But as inflation eats into domestic demand forcing the Bank of England to raise interest rates last week for the first time in over a decade some strategists argue that relationship is set to break down removing a key support for British stocks That negative correlation tends to exist typically when you don t have inflation pressures when no one is hiking rates and when you don t have too much depreciation going on said Yianos Kontopoulos head of macro strategy at UBS A hawkish central bank could disrupt the negative correlation he said even though most economists in a Reuters poll saw last week s rate rise as one and done with no further increases to come until 2019 While it s not necessarily going to change the relationship in the first days and we won t know because correlation is a little bit more elusive than that it will over the next year if you have inflationary pressures too said Kontopoulos Inflation jumped to its highest in more than five years in September largely as a result of sterling s post Brexit decline all but sealing the Bank s decision to raise rates British based equity investors have been reaping the benefits of the depreciation which effectively boosts earnings for companies that do the bulk of their business abroad once converted into sterling They stand to lose should that relationship loosen Sterling s weakness has boosted FTSE earnings by up to double digits for some quarters but its effect is likely to fade to having no impact at all on stocks in the fourth quarter said Caroline Simmons deputy head of UK investment office at UBS Wealth Management Earnings for MSCI s index of all UK stocks are expected to grow 20 percent for the year in sterling terms compared with 10 4 percent in euro terms for MSCI EMU according to Thomson Reuters data largely thanks to currency translation and a high weighting for energy stocks While domestic investors enjoy that outperformance the negative currency translation blunts the benefits for foreign investors in the market After a sharp depreciation the currency is now relatively rangebound making its effect more negligible And according to UBS analysis periods of negative correlation have historically been short lived Unless one is very bearish around one s sterling forecasts it s definitely going to be a fading factor in UK profitability said Matthew Garman equity strategist at Morgan Stanley NYSE MS For a graphic on Correlation between FTSE 100 and sterling click NOT A GIFT THAT KEEPS ON GIVING Options markets indicate investors are still pricing in a negative relationship between sterling and the FTSE 100 It would be cheaper for an investor seeking to short FTSE and short sterling to buy those two options jointly Kontopoulos said indicating a strong negative correlation is priced in Some investors could therefore get a nasty surprise when the carpet is pulled from under them It s something that people might be banking on said Kontopoulos It has been the case historically but this is not the gift that keeps on giving under any and all circumstances The currency effect will not insulate or help diversify away from domestic risks as it has done thus far and multiplying profit warnings recently suggest slower economic growth is beginning to be felt at company level The net earnings surprise when I look at the breadth of companies in the UK is better than the euro zone which I think comes down to the currency said Matthew Garman European equity strategist at Morgan Stanley But I don t think the euro zone has had anywhere near the same degree of profit warnings or earnings surprises to the downside that you ve seen during the last quarter in the UK But equally a diminishing currency translation also means that a rising pound won t hurt the index anymore Most banks predict the pound will fall not rise in the next year as Brexit negotiations inch closer to the divorce date UBS sees the pound weakening but does not expect that to support the equity market JP Morgan analysts on the other hand expressed concern the FX backdrop could turn into a lose lose for UK stocks They see the pound appreciating a presumed negative for equities and say any major Brexit fallout would cause stocks to fall as well flipping the correlation to positive Investors wary of predicting the direction of either stocks or the currency have been moving into volatility trades where the bet is on price fluctuations rather than price direction A short FTSE volatility long EUR GBP volatility trade is one of Societe Generale s best performing this year said the bank s head of equity derivatives Vincent Cassot
A lot will be dependent on Brexit negotiations he said It s hard to have a view of where it s going to go but we do know it s going to be volatile |
MS | U S dollar s continued rise rests on major tax reform delivery poll | By Rahul Karunakar and Hari Kishan BENGALURU Reuters On an upswing in recent months the fate of the U S dollar hinges on whether Congress passes major tax reform with future Federal Reserve interest rate rises already priced in according to the latest Reuters poll of currency strategists But an agreement to overhaul the complex U S tax code giving the largest American tax cut since modern corporate tax began more than a century ago is by no means certain by the late November deadline that the Republican Party says it is aiming for Indeed optimism about the dollar which had its best month since February in October has wilted following a Washington Post report on Tuesday that suggested Republican leaders were considering a one year delay in the implementation of a big corporate tax cut to comply with Senate rules The Republicans were dealt another setback after the Democrats recorded a comprehensive political victory in Virginia on Tuesday The consensus view from the latest poll of over 60 foreign exchange strategists taken Nov 3 8 showed the dollar was expected to hold steady over the coming year However the lowest forecasts for the dollar were even more pessimistic than last month against several currencies While about 80 percent of over 50 strategists who answered an extra question said significant tax reform would help the dollar not everyone was convinced that Congress which has failed to pass any major legislation this year will deliver The USD has been stabilizing mainly thanks to investors shifting their focus back to U S President Trump s tax overhaul plans as well the FOMC having a potentially more hawkish composition next year From the current levels we expect the USD to face only limited upside risks wrote Valentin Marinov head of G10 FX strategy at CA CIB in a note This is especially true as a December hike by the Fed is largely priced in While speculators trimmed their bearish bets on the dollar to the lowest in 15 weeks the latest data marked the 16th straight week that they maintained a net short position according to the Commodity Futures Trading Commission We see USD nearing the end of its rally noted David Adams G10 FX strategist at Morgan Stanley NYSE MS Near term political risks relating to tax reform also keep us bearish on USD as much of the positive news on tax reform has been priced in That uncertainty about the passage of a bill to cut taxes has also hauled down inflation expectations and long term bond yields while upcoming rate increases are pushing short term yields higher flattening the U S yield curve to levels not seen in a decade President Donald Trump s decision to appoint Jerome Powell as Fed Chair when Janet Yellen s term expires in February has also kept dollar expectations steady More than three quarters of over 50 analysts who answered a separate question said the risks to their dollar forecasts were unchanged after that appointment EURO STILL IN FAVOR The euro fell over 1 percent last month against the dollar but has traded in narrow ranges after the European Central Bank said on Oct 26 it was cutting its monthly bond purchases in half to 30 billion euros a month from January The central bank extended its asset purchases by nine months which also kept the euro from rising further Still the single currency has gained over 10 percent against the greenback this year and is set to mark in 2017 the first calendar year gains since 2013 The euro was predicted to trade at around 1 16 in a month about where it was on Wednesday It is then forecast to inch higher to 1 17 in three months and rise to 1 20 in a year similar to predictions made in the previous poll The contrasting views for monetary policy in the United States and Japan has pushed the dollar up against the yen to an eight month high of 114 735 on Monday While the Fed is expected to stay on a path of gradual tightening the Bank of Japan is forecast to be in no hurry to exit its ultra easy monetary policy The yen is expected to hold steady against the dollar and trade around 114 7 in a year from about 113 6 on Wednesday The range of forecasts showed higher highs and lower lows compared with the previous month
For other stories from the global FX poll Polling and analysis by Indradip Ghosh and Mumal Rathore Editing by Ross Finley and Toby Chopra |
JPM | U S China trade hopes lift world stocks oil soars | By Karin Strohecker LONDON Reuters World stocks extended their gains to hit a near four week high and oil prices rose on Wednesday on optimism that the United States and China may be inching toward a trade deal soothing fears of an all out trade war Delegations from China and the U S ended talks that had lasted longer than expected in Beijing on Wednesday amid signs of progress on issues including purchases of U S farm and energy commodities and increased access to China s markets Officials said details would be released soon MSCI s all country index MIWD00000PUS sailed 0 5 percent higher in a fourth day of gains Hopes for a trade deal boosted Europe s export oriented autos and tech sectors and lifted the pan European STOXX 600 STOXX benchmark to a three week high Germany s DAX GDAXI France s CAC 40 FCHI and the UK s FTSE 100 FTSE all gained around 1 percent to hover at multi week highs U S stock futures ESc1 NQc1 firmed between 0 2 and 0 4 percent pointing to another upbeat session ahead for Wall Street after the S P 500 SPX gained nearly 1 percent on Tuesday Asian bourses saw a strong finish with Japan s Nikkei N225 and China s blue chip CSI 300 CSI300 closing up 1 percent while the tech heavy South Korean KOSPI KS11 jumped nearly 2 percent The positive news around the trade talks is giving a boost to risk assets it s what the global economy needs to see said Chris Scicluna head of economic research at Daiwa Capital Markets in London Adding to the upbeat mood were reports that Beijing plans to introduce policies to boost domestic spending on items such as autos and home appliances this year These come on the back of Friday s monetary easing by the People s Bank of China China are now firmly off the brakes and back on the accelerator said Karen Ward chief market strategist for EMEA at JPMorgan NYSE JPM Asset Management The sugar rush that s fading in the U S we are going to get that rush coming through in China However details on the outcome of the latest trade talks were scant and sources said the two sides were still far from U S demands for structural reforms in China SUGAR RUSH The rally in riskier assets has accelerated since last Friday when Federal Reserve Chairman Jerome Powell said he was aware of risks to the economy and would be patient and flexible in policy decisions this year Oil prices roared 2 percent higher in their eight day of gains U S West Texas Intermediate WTI crude oil futures CLc1 have soared more than 20 percent since hitting an 18 month low in late December and have now broken through the 50 per barrel overnight for the first time in 2019 U S bond yields also climbed with the benchmark 10 year Treasuries yield rising to 2 7386 percent compared with its one year low of 2 543 percent hit just before Friday s strong payrolls data In another sign of subsiding worries about the U S economic outlook Fed funds rate futures 0 FF showed traders are now pricing in a small chance of a rate hike in 2019 a change from late last week when futures markets had priced in a cut In currency markets the dollar index DXY softened to 95 835 against a basket of currencies after flirting in early trading with a 2 1 2 month low hit on Monday The euro traded at 1 1452 EUR while the dollar stood at 108 86 yen China s yuan strengthened in offshore trading by 0 4 percent hitting its strongest level in five weeks Sterling gained 0 2 percent against the dollar and strengthened against the euro EURGBP D3 following a media report that British Prime Minister Theresa May is attempting to win over the Northern Irish DUP party in a crucial vote next week on her Brexit deal
The British parliament is due to vote on the EU withdrawal bill on Jan 15 and the issue is likely to dominate sterling trade in the run up May will lose the vote unless she can convince opponents both within and outside her Conservative Party to back the deal |
JPM | JPMorgan Citi get roles in 7 5B Saudi bond offering | BNP Paribas PA BNPP OTCQX BNPQF 0 2 JPMorgan JPM 0 2 HSBC HSBC 0 6 Citi C 1 7 and NCB Capital are arranging Saudi Arabia s international bond sale the Wall Street Journal reports Banking documents call it a benchmark sale meaning at least 500M principal amount will be sold but Bloomberg reports the kingdom will sell 7 5B of bonds in two tranches citing people familiar with the matter The spread on 4B of 10 year notes is 175 basis points over Treasuries while the spread of the 3 5B 31 year bond portion is 230 bps Bloomberg reports Saudi Arabia started its borrowing spree in 2016 when faced with declining income from oil production The bond sale is Saudi Arabia s first debt issue since the killing of journalist Jamal Khashoggi in October ETFs KSA FLSANow read |
JPM | Looking past Khashoggi investors flock to Saudi Arabia bond sale | By Davide Barbuscia DUBAI Reuters Foreign investors flocked to buy Saudi Arabia s first dollar bonds since Jamal Khashoggi s death in a clear vote of market confidence after the country s reputation was damaged over the journalist s murder The finance ministry in Riyadh said on Thursday the order book for the 7 5 billion sale of longer term debt sale peaked at 27 5 billion with final pricing only a few basis points above corresponding secondary market yields Almost all the paper was bought by foreign investors with U S based buyers in particular snapping up 40 percent of the bond due in 2029 and 45 percent of the note due in 2050 Middle East buyers only got 3 percent and 2 percent of the two issues respectively Riyadh s stock among investors took a hit with the killing of Khashoggi in the Saudi consulate in Istanbul in October for which a definitive explanation has yet to emerge and as the humanitarian consequences of its war in Yemen have become clearer But this week s sale coincided with improved conditions across emerging markets with yields compressing over the past few weeks and Timothy Ash senior emerging markets strategist at Bluebay Asset Management on Wednesday called it opportunistic A second analyst said the impact of the Khashoggi case was fading SHRINKING YIELD PREMIUM Hit by slumping oil prices Saudi Arabia has become one of the biggest emerging market issuers having sold 52 billion in international bonds since its debut in 2016 It plans to boost borrowing this year along with state spending It started marketing the bonds at around 40 basis points above its existing curve but spreads were progressively tightened and final pricing on the 4 billion 2029 tranche was around 15 20 bps above and 25 bps on the 3 5 billion 2050 tranche Timing wise this is great because risky assets are in vogue 2019 went off like crazy and investors want to put their money to work Philipp Good chief executive and head of portfolio management at Fisch Asset Management said on Wednesday Sergey Dergachev functional head of EM corporate debt and senior portfolio manager at Germany based Union Investment said he thought investors had relegated the Khashoggi case to the background especially since some significant government reshuffling two weeks ago The sale arranged by BNP Paribas PA BNPP Citi HSBC JPMorgan NYSE JPM and NCB Capital was also the first this year by a Gulf borrower and comes as crude prices recover Top oil exporter Saudi Arabia announced a slight rise in its crude oil reserves on Wednesday after they were independently audited When you issue first or among the first in early January investors have cash balances to be put to work Dergachev added Saudi s public debt amounted to 560 billion riyals 150 billion or 19 1 percent of GDP in 2018 and the budget forecasts a rise to 678 billion riyals or 21 7 pct of GDP this year
The country is rated A1 by Moody s and A by Fitch |
MS | FOMC Good For Gold Bad For Economy | The much anticipated decision by the Federal Reserve Board at the Sept 17 meeting to hold interest rates near zero was met in the resource community with a mixture of relief and disappointment The 9 to 1 vote citing global economic pressure on inflation left open the possibility of a hike at the December meeting The Gold Report asked the experts in the resource sector what this means for precious metals and oil prices and what signs they are looking for that a different outcome will be announced in December
Joe McAlinden founder of McAlinden Research Partners and former chief global strategist with Morgan Stanley NYSE MS Investment Management was disappointed that the Fed blinked He called the decision irresponsible and attributed it to worries about China s growth The veteran investor saw the status quo as bullish for precious metals and oil but warned As the Fed continues to postpone moving towards normalization of interest rates the potential for future inflation from years of excessive stimulation increases with every delay of the end of the zero interest rate policy
He continued Based on today s decision we now need to watch economic data from China and the performance of the markets themselves I do not believe that the Fed s focus on those points is appropriate Nonetheless it is now clear that these will influence the timing of the next Fed move Also and more appropriately we should be watching average hourly earnings overall signs of strength or weakness in the U S economy and the trend of the core PCE deflator
Frank Holmes CEO and chief investment officer at U S Global Investors called the decision combined with recent negative global Purchasing Managers Index 51 10 for August compared to 52 7 in July a wash for precious metals oil and gas prices as an increase would have increased the strength of the dollar compared with other currencies and accelerated an economic slowdown He saw the inevitable decision coming however and used it as an opportunity to buy 2 year bonds in the lead up to the meeting Shortly after the announcement bond yields began to fall and prices went up From the Precious Metals Summit in Beaver Creek where he was speaking about global trends he blamed China s blue skies a smog clearing brought on by a lack of manufacturing output I anticipate a resurgence of exports as the renminbi becomes more competitive with the dollar he said He will be watching the October and November PMI numbers for an increase in economic activity which will be positive indicators for the love trade gold as gifts and jewelry in China and India and growth commodities copper oil and gas
ShadowStats Publisher John Williams was expecting the Fed to raise interest rates as he said in an interview with The Gold Report the first week of September to begin restoring some sense of normalcy in the monetary system The decision not to make even a token move up could be cause for concern he warned Market concerns should shift now to looking at what circumstances really are scaring the Fed The dynamics of intensifying shifts in global perceptions of U S economic activity and U S systemic stability rapidly should gain dominance over Fed policy in driving the U S currency and equity markets irrespective of future Fed actions or lack of same he said in a note to subscribers moments after the announcement
When asked for his reaction John Mauldin the man behind Mauldin Economics and author of Bull s Eye Investing Targeting Real Returns in a Smoke and Mirrors Market quoted Peter Boockvar managing director of The Lindsey Group who lamented that because the Fed had punted again we are all in for another six weeks of obsessing over when it will happen The Fed is implicitly acknowledging that its policy action over the past five years of putting the U S economy on a sustainable growth path has been a failure and now if their international concerns become more pronounced they will also admit to the world that they have no tools to deal with it I think today s decision was a bad one The dollar rally should be over and I m bullish on precious metals again as I don t understand at all what the bear case is in it anymore Other commodities should benefit too from the weak dollar Be cautious the Fed did more damage to its credibility today
DISCLOSURE 1 JT Long conducted this interview for Streetwise Reports LLC publisher of The Gold Report The Energy Report and The Life Sciences Report and provides services to Streetwise Reports as an employee
2 The interview does not constitute investment advice Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility By opening this page each reader accepts and agrees to Streetwise Reports terms of use and full legal
3 From time to time Streetwise Reports LLC and its directors officers employees or members of their families as well as persons interviewed for articles and interviews on the site may have a long or short position in securities mentioned Directors officers employees or members of their families are prohibited from making purchases and or sales of those securities in the open market or otherwise during the up to four week interval from the time of the interview until after it publishes |
MS | Buying AUD USD Tactically | Morgan Stanley NYSE MS picks AUD USD as its technical FX chart of the week where MS maintains a bearish view medium term but looks to buy the pair tactically in the near term MS provides some insights on where traders should establish this trade and place their targets accordingly
On the long term AUD USD Chart
When AUD USD broke out of the bottom end of the long term channel at 0 84 a further bearish AUD signal was triggered We still target 0 65 for the end of next year but the short term charts below show that there could be some upside in the coming weeks Our positioning tracker suggests that the market remains short AUD therefore opening room for a reversal MS argues
On the 2 year AUD USD Chart
AUD USD has failed to break below the 0 6896 low from early September We believe that this was a sign that AUD USD is set to rebound for the time being We believe that AUD USD has formed a complete a wave structure so the b wave would take AUD USD back into the trend channel drawn here Initial moves above the 0 7300 high are required to keep the momentum MS adds
On the 90 day AUD USD Chart
AUD USD attempted to make a new low but failed to go below 0 6937 We believe this was the end of a b wave suggesting further upside for AUD completing the c above 0 7273 at least A move above here opens the way to our tactical trading target of 0 7500 The level is around the middle of the channel shown above MS projects
As a short term trade MS runs a limit order to buy AUD USD at 0 7020 targeting a move to 0 75 |
MS | Commodities Boost Equities Pound Surges On SAB Rumors | Commodities boosting equities FTSE 0 78
Once again the flip back to basic resources helped by a positive upgrade from Morgan Stanley NYSE MS on a number of mining stocks is giving the UK benchmark a push northwards The surge in oil prices and Brent crude finally managing to return to the 50 bbl marker is also boosting the cyclical sector despite the IMF s rather negative global growth viewpoint
The FTSE has finally pushed its way through the 6300 level for the first time since late August this is more than a little bullish and tends to set the scene for a bigger move higher should the momentum carry The FTSE is now down mere 3 4 year to date and while there are certainly some upside barriers from both a technical and fundamental perspective the risk on attitude has removed some the recent downside bias Breaking the 6400 level and a return to the levels last seen in August seems to be on the cards The obvious correlation causation to this more upbeat investor sentiment could well be attributed to the fact that Chinese stock markets have been closed much of this week Ultimately a weekly close above the 6300 level is required for this optimism to remain
Also supporting the miners is the precious metals complex which is also starting to look a lot perkier with gold prices once again challenging 1150 oz and threatening to break out of a major downtrend in play since the end of January this year Silver in general rather volatile is trading at 16 for the first time since June and may well present a bullish move through its 200 day moving average
The weakness in the US dollar can in some ways explain some of the current upside both in equities and most importantly commodities The Fed s failure to act in September and the weaker than expected jobs numbers last week have essentially pushed expectations for a rate hike to at least the end of Q1 2016 and even then it s precarious given the poor Q1 GDP growth we ve come to expect from the US on the basis of bad weather
Tesco LONDON TSCO 1 9 Nobody was expecting anything all that positive from Tesco but the fact that profits more than halved in H1 from 779m to 354m Like for like sales were also down 1 1 and there was a note of caution from management that trading conditions will continue to be challenging Nevertheless pre tax profit was 74m a great deal better than the 19m loss posted last year The new national living wage is also set to pose a problem for the supermarket chain costing 500m by 2020 and expected to put even more pressure on weak profit margins Also the company is not paying an interim dividend which will likely put off some of the income investors
Tesco s peers are not doing much better with Morrison LONDON MRW falling 0 5 and Sainsbury LONDON SBRY shedding 0 9
Marks Spencer LONDON MKS 2 41 JPM downgrade We expect another quarter of negative LFL performance from M S in General Merchandise and are also concerned that LFL growth in the Food business is becoming harder to achieve With our new TP of 550p from 600p offering only 6 upside to the current share price we reduce our recommendation to Neutral
SAB Miller LONDON SAB 2 5 following yesterday s refusal Budweiser maker Anheuser Busch Inbev NV NYSE BUD has now bid 42 15 pounds a share in cash For now it s uncertain if this will be acceptable and investors judging by the muted response in the share price this morning are cautious and probably more than a little dubious that this deal will go ahead The transaction would be the biggest of 2015 and the fourth largest takeover ever
Anglo American LONDON AAL 4 55 Raised to equal weight at Morgan Stanley
Rio Tinto NYSE RIO 5 Raised to overweight Morgan Stanley state that stable data from China in the past few months has spurred this upgrade potential uplift from stimulus policies increased conviction that the 19 commodity uplift by 2017 is achievable Forcing supply disciple on the mining companies will also be an elevator to commodity prices
Easyjet LONDON EZJ 3 some profit taking following yesterday s upside The pop higher in oil prices may also become a factor for the airline industry should the present move prove sustainable U S crude closed at nearly a three month high yesterday after a new U S forecast showed tighter oil supplies next year while Russia Saudi Arabia and other big producers hinted at further talks to support the market
IAG LONDON ICAG 2 98
Ryanair NASDAQ RYAAY 3 56
Standard Chartered LONDON STAN 1 92 Heinz Hilger announced as new Germany head Standard Chartered just launched a fintech accelerator programme to help companies crack the Asian market
Old Mutual LONDON OML 2 72 Underpriced and underrated according to Barclays upgraded to Overweight
We are calling the Dow higher by 100 points to 16891
Pound surges on SAB rumours and improved industrial data
Cable made a bullish start in London on news that AB InBev revised offer to SAB Miller Early gains were supported by a better than expected industrial and manufacturing data in the UK Cable surged to 1 5309
While the possibility of a deal keeps the pound upbeat against the US dollar and the euro the activity on SAB Miller shares remains subdued The company said InBev bid substantially undervalues the company and investors reluctance to buy the rumour could not suffice to support the early rally in pound At this point investors are holding their breath before jumping back in the field
Thankfully the macro data is there to keep the sentiment in pound upbeat In opposition to last month s figures the UK industrial activity expanded by a solid 1 0 in month of August manufacturing activity picked up by 0 5 over the same month This being said the global rout in commodity and energy prices has a significant negative impact on entire sectors revenue margins We already know that manufacturers are looking to adjust their capacity lower in order to adapt to sluggish exports and waning demand The adjustment in capacity warns of a bumpy path ahead of us A single data point is obviously not sufficient to assess a better outlook
The BoE meets tomorrow and is broadly expected to maintain its bank rate at the historical low of 0 50 Of course the delay in Fed s normalisation plans will not be directly mentioned yet cold winds from China and the slowing signs in economic recovery will certainly keep the MPC members from sailing the open sea |
MS | Weekly Charts USD EUR NZD | Morgan Stanley NYSE MS picks USD Index EUR USD and NZD USD as its technical FX charts of the week where MS provides its views on their related technical settings and targets
On the DXY 1 year chart
With our bullish risk outlook we look at where the DXY buy or sell levels are Two trend channels cross at the 95 00 level suggesting there could be some support around here Recent USD rallies from MayJuly have been around 5 6 suggesting the current rally could top around this level of appreciation which is 97 80 This suggests USD rebounds could be limited at this stage MS argues
On the EUR USD 1 year chart
EUR USD has been trading within a range since hitting the 1 0463 low in March Now sitting in the middle of the channel we expect EUR USD to remain rangebound in the coming months The upper end of the range is at 1 1975 and the lower end at 1 1075 A move towards 1 1600 would indicate a sell level for us MS advises
On the NZD USD 3 month chart
We believe there is a bullish impulsive wave forming in NZD USD supporting further upside in the near term NZD USD is in a 3 rd wave of a iiird within a larger 3rd wave maintaining bullish momentum The next resistance area would be the previous high at 0 6709 A move below the 1st wave high at 0 6100 would suggest this wave structure is incorrect MS projects |
C | U S housing starts fall permits hit two year low | By Lucia Mutikani WASHINGTON Reuters U S homebuilding fell for a second straight month in June and permits dropped to a two year low suggesting the housing market continued to struggle despite declining mortgage rates The Commerce Department report on Wednesday also showed housing completions at a six month low and a modest increase in the number of homes under construction indications that an inventory squeeze that has haunted the market could persist for a while Weak housing and manufacturing are holding back the economy offsetting strong consumer spending Land and labor shortages as well as expensive building materials are making it difficult for builders to meet demand for housing especially in the lower price segment of the market Mortgage rates have been decreasing since the Federal Reserve signaled it was pausing its interest rate raising campaign Borrowing costs could drop further as the U S central bank is poised to cut rates this month for the first time in a decade to protect the economy from rising threats from Washington s trade dispute with Beijing and slowing global growth Residential housing construction is one of the leading indicators of a recession and while construction activity isn t dropping precipitously housing is stuck in a rut said Chris Rupkey chief economist at MUFG in New York If the Fed thinks rate cuts are going to send housing construction up like a rocket they better think again Housing starts decreased 0 9 to a seasonally adjusted annual rate of 1 253 million units last month as a rebound in the construction of single family housing units was overshadowed by a plunge in multi family homebuilding the government said Data for May was revised slightly down to show homebuilding falling to a pace of 1 265 million units instead of slipping to a rate of 1 269 million units as previously reported Economists polled by Reuters had forecast housing starts dipping to a pace of 1 261 million units in June Single family homebuilding which accounts for the largest share of the housing market increased 3 5 to a rate of 847 000 units in June partially recouping some of May s sharp drop Single family housing starts fell in the Northeast but rose in the Midwest West and South Building permits tumbled 6 1 to a rate of 1 220 million units in June the lowest level since May 2017 Permits have been weak this year with much of the decline concentrated in the single family housing segment The housing market hit a soft patch last year and has been a drag on economic growth for five straight quarters Economists have said housing had no impact on GDP in the second quarter A Fed report on Wednesday described residential construction as flat from mid May through early July The Fed s Beige Book report of anecdotal information on business activity collected from contacts nationwide also viewed the economy as continuing to expand at a modest pace with little change from the prior reporting period nFOMHIEF5B The Atlanta Fed is forecasting gross domestic product rising at a 1 6 annualized rate in the April June quarter The economy grew at a 3 1 pace in the first quarter The government will publish its advance GDP growth estimate for the second quarter next Friday The PHLX housing index HGX fell underperforming in a broadly weak U S stock market The dollar weakened against a basket of currencies while U S Treasury prices rose DOWNWARD TRAJECTORY These prints are in line with our view of a slowing housing market that is likely to continue on a downward trajectory for the rest of this year but with no significant risks of an immediate slump said Igor Cesarec an economist at Citigroup NYSE C in New York We continue to expect residential investment to be either flat or provide a slight boost to GDP growth in the second half of the year The 30 year fixed mortgage rate has dropped to about 3 75 from a peak of 4 94 in November according to data from mortgage finance agency Freddie Mac A survey on Tuesday showed confidence among homebuilders increased in July Builders however complained they continue to grapple with labor shortages a dearth of buildable lots and rising construction costs that are making it increasingly challenging to build homes at affordable price points relative to buyer incomes Permits to build single family homes rose 0 4 to a rate of 813 000 units in June Despite the increase last month permits continue to lag housing starts suggesting single family homebuilding could remain sluggish Starts for the volatile multi family housing segment dropped 9 2 to a rate of 406 000 units last month Permits for the construction of multi family homes plunged 16 8 to a pace of 407 000 units Permits for buildings with five units or more were the lowest since March 2016 Housing completions fell 4 8 to 1 161 million units last month the lowest level since December
Realtors estimate that housing starts and completion rates need to be in a range of 1 5 million to 1 6 million units per month to bridge the inventory gap The stock of housing under construction increased 0 5 to 1 135 million units in June |
C | Citi Private Favors Corporate EM Bonds Underweight Stocks | Bloomberg Citi Private Bank is advising its wealthiest customers to put more money into U S investment grade corporate bonds and bank loans while staying underweight government debt and equities
The Citigroup NYSE C unit that caters for clients with a minimum 10 million also favors emerging market bonds which are likely to benefit as the Federal Reserve cuts interest rates said Roger Bacon head of investments Asia Pacific based in Hong Kong
Extending duration is something the clients are very focused on Bacon said in an interview in Singapore We are increasing allocation to U S investment grade corporate debt We are increasing client allocations to certain parts of emerging market debt
The average Citi private client s balanced portfolio now has a 1 5 overweight in income producing securities and an average underweight of 2 for stocks Bacon said citing data as of June
Bonds have rallied around the world this year as the Fed has signaled a willingness to ease policy amid signs global growth is faltering A Bloomberg Barclays LON BARC index of U S investment grade corporate bonds has returned 10 over the past 12 months while the MSCI World Index of stocks has gained just 3
Bacon says the Fed will probably cut its benchmark rate by 25 basis points in July and by the same amount in September which matches the pricing given by fed fund futures We are now in the cutting part of the cycle which we wouldn t have said 12 months ago he said
Citi Private Bank also favors the debt of companies that are domestically focused such as those in the food and beverage industry which are likely to outperform amid the U S China trade war
We ve been taking the opportunity to raise quality within clients fixed income portfolios Bacon said
Here are some of his other views
Firm has a slight bias for U S high yield over equivalent European paper in a balanced model portfolio and underweight government debt Prefers U S bank loans which are less volatile than junk bonds Citi remains very constructive on Asia and the region s equities Likes yen as a store of value amid ongoing market volatility and U S China trade tensionsSees scope for Chinese authorities to cut the required deposit reserve ratio for banks by a full percentage point or more in the coming months In terms of the Chinese currency we think that 7 will be very very strongly defended Adds view on equities in third bullet point updates prices |
C | China s Economy Weakened Further in July Early Indicators Show | Bloomberg China s economy continued to weaken in July bolstering the case for greater policy support to shore up growth as talks over the trade dispute with the U S continue
The slowdown is seen in a Bloomberg Economics gauge aggregating the earliest available indicators on market sentiment and business conditions While China and the U S will resume in person negotiations this week after an almost three month hiatus small firms worries about business have deepened a measure of exports is getting worse and decelerating producer prices continue to squeeze profits
China s growth rate is on a long term slowdown as the economy matures but with trade and company profits shrinking and investment growth weak the immediate outlook for the economy is still a source of concern for policy makers While the resumption of talks with the U S renews some hope of a deal deep divisions remain between the two sides
Trade disputes are still a key risk to both Chinese and other major economies according to David Qu from Bloomberg Economics Producer prices are under pressure as material prices may be influenced by the concerns about trade and as we see in the PMI surveys domestic confidence is still subdued
The official purchasing managers surveys for this month are due for release on July 31
The outlook for export oriented small business eased in July and an index gauging conditions for small companies slowed to the weakest in more than three years with overall demand subdued and investment appetite down according to economists from Standard Chartered LON STAN Plc
We expect exporters to remain cautious on production and investment prospects given weakening external demand on sluggish global growth and the protracted trade friction with the U S Standard Chartered economists Shen Lan and Ding Shuang wrote in a note
Outbound shipments from South Korea also suggested weaker demand from overseas Their exports fell 13 6 in the first 20 days of July from a year earlier indicating shrinking demand for components from Chinese assemblers of electronics such as iPhones Conditions reported by sales managers also weakened in the month due to low business confidence especially in manufacturing according to London based World Economics Ltd
Markets are anxiously looking for signals of any escalating policy support with some expecting an announcement from the meeting of top ranking leaders that s due to happen soon in Beijing However the uncertainty of what will happen with the U S may mean that any action is limited for now Policy makers have also stressed their commitment to moderate targeted stimulus measures in order to avoid inflating asset prices
China s second half economic outlook continues to be clouded by great uncertainty over trade relations with the U S which in turn constrains its policy responses Liu Li gang chief China economist at Citigroup Inc NYSE C in Hong Kong wrote in a note Policy easing will continue but any stimulus will be restrained to leave fiscal head room if U S China trade tensions re escalate
To contact Bloomberg News staff for this story Yinan Zhao in Beijing at yzhao300 bloomberg net Adrian Leung in Hong Kong at aleung206 bloomberg net
To contact the editors responsible for this story Jeffrey Black at jblack25 bloomberg net James Mayger
2019 Bloomberg L P |
MS | Morgan Stanley ordered to pay 350 000 penalty for data reporting flaws | WASHINGTON Reuters The Commodity Futures Trading Commission said on Thursday it had ordered Morgan Stanley N MS to pay a 350 000 penalty for failing to comply with rules that require large traders to include large amounts of futures and options data in reports to the agency
The CFTC said Morgan Stanley omitted the mandatory futures and options data from its reports over a 10 year period from 2007 to 2017 The information primarily for contracts on the Chicago Mercantile Exchange and the Minneapolis Grain Exchange is used to help the CFTC evaluate potential market risks |
MS | Analysts divided on Shake Shack | Shares of Shake Shack SHAK 2 8 are lower after starting off the day in positive territory Morgan Stanley NYSE MS lifted its price target to 34 on the restaurant stock after taking in Q3 earnings while keeping its Underweight rating in place SunTrust points to stabilizing same store sales trends in backing its Buy rating and new price target of 50 Meanwhile Hedgeye is calling out 50 downside potential for shares Volume on SHAK today is already over 1 1M shares vs 635K on average Sources Bloomberg Nasdaq comPreviously Shake Shack beats by 0 02 misses on revenue Nov 1 Previously Menu pricing lifts Shake Shack Nov 1 Now read |
MS | U S Steel upgraded at Cowen Morgan Stanley maintains at Overweight | U S Steel X 1 1 is upgraded to Market Perform from Underperform with a 28 price target raised from 20 at Cowen which says the company s revitalization program has improved cost performance and driven stable financial results for two consecutive quarters Cowen says the downturn in U S hot rolled coil prices was short lived and believes the U S steel industry outlook will continue to improve as imports fall in the coming months Morgan Stanley NYSE MS analysts maintain an Overweight rating on U S Steel with a 34 price target the firm has an Equal Weight rating on AK Steel AKS 2 8 but the 7 price target implies 60 upside from battered levels sustained this week Now read |
MS | Earnings misses put dampener on European shares | By Helen Reid LONDON Reuters European shares edged lower on Monday after a strong run with declines in Asia weighing as some earnings disappointments also took the shine off early deals The pan European STOXX 600 STOXX was down 0 1 percent with Dutch firms SBM Offshore and Vopak falling sharply after badly received results Euro zone stocks STOXXE and blue chips STOXX50E were down 0 3 percent and 0 4 percent respectively JP Morgan strategists said it was prudent to take profits in European cyclicals downgrading them to neutral from overweight Risk repriced very sharply in the last two months with Cyclicals vs Defensives up as much as 900 basis points wrote European equity strategist Mislav Matejka adding they remained bullish on the overall market thanks to strong earnings and economic activity Energy company SBM Offshore AS SBMO sank 12 percent after taking a 238 million provision to settle a U S investigation over a Latin American bribery case The company said a preliminary settlement reached with Brazilian authorities had fallen through and as a result it would no longer be able to participate in tenders for Petrobras SA PETR4 one of its largest customers Chemical and oil storage firm Vopak AS VOPA fell 7 percent after profits missed expectations It lowered its earnings guidance for the full year citing weaker occupancy rates and higher costs Shares in French hotel group Accor PA ACCP fell 1 7 percent at the open the biggest CAC 40 faller after its third biggest shareholder Prince Alwaleed bin Talal was arrested in Saudi Arabia amid a purge by the future king The news is stirring concerns about the possibility of Saudi money pulling out of world markets Bank stocks were weaker across the region with Societe Generale PA SOGN and BNP Paribas PA BNPP among the worst performers Euro zone lenders SX7E were down 0 9 percent as investors exercised greater caution A string of target price cuts from JP Morgan Morgan Stanley NYSE MS Deutsche Bank DE DBKGn Kepler Cheuvreux and Natixis hit Societe Generale down 3 3 percent as analysts digested last Friday s weaker results Overall with 60 percent of third quarter results through for MSCI Europe 67 percent of companies have beaten or met expectations Financials and technology stocks have been the clear leaders while energy and utilities stocks have underperformed Thomson Reuters data showed Shares in Deutsche Telekom DE DTEGn dropped 3 percent to the bottom of the DAX after an attempt by its T Mobile U S unit to merge with Sprint Corp N S collapsed at the weekend Among gainers Tullow Oil L TLW rose 2 3 percent leading oil stocks higher after crude prices soared to the highest since July 2015 amid the Saudi purge Spain s IBEX index IBEX fell 0 9 percent lagging European peers after sacked Catalan leader Carles Puigdemont turned himself in to Belgian authorities while weekend polls showed parties favoring Catalan independence would likely win December s regional election |
MS | SBM Offshore hit by rising bill for corruption cases | By Toby Sterling AMSTERDAM Reuters Marine engineering group SBM Offshore AS SBMO said a Brazilian investigation into its role in corruption cases had not been resolved and set aside an additional 238 million provision on Monday to cover costs from an unexpected U S inquiry The Dutch company has also been forced to suspend its involvement in tenders with Brazilian oil company Petrobras SA PETR4 a major customer Shares fell 10 percent to 13 96 euros at 0930 GMT wiping out gains made this year when investors believed the builder of floating oil and gas platforms had settled the issue The scandal blew up in 2012 after the company said it had uncovered improper sales practices Morgan Stanley NYSE MS analysts flagged that the new 238 million provision compares to consensus 2017 net income estimate of 157 million SBM paid 240 million to Dutch authorities in 2014 to settle the Latin American bribery case and had set aside another 280 million last year to settle related issues in Brazil But it announced on that Monday the Brazilian case remained unresolved It also said it had taken an additional 238 million provision ahead of a settlement with U S authorities both for the Brazil investigation and an separate investigation into its dealings with Monaco based Unaoil Chief Compliance Officer Erik Lagendijk said a prospective settlement with the U S Department of Justice would settle issues there for ever and a day Lagendijk said in a statement that since 2012 SBM had completely changed its business model and ways of working Although it appears that the company can likely reach a resolution with the DoJ U S Department of Justice and thus make an important step towards closure of the past no global solution to bring finality is currently available he said Chief Financial Officer Douglas Wood said the company has enough cash on hand to pay U S authorities once a settlement deal is finalised but it would only detail implications for shareholders and dividends later BRAZILIAN PICTURE CLOUDED In Brazil the picture is less clear The company said earlier this year it was cleared to do business in the country and that it was participating in two tenders leading to a major re rating of shares Brazil previously represented 60 percent of its business On Monday it said those tenders had been moth balled and until a settlement is reached it will not participate in further tenders for Petrobras The company offered a detailed explanation of its legal situation in Brazil where the courts have challenged aspects of its settlement agreements and it has no guarantee that any settlement would actually cap its liabilities The company did not set aside any new provision for Brazil In the 2014 settlement Dutch prosecutors said payments made with the cooperation of SBM employees constituted the indictable offence of bribery That settlement precluded the company and its officials from being prosecuted in the Netherlands but did not rule out the possibility they could be indicted elsewhere SBM said in Monday s statement that individuals and former executives could still be prosecuted SBM is due to report third quarter earnings on Wednesday |
JPM | Emerging Markets Get That Goldilocks Feel as Risk Buying Returns | Bloomberg The year may be little more than a week old but emerging markets are already feeling good about 2019
Developing nation assets roared ahead on Monday continuing Friday s theme as traders took their cue from China s move last week to release more cash into the financial system and speculation that the Federal Reserve will pause interest rate increases this year
Indonesia s rupiah at one point registered its biggest gain since 2015 driving the MSCI EM Currency Index to its highest level since July while a gauge of stocks clocked up its best two day advance in two months Russian and Nigerian dollar bonds were among the biggest winners in the debt markets as oil rallied a sixth day
The Goldilocks scenario turned to tatters during 2018 Piotr Matys an emerging market foreign exchange strategist at Rabobank in London wrote in a report Monday However it seems that this expression has been dusted off from the lexicon of financial markets following comments from Fed Chairman Jerome Powell on Friday who gave severely battered investors what they wanted to hear
Powell said Friday policy makers are listening carefully to markets denting the dollar and boosting the allure of riskier investments The global economic outlook also received a boost from a better than expected U S jobs report Meanwhile the People s Bank of China said it would lower the required reserve ratio for lenders by 1 percentage point potentially releasing about 117 billion of liquidity
While bears will point to how quickly the gains at the start of last year evaporated bulls say developing nations assets are close to a pivot point Bank of America s Bull Bear Indicator a gauge that told investors to sell right before emerging markets tanked a year ago last week flashed its first buy signal for risky assets since the Brexit vote in June 2016 Citigroup Inc NYSE C upgraded developing nation shares calling them its preferred value play and BlackRock said attractive valuations offer a positive backdrop for the asset class
Risk Premium
The largest emerging market equity exchange traded fund had its biggest gain in more than two months Friday while the risk premium on sovereign debt narrowed by the most since November 2016 according to data compiled by JPMorgan Chase Co NYSE JPM
True two days of U S China trade talks starting Monday are hanging over markets though Mitul Kotecha a senior strategist at TD Securities in Singapore says there are good reasons for both sides to want a breakthrough
Against the backdrop of market pressure in the U S the U S will want to arrive at a deal while China faced with slowing growth will similarly want to come away from the table with some success This makes a deal of sorts more likely he said |
JPM | Too Early to Throw in the Towel on U S Stocks JPMorgan Says | Bloomberg Don t give up on U S equities just yet say JPMorgan Chase Co NYSE JPM strategists
For many investors the U S cycle appears long in the tooth but the record high buybacks the region s earnings growth that exceeds the rest of the world and the accelerating revenue all favor U S stocks the strategists led by Mislav Matejka said in a note
U S equities just had their worst year since the financial crisis in 2008 as investors turned cautious amid trade tensions with China and rising concerns that growth may be peaking But JPMorgan analysts remain optimistic on U S stocks with an overweight recommendation within developed markets as they expect the robust economy to support equities
The earnings growth for S P 500 companies this year is seen at 7 7 percent compared with 24 percent in 2018 according to a Bloomberg survey Last year s profit boom was fueled by the U S tax reform and promoted a rally in equities through the end of September before investors turned negative
The sell off in U S equities in the fourth quarter sank valuations to 2013 lows The S P 500 Index has attempted a recovery in the first trading sessions of 2019 with mixed results so far
One should not extrapolate U S growth slowdown all the way into recession though as jobless claims and labor market more broadly remain well behaved the JPMorgan strategists said China is progressively increasing stimulus
In addition the fact that the U S is not decoupling anymore from the rest of the world has a silver lining as a compromise on trade is becoming much more likely they said
Globally JPMorgan prefers developing market stocks to those in developed economies on lower valuations and the possibility that the U S Federal Reserve might slow the pace of rate increases |
JPM | U S services sector growth hits five month low | NEW YORK Reuters U S services sector activity slowed to a five month low in December but remained above a level consistent with solid economic growth in the fourth quarter The Institute for Supply Management said on Monday its non manufacturing activity index fell to 57 6 last month the lowest reading since July from 60 7 in November Still the index stayed well above the 50 mark suggesting expansion of the vast services sector Analysts polled by Reuters had forecast a reading of 59 0 Economists said while the drop in the services industries measure echoed recent declines in other business surveys including the ISM s manufacturing survey published last week the reading was still strong by historic standards We have seen a range of different indicators lately that point to some softening in the economy as well as rising recession risks but we think that the economy will continue to expand at a decent pace despite some moderation in growth said Daniel Silver an economist at JPMorgan NYSE JPM in New York Growth estimates for the fourth quarter are around a 2 6 percent annualized rate The economy grew at a 3 4 percent pace in the third quarter The dollar fell against a basket of currencies pressured by growing expectations the Federal Reserve will either pause or halt its interest rate hike cycle Stocks on Wall Street were trading higher while U S Treasury prices were lower The ISM described growth as having cooled noting that trade tensions between the United States and China remained a major concern for businesses It also said that while capacity constraints had eased finding workers was still a challenge A measure of services industries employment fell to a reading of 56 3 last month the lowest since July from 58 4 in November While industries reported a modest increase in new orders amid strong exports order backlogs declined sharply Companies in the wholesale trade industry said they were anticipating a pullback year in demand for 2019 citing several factors including the trade dispute with China a stock market sell off higher mortgage rates as well as labor shortages and higher material costs There were concerns in the company management and support services industries about the trade war with China with companies saying they were expecting lower profit margins and reduced sales for 2019 until our suppliers can source product from other countries But retailers described business as being very good Companies in the real estate rental and leasing industries reported business as exceeding expectations and anticipated that 2019 should equate or exceed 2018 News of the decline in service sector growth followed ISM s data released last week that showed a sharp slowdown in manufacturing activity in December The drop in factory activity and an ebb in consumer confidence had fueled investor fears of a recession Those fears were allayed on Friday after a government report showed job growth in December was the largest in 10 months
We believe this report adds further weight to the case that the economic data have solid momentum and that fears of a sharp slowing in growth are overblown said John Ryding chief economist at RDQ Economics in New York |
MS | The Case For Tactical EUR Rally | As the EUR enters a period of relief from the major bearish trend Morgan Stanley NYSE MS has turned tactically bullish on the single currency attempting to buy EUR USD on dips for more than a week In a note to clients today MS outlines the case for this ongoing EUR rally projecting its potential target in the near term along with its year end target for the pair
1 Strong investment outflows from the eurozone since the beginning of the year and the use of EUR as a global funding currency not just for portfolio investment but also for longerterm business investment were major contributing factors to the EUR s steep decline earlier in the year Without these investment and funding outflows the structural commercial inflows to the eurozone resulting from the regions current account surplus have the potential to push the EUR higher MS argues
2 When a dovish Fed fails to spur markets to take on more risk then it is time to take a cautious approach Sharply falling commodity prices tell the same story suggesting non commodity currencies that either run current account surpluses or positive net foreign asset positions will rally Hence USD markets will likely stay split USD benefiting from EM repatriation flows while staying offered against surplus currencies We expect the EUR and the SEK to benefit most from declining cross border investment flows and rising cross border liquidation flows MS adds
3 European banks overseas lending data another indicator of the use of the EUR for foreign funding also showed a setback in the pace of gains in the second quarter of the year While foreign investor portfolio inflows to European assets have been currency hedged suggesting little in the way of direct currency impact from foreign inflows or outflows the subsequent hedging activity is a significant EUR driver MS notes
4 We believe there is scope for a EUR USD rebound to 1 15 with the EUR also outperforming on many of the crosses especially against EM and commodity related currencies However we reiterate our longer term bearish EUR USD view with 1 05 projected for year end |
MS | Morgan Stanley Turns Bearish EUR JPY | Morgan Stanley NYSE MS picks EUR JPY as its technical FX chart of the week where MS is bearish and looking to sell the pair on rebounds MS provides the important levels where traders should consider adopting such a bearish strategy and placing their targets accordingly
On the 10 Year EUR JPY Chart
We believe EUR JPY traded a major top at the 149 78 level at the end of last year completing a major b wave rally This implies that a major C wave decline is now developing Still within the early stages of this C wave decline EUR JPY is starting to develop a series of impulsive bearish structures This is consistent with a sustained decline over the longer term MS argues
On the 2 Year EUR JPY Chart
Indeed the substructure from the 149 78 peak has completed the 1st wave lower followed by a second wave correction EUR JPY is now entering a 3rd wave decline we believe of the anticipated 5 wave structured C wave down This is usually the sharpest part of the structure and often provides attractive risk reward for positioning Hence our bearish EUR JPY strategy recommendation this week MS advises
On the 90 Day EUR JPY Chart
The recent up trendline support has been broken triggering a fresh bearish signal We now expect a decline towards the 133 31 July low which represents the 1 st wave bottom within the broader 3rd wave decline A further move below here would confirm the bearish structure opening the way for a decline through 130 00 towards 126 10 initially MS projects |
MS | Solar City s 2014 Low Has Behaved Like A Critical Pivot Point | The solar industry has taken an extra hard beating in the wake of the market s general sell off Solar City SCTY has caught my interest because the stock has exhibited a clear pattern during this sell off a pivot around the 2014 low The recent market sell off sent Solar City SCTY through the lower support of a long standing trading range
Solar City s primary trading range extended back to late 2014 If I could extend the chart backward in a neat way I could also show how SCTY experienced what now looks like two brief spurts above this same trading range Under this looser definition SCTY s trading range goes all the way back to late 2013 The duration and durability of this trading range heightens the importance of the current breakdown
The chart below shows a close up of this breakdown
This close up of Solar City shows how well the 2014 low has served as a pivot
Note well how the 2014 low has served well as a pivot On August 12 SCTY made a very neat bounce directly off the 2014 low At the time the move looked like a promising bottom in the making The warning began the very next day as SCTY failed to print any buying follow through The stock drifted lower for 6 trading days as the downward channel defined by the two lower Bollinger Bands BB guided SCTY As a result found SCTY extremely vulnerable SCTY made a clean break below the trading range for the first time since November 2013 Selling volume had not been that high since November 2014 This was a serious technical breakdown
The good news for SCTY is that the stock has not CLOSED any lower since that day The bad news for SCTY is that two attempts to close above the 2014 low were effectively faded by sellers
This trading action turns the 2014 low into a very important pivot line IF SCTY makes a new closing low in this cycle traders should assume a lot more downside lies ahead IF SCTY can manage to close above the pivot line AND next show at least one more higher close preferably on strong buying volume then traders should assume SCTY has primed itself to rally The first upside target rests at overhead resistance from the downward sloping 50 and 200 day moving averages DMA The very bullish target rests at the top of the former trading range
Adding to the intrigue was Boyd set a 93 rice target which is WELL above SCTY s trading range He even defended SCTY against short seller Chanos has a LOT of company 44 of SCTY s float is sold short Talk about a potential powder keg
Be careful out there
Full disclosure no positions |
MS | US Dollar Weaker As Equity Markets Extend Losses | US stocks fell on Monday amid concerns Federal Reserve may raise interest rate at its September policy meeting The dollar weakened with the ICE US Dollar Index a measure of the dollar s strength against a basket of six currencies losing 0 2 The S P 500 closed 0 8 lower at 1972 18 recording the sharpest monthly decline of 6 3 since May 2012 The Dow Jones Industrial Average lost 0 7 ending August with a 6 6 loss the biggest decline in one month since May 2010 Federal Reserve Vice Chairman Stanley Fischer on Saturday said US inflation would likely rebound as pressure from the dollar fades allowing the Fed to raise interest rates gradually Investors interpreted the comment at the global central banking conference in Jackson Hole Wyoming as a sign that the Fed planned to raise interest rates in September Recent market turmoil had led market participants to believe the Fed would delay interest rate hike till December Morgan Stanley NYSE MS cut its 12 month outlook on the S P 500 index for 2015 from 2275 by more than 3 to 2200 citing forecasts of lower growth and higher inflation as well as expectations for six rate hikes by the Federal Reserve before the end of 2016 Trading volume was 7 8 billion shares on US exchanges about 27 lower than the average in the past five sessions Today at 14 45 CET August manufacturing PMI will be released by Markit The outlook is neutral AT 15 00 CET August construction spending and September ISM manufacturing index will be released The tentative outlook is positive
European stocks ended lower on Monday on concerns slowing China s economy will weigh on global growth Euro strengthened against the dollar gaining 2 2 in August The Stoxx Europe 600 fell 0 5 The pan European benchmark index ended the month 8 5 lower recording the largest decline since August 2011 when the index fell nearly 10 5 German DAX 30 fell 0 4 tumbling 9 3 in August suffering the biggest monthly loss since a near 20 plunge in August 2011 Today at 10 00 CET July unemployment rate will be released in euro zone The tentative outlook is neutral
Nikkei ended 3 8 lower today while yen strengthened as investor confidence was undermined by official report China s manufacturing sector contracted at its fastest pace in three years in August pointing to the possibility of further slowdown in the world s second largest economy Market sentiment was hurt also by report Japanese companies slowed capital expenditures in the second quarter
Today Reserve Bank of Australia kept the interest rate unchanged at 2 Tomorrow at 2 30 CET Q2 GDP data will be released in Australia The tentative outlook is negative
Oil futures prices are falling today on profit taking and concerns over possible slowing of Chinese demand after report showed China s official manufacturing PMI fell to 49 7 in August from 50 0 in July Oil prices closed almost 9 higher on Monday after the Energy Information Administration report estimated June US crude oil output declined 1 1 from a revised May figure totaling 9 3 million barrels a day
Gold is rising today after Asian equities retreated on concerns China s economy is slowing sharply Gold prices closed lower yesterday as the likelihood of Federal Reserve interest rate hike in September limited the attractiveness of the safe haven metal Gold advanced about 3 4 in August recording the largest gains since January s 8 surge |
MS | GBP USD Tradable Moves | Morgan Stanley NYSE MS picks GBP USD as its technical FX chart of the week where MS is medium term bearish but sees the pair in a wide range over the next few months and within this range there are set to be clear tradable moves
On the 10 year GBP USD chart
We believe that GBP USD has completed a major multi year corrective pattern with the 1 7192 high of last year representing a 4th wave top This implies that the early stages of a major 5th wave decline are currently developing which has the potential to result in long term GBP weakness against USD Indeed the long term trendline from the 2008 lows has also been broken MS notes
On the 2 Year GBP USD chart
Within the major 5th wave decline the first wave lower of a 5 wave substructure is complete we believe Hence the rebound from the 1 4566 low earlier in the year is developing a 2nd wave correction The structure of this correction has the potential to be complex leaving GBP in a wide range over the next few months However within this range there are set to be clear tradable moves MS argues
On the 90 Day GBP USD chart
Indeed the a wave of the 2nd wave correction appears complete with a top at 1 5930 An a b c structured b wave lower is now developing with the final c wave lower under way The move below the 1 5300 level confirms this bearishness and a further decline towards the 1 50 1 48 area is now likely This would complete the b wave allowing a c rebound towards 1 5819 1 5930 to complete the correction MS adds |
MS | Joe McAlinden Reverses View | With the markets in whiplash mode Joe McAlinden founder of McAlinden Research Partners and former chief global strategist with Morgan Stanley NYSE MS Investment Management believes volatility is going to stick around for a while and we might see a correction double of what we ve had so far In this interview with The Gold Report McAlinden bucks conventional wisdom to argue that an interest rate hike is good for gold and oil and lays out his investing strategy for this period of market uncertainty
The Gold Report For more than a decade you led Morgan Stanley Investment Management s global investment strategy now you own your own research firm based on your observations of the industry for more than 50 years How do you explain the volatility in the markets right now and how should investors position themselves to prepare for what is coming
Joe McAlinden It has been a wonderful bull market a wild ride going all the way back to 2007 when the market made its top That was followed by a horrendous plunge We ve not only made that back but the market has reached highs that were 36 above the 2007 highs I had been concerned recently however that price earnings ratios have become elevated and we are seeing other spooky similarities to the conditions that prevailed prior to the 1987 crash including the absence of a more than a 10 correction for three years and a breakdown of small cap stocks The market could be vulnerable to some kind of major shock I believe that the big shock is only beginning to unfold and that as it does this correction will get considerably worse perhaps double what we ve had so far and maybe even worse than that
TGR What do you think the market expects the Federal Reserve Board to do
JM The market is hoping the Fed will bail them out by postponing the tightening but I don t think that s going to happen It is appropriate for the Fed to begin the tightening process now It s not the Fed s job to regulate what s going on in the stock market It s job is to maintain the purchasing power of our currency The Fed is tasked with keeping inflation and inflation expectations stable and fostering full employment
The U S government should not be in the business of trying to manipulate the stock market the way the central planners in Beijing do We re supposed to be a free market economy The Fed should not allow monetary policy actions to be determined by what the Dow does on a given day I think that as some Fed officials have indicated it should and will go ahead with the quarter point move in September
I am worried about the tremendous gap between the Federal Open Market Committee FOMC members expectations and the market s perception about the path ahead for the federal funds rate When you look out to 2017 the gap is about 130 basis points That is a big deal because we all learned in securities analysis 101 that stocks are worth the present value of the future stream of earnings In the case of high growth equities future earnings are a big part of the current value especially when the discount rate is influenced by the current policy of zero interest rates in the U S So my concern is that a the market is overvalued b there are these similarities to 1987 and c the gap between market expectations and what the Fed plans to do needs to be closed My guess is that as it closes there will be downward adjustment in equity prices and bond prices
TGR What were the causes of the flash crash that happened at the end of August Are there black swans that could bring back painful 2008 scenarios
JM The consensus interpretation of the flash crash is that the volatility was due to the China slowdown I don t argue that is not a factor but the bigger problem was China s peg of the currency to the dollar which just kept getting stronger They couldn t hold the peg any longer and did that devaluation I think it will probably not be the last
Derivatives which have proliferated throughout the markets are vulnerable to jolts It is unknown to what degree big players afraid of being exposed to liquidity problems played a role in the crash The ability of banks to step in with capital has been greatly diminished and that could have played a role along with Dodd Frank and other reporting requirements Many hedge funds today are driven by algorithms so there is no human compassion in place to make rational decisions when anomalies occur More corrections are likely
The big question is Where can investors hide if we are heading into major correction territory I think we re going to see the relative strength of precious metals turn up sharply it already appears to have perked up simply because when you get into a scary environment there tends to be that flight into hard money But I think there s more involved here
Conventional wisdom is that a hike in interest rates is going to hurt gold but that is not borne out by history When rates have gone up in the past gold has risen as have other precious metals That is what will happen again That makes me positive on gold which to be honest I haven t been in a long time
Oil follows the same trends Interest rates rose in the mid 1970s by a ginormous amount but so did oil and gold I was there and I can tell you I witnessed a broad move in precious metals and hard assets Energy also enjoyed a tremendous move Last month I wrote a piece for our subscribers called Time for Value that predicted the value side of the market which includes a lot of hard asset categories will outperform on a relative strength basis In other words if you were short growth and long value I think you d make money irrespective of how deep this correction goes A part of that call would be to go out there and catch a falling knife on the energy and precious metals side of the market
TGR Are there specific areas in the energy sector that you see thriving in the scenario you describe
JM Crude oil prices are the key to the sector There are a lot of moving parts Fracking is becoming more economic and competitive Production costs continue to fall in the U S But the world depends on non U S production Countries like Saudi Arabia and Russia need higher oil prices to pay for the social programs that keep leaders in office creating pressure on prices That includes prices for production from North American shale and tar sands
At the same time technology is improving for solar production and prices are coming down That is where the future lies
TGR Streetwise Reports looks for investing ideas across all sectors Where else would you find value
JM I ve been very positive on the U S residential housing market largely because of demographics Home ownership for American families is the hard asset of choice Home prices will continue to rise to above where they were at the so called bubble peak in 2006 2007
The problem with housing up until recently has been that people born after 1980 have been slow to form new households It is part of the failure to launch syndrome where folks are staying with family because jobs have been hard to find Job data for that age cohort has picked up dramatically and as a result household formations have spiked up like a hockey stick For several years household formations were running around 500 000 per year Now they re in the 1 5 2 million per year range A lot of that is going into rentals but now rentals have skyrocketed vacancy rates are down and young people are being motivated to find a way to buy a first home First time home buyers as a percentage of the total are up from where they were a year ago This is true across the country in large and small cities The negative view of housing after the crash and the disinflationary environment will be reversed as people continue to see housing prices rise They are already up at least 35 from the bottom with way more to go
Just as in the 1970s when a housing recovery was driven by a shortage due to underbuilding in the previous decade prices will go up The Case Shiller statistics show that home prices dropped 35 from the peak in 2007 to the trough and they ve come back more than halfway over the better part of a decade At the peak house prices were probably higher than they should have been at the time But when you look at some of the components of what it takes to build a house like construction wages the average hourly pay of construction workers is actually 20 higher now than it was in 2007 That is a sign replacement costs are increasing which indicates home prices will continue to move higher That is why I think housing is the other area that will do well in spite of what s going on in the broader market
TGR I know you are a true hedger I understand your concept of shorting growth and being long value but is there an exchange traded fund that would capture this real estate play Would you be buying the builders or the apartment Real Estate Investment Trusts REITs Where should our readers be looking
JM I think the home builders are going to continue to do well and outperform the market I think everything related in that food chain home furnishings and home improvement is part of that story It helps existing home sales as well
I m reluctant to make a general statement about REITs because there are so many different kinds Sometimes you think you re buying real estate but you re really getting the mortgages But if you can find a true equity play on the value of the underlying residential asset whether it s apartments or single family homes there is shopping to be done in the REIT space
If I m right we re going to see bond prices continue to erode from the cyclical highs that they hit at the end of January when yields got down to a one handle on the 10 year government bond Over the next several years I think we are heading toward a three handle and maybe between a four and a five for the 10 year treasury
TGR What else can investors do to protect themselves
JM The Nobel Prize winning economist Paul Samuelson joked in the 1960s that the stock market has correctly predicted nine out of the last five recessions More often than not when you have a major stock market crash it s a sign the economy is going into a recession but every once in a while a historic drop is not followed by an economic downturn That s what I think we re dealing with here This is a market and financial asset phenomenon and it s going to be part of a re allocation globally away from financial assets and toward hard assets That takes you to a lot of commodity cyclical stocks the precious metals and real estate to the extent that it gives you exposure to the equity side
TGR You are a wise man who has seen a lot from your perch at Morgan Stanley and now in the companies you founded McAlinden Research Partners and Catalpa Capital Advisors How are you positioning yourself based on what you see coming
JM I work with hedge funds and portfolio managers and now increasingly other investors doing market strategy research I focus on change and only write about a sector when I see a shift We are at a major turning point in the macro picture right now There is potential for big moves up and down in sectors and specific securities
For my own portfolio right now I m very heavily in cash I m getting ready to deploy some money in energy Precious metals are also going to be a safe haven
TGR Thank you for your insights
Joe McAlinden has over 50 years of investment experience He is the founder of McAlinden Research Partners and its parent company Catalpa Capital Advisors Previously McAlinden spent more than 12 years with Morgan Stanley Investment Management first as chief investment officer and then as chief global strategist where he articulated the firm s investment policy and outlook He received a bachelor s degree cum laude in economics from Rutgers University and holds the Chartered Financial Analyst designation McAlinden has served on the board of the New York Society of Security Analysts
DISCLOSURE 1 Gordon Holmes conducted this interview for Streetwise Reports LLC publisher of The Gold Report The Energy Report and The Life Sciences Report and is a principal of Streetwise Reports 2 Joe McAlinden I was not paid by Streetwise Reports for participating in this interview Comments and opinions expressed are my own comments and opinions I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview 3 Interviews are edited for clarity Streetwise Reports does not make editorial comments or change experts statements without their consent 4 The interview does not constitute investment advice Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility By opening this page each reader accepts and agrees to Streetwise Reports terms of use and full legal 5 From time to time Streetwise Reports LLC and its directors officers employees or members of their families as well as persons interviewed for articles and interviews on the site may have a long or short position in securities mentioned Directors officers employees or members of their families are prohibited from making purchases and or sales of those securities in the open market or otherwise during the up to four week interval from the time of the interview until after it publishes |
MS | Great USD Expectations | There s an old saying If you have no expectations you ll never be disappointed Some might even suggest it s universal wisdom a tenet that neither leads one astray nor fools with randomness And while the long reflection of the more than six year bull run in equities benevolently nurtured a Zen approach towards risk i e don t think just buy the past year has introduced a challenge to that dogma as the Fed stepped away from quantitative easing and looked to further normalize monetary policy through posture now perhaps practice The end result has lengthened the expectation phase for this policy cycle commensurate with the extraordinary span of ZIRP As such the ambiguity either intended or not has muddled the macro waters for participants to gauge conditions of where they are actually swimming
When it comes to the US dollar this prolonged and fuzzy chapter in the face of easing across much of the developed and emergent world cleared the airspace for the buck and real yields to take flight in which has already tightened financial conditions in our opinion with even greater capacity than what the Fed could will engender with marginally raising the fed funds rate off ZIRP over the next year
Here s Morgan Stanley NYSE MS in August characterizing an impact of a stronger dollar
The role of the USD in financial conditions is also significant We find that a 1 month 1 increase in the nominal trade weighted exchange value of the USD versus major currencies would add roughly 0 14 points to the Chicago Fed s adjusted financial conditions index indicative of substantially tighter financial conditions To put it in perspective a 10bp widening of the 2 year 3 month Treasury yield spread would have an equivalent impact on financial conditions
With the Fed s preferred measure of the dollar broad index gaining more than 15 percent over the past 12 months and the DXY trade weighted index cresting in March over 20 percent higher financial conditions have tightened swiftly Considering the dollar s reserve status throughout the world and the more than 9 trillion in credit outstanding outside the US the impact has been especially severe overseas Moreover taking into account the move higher in real yields from the initial suggestion of an end zone for QE by Bernanke in May 2013 through the completion of the taper last October markets have reflected tighter financial conditions for some time
We know in past cycles and characteristic of markets forward discounting dynamics the dollar strengthens during the expectation phase of tightening and typically begins to weaken directly before as markets become confident that the Fed will move Commonly understood by traders as buy the rumor sell the news we ve playfully suggested it s become buy the hype sell the bluff The bluff of course being the posture and expectations shaped from more conventional tightening cycles would have stronger influence within the financial markets than the actual structural significance of a quarter point hike or less Granted this is par for course with the Fed and monetary policy over the past 6 years where the behavioral reflex inferred was arguably as or more important than the structural transmission mechanisms themselves
That said having their cake and eating it too has proved difficult for the Fed While the US equity markets had enjoyed the warm gentle breeze of disinflationary conditions over the past several years a consequence of elongating the expectation phase of the next pivot in posture or policy engendered a vacuum in the currency markets that supported and strengthened the dollar and which ultimately has worked against their goal of achieving a 2 percent inflation target
Just recently Stanley Fischer Vice Chairman of the Fed remarked on the dollar s sizeable impact on inflation and the economy in his Jackson Hole speech this August
In the first instance as already noted core inflation can to some extent be influenced by oil prices However a larger effect comes from changes in the exchange value of the dollar and the rise in the dollar over the past year is an important reason inflation has remained low chart 4 A higher value of the dollar passes through to lower import prices which hold down U S inflation both because imports make up part of final consumption and because lower prices for imported components hold down business costs more generally In addition a rise in the dollar restrains the growth of aggregate demand and overall economic activity and so has some effect on inflation through that more indirect channel 3
To get a sense of the timing and magnitude of these exchange rate effects chart 5 shows dynamic simulations of a 10 percent real dollar appreciation based on one of the models we maintain at the Federal Reserve The estimated pass through from import prices to consumer price inflation occurs relatively quickly with effects becoming evident within a quarter and the bulk of the overall effect occurring within one year By contrast the portion of the dollar effects on inflation that work through the channel of overall economic activity occurs with considerable lags In the model shown here the appreciation has its largest effect on gross domestic product GDP growth in the second year after the shock Thus it is plausible to think that the rise in the dollar over the past year would restrain growth of real GDP through 2016 and perhaps into 2017 as well The rise in the dollar since last summer of about 17 percent in nominal terms with its associated declines in non oil import prices could plausibly be holding down core inflation quite noticeably this year U S Inflation Developments Stanley Fischer
Weighing into the inflation policy debate this past Friday Kenneth Rogoff the esteemed professor of economics and public policy at Harvard questioned the logic surrounding the growing idea that the Fed s liftoff from ZIRP will be a one off event Concerned with the lack of inflation and arguing the Fed should wait to raise until they see the whites of inflation s eyes the idea of lifting rates just to prove they can doesn t seem to be worth the risk for Rogoff
What is the logic of doing it also he said in response to a question on the merits of a rate hike followed by a long pause It s very asymmetric If we see inflation they can start raising rates and if you go in the wrong direction it s harder to do something about it
The models have not been very good for a long long time since the financial crisis and why you would want to rely on that and not be more on seeing inflation I don t understand said Rogoff After your models have been so off for so long your ship s been thrown around in a storm and you don t know where you are when you land you kind of want to see the inflation more than usual
The danger in signaling a long pause or potentially having to reserve a hike soon thereafter is that it fosters unnecessary uncertainty the professor asserted
You re trying to create some certainty about what your path is to have a reaction function people understand Rogoff said Ken Rogoff Slams One of the Most Popoular Theories for What the Fed Should Do Next Bloomberg
What we d argue that Rogoff is missing today that Fischer gets see Here with respect to policy at the zero bound is the significance of the signal itself to the markets as small as it may be which greatly influences confidence and consequently inflation expectations From a behavioral point of view QE and ZIRP have not been considered a positive station for the markets for some time rather much the opposite a confirmation in the belief that the economy still requires further external support From a market perspective maintaining current policy is in and of itself disinflationary Notwithstanding the tepid measure of inflation over the past year which as we contend is more a consequence of the currency markets and the drawn out and ambiguous expectations of this policy cycle the underlying conditions in the economy from near full employment to robust business and construction spending at the very least supports further normalizing policy and posture from a crisis stance
As counterintuitive as it may sound but in line with the coriolis like effect on expectations and outcomes for this cycle i e gold silver and commodities round trip across ZIRP and QE we d argue financial conditions will loosen i e real rates decline over time as the Fed either finally marginally moves off ZIRP next week or provides greater clarity of policy going forward Whichever the case we believe the magnitude of the rate hike will be exceedingly modest and consequently the dollar s decline from the relative performance extreme will have greater positive impact on the global economy and inflation expectations than a governor on growth of higher nominal yields |
C | As steep patent cliff looms Shionogi moves to develop its own U S sales staff | By Takashi Umekawa TOKYO Reuters For much of its 141 year history Japan s Shionogi Co Ltd T 4507 has played safe when selling its drugs in the United States and other overseas markets relying on bigger partners to promote its products and avoiding the cost of maintaining a large sales force It followed that pattern for blockbuster cholesterol treatment Crestor its biggest success story which was developed in house until mid stage trials when it teamed up with AstraZeneca Plc L AZN AstraZeneca gained the rights to sell the drug in all markets but Japan But Shionogi Japan s most profitable drugmaker by operating margin has become open to more risk prodded into seizing more sales for itself by a looming patent cliff that will see a key HIV drug and three combination medicines exposed to generic competition in nine years time We ll have to increase by a bit the portion of what we sell by ourselves and not just rely on others CEO Isao Teshirogi told Reuters in an interview Shionogi tested the waters in the world s biggest drug market last year with Mulpleta a drug designed to prevent excessive bleeding in patients who need surgery and have a lower blood platelet count due to chronic liver disease It also plans to develop its own U S sales team for cefiderocol an antibiotic it hopes will gain approval this year and which will be used as a last resort treatment for patients with infectious disease not cured by other antibiotics Cefiderocol is a drug that will only be used by specialists at big hospitals and across the U S we re only going to need 50 to 70 medical representatives That makes it a good next entry point for us something we can do under own steam he said Shionogi declined to disclose its sales team numbers for Mulpleta a drug it expects will earn 12 3 million this year It has also not disclosed sales estimates for cefiderocol Japan s No 9 drugmaker by revenue is however also keen not to bite off more than it can chew Teshirogi said while it might be possible to take on U S sales of a drug like an HIV medicine with a team of 100 plus primary care market drugs that require teams of 400 to 500 people were another matter An attempt at U S sales in 2013 for Osphena used by women who experience pain during sexual intercourse became too costly as it was a primary care market drug and as it was the only drug Shionogi had in women s healthcare at the time It licensed out Osphena to Canada s Duchesnay in 2017 Shionogi which gains roughly half its revenue from royalties has notched up four straight years of record operating profit and boasts an operating profit margin of 38 It also has promising drugs like newly launched flu drug Xofluza but the patent cliff for its HIV treatments will create an earnings gap that will be hard to completely offset HIV drug Tivicay and three combination treatments which are marketed by GlaxoSmithKline s L GSK ViiV Healthcare Ltd accounted for a third of Shionogi s 364 billion yen 3 4 billion in revenue in the last financial year The next few years are going to be key for Shionogi said Citigroup NYSE C analyst Hidemaru Yamaguchi The drugmaker currently has 23 drugs in clinical trials with five of those trials having progressed to late stage In other moves to diversify its revenue stream Shionogi has partnered with U S startup Akili Interactive Labs Inc to develop and sell two medical apps one for ADHD and one for patients on the autism spectrum Japan has yet to approve apps designed to treat diseases or disorders By comparison the U S Food and Drug Administration gave its first nod for such medical apps in 2010 Teshirogi said Shionogi was keen to develop drugs made from so called mid sized molecules such as peptides an area that few other drugmakers were looking at Shionogi is working with universities and had partnered with Japanese biopharmaceutical firm PeptiDream Inc T 4587 to conduct joint research I truly believe we re going to see two or three products come out of these efforts that will help us counter our HIV patent cliff he said
GRAPHIC Japan s top 10 drugmakers by sales and operating profit margin |
JPM | Is JPMorgan Large Cap Value Fund A OLVAX A Strong Mutual Fund Pick Right Now | Large Cap Value fund seekers should consider taking a look at JPMorgan NYSE JPM Large Cap Value Fund A OLVAX possesses a Zacks Mutual Fund Rank of 1 Strong Buy which is based on nine forecasting factors like size cost and past performance History of Fund ManagerJ P Morgan is based in Boston MA and is the manager of OLVAX Since JPMorgan Large Cap Value Fund A made its debut in February of 1992 OLVAX has garnered more than 250 57 million in assets The fund is currently managed by Scott Blasdell who has been in charge of the fund since April of 2013 PerformanceInvestors naturally seek funds with strong performance This fund in particular has delivered a 5 year annualized total return of 16 8 and is in the top third among its category peers Investors who prefer analyzing shorter time frames should look at its 3 year annualized total return of 11 93 which places it in the top third during this time frame When looking at a fund s performance it is also important to note the standard deviation of the returns The lower the standard deviation the less volatility the fund experiences Over the past three years OLVAX s standard deviation comes in at 12 56 compared to the category average of 8 93 Over the past 5 years the standard deviation of the fund is 11 6 compared to the category average of 9 89 This makes the fund more volatile than its peers over the past half decade Risk FactorsIt s always important to be aware of the downsides to any future investment so one should not discount the risks that come with this segment In the most recent bear market OLVAX lost 54 14 and underperformed comparable funds by 3 98 This might suggest that the fund is a worse choice than its peers during a bear market Investors should note that the fund has a 5 year beta of 1 07 so it is likely going to be more volatile than the market at large Alpha is an additional metric to take into consideration since it represents a portfolio s performance on a risk adjusted basis relative to a benchmark which in this case is the S P 500 The fund has produced a positive alpha over the past 5 years of 0 09 which shows that managers in this portfolio are skilled in picking securities that generate better than benchmark returns ExpensesFor investors taking a closer look at cost related metrics is key since costs are increasingly important for mutual fund investing Competition is heating up in this space and a lower cost product will likely outperform its otherwise identical counterpart all things being equal In terms of fees OLVAX is a load fund It has an expense ratio of 0 92 compared to the category average of 1 04 Looking at the fund from a cost perspective OLVAX is actually cheaper than its peers Investors should also note that the minimum initial investment for the product is 1 000 and that each subsequent investment needs to be at 50 Bottom LineOverall JPMorgan Large Cap Value Fund A has a high Zacks Mutual Fund rank and in conjunction with its comparatively strong performance average downside risk and lower fees this fund looks like a good potential choice for investors right now Don t stop here for your research on Large Cap Value funds We also have plenty more on our site in order to help you find the best possible fund for your portfolio Make sure to check out for more information about the world of funds and feel free to compare OLVAX to its peers as well for additional information Zacks provides a full suite of tools to help you analyze your portfolio both funds and stocks in the most efficient way possible |
MS | Japan s retail sales show strength in consumer spending | By Stanley White
TOKYO Reuters Japan s retail sales rose in September at the fastest pace in three months as shoppers spent more on clothes and daily goods in a sign that consumer spending remains strong due to a tight labor market
The 2 2 percent annual increase in retail sales in September was less than the median estimate for a 2 5 percent annual increase and follows a revised 1 8 percent annual increase in August
Strong consumer spending makes it more likely that consumer prices will accelerate in the future which supports the Bank of Japan s argument that it can afford to keep its monetary easing unchanged as inflationary pressure gradually builds up
Consumption in July September is likely to be a little bit weaker than the previous quarter but the outlook remains healthy said Shuji Tonouchi senior market economist at Mitsubishi UFJ Morgan Stanley NYSE MS Securities
Consumer spending is still in moderate recovery The labor market will support spending in the future
Spending on clothes rose 5 0 percent in September from a year ago the fastest increase in three months data from the trade ministry showed on Monday Spending on daily goods like soap and shampoo rose an annual 1 2 percent versus a 0 4 percent annual decline in the previous month
The BOJ is expected to signal that it will hold off on expanding stimulus for the time being at a policy meeting ending on Tuesday
The policy meeting comes after Prime Minister Shinzo Abe s victory in a lower house election which heightened expectations the BOJ s ultra loose policy a key pillar of his Abenomics stimulus policies will continue
Core consumer prices rose 0 7 percent in September from a year ago which is distant from the BOJ s 2 percent inflation target although the central bank argues that consumer prices will eventually pick up because of the tight labor market and wage growth albeit slow |
MS | AMD drops after Morgan Stanley downgrade | Advanced Micro Devices NASDAQ AMD shares are down 3 12 premarket after a Morgan Stanley NYSE MS downgrade to Overweight with the price target lowered from 11 to 8
Analyst Joseph Moore cites slowing microprocessor market momentum and the likelihood that cryptocurrency mining gains will fade
Source Bloomberg First Word
Now read |
MS | Bitcoin Passes More Milestones as Market Cap Tops 100 Billion | Bloomberg Another day Another record for bitcoin
The most widely used digital currency will now cost you about 6 125 apiece after blowing past the 5 000 and 6 000 price levels for the first time earlier this month Bitcoin s BitfinexUSD total value is just over 100 billion meaning it makes up more than half of the overall cryptocurrency market
Cryptocurrency prices have been unfazed by recent regulatory crackdowns across the world and skepticism from Wall Street stalwarts including Warren Buffett and JPMorgan Chase Co NYSE JPM Chief Executive Officer Jamie Dimon More than 3 billion has poured into initial coin offerings this year despite warnings from the U S Securities and Exchange Commission and other government watchdogs
The price of ether the second most valuable virtual coin has climbed 8 percent in the past week eclipsing bitcoin s 4 8 percent gain during the same period according to Coinmarketcap com That comes amid cautious comments from Advanced Micro Devices NASDAQ AMD Inc a company that makes hardware for mining ether
In terms of the headwinds we have the semi custom seasonality and we re also predicting that there will be some leveling off of some of the cryptocurrency demand Advanced Micro Devices Chief Executive Officer Lisa Su said last week on the company s third quarter earnings call
Morgan Stanley NYSE MS downgraded the stock Monday citing the likelihood of a significant slowdown in graphics chip sales to cryptocurrency miners
We believe that the cryptocurrency mining demand should fade in the coming quarters similar to what AMD indicated on its conference call Morgan Stanley analyst Joseph Moore wrote in a note to clients We think this creates a large hole for the company next year |
MS | Power sales decline for Japan s top utilities amid market liberalization | By Osamu Tsukimori
TOKYO Reuters Japan s three big power utilities reported another decline in electricity sales for the first half of the year as new entrants grab market share following liberalization of the 8 trillion yen 71 billion retail power market a year and a half ago
More than 5 1 million retail power accounts or about 8 percent of total in Japan have switched to new power providers in Japan by end September data by the national grid monitor OCCTO showed
The overall share of power sales by new power entrants has more than doubled to over 12 percent since full market liberalization in April 2016
Japan s top 10 utilities having barely recovered from the Fukushima nuclear disaster of 2011 the resultant high fuel costs after most reactors were shut and costly safety upgrades are now facing an exodus of their customers with Japan s retail market thrown open to more than 350 firms
Japan s top three firms Tokyo Electric Power Co Tepco Kansai Electric Power and Chubu Electric Power said their power sales fell by 3 8 percent 7 3 percent and 0 8 percent respectively
Though all 10 former regional power monopolies reported a gain in revenues in the first half ended September due to higher energy prices the decline in power sales is weighing on profit
Eight of them reported declines in recurring profits in April September with No 2 power seller Chubu Electric posting a 46 6 percent decline on year
Reiji Ogino senior analyst at Mitsubishi UFJ Morgan Stanley NYSE MS Securities said that though the power utilities do not report the details on the adverse impact to earnings from the customer losses the impact should not be minimal
Power sales for the high profit margin retail accounts have been down so that should work as a factor for profit decline he said
He added that Kansai Electric which reported a recurring profit of around 158 billion yen for the six months ended Sept 30 could have seen its profit decline by around 10 billion yen during the period adding the profit drop for the full year could be about double that
To offset declining power sales Tepco has been trying to limit the impact by entering the 2 4 trillion yen retail city gas market that were opened up for competition in April and selling power outside its home turf Tepco Holdings Managing Executive Officer Yoshihito Morishita said |
MS | Euro zone economy grows faster than expected in third quarter supports ECB QE decision | By Jan Strupczewski BRUSSELS Reuters The euro zone economy grew faster than expected last quarter and unemployment fell to its lowest in almost nine years backing up the European Central Bank s move to begin reducing its bond buying despite slightly soft inflation this month The European Union s statistics office Eurostat estimated that the gross domestic product of the 19 countries that use the euro grew 0 6 percent in July September from the previous three months and was 2 5 percent higher than in the same period of 2016 Economists polled by Reuters had expected a 0 5 percent quarterly rise and a 2 4 percent year on year gain The better than expected GDP print along with our leading indicators suggests that growth remains robust thus supporting the recent ECB QE recalibration Morgan Stanley NYSE MS economists Daniele Antonucci and Joao Almeida wrote in a note Last week the ECB took its first step towards weaning the euro zone off ultra loose money by saying that from January it will halve the amount of bonds it buys every month to 30 billion euros It nevertheless promised years of stimulus and left the door open to backtracking The economic growth helped bring down euro zone unemployment to the lowest level since January 2009 beating market expectations The unemployment rate fell to 8 9 percent of the workforce or 14 513 million people in September from a downwardly revised 9 0 percent or 14 609 million in August Economists polled by Reuters had expected an unemployment rate of 9 0 percent But consumer price growth in October eased to 1 4 percent year on year a Eurostat estimate showed from 1 5 percent in the previous two months The ECB wants to see headline inflation below but close to 2 percent over a two year horizon The slower inflation was mainly because of slower growth of energy prices which rose 3 0 percent year on year in October slowing from 3 9 percent in September offsetting equally volatile unprocessed food prices which rose 2 8 percent after 1 5 percent in September Measured without these two most volatile components inflation slowed to 1 1 percent in October from 1 3 percent in September Strong growth supports the notion that core inflation should eventually normalize further while headline inflation is likely to print lower for some time and follow a V shaped trajectory to come closer to the ECB target from late 2018 the Morgan Stanley analysts wrote
Despite today s downside surprise core HICP has inflected higher since the local low of 0 7 percent in March albeit gradually and from a low level It should get back to its long term average of 1 5 percent in the second half of 2018 it said |
MS | AMD and Nvidia Disagree on Future Impact of Crypto Mining | Investing com AMD and Nvidia both manufacture chips that help power the data centers mining Bitcoin Ethereum and other cryptocurrencies However they differ in their visions for the future AMD seems to think that despite a year in which Bitcoin prices have grown more than 800 and Ethereum has gained 3 500 demand for crypto mining will fade During the Q2 earnings call back in July AMD CEO Lisa Su said they weren t looking at cryptocurrency as a long term growth driver She continued that train of thought after Q3 earnings last week saying there will be some leveling off of some of the cryptocurrency demand Meanwhile Nvidia whose shares have risen during this time are up close to 95 year to date has sounded more positive In August Nvidia CEO Jensen Huang said the market for graphics cards in cryptocurrency would grow quite large and that they have the ability to rock and roll with this market as it goes This week Morgan Stanley NYSE MS downgraded AMD to underweight and said that they expect sales of crypto mining chips to meaningfully decelerate next year AMD shares have tumbled about 25 in recent days It will be interesting to see if Nvidia will stay as optimistic about crypto mining when they report earnings on November 9th A bleak outlook could pull Nvidia down from its newly reached all time high |
JPM | Pressure on small brokers grows a year after new EU rules | By Helen Reid Simon Jessop and Josephine Mason LONDON Reuters A year after new EU rules forced banks and brokers to charge investors for equity research the pressure on small brokerages to make ends meet is becoming intense and more look set to merge or even shut up shop in 2019 According to dozens of executives at major hedge funds asset managers banks and brokerages the picture looks bleak for smaller brokers who are being undercut by large banks and face increasingly cost conscious asset managers Smaller brokerages have far less clout in negotiating contracts with investors forcing some to cut prices or research carve out a niche with bespoke research or in more drastic cases team up with a rival or close The aim of the EU s Markets in Financial Instruments Directive II MiFID II was to increase transparency and ensure investors got a fairer deal but the dominance of the big banks is also pushing some regulators to have a rethink MiFID is going to have continued significant ramifications I always felt the fourth quarter 2018 or first quarter 2019 would be when the change starts to bite said Steven Fine chief executive at mid and small cap broker Peel Hunt Before MiFID II came into force in January 2018 banks and brokerages bundled the cost of research into their overall charges for executing customer trades or gave it away free Under the new EU rules they must bill institutional investors for everything from research to meetings to conference calls and separate research from execution fees Itemizing the services has caused havoc U S bank JPMorgan Chase N JPM led the charge in 2017 before the rules came in by offering research subscriptions to investors for as little as 10 000 a year a fraction of the six or seven figure sums some smaller boutique firms had hoped for MORE RADICAL The move roiled Europe s fragmented stockbroking sector and put pressure on rivals to follow suit or risk losing business One year into Europe s big experiment data from Greenwich Associates shows 60 percent of research services are still handled by the global investment banks suggesting they have not loosened their grip on the market since the new rules came in While large investment banks are more willing to fund their research teams to maintain their edge in equity capital markets the pressure is only set to get worse for smaller rivals and the small companies they cover executives said Recent merger talks between Australian investment bank Macquarie and UK broker Liberum were a sign of things to come in 2019 said Nigel Bolton co head of fundamental equities at BlackRock the world s biggest asset manager That s the sign that brokerages and banks are saying now we ve been trying this for a year it s not improving we re going to have to do something more radical And I think you will see that happening in 2019 Market regulators in the UK and France have raised concerns about the impact of a subsequent decline in research coverage and trading liquidity for smaller firms and may yet take action In an interview with the Financial Times in November the head of the French markets watchdog Robert Ophele said MiFID had had very detrimental effects on research particularly of midcap companies and called for a review of the legislation The fragmented nature of the UK market means brokerages there are undergoing the biggest change but firms in the euro zone are also under pressure In November AllianceBernstein N AB announced plans to buy Autonomous Research an independent firm with offices in London New York and Hong Kong and more than 35 analysts German private bank Berenberg has laid off staff in its equities business amid pressure from MiFID II the Financial Times reported last year Others including London s Numis Corp L NUM and Peel Hunt say they are expanding research teams to fill a gap left from cutbacks by rivals Peel Hunt s Fine says he won t budge on the prices his company charges and expects the impact of the loss of some research clients to be cushioned by revenues elsewhere in the business including corporate finance Still pressure on research prices may be here to stay with asset managers in a strong bargaining position Finding it hard to charge the bill to investors most asset managers are paying for it themselves and using less leading to a slide in total industry spend of about 30 percent NOT PAYING Penny pinching led to an average budget cut by asset managers of about 20 percent in 2018 with a reduction of another 5 percent to 6 percent expected in 2019 according to Greenwich Associates research Asset managers are also expected to reduce the number of research and advisory firms they use to 15 3 in 2019 from 15 7 last year and 20 in 2015 it said Richard Buxton chief executive of Merian Global Investors said his firm began pricing research separately before the new rules kicked in with year on year budget reductions of 10 percent that should continue in 2019 We don t want waterfront coverage from a whole raft of big firms It s we like your analysts in these three sectors and everything else frankly we re not prepared to pay for Matthias Desmarais head of research at broker Oddo BHF in Paris said he expected more cuts in research budgets when talks with providers kick off in 2019 before brokers recover some pricing power from 2020 BlackRock s Bolton was not so sure He said his team s research spending would stay lower as managers think twice about paying for a broker s research or access to their analysts with quarterly reviews and a massive monitoring and reporting exercise to check usage and spending One hour with an analyst can cost as much as 1 000 pounds Stiffer competition has also forced brokerages to look at selling their wares in new ways
RSRCHXchange an online marketplace for research said the number of firms selling research on its site has doubled to 400 since January 2017 People want to monetize their research more than ever before co founder Jeremy Davies said |
JPM | JPMorgan Buy on Sirius XM s pullback | JPMorgan NYSE JPM upgrades Sirius XM NASDAQ SIRI from Underweight to Overweight and raises the target by a dollar to 7 a 23 upside The firm sees a buying opportunity in the recent pullback that has SIRI down 9 7 in the quarter Source StreetAccount Sirius XM shares are up 0 2 premarket to 5 72 Now read |
MS | A Scary Proposition For Gold Bulls | With gold floundering just below 1 100 oz for the last week gold bulls are digging for reasons to be optimistic However the following two charts courtesy of Morgan Stanley Research NYSE MS indicate that relative to other commodities gold is fairly is expensive and producers have not yet responded to the recent price decline by cutting production
Here s a quote from Morgan Stanley s most recent Commodities Manual
Despite the recent sell off gold s price is actually holding well above its marginal cost Gold probably has the largest downside risk of all commodities that we track
In commodities is distinct from All in cost is more appropriate for gold producers and investors who are interested in determining the long term economics of various mining projects or companies whereas marginal cost is crucial in understanding the downside potential for any given commodity market
When commodities enter into a vicious bear cycle which gold seems to be firmly in the grips of prices can fall deep into marginal cost percentiles That is a scary proposition for gold investors |
MS | Oil s Dilemma Greece Iran And China | Swan Song
Oil prices ended their worst month since the 2008 financial crisis after 3 events in a row knocked oil and other commodities for a loop Those three events in order are Greece Iran and China and while I guess you can t call them black swan events the timing of all three colliding at the same time led to the oil markets July swan song Those same three issues are weighing on oil again as we start the new month so let us cover them in the same order that they impacted oil last month
Greece was first Greece by playing hard ball with the EU and the IMF gained noting and hurting not only their economy but took a toll on the global economy as well Today the reopening of the Greek stock market in Athens after a 5 week closure saw its market it crash s 23 before recovering while many stocks hit their daily downside limit The expectations is for more selling and more turmoil in the days to come That turmoil does not help oil demand expectations
The other event that hurt oil was a possible deal with Iran to lift sanctions Overnight Iran s oil Minister Bijan Namdar boosted that Iran s oil production could increase by 500 000 barrels per day in just one week after international sanctions are lifted Then he says that they can raise production by 1 million barrels a day one month later Most experts doubt these claims because of years of sanctions taking its toll on the Iranian oil fields but we know that Mr Namdar boosts are getting larger He also says that sanction on Iran s oil industry should be lifted by late November showing once again that he is the king of optimism
Yet perhaps the biggest reason why oil crashed was because of the slowdown in china Even though China oil imports hover near record highs the slowdown talk is causing many to question whether that pace will continue The AP reports that two surveys showed Chinese manufacturing weakened in July The Caixin purchasing managers index previously sponsored by HSBC declined to a two year low of 47 7 from June s 49 4 on a 100 point scale Numbers below 50 indicate activity contracting A separate index by a Chinese industry group the Federation of Logistics Purchasing and the government statistics bureau declined to 50 from June s 50 2 The bigger decline in the Caixin index suggests weakness was concentrated in private and smaller companies which make up a bigger share of the group surveyed for that report
I guess we should mention strength in the dollar but the dollar is not a leading indicator on this but reflecting the risk aversion from the fore mentioned events Of course Fed policy may be behind some of that strength but if the Fed pauses because of the commodity crash it is more proof that the dollar is just acting as a safe haven away from global turmoil
Oil also saw some pressure from a drop in rig counts but Dow Jones reports that while the rig count rose for the second consecutive week and third time in the last four weeks for some like the analysts at Deutsche Bank XETRA DBKGn this means that U S producers are coming to the point where they start considering growth However Morgan Stanley NYSE MS says investors should be cautious about assuming this represents the start of a material increase in the Rig count or much slower U S production declines Lower cost vertical rigs are driving much of the increase but these rigs as opposed to horizontal ones generate only marginal production the bank says
The commodity crunch has hurt some major players The Wall Street Journal reported that Private equity firm Carlyle Group NASDAQ CG has split with the founders of its Vermillion commodity hedge fund firm after its flagship fund shrank from 2 billion to less than 50 million in assets according to people familiar with the matter Vermillion Asset Management LLC s Viridian commodity fund which traded in oil metals and agricultural markets has seen assets dwindle after heavy losses and a wave of investor redemptions the people said The fund lost 23 in 2014 the latest investor exits began in the spring and the fund reached a nadir in recent weeks |
MS | Data Causes Sell Off Across US And Europe | The red is back
Data sentiment or general market malaise could be pointed to as reasons for the sell off across Europe and the US
From where I sit data is the clearest reason for the sell off in US markets The ISM price and manufacturing indices were below consensus and the price index shows inflation expectations falling putting a question at the feet of the Fed
The issues around Brent and other commodities are also growing sluggish data and a demand side that is evaporating by the day are clearly impacting commodities prices
There are very interesting stats developing in the current market
What s spiking my interest
Brent fell to the lowest level since January overnight as supply side continues to dominate the equation Iran announced it is set to boost production the instant sanctions are lifted while the Chinese manufacturing data from Saturday and yesterday suggest the demand side will remain sluggish Asian energy sectors are going to see a lot of hurt today as the supply side dilemma is only going to get stronger in the short term pushing prices lower still
Copper lost a further 1 7 on the LME to US 5142 a ton and CME copper fell to US 2 34 a pound 0 96 According to Morgan Stanley NYSE MS high cost producers are seeing margins underwater at US 2 40 a pound or lower as the copper price crosses into production cost The saving grace for Australian copper producers is the AUD but it doesn t bode well for the start of FY16
Nickel lost 2 76 and zinc was down 0 92 Coupled with the oil and copper story this saw Bloomberg s commodities index falling to its lowest read since 2002 Bloomberg s largest mining stocks index fell to a 2009 low on the back of the slump in the London listing South32 ASX S32 is the stock to watch in response to the collapse in nickel and other non core industrials it has lost over 29 since the high May 25 high
China s manufacturing data yesterday was the lowest manufacturing read for small and medium enterprises in over two years at 47 8 The interesting development was the fact Asia didn t react to this figure in any sharp or form In fact if anything Chinese indices rallied and the AUD also shifted higher The reaction in Europe and the US however was in stark contrast and sent China facing sectors down 1 or more
Iron ore recouped all the losses from Friday s close yesterday adding 4 12 However this was foreshadowed in the Dalian futures yesterday which were up over 3 8 yesterday This may stave off a stronger than expected sell off in the mining stocks but the upside may already be priced in
RBA rates day
Since 7 July
AUD USD has lost 2 cents and the TWI AUD is down 1 7 over the same period
The best performing currency over the same period is GBP up 3 The EUR is up 1 7
The spread in the 2 to 10 bind curve has lost 16 basis points to 84
The ASX is up 1 8
Iron ore is up over 14
What the market is pricing
The interbank market has a 11 probability of a cut today most likely hedging in case of a surprise
24 economists see no change
With the Statement of Monetary Policy SoMP on Friday the press statement may not cover all aspects of what we expect to see growth and inflation expectations for the remainder of the calendar year
However we do expect to see more recognition of the commodities slide the Chinese economic developments and risks in the global economy The previous two statements have been very domestically focused for obvious reasons but we need to gain some understanding of the Bank s position around the global conditions
The trade balance today will give a clearer understanding of the impact the commodities slide is having The iron ore copper and coal trade figures will be the key component of the export figure today and a key part to investment decisions in the materials sector We know record shipments have been leaving Port Hedland The return however is more important and the bulk figures will give a read to the state of play in the local economy
Ahead of the open
Ahead of the open we are calling the ASX down seven points to 5672 However with the retail sales figures as well as the trade balance due at 11 30am AEST then the RBA announcement at 2 30pm AEST there is plenty of data to push the currency and the index around today
Reporting season sees Suncorp ASX SUN releasing full year numbers today Figures to watch cash profit of 1 14 billion a total dividend of 51c a special dividend of 20c is expected on top of the 31c final dividend and net interest margins for the banking division of 1 85
Asian markets opening call
Price at 8 00am AEDT
Change from the Offical market close
Percentage Change
Australia 200 cash ASX 200
5 672 10
7
0 13
Japan 225 Nikkei
20 495 60
53
0 26
Hong Kong HS 50 cash Hang Seng
24 256 70
155
0 63
China H shares cash
10 978 70
31
0 28
Singapore Blue Chip cash MSCI Singapore
358 11
2
0 45
US and Europe Market Calls
Price at 8 00am AEDT
Change Since Australian Market Close
Percentage Change
WALL STREET cash Dow
17 587 80
100
0 57
US 500 cash S P
2 097 57
5
0 27
UK FTSE cash
6 667 40
7
0 11
German DAX cash
11 413 60
30
0 26
Futures Markets
Price at 8 00am AEDT
Change Since Australian Market Close
Percentage Change
Dow Jones Futures September
17 509 00
98 00
0 56
S P Futures September
2 090 88
5 25
0 25
ASX SPI Futures September
5 612 50
8 00
0 15
NKY 225 Futures September
20 507 50
42 50
0 21
Key inputs for the upcoming Australian trading session Change are from 16 00 AEDT
Price at 8 00am AEDT
Change Since Australian Market Close
Percentage Change
AUD USD
0 7287
0 0011
0 16
USD JPY
124 030
0 025
0 02
Rio Tinto LONDON RIO Plc London
24 53
0 34
1 37
BHP Billiton LONDON BLT Plc London
11 67
0 15
1 31
BHP Billiton Ltd NYSE BHP ADR US AUD
25 59
0 59
2 26
Gold spot
1 086 50
9 35
0 85
Brent Crude September
49 66
1 98
3 82
Aluminium London
1611
9 00
0 56
Copper London
5192
32 00
0 61
Nickel London
10760
305 00
2 76
Zinc London
1902
15 50
0 81
Iron Ore 62 Fe Qingdao
55 63
2 22
4 16 |
MS | Sterling Charge The Bulls Or Bears | As we expected in our July 12 Article This potentially form the next swing low on the daily if there are not enough sellers who are willing to continuously sell at current rate around 1 5450 has come to light thanks to the heavyweight UK GDP that was released at 0 7 as expected last week which help keep the buying momentum
Thursday the very much awaited BoE s MPC Meeting on interest rate will dictate whether the next psychological level 1 55 will be defended It will be an interesting meeting since this is the first time BoE s Monetary Policy Committee will release a rate statement together with inflation report Market expects two of the voting member to favor a hike while the remaining seven unchanged hence we potentially see heavy buying on dips prior to the meeting
Alternatively if all 9 votes remained unchanged we might see 1 5450 being retested as a potential bear flag is evident on the daily Furthermore both UK constructions and services PMI has missed estimates hence weakened market confidence and make a bear case more probable
On the dollar side Feds Atlanta s Lockhart fueled dollar bulls yesterday and pressed dollar Index to test last month high around 98 30s but ADP employment change that missed estimates and below 200K put a rein on the bulls Either way up or down this Friday s NFP could be a game changer for the dollar
On the institutional side Morgan Stanley NYSE MS was seen to quit its long and switched to the bear camp in the interim Halal Traders remains bullish with closed below 1 5450 stop targeting 1 61 in 3 months We are buying on dips with caution and long dollar yen as a hedge |
MS | China s Move May Have Global Impact | The longer you invest the more you realize that the extremely important role central bank policy plays in the global financial markets cannot be overstated China s recent currency devaluation puts additional pressure on other central bankers From Bloomberg
China s move has raised the risk of a currency war as export rivals seek a weaker exchange rate to stay competitive according to Stephen Roach a senior fellow at Yale University and former non executive chairman for Morgan Stanley NYSE MS in Asia It s hard to believe this will be a one off adjustment Roach said In a weak global economy it will take a lot more than a 1 9 percent devaluation to jump start sagging Chinese exports That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever widening global currency war The race to the bottom just became a good deal more treacherous
What Is The Race To The Bottom
All things being equal a weaker currency tends to help drive exports and a stronger currency tends to be a drag on exports Therefore the race to the bottom refers to the ongoing battle between countries to keep their currencies weak and their exports strong From The Financial Times
There is a race to the bottom in currency markets Just when many thought interest rates could go no lower they do just that Central banks are locked into a lower rates contest Switzerland has reached minus 0 75 per cent Denmark has had four rate cuts recently Sweden also has negative rates and the Bank of England s chief economist recently opined that the UK s 0 5 per cent base rate unchanged since March 2009 could be too high rather than too low
The Same Logic Applies To U S Exports
In currency markets everything is relative If country A devalues it impacts the value of other countries currencies Therefore if other countries are going down an easier money path and the Federal Reserve is heading down a tighter monetary path it puts upward pressure on the U S dollar assuming the market believes the Fed will raise rates From Bloomberg
As recently as April other central bankers were speaking confidently that China wouldn t devalue This puts pressure on them to follow suit China s currency move also could pose a challenge for the U S Federal Reserve The Fed is preparing to raise U S interest rates later this year One source of concern for the Fed this year has been a strong U S dollar which is squeezing exports and helping to hold U S inflation below the Fed s 2 target China s move puts more upward pressure on the dollar which could be exacerbated further when the Fed actually raises rates
Big Picture Calls For Flexibility
My Twitter NYSE TWTR comment below sums up the topic of this week s stock market video
Bullish Outcomes Harder To Imagine
It is easy to understand the bearish case earnings have been disappointing economic growth is tepid the Fed is close to raising interest rates momentum is weak market breadth is concerning etc It is more difficult to respect the bullish case
Long Term Breakout Still In Play
We have already noted that China s recent move in the currency markets may extend the period of easy money and push Fed action into 2016 Is there any other basis for keeping an open mind about better than expected outcomes Yes the chart of the New York Stock Exchange Composite Stock Index below shows resistance in 2007 red arrow and a bullish breakout in 2014 The bullish breakout was recently tested green arrow
A explains the importance of the bullish breakout above from two important perspectives 1 recency bias and 2 market fractals
Possible Support Close By
As shown in the chart below another bullish hurdle was crossed in 2013 it has since been retested several times green arrows In the last six weeks the NYSE Composite Stock Index has dropped back to the green trendline and held As long as the NYSE Composite stays above 10 600 it is prudent to remain open to better than expected outcomes If 10 600 does not hold then the longer stocks remain below that level the more concerning it becomes On August 11 2015 the market was trading at 10 783
Investment Implications Game Plans For All Outcomes
With a Fed speaker coming before Thursday s open the outcome for stocks this week remains in the TBD category Given the mixed nature of the intermediate term outlook it remains prudent to have how will I handle plans for both a big drop in stocks and a sharper than expected rally |
MS | That s Fracking Absurd The Fed Does Create Bubbles | In Crude s Carnage To Continue And Break The 2009 Low I briefly touched on how the shale boom in the U S is a bubble formed from the Federal Reserve s quasi monetary policy
Comments erupted that I should not blame the Fed but blame the shale companies for over indulging in the abundant free money
That is the equivalent of saying do not blame the drug pushers blame the drug addict for taking the drugs and overdosing Well if no one was there to push the drugs then less people would be overdosing Despite the copious data and research proving the Fed creates bubbles many people believe the Fed is in it for the good fight We are all witnessing unprecedented asset price growth whether it is stocks bonds housing prices and oil prices until recently Against a global slowdown which was suppose to be cured by the trillions poured into the markets by major central banks oil producers continue to produce black gold
Production has hit multi decade highs When the Fed introduced quantitative easing for the third time in 2012 because the first and second doses worked so well U S oil production increased over 70 percent
Tom Fowler Wall Street Journal wrote in January of 2013
U S oil production grew more in 2012 than in any year in the history of the domestic industry which began in 1859
The Federal Reserve s decision to hold interest rates at historical lows created the environment that supports borrowers The environment almost forces borrowing to fuel spending Those in tune with how monetary policy works will be able to connect the dots This past April Mark Lewis from Kepler Cheuvreux said during a CNBC interview
I think it s questionable whether we would ever have had the increase in oil production we ve had out of the shale plays over the last three or four years if we hadn t been in this environment
The easy money is a red flag and the potential for a industry wide credit crunch is huge
According to Bloomberg the drilling industry is devoting more revenue to interest payments then ever before Continental Resources Inc NYSE CLR put the Bakken Shale oilfields on the map They also spend almost as much paying interest as Exxon Mobil NYSE XOM yet Continental is 20 times smaller Gold producers bled money as gold jumped several hundred percent after the Federal Reserve began it s quantitative easing program Because prices kept rising producers kept spending
It is now crude s turn It is easy to be inefficient when prices are always rising but when they turn is when the House of Pain begins to accept reservations Perhaps the shale industry is a derivative of the U S government Bloomberg reported for those included within their index for every 1 earned shale companies spent 4 15 The Economist reported that so far this year oil production firms have raised 15 billion of equity and 20 billion of bonds helped by frothy markets a near zero Fed Funds rate
It continued
Listed E P firms owe 235 billion and during the first quarter debt rose reflecting continued heavy spending Assume a firm is in trouble if its net debt is more than eight times its annual cashflow from operations based on the annualised first quarter figures and excluding the benefit from derivatives
On the basis of this snapshot 29 of the 62 firms are distressed owing a total of 84 billion Listed shale firms with distressed balance sheets account for 1 1m barrels a day of oil production or 1 2 of global oil production
This year Standard Poor s has lowered the outlook or downgraded the credit of almost half of the 105 U S E P companies that it covered
When the Fed keeps rates lower for longer companies that should not have access to easy money do The Federal Reserve Chair Janet Yellen has even expressed concerns with asset prices as well as much needed improvement in economic data
However the Fed is caught in between deflation and a bubble The Fed wants to raise rates because they have effectively used up every tool at their disposal and have nothing left as the business cycle is beginning to end and the next recession is looming However they cannot raise rates At least they cannot meaningfully
Everything is somehow tied into the Fed s policies stocks bonds interest rates housing etc And to say the Fed does not create bubbles is myopic The motto this entire recovery has been don t fight the Fed An article from the Wall Street Journal featured something both interesting and scary
At Morgan Stanley NYSE MS Investment Management we have analyzed data going back two centuries and found that until the past decade no major central bank had ever before set short term interest rates at zero even in periods of deflation in regards to low inflation this ignores the fact that when money is nominally free strange things happen and today record low rates are fueling an unprecedented bout of inflation across asset prices Commodities are simply the first to fall as they did in 2008 Commodity prices do not drive economic growth Economic growth drives commodities prices The collapse in commodity prices and lack of inflation are tell tale signals that the global economy is at a standstill
Ruchir Sharmar s sum s it all up
Every major economic shock in recent decades has been preceded by an asset bubble housing and stocks both before Japan s meltdown in 1990 and before the Asian financial crisis in 1998 stocks before the U S dot com bust in 2000 housing again before the crisis in 2008 Strikingly even as asset prices were climbing before the busts of 2000 and 2008 the Fed kept monetary policy loose because consumer prices were rising only moderately That is the same excuse we hear now amid a price boom in stocks houses and bonds
Those that rush to defend the Fed believe the Fed is doing what it has to without realizing it s merely reacting to their screw ups in the first place
The Fed academic economists in general are devoid of reality Dr Paul Wilmott who warned of a derivative led meltdown prior to 2008 said that economists are unable to relate with how the world works and is why the Fed is always reactive to a crisis it starts
Among bubbles in the above mentioned above a bubble in corporate debt has formed As customers began to deliver following the Great Recession businesses quickly took the handout
Political economist John Stuart Mill said it best
Panics do not destroy capital they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works
It will only get worse |
MS | Intercept Pharmaceuticals Loses More Momentum As Morgan Stanley Weighs | Morgan Stanley NYSE MS initiated coverage on Intercept Pharmaceuticals Inc ICPT with an underweight rating The negativity weighed on the stock for a 7 9 loss that sent the stock below critical support at its 200 day moving average DMA
Intercept Pharmaceuticals ICPT breaks down below its 200DMA thanks to a poor rating from Morgan Stanley
Morgan was VERY emphatic about its out of consensus call on ICPT
This is one of our highest conviction out of consensus calls Near term our concerns focus on the FDA review of Intercept s lead candidate obeticholic acid OCA for approval in Primary Biliary Cirrhosis PBC which is likely to increase scrutiny of the adverse lipid changes seen in the clinical trials
In our survey 44 of clinicians would limit OCA prescriptions to NASH patients with no cardiovascular disease risk or not prescribe the drug at all The survey also found 50 of NASH patients have cardiovascular disease risk factors Compounding this we think the NASH opportunity will take many years to evolve
As the chart above shows the market reacted very negatively to ICPT details of its international Phase 3 trial of obeticholic acid OCA in patients with non cirrhotic nonalcoholic steatohepatitis NASH with liver fibrosis The trial will take 72 weeks to complete and involve 1 400 treated patients Apparently the scale and duration of the trial took the market by surprise The trial will likely compel ICPT to raise more money and lean on the patience of investors The stock has yet to recover from that knockdown and was in the middle of multiple tests of the 200DMA support ahead of Morgan s takedown
With a 5 2B market cap even after today s sell off traders and investors should expect wild swings in ICPT on any news positive or negative The stock is likely already priced for the best outcome or at least it was when it stalled out around 300 for four months this year so negative news will weigh more
From a technician s viewpoint ICPT continues to lose momentum slowly but surely Doubts about the pot of gold at the end of the extended rainbow only serve to accelerate the downward pressure Ever since ICPT gained notoriety with a massive one day gap up in January 2014 the stock has failed to generate further momentum Almost every major news release since then has caused the stock to sell off and or top out in the wake of the news Until now analyst consensus around positive narratives have helped to heal the stock between news releases These are signs of what technicians call distribution the market taking choice opportunities to unload shares when liquidity is high and or when news runs contrary to the most optimistic assumptions that seem baked into the stock
Be careful out there
Full disclosure long ICPT call options and short shares |
C | S P trades near flat as Citigroup results weigh on bank stocks | By April Joyner NEW YORK Reuters The benchmark S P 500 index ended little changed on Monday after oscillating between positive and negative territory throughout the session after Citigroup Inc N C kicked off the earnings season with a mixed quarterly report The bank reported a better than expected profit but also a decline in its net interest margin The fall in net interest margin triggered a fall in shares of other banks on concerns that it would presage lower profits across the industry as interest rates have dropped Though Citigroup shares erased nearly all their losses to end just 0 1 lower the S P 500 bank index slid 1 0 Shares of JPMorgan Chase Co N JPM Goldman Sachs Group Inc N GS and Wells Fargo Co N WFC all set to report results on Tuesday declined more than 1 As a result financial shares SPSY fell 0 5 to weigh most heavily on the S P 500 among its 11 major sectors Gains in technology SPLRCT and healthcare SPXHC shares offset the losses in financial shares however Those sectors helped the Nasdaq edge higher to notch its fourth consecutive record closing high Second quarter earnings start in earnest this week and analysts expect S P 500 companies to report a 0 3 fall in profit which would be the first quarterly drop in three years according to Refinitiv IBES data U S stocks will likely be muted until more results come in said Oliver Pursche chief market strategist at Bruderman Asset Management in New York The three main indexes ended last week at record closing highs as dovish comments from Federal Reserve Chairman Jerome Powell bolstered hopes the central bank would cut interest rates later this month It s definitely a wait and see environment Pursche said Citi was looked at as slightly disappointing Yet solid earnings could give U S stocks a further boost said Lamar Villere portfolio manager of the Villere Balanced Fund in New Orleans We think earnings are going to be generally positive this season he said We ve been on a tear this year but we still have some room to go The Dow Jones Industrial Average DJI rose 27 13 points or 0 1 to 27 359 16 the S P 500 SPX gained 0 53 point or 0 02 to 3 014 3 and the Nasdaq Composite IXIC added 14 04 points or 0 17 to 8 258 19 Gilead Sciences Inc O GILD shares rose 2 7 helping to boost the S P 500 healthcare index as the drugmaker said it would invest 5 1 billion in a major expansion of its partnership with biotech Galapagos NV AS GLPG Boeing Co N BA shares slipped 1 0 following a Wall Street Journal report on Sunday that its 737 MAX jet could stay grounded until early 2020 Symantec Corp O SYMC shares tumbled 10 7 the biggest percentage drop among S P 500 companies after a report that the cybersecurity company and Broadcom Inc O AVGO have ceased deal talks Broadcom shares rose 1 0 Advancing issues outnumbered declining ones on the New York Stock Exchange by a 1 04 to 1 ratio on the Nasdaq a 1 06 to 1 ratio favored decliners The S P 500 posted 66 new 52 week highs and two new lows the Nasdaq Composite recorded 77 new highs and 64 new lows
Volume on U S exchanges was 5 39 billion shares compared with the 6 69 billion share average for the full session over the last 20 trading days |
JPM | Citizen Financial CFG Q4 Earnings Beat Expenses Increase | Riding on higher revenues Citizens Financial Group NYSE C delivered a positive earnings surprise of 6 in fourth quarter 2017 Adjusted earnings per share of 71 cents topped the Zacks Consensus Estimate of 67 cents The figure excludes the impact of after tax benefit from the sale of a Troubled Debt Restructuring portfolio and tax reform Also the reported figure improved 29 year over year
Continued expansion of margins which aided higher revenues was recorded Higher deposits and lower provisions were the positives However increase in expenses was aheadwind
After considering the benefits from notable items Citizens Financial reported net income of 666 million
For full year 2017 the company reported net income of 1 64 billion or 3 25 per share compared with 1 03 billion or 1 97 per share in 2016
Increase in Revenues Partially Offset by Higher Expenses
Total revenues for the quarter were 1 48 million surpassing the Zacks Consensus Estimate of 1 45 million Also revenues were up 6 3 year over year
In 2017 the company reported total revenues of 5 71 billion which surpassed the consensus estimate of 5 98 billion Also it compares favorably with the year ago figure of 5 26 billion
Citizens Financial s net interest income increased 8 7 year over year to 1 08 billion The rise was primarily attributable to average loan growth and improved margin In addition net interest margin expanded 18 basis points bps year over year to 3 08 This was mainly due to higher interest earning asset yields given balance sheet optimization initiatives and higher interest rates partly mitigated by increase in funding costs
Also non interest income climbed 6 7 year over year to 404 million The rise was driven by trust and investment services capital markets and card fees partially offset by lower mortgage banking fees
Non interest expenses were up 5 7 year over year to 898 million The increase reflects rise in almost all components
Efficiency ratio declined to 61 in the fourth quarter from 62 in the prior year quarter Generally lower ratio is indicative of the bank s improved efficiency
As of Dec 31 2017 period end total loan and lease balancesremained flat sequentially at 111 3 billionwhile total deposits increased 1 6 from the prior quarter to 115 1 billion
Credit Quality Improves
As of Dec 31 2017 allowance for loan and lease losses remained flat at 1 24 billion sequentially Net charge offs for the quarter declined25 year over year to 78 million
Provision for credit losses fell 19 year over year to 83 million Additionally total non performing loans and leases were down 17 year over year to 871 million
Capital Position Weakens
Citizens Financial remained well capitalized in the quarter As of Dec 31 2017 Common Equity Tier 1 capital ratio was 11 1 compared with 11 2 at the end of the prior year quarter Further Tier 1 leverage ratio came in at 9 9 flat with Sep 30 2016 level Total Capital ratio was 13 8 compared with 14 in the prior year quarter
Capital Deployment Update
As part of its 2017 Capital Plan the company repurchased 8 8 million shares during the quarter Notably including common stock dividends the company returned 315 million to shareholders In 2017 the company repurchased 22 4 million shares and returned 1 14 billion to common shareholders
Also the board of directors announced a 22 hike in its common stock dividend to 22 cents per share The new dividend is payable on Feb 15 to shareholders on record as of Feb 1
Our Viewpoint
Results highlight a decent quarter for Citizen Financial We are optimistic as the company remains focused on several initiatives to grow revenues and improve efficiency With a diversified traditional banking platform Citizens Financial is well poised to benefit from the recovery of economies where it has footprint along with lower taxes
Citizens Financial Group Inc Price and EPS Surprise Citizen Financial carries a Zacks Rank 2 Buy You can see
Performance of Other Banks
Amid an expected trading weakness strong investment banking results and higher rates drove JPMorgan s NYSE JPM fourth quarter 2017 earnings of 1 76 per share which handily surpassed the Zacks Consensus Estimate of 1 69 Results exclude one time tax related charge of 2 4 billion or 69 cents per share
Wells Fargo s NYSE WFC fourth quarter 2017 adjusted earnings of 97 cents per share improved from the prior year quarter earnings of 96 cents Results included 3 35 billion after tax benefit related to the Tax Cuts Jobs Act 848 million pre tax gain from the sale of Wells Fargo Insurance Services and 3 25 billion pre tax expenses related to litigation accruals
Though fixed income trading income slumped as expected Citigroup s NYSE C fourth quarter 2017 adjusted earnings of 1 28 per share were driven by prudent expense management and strong consumer banking The figure easily outpaced the Zacks Consensus Estimate of 1 19 Results included non recurring non cash charge of 22 billion related to the tax reform
Will You Make a Fortune on the Shift to Electric Cars
Here s another stock idea to consider Much like petroleum 150 years ago lithium power may soon shake the world creating millionaires and reshaping geo politics Soon electric vehicles EVs may be cheaper than gas guzzlers Some are already reaching 265 miles on a single charge
With battery prices plummeting and charging stations set to multiply one company stands out as the 1 stock to buy according to Zacks research
It s not the one you think |
MS | Beginning of the end for Europe s loose money ECB to curb stimulus | By Balazs Koranyi and Francesco Canepa FRANKFURT Reuters The European Central Bank is all but certain to cut back on its bond buying stimulus on Thursday taking its biggest step yet in unwinding years of loose monetary policy It can do so because the euro zone s economic recovery is now well into its fifth year It also coincides with other major central banks in the United States and Britain for example preparing to raise interest rates But the ECB is still bothered about low inflation So it is expected to twin the cut with an extension of the program essentially a less but for longer move Policymakers from the 19 euro zone countries are seen cutting monthly bond purchases by half in a nod to the rapid growth a move towards dismantling the unprecedented measures that held the currency bloc together after back to back recessions Yet because inflation the ECB s single focus remains far below target any move is expected to come with a lengthy extension a signal that support even if diminished could continue for years to come Indeed sources close to the discussion said the debate was focusing on extending bond purchases by nine months with volumes cut perhaps by half from the current 60 billion euros while at the same time reaffirming a commitment to keep rates steady until well after the purchases end The biggest debate is likely to be whether the ECB should signal its intent to exit the scheme commonly known as quantitative easing or keep it open ended so its could consider yet another extension next year Designed nearly three years ago to stave off deflation the ECB s 2 3 trillion bond buying scheme has cut funding costs reviving borrowing and spending with the ultimate aim of generating inflation Hawks like Germany and the Netherlands now want a commitment to end these buys arguing that more purchases do next to nothing for inflation Doves on the bloc s periphery meanwhile warn that a rapid exit could tighten financial conditions undoing years of work We think the ECB will keep a bias to buy more and or for longer if needed to respond to any adverse development in the inflation outlook in particular any unwarranted tightening in monetary conditions stemming from the euro Luigi Speranza an economist at BNP Paribas PA BNPP said FOCUS SHIFT The broader outlook is as good as it has been since before the global financial crisis An unbroken growth streak has created 7 million jobs and the expansion is now self sustaining driven by domestic consumption Banks are better capitalized lending is growing and divergence between the core and the periphery the biggest failure of currency project appears to have halted Yet inflation will miss the ECB s target of almost 2 percent at least through the decade as labor market slack remains large keeping a lid on wages and supporting the case for continued support Still the ECB is slowly running out of bonds to buy in some countries suggesting that market constraints will play an increasingly large role in the policy debate as a major redesign of rules risked sending the wrong signal when the bank is working on an exit strategy While a nine month extension at a reduced pace is viable under current rules another move could require more creativity as the ECB would be running low on German bonds to buy a hurdle since purchase need to match the so called capital key each country s relative size in the euro zone Our work suggests that there s scope to buy beyond September 2018 Morgan Stanley NYSE MS said in a note This will probably require an even more pronounced deviation from the capital key and or relying to a greater extent on the corporate bond buying program To pave the way for the eventual end of bond buys the ECB is likely to increase its emphasis on conventional tools such as interest rates which are not seen rising until 2019 at the earliest It will also focus more on reinvestments from maturing debt and the support provided by its oversized balance sheet shifting communication away from flows It could also take some pressure off government bond purchases by increasing the share of corporate and covered bond buys in the scheme funneling a bigger share of its cash to the private sector rather than government bond markets
The ECB announces its policy decision at 1145 GMT followed by ECB President Mario Draghi s news conference at 1230 GMT |
MS | European shares steady at four week low as Nokia Barclays results weigh | By Danilo Masoni MILAN Reuters European shares steadied at 4 week lows on Thursday as investors digested a raft of mixed earnings updates and waited for the European Central Bank s decision on curbing its massive stimulus program Nokia HE NOKIA was the biggest faller down 13 5 percent after the Finnish firm reported weaker than expected quarterly earnings from its mainstay networks gear business saying the market had turned more challenging Difficult to say at this stage how much lower consensus could go given all the negative wording on 2018 Morgan Stanley NYSE MS analysts said in a note Banks SX7P were also under pressure down 0 3 percent with Barclays L BARC tumbling as much as 7 percent and set for its biggest one day fall since the Brexit vote in June 2016 The British bank posted worse than expected profit before tax for the third quarter of 1 1 billion pounds due to a weak trading performance by its investment bank Deutsche Bank DE DBKGn fell 2 2 percent It posted a 10 percent drop in revenue in the third quarter reflecting a weak market and the effects of a major restructuring Losses in Nokia and banks however were offset by gains among companies including MTU Aero Engines DE MTXGn Neste HE NESTE and STMicro PA STM following strong results The pan European STOXX 600 STOXX benchmark index was flat at 387 19 points by 0840 GMT while Britain s FTSE added 0 3 percent and euro zone blue chips STOXX50E declined 0 2 percent According to Thomson Reuters data third quarter earning growth expectations for the STOXX 600 have declined to 3 4 percent from around 10 percent expected in July A country breakdown shows that earnings of UK companies in the pan European index are expected to rise 11 2 percent in the third quarter compared to a fall of 11 8 percent seen for France and a 0 6 percent drop expected for Germany Italy s earnings growth is seen at 35 percent A key focus later in the day will be the ECB s policy decision The central bank is all but certain to cut back on its bond buying stimulus taking its biggest step yet in unwinding years of loose monetary policy |
JPM | JPMorgan to pay more than 135 million for improper handling of ADRs | By Pete Schroeder WASHINGTON Reuters JPMorgan Chase Co N JPM will pay over 135 million to settle charges it mishandled so called pre released American Depositary Receipts ADRS the Securities and Exchange Commission announced on Wednesday The regulator said the investment bank improperly provided ADRs which are U S securities that represent foreign shares of foreign companies to brokers even though the brokers and their clients lacked the corresponding foreign shares The bank did not admit or deny the SEC s findings but agreed to pay back ill gotten gains and additional penalties the SEC said JP Morgan declined to comment In August the bank said it was under investigation by the SEC for its handling of ADRs The bank is the eighth institution to face SEC charges on such a practice according to the regulator Its probe into ADR abuse is ongoing it said
The SEC said that improperly providing ADRs that are not supported by underlying foreign securities can create inappropriate short selling and dividend arbitrage |
JPM | Drop in U S consumer confidence stokes fears of economic slowdown | By Jason Lange WASHINGTON Reuters A measure of U S consumer confidence posted its sharpest decline in more than three years in December rattling investors already nervous about the prospect that a global economic slowdown was spilling over into the United States In a sign households were growing more worried about the economy the Conference Board on Thursday said its consumer confidence index fell this month by 8 3 points to a reading of 136 4 the largest one month drop since July 2015 Other data released by the Labor Department however showed the number of new applications for jobless benefits dipping in the latest week U S stocks which enjoyed a huge rally on Wednesday were trading sharply lower after Thursday s data with the S P 500 index SPX down about 1 8 percent early in the afternoon Prices of U S Treasuries were higher while the U S dollar DXY was weaker against a basket of currencies U S stock prices have plunged in December as investors worried the U S economy could face headwinds due to the global economic slowdown Adding to those concerns on Thursday was data showing earnings at China s industrial firms dropped in November for the first time in nearly three years nL3N1YP2G6 Whipsawing financial markets could lead to further drops in consumer confidence which could eventually make consumers more shy about spending said Stephen Stanley chief economist at Amherst Pierpont Securities It will definitely be worthwhile to keep a close eye on the various measures of consumer attitudes Stanley said The drop in consumer confidence in December was mostly fueled by falling measures of expectations with more people expecting jobs will become more scarce LABOR MARKET STRENGTH The labor market however appears to still be strong Initial claims for state unemployment benefits dropped 1 000 to a seasonally adjusted 216 000 for the week ended Dec 22 the Labor Department reported Initial claims have now fallen in three of the last four weeks and are just above the 49 year low of 202 000 reached in the week ended Sept 15 After several years of near steady falls claims trended higher between mid September and mid December prompting concern the U S economy was losing momentum It remains unclear how much of that increase was related to the difficulty government statisticians have in adjusting the claims data for seasonal swings Economists polled by Reuters had forecast claims increasing to 217 000 in the latest week The latest claims data signals improvement in the labor market relative to a few weeks ago but softening in conditions relative to a few months ago said Daniel Silver an economist at JPMorgan NYSE JPM Worries about the economy have also been stoked by signs of weakness in the housing market U S home prices rose just 0 3 percent in October leaving the year over year increase at 5 7 percent the smallest gain in more than two years data from the U S Federal Housing Finance Agency showed on Thursday A report on new home sales in November will not be released on Thursday as previously scheduled due to a partial shutdown of the federal government
The Federal Reserve raised interest rates last week for the fourth time this year but forecast fewer rate hikes next year and signaled its tightening cycle is nearing an end in the face of financial market volatility and slowing global growth |
JPM | Hong Kong Watchdog Fines JPMorgan Over Money Laundering Controls | Bloomberg Hong Kong Monetary Authority fined the local unit of JPMorgan Chase Co NYSE JPM HK 12 5 million 1 6 million for failing to meet anti money laundering and counter terrorist financing laws
JPMorgan Hong Kong violated six provisions of the rules between April 2012 and February 2014 the HKMA said in a statement Friday The bank didn t conduct relevant customer due diligence and handled wire transfers on the SWIFT messaging system without including the names of the originators
Hong Kong introduced anti money laundering laws in 2012 and State Bank of India was the first to be fined in 2015 followed by Coutts Co AG and Shanghai Commercial Bank Ltd In October 2017 the HKMA said it was investigating eight banks for alleged violations
JPMorgan s Hong Kong unit had self identified and reported certain deficiencies and had taken positive and extensive remediation work the HKMA said It added that the bank has no previous disciplinary record in relation to the anti money laundering ordinance |
JPM | HKMA fines JPMorgan Hong Kong branch over anti money laundering lapses | HONG KONG Reuters The Hong Kong Monetary Authority HKMA said on Friday that it had fined the Hong Kong branch of JPMorgan Chase Co N JPM HK 12 5 million 1 60 million and reprimanded it for breaching anti money laundering and counter terrorist financing rules The regulator said that the firm failed to establish and maintain effective procedures for identifying and handling wire transfers and for complying with rules on customer due diligence and continuous monitoring of business relationships The HKMA also ordered the Hong Kong unit of the U S bank to have an independent external adviser prepare a report into whether its remedial measures were sufficient to address the contraventions and other deficiencies it had identified The action follows an investigation by the HKMA which found that between April 2012 and February 2014 JPMorgan Hong Kong contravened six provisions of the anti money laundering and counter terrorist financing rules the regulator said We look forward to working with the independent adviser who will be appointed to review our current internal controls in Hong Kong to verify that the legacy issues have been addressed by the remedial actions already undertaken by JPMorgan the bank said in an emailed statement to Reuters The HKMA statement said that JPMorgan Hong Kong had self identified and reported certain deficiencies and had taken positive and extensive remediation work after it became aware of the lapses In particular it has enhanced its control functions to prevent similar contraventions from recurring it said The Asian financial hub s regulator has made combating money laundering and terrorist financing a priority and the HKMA has recently stepped up action against banks for breaches in its 2012 anti money laundering rules
In August the regulator fined unlisted Shanghai Commercial Bank HK 5 million 638 000 for similar breaches |
MS | China s Market Rout In Perspective | Millions of investors around the world are watching China s stock markets with bated breath given that the Shanghai and Shenzhen bourses have lost more than 3 trillion in market capitalization between them over the past three weeks a real money amount that s greater than Brazil s annual output or Spain s entire stock market according to Bloomberg
Bluntly speaking they re hoping the bubble won t pop
Well you and I both know that hope is not a viable investment strategy In reality a Chinese market correction is exactly what s needed and what every savvy investor knows has to happen even if they don t want to see it
Once you understand why you won t want to miss out on what happens next
Here s what most investors are missing and how to get a piece of the Red Dragon
Extraordinary Volatility and Uncommon Profit Potential
Legions of experts are falling all over themselves recently to pronounce China s imminent collapse Never mind that most of them have never set foot in country but it s hard not to pay attention
More than 40 of Chinese stocks were halted last Wednesday meaning trading was suspended for more than 1 200 of 2 808 listed issues according to Cninfo com
Comparisons between what s happening there now and what happened here in 1929 just before the Great Depression raged across the Internet even though Chinese markets seem to be gaining at least some semblance of stability
The Parallels with 1929 Are Uncanny The Daily Telegraph
Has China s Bubble Popped Forbes
Forget about Greece China Is Cause to Freak Out MarketWatch
Things are so bad that even Chinese regulators are reporting that this is the largest wave of trading halts in the history of that country s equity markets Given that China s bureaucrats are notorious for publishing only sunshine accounts of what s happening there that s a serious development
Yet it s not the end of the financial universe In fact China s markets have a long history of growth and contraction
From 1990 to 1992 they rose 629 and fell off 71 before a brilliant U turn and another run up of 97 into early 1993 Then they took off on a brilliant run that saw the Shanghai index peak eight years later in June 2001 after it d tacked on additional gains of 156 staggering growth considering the gains it was already building off of
But that was chump change compared to the 396 run from June 2005 to October 2007 Even the most recent run up is a story of triple digits
The next run up will be too
Keep the following in mind and chances are you ll do just fine
This Crash Won t Stop China from Growing at a Pace That Puts Western Economies to Shame
First China s stock markets are not the economy It s important to remember that one is a capital instrument while the other is a driver So don t immediately assume that the economy will fail just because the markets are getting trashed There have been plenty of cases throughout history where markets fell yet growth continued
Second China s middle class of 600 million people will no more return to the financial equivalent of a consumer Stone Age than we would even if the markets there come totally unglued as opposed to partly unglued like they are now The genie is out of the bottle and hundreds of millions of communist Chinese want the high quality of life that comes with capitalist success so they re going to do what every society in history has done before them buy everything
Third China s economy is still growing at 6 5 to 7 a year To that end Premier Li Keqiang noted Wednesday that the country is still on track when it comes to meeting its projections So what if the numbers are cooked Everybody knows that just like they know the recovery our politicians are peddling is a pile of you know what
It s the proportions that matter China s still way ahead of the West even after trillions of dollars have been spent here in a well intentioned but totally misguided stimulus That s why you want to stay focused on the upside and the profits that come with it Anything else is a waste of time and a risk you don t need
Fourth despite the perception that global markets are inextricably linked in reality China s markets are still largely isolated from global capital That means the real risk here is not China s markets cratering but China s leaders using the rout as an excuse to curtail economic reforms that have propelled that nation to where it stands today as the second largest economy on earth
Fifth a strong correction is great for Chinese equities because it bleeds out the excess that s crept in That s the way markets work in a normal growing country any normal growing country
If anything I d be more worried if we didn t see a correction like this every now and then Nothing goes up forever including China
Why then is all this happening
What the West Gets Wrong About What Really Drives China s Economy
Most Western analysts have it wrong They re blaming everything from corruption to insider trading ghost cities and more because it s convenient and sounds logical
Chinese investors who are a naturally suspicious lot anyway are also pointing fingers I m hearing reports that Morgan Stanley NYSE MS and other evil Western influences are supposedly at work there profiteering in Chinese markets much the way billionaire trader George Soros did when he broke the Bank of England in 1992 and made billions doing so
In reality something far simpler is at work
Every Chinese company has to submit to a semi annual listing that forces it to disclose what it owns and how it came to possess what it has That means just like their Western money manager counterparts they engage in the process of window dressing intended to please regulators and investors alike
Chinese money managers are simply dumping holdings related to the excess margin they ve got on the books And that s what initially took the legs out from under the latest Chinese rally
Now emotion has taken over We ve talked many times about so there shouldn t be any surprise here
Hundreds of millions of inexperienced Chinese investors many of whom have never owned securities before and who have never experienced anything other than rising markets are panicking Effectively they ve all hit the sell button at once
That compounds the problem because routs like China s are not really the result of too much selling like most people think Prices really drop hard and fast when there s not enough buying
The other thing to consider is Chinese markets got this way by taking a similar path to our own Chinese regulators there did in 2010 what regulators here did years before loosening requirements that used to prevent buying stocks on borrowed money
At the same time Chinese investors did what their American and European counterparts did leading into 2007 2008 and found very creative ways around the system to engage in speculative trading
For example many Chinese banks offer something called a Wealth Management Product or WMP for short They re marketed to individuals and supposed to be invested in very conservative risk averse securities like a money market fund would be here
However WMPs are also invested in very risky instruments made up of bundled assets that you guessed it are sold in tranches carrying varied risk levels That means Chinese investors who think they are buying low risk products are really being sold highly leveraged instruments that resemble the collateralized debt obligations or CDO s that sent our markets off a cliff in 2007
Compounding the problem is the fact that WMP investing falls outside the margin requirements applied by the Chinese regulators That means millions of investors were able to pile in well above the legally permissible 2 1 leverage using virtually the identical structure and off balance sheet loophole our big banks did to trade trillions in derivatives yet maintain the perception of having everything under control
I wish I knew how to say d j vu in Chinese no doubt it applies
Anyway the bottom line here is that the Chinese market correction is as long overdue as it is logical especially when you understand the reasons behind it
It will continue until excess leverage is either priced out of the system or stocks are sold down to where value takes over and margin does not apply
You ll know you ve reached that point when you see magazine articles talking about the end of Chinese stock investing or hear stories about Chinese investors who are swearing off the evils of Western style trading forever
And you ll know it s time to put money to work there again because I ll tell you |
MS | Shale Industry May Need A Complete Rethink To Survive | Shale reservoirs have become an important part of North American oil and gas supply and their development has begun a new era of oil and gas production worldwide Advances in well drilling and completion technologies supported the rapid development of shale resources which contributed to the almost overwhelming success of U S shale in recent years
Globally Argentina s Neuqu n Basin and China s Sichuan Basin are the two front runners to emulate the successes of the United States with Poland Algeria Australia Colombia Russia and Mexico still in earlier phases of exploration and evaluation while Saudi Arabia also has plans for domestic shale investment and development Many more countries have yet to fully review their potential shale strategy and policies
The Current State Of Affairs
Shale developments have added yet another layer of complexity to the global oil markets with record oil production during 2015 forcing WTI prices to collapse by about 60 percent from 107 per barrel in June 2014 to 43 per barrel in March 2015 The industry is looking increasingly vulnerable as a result with companies becoming more distressed as hedges expire As a result they are forced to significantly reduce operating costs and capital investment stop drilling defer completions of already drilled wells and await better market conditions Although drillers have been able to achieve significant price reductions from oilfield service providers it has not been enough and drilling activity has dropped substantially
Global oil consumption according to BP s has been rising annually at a compound growth rate of 1 percent during the last 10 years despite several years of slow global economic growth a trend that is forecasted to continue The industry has to produce more to meet this increasing demand but it also needs to produce more to overcome rapid well production decline rates present in the shale industry which are estimated around 5 percent to 6 percent annually more wells and actions are needed to keep up with demand Read more
Price however has been very volatile experiencing wide swings in reaction to a barrage of seemingly conflicting data gluts shortages geopolitical events and fluctuations in supply and demand market conditions that all producers try to incorporate into their long term strategies
Despite this low oil price situation the U S shale boom will likely not end anytime soon as the industry is adapting to find a new equilibrium Companies are looking for more financial protection as their hedging positions end potentially reconsidering their asset portfolio with some considering extensive consolidation mergers and acquisitions
This situation also creates opportunities for further improvement exploring new areas and projects that due to their nature do not depend on current oil prices
The Future State Of Affairs
If the shale industry is to survive it must become even more competitive through better efficiency and massively reduced costs
Achieving this will largely depend upon the attitudes and abilities of all parties to produce incremental productivity gains sector wide Partnership among all sectors of the industry is essential Operators must be prepared to maintain and increase the use of data driven advanced analytical studies and methodologies Service providers need to understand and rapidly adapt to new market conditions while continuing to invest in developing new and more efficient technologies and processes for current and future production and recovery These things will help extend the economic life of reserves and guarantee survival in the long term
Implementing the right approaches to lower the cost per barrel produced shale production will become increasingly competitive with other competing alternatives
George Soros Morgan Stanley NYSE MS and other top money managers are making big bets on the coming Argentinian shale boom With similar geology to the US and much larger deposits oil majors and investors are all looking to Argentina
Shale economics require a much larger upfront investment for a return that involves time initial production rate at which production declines over time and finally lifetime accumulated production per well Their capital intensive nature and the investment needed to maintain production is an important burden Read more
Oil producers have realized a key difference between unconventional and conventional production the rate of decline for a conventional reservoir is between 2 to 5 percent per year helping to support periods of price volatility Shale does not have that stability suffering from steep decline rates within the first few months
Developing shale resources is an evolving scenario with distinct life cycle phases prospect evaluation exploration delineation pilot development and production and finally decline and abandonment Unlike conventional resources for shale the transition between each phase is far less discrete presenting a higher subsurface risk that requires an extended pilot drilling program to effectively support a de risking strategy
Shale reservoirs are more complex requiring more accurate resource analysis and interpretation combined with sophisticated operations Characterizing a shale reservoir estimating reserves and predicting production has been a challenge The complexity or scarcity of data combined with limited analytical insights and the time it takes to produce may limit the understanding and possibilities of performing an accurate resource analysis and interpretation Initial production rate of decline accumulated production understanding the estimated ultimate recovery EUR and economic life of the resource must remain as a key objective for producers hoping to drill as effectively and efficiently as possible
The industry is constantly striving to improve the acquisition of data An important challenge found in exploiting shale resources is finding and mapping the most productive zone the sweet spots within a large resource and mapping their mineralogy petrophysical and geomechanical characteristics Since the characteristics of these reservoirs vary over short distances it is critical to understand which information is needed to be able to perform a detailed analysis to select the well location perform a well engineering and design a successful completion program
Read more
The capital intensity capital investment needed for unit of production required to grow and sustain production for shale resources is very high compared with producing other onshore assets On average since the 80s capital intensity has more than tripled from less than 10 boe to 30 to 40 boe
Shale will continue to be an important resource and is here to stay While currently limited in its capacity to influence the markets as a result of overreliance on junk bonds to fund operations the next shale cycle will surely depend on what can be done in partnership to increase productivity continue to reshape operations
Continued success depends on constant gains in productivity and innovation in an investment climate that is markedly different from years past
Disclosure Originally published at |
MS | No Relief For EUR Path Clear For Selloff | The performance of the EUR over the past week is another good example of how the removal of a major risk factor has not benefitted the relevant currencies says Morgan Stanley NYSE MS
Grexit has been avoided for the time being at least with the EU and Greece agreeing to a plan to start negotiations for a third bailout But the EUR was afforded only the briefest of rebounds Our assumption that there could be a limited period where the inverse relationship between the EUR and equities markets broke down allowing the EUR to rebound along with higher equity markets has not materialized Instead the inverse correlation has remained in place with the EUR coming back under pressure as equities rallied MS clarifies
With uncertainty regarding Greece diminished we believe that investors will feel more comfortable reinitiating EUR shorts as evidenced by the latest break in EUR USD below the 100 DMA MS argues
Draghi has reiterated that the ECB stands ready to act if needed which could be enough to weigh on EUR particularly if it supports equities given the inverse relationship between European stocks and EUR We see this stance as reinforcing the inverse relationship between the EUR and risk assets A rebound in equity markets will keep the EUR under pressure we believe and hence we maintain our overall bearish EUR view MS projects |
MS | RBC Strategist Says Bull Market To Continue For Years | SuperBull Club
RBC Capital Markets chief U S market strategist Jonathan Golub joined the SuperBull Club today Golub says in S P 500 Bull Market
The U S economy s slow recovery may extend another six years potentially doubling the duration of the bull market in equities according to RBC Capital Markets chief U S market strategist Jonathan Golub
Bull markets tend to continue until an economic cycle runs out usually after about seven years Golub said in an interview with Bob Moon on Bloomberg Radio Given the pace of the current economic expansion he said the cycle could last 12 years or longer providing investors with reason to continue buying stocks
We re going to see a lot more upside to the stock market Golub said This is going to go on for long enough that many Americans are going to be able to participate in the run higher
The Standard Poor s 500 Index has more than tripled during the current bull run which at 76 months is the second longest in the past 60 years
He forecasts the benchmark index will end the year at 2 325 the fourth most bullish forecast in a Bloomberg survey of 21 strategists
Upping Morgan Stanley s 5 Year Prediction
Gulub upped the forecast of Adam Parker Morgan Stanley NYSE MS s chief U S equity strategist
On Monday Parker stated his belief
I commented The bulls are attempting to outdo each other as often happens at or near market tops But who s to say this is a top Why stop with a 5 year rally Why not 10 or 20 years Why not forever There s plenty of room for more optimism and this bull market won t end until we see every ounce of it
It seems fitting that it took only one day for RBC to up the forecast of Morgan Stanley Surely someone can outdo six more years
SuperBulls it s time to strut your stuff
Sobering Alternative View from GMO
In contrast to the SuperBulls I present the 7 Year Real Return Forecast of
The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy These forecasts are forward looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance Forward looking statements speak only as of the date they are made and GMO assumes no duty to and does not undertake to update forward looking statements Forward looking statements are subject to numerous assumptions risks and uncertainties which change over time Actual results may differ materially from those anticipated in forward looking statements U S inflation is assumed to mean revert to long term inflation of 2 2 over 15 years
Rain on the SuperBull Party
Note that GMO expects negative real returns in US stocks on average for a full seven years
I hate to ruin a SuperBull party with forecasts that have been historically among the best in the world but so be it |
C | Australian regulator threatens action on banks over past consumer insurance sales | By Paulina Duran
SYDNEY Reuters Australia s corporate regulator threatened on Thursday to prosecute some of the country s largest banks over their sales earlier this decade of consumer insurance products that it said had harmed customers
The Australian Securities and Investments Commission ASIC said in a report that consumer credit insurance products which cover credit card debts or loans when a person loses their job falls sick or gets injured had consistently failed consumers
It said a seven year review of the sales practices and products of Commonwealth Bank of Australia AX CBA Citigroup N C Australia and New Zealand Banking Group AX ANZ and eight other lenders had showed they caused consumers harm and were extremely poor value for money
We are deeply troubled by the findings in our report and the stories they tell of unfair practices occurring within Australia s largest and most well known financial institutions ASIC Commissioner Sean Hughes said in a statement
An inevitable consequence of these widespread failings and mis selling practices will involve ASIC taking significant enforcement action against some of the entities named in our report Hughes added
The regulator s report and threat of action follows over A 100 million 69 58 million in remediation made to over 300 000 consumers and revelations at a powerful inquiry that banks were aware of the problems for years but continued selling the products
Representatives from CBA ANZ and Citi did not immediately respond to emails seeking comment
ASIC said its investigation for the period 2011 to 2018 found insurance sold to cover credit card debts had paid only 11 cents for every dollar that consumers spent in premiums
It said the report found that the products were sold to people that were ineligible to claim their policy for example due to unemployment It also found that telephone sales staff used high pressure selling tactics and that consumers were given poor personal advice to buy the policies
ASIC threatened to intervene to get the products banned and said it would investigate suspected misconduct of several entities involved in the CCI product market and would take public action against the culprits |
C | What Powell s Rate Cut Signal Means for China s Central Bank | Bloomberg The unmistakable signal from U S Federal Reserve Chairman Jerome Powell that a rate cut is imminent hands China more room to maneuver in easing its own monetary policy The question is on which tool to use
With a slowing economy resurgent deflationary fears and the downdraft from trade tensions the case for easier policy from the People s Bank of China is building A more stable yuan also gives Governor Yi Gang and other policy makers more leeway
If the Fed does cut rates in July it would open room for a domestic interest rate cut here Ming Ming head of fixed income research at Citic Securities Co in Beijing wrote in a note China s central bank will very likely follow suit
It s not as simple as matching one rate cut in Washington with another in Beijing though China s complex array of monetary tools is in flux and the instrument that s nominally still the benchmark is falling into disuse Policy makers have given few clues about their intentions and a meeting of the Politburo later this month may be the first opportunity to clarify the government s intentions
Here s an analysis of different monetary easing venues
Reverse Repurchase Rate
The interest rate the PBOC charges on 7 day reverse repo operations had been its most favored tool to mirror the Fed s rate decisions in recent years The central bank raised the cost of the short term loans by 5 basis points in March 2018 after a Fed hike but has kept the price unchanged since then The rate is seen falling in the second half of the year according to a Bloomberg survey of economists last month
Whether such a market centric cut is effective to lift sentiment and revive production is questionable though The PBOC faces renewed difficulties around the transmission of cheap funding to the real economy Further lowering market borrowing costs aren t likely to be very helpful without other measures to unclog the monetary plumbing
Rate Reform
A recent State Council meeting presided over by Premier Li Keqiang pledged to lower real borrowing costs indicating the easing will come from better transmission of monetary policy and lower loan application fees rather than a direct interest rates reduction
A long postponed reform of interest rates to make borrowing costs more market oriented is gathering pace While details aren t yet available yet about the revamp policy makers are working to make interbank borrowing and bond yields more in line with the price charged for the PBOC s short term and mid term loans
The reform can allow a better transmission of monetary policy with the ultimate purpose of lowering corporate borrowing cost and reviving credit demand according to a report by Judy Zhang an analyst at Citigroup NYSE C Global Markets Ltd
Reserve Ratios
Lowering the amount of money banks have to deposit at the central bank can provide cheap long term funding to lenders and encourage credit growth The ratio of required reserves is seen declining further this year according to a Bloomberg survey of economists Premier Li Keqiang also said this month that the government will offer cuts or targeted cuts for the reserve requirement ratios aimed at specific sectors
Medium Term Lending Facility
The borrowing cost the PBOC charges for more expensive longer maturity loans usually moves along with the rate for 7 day reverse repo operations otherwise it d give way to interest rate arbitrage The overall amount borrowed via this facility has been declining and with more reserve ratio cuts on the way that can help banks pay off those loans and replace them with cheaper options
Benchmark Rate
China s one year lending rate a tool that governs borrowing costs across the whole economy is arguably the least likely to be used Amid concerns about the fragile yuan rising household debt as well as the risk of property and stock market bubbles policy makers have shied away from adjusting this rate since 2015 The PBOC is on track to revamp the rates system this year which may cause the so called benchmark to be scrapped altogether
To contact Bloomberg News staff for this story Yinan Zhao in Beijing at yzhao300 bloomberg net
To contact the editors responsible for this story Jeffrey Black at jblack25 bloomberg net James Mayger
2019 Bloomberg L P |
C | China s Tepid Growth Prompts Calls for Imminent Rate Revamp | Bloomberg China s slowing economy and clogged policy transmission are adding to the urgency of a reform of the country s interest rates in order to lower borrowing costs
With the economy about to post the slowest pace in years economists from Bank of China Ltd to Citigroup Inc NYSE C and Everbright Securities expect the central bank to accelerate a long mulled revamp to simplify the complex array of interest rates
The need to reduce real borrowing costs for companies and lift domestic demand is pressing but the room for more easing is limited said Fan Ruoying an analyst at the Bank of China s Institute of International Finance in Beijing
The dilemma gives policy makers little choice but to push for the so called market oriented reform of interest rates she said hoping to unclog the transmission and make stimulus measures pass through better
A State Council meeting on June 26 discussed how to deepen the interest rate reform as part of the efforts to lower borrowing costs this year indicating the plan is in the last stages
Policy makers are struggling to generate demand for bank loans as growth slows partly because of the shortcomings of the current two track interest rate system Amid concerns that broad easing via cuts to the benchmark one year lending rate could weaken the yuan and inflate asset bubbles officials have kept that rate on hold and instead funneled cheaper liquidity to banks without that cash being able to flow readily to the real economy
Policy makers have long telegraphed their intention to reform the system and the situation became more pressing this month when the overnight repo rate fell to the lowest level since at least 2003 breaking the floor of the central bank s interest rates corridor
The issue now is that monetary policy isn t being transmitted effectively and the interest rates for loans remain high said Wang Yifeng analyst at Everbright Securities Co in Beijing
For now details about the reform are scarce but clues are available in officials comments PBOC Governor Yi Gang indicated in May that the PBOC will likely scrap the benchmark lending rate while keeping the deposit rate in the early stages of the reform
Policy makers will likely make the Loan Prime Rate the price banks offer to their best clients more closely linked to the rate of PBOC s mid term loans or the Medium term Lending Facility according to Everbright s Wang |
JPM | Swamp Lives On Crooked Banks And Captured Regulators | If officials at the Securities and Exchange Commission SEC are bothered by allegations of incompetence and capture by Wall Street s bankers it is hard to tell The Commission recently hired Brett Redfearn to serve as Director of the Division of Trading and Markets Redfearn left a 13 year stint at JPMorgan Chase Co NYSE JPM to assume a key role in regulating banks investors and traders
The SEC and other regulators such as the CFTC and the Federal Reserve aren t worried about appearances Redfearn looks like yet another fox being sent to guard the henhouse His appointment undermines confidence even if he intends to serve with integrity
Instilling confidence ought to be a priority at the SEC The past decade has been a disaster when it comes to the agency s credibility
To date not one high level bank executive has been prosecuted for misdeeds related to the 2008 Financial Crisis This despite plenty of the shareholders SEC officials are supposed to be protecting having lost their shirts SEC bureaucrats either bungled or turned a blind eye to Bernie Madoff s Ponzi scheme
To cap it off a high profile story which broke in 2010 uncovered agency staff and contractors spending an inordinate amount of time watching pornography on the job
Office of Inspector General investigators looked at a 5 year period and found 33 people had violated policy by watching X rated content on federal computers During these years Madoff s con was reaching its peak and Wall Street banks were busily selling mortgage backed securities stuffed with fraudulent loans to pension funds You would think leadership there might be embarrassed
Which brings us back to the appointment of Mr Redfearn It demonstrates the SEC remains tone deaf at a minimum and completely captured at worst
JP Morgan Redfearn s former employer served as Madoff s banker and has been involved in a number of questionable affairs Laurence Kotlikoff from Forbes suggested the bank may be America s Most Corrupt
Until the SEC and its people prove they actually care about keeping the investment banks and financial insiders honest they should probably do their hiring somewhere besides Wall Street Otherwise people will understandingly assume federal regulators are there to protect powerful firms under their jurisdiction and not Americans at large
About the Author Clint Siegner is a Director at the national precious metals company named 2015 Dealer of the Year in the United States by an independent global ratings group A graduate of Linfield College in Oregon Siegner puts his experience in business management along with his passion for personal liberty limited government and honest money into the development of Money Metals brand and reach This includes writing extensively on the bullion markets and their intersection with policy and world affairs |
JPM | 4 European Mutual Funds To Ride On Stellar Economic Growth | The European economy is growing by leaps and bounds Such a claim is evident from the fact that some of the major indicators of economic growth in the region have recently breached records Manufacturing and service activity have blossomed due to strong economic expansion in Germany Ireland and France Further economic confidence is at its best levels in about 17 years The European Central Bank also has a positive outlook on economic growth in the region for 2018 Thus this is the best time to invest in a portfolio of mutual funds from the region Eurozone Economic Activity at its Fastest Pace Since 2011The Eurozone achieved its fastest pace of economic activity since 2011 on the back of burgeoning domestic demand and a surge in service sector Moreover factories gained from stupendous growth in export order which remains near its record levels Further economists have also confirmed that Eurozone economic growth in 2017 has been the best in a decade The European Central Bank meanwhile raised its growth and inflation forecasts for the Eurozone Officials from the central bank also predicted that inflation would linger below the target of 2 till 2020 Risks surrounding the euro area growth outlook remain broadly balanced ECB President Mario Draghi had commented Further he stated that the economy has been gaining from an increase in business investments improved profits and rising demand The GDP forecasts 2018 and 2019 were raised to 2 3 and 1 9 respectively Economic Confidence in Europe at 18 Year HighEconomic confidence in the Eurozone hit its highest level since 2000 Measured by the European Commission the reading came in at 116 surpassing the expectation of 114 8 Analysts have stated that such a record surge followed an increase in the outlook for services and industry in the region Additionally unemployment continues to recede For the record the unemployment rate is at its lowest ever level in Germany and at a nine year low in Spain Further industrial confidence rose to 9 1 the highest level in more than three decades Also the Business Climate Indicator which measures the conditions that manufacturers face also hit a high Such an overall rise in confidence was achieved on the back of strong demand from customers and manufacturers responding efficiently to rising demand at the same time Manufacturing and Service Activities Burgeoning in EuropeManufacturing and service activities in Europe hit fresh records following an increase in the composite Purchasing Managers Index Such an index for manufacturing and services increased to 58 1 in December from 57 5 in the prior month This marks its highest level since February 2011 A reading above 50 indicates economic expansion Strong economic growth from Germany France and Ireland supported such gains with manufacturing activity in Germany rising to a seven year high 4 Best Performing European Mutual FundsGiven such positives we have highlighted four European mutual funds carrying a Zacks Mutual Fund Rank 1 Strong Buy or 2 Buy Moreover these funds have encouraging three and one year returns Additionally the minimum initial investment is within 5000 We expect these funds to outperform their peers in the future Remember the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers Unlike most of the fund rating systems the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund The question here is why should investors consider mutual funds Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds read more The Eurozone is growing at an encouraging pace under favorable economic conditions This is why we recommend the following mutual funds from Europe T Rowe Price European Stock seeks appreciation of capital in the long run by investing in common stocks This fund invests the lion s share of its assets in companies from Europe Normally the fund is invested in companies of any capitalization from a minimum of five countries This Europe Equity product has a history of positive total returns for over 10 years Specifically the fund has returned 4 2 over the three year and 7 6 over the five year benchmarks To see how this fund performed compared to its category and other 1 and 2 Ranked Mutual Funds The T Rowe Price European Stock as of the last filing allocates their fund in top two major groups namely Foreign Stock and Intermediate Bond The fund has a Zacks Rank 1 PRESX has an annual expense ratio of 0 96 which is below the category average of 1 39 The fund s respective returns are 26 7 and 6 for the one and three year annualized periods Invesco European Growth A seeks appreciation of capital in the long run and invests the majority of its assets in securities of European countries The fund invests in companies of all capitalizations however a large portion of its assets are invested in small and mid cap companies This Europe Equity product has a history of positive total returns for over 10 years Specifically the fund has returned 8 9 over the three year and 8 4 over the five year benchmarks To see how this fund performed compared to its category and other 1 and 2 Ranked Mutual Funds The Invesco European Growth A as of the last filing allocates their fund in top two major groups namely Foreign Stock and Precious Metal The fund has a Zacks Rank 2 AEDAX has an annual expense ratio of 1 34 which is below the category average of 1 39 The fund s respective returns are 28 6 and 10 6 for the one and three year annualized periods Fidelity Europe seeks appreciation of capital in the long run It invests primarily in common stocks of different European companies This Europe Equity product has a history of positive total returns for over 10 years Specifically the fund has returned 8 3 over the three year and 8 3 over the five year benchmarks To see how this fund performed compared to its category and other 1 and 2 Ranked Mutual Funds The Fidelity Europe as of the last filing allocates their fund in top two major groups namely Foreign Stock and Intermediate Bond The fund has a Zacks Rank 2 FIEUX has an annual expense ratio of 0 96 which is below the category average of 1 39 The fund s respective returns are 31 3 and 10 2 for the one and three year annualized periods JPMorgan NYSE JPM Intrepid European A seeks appreciation of capital in the long run It invests the lion s share of its assets in equity securities of companies that have the majority of its operations in Western Europe This Europe Equity product has a history of positive total returns for over 10 years Specifically the fund has returned 6 over the three year and 8 5 over the five year benchmarks To see how this fund performed compared to its category and other 1 and 2 Ranked Mutual Funds The JPMorgan Intrepid European A as of the last filing allocates their fund in top two major groups namely Foreign Stock and Large Growth The fund has a Zacks Rank 2 VEUAX has an annual expense ratio of 1 36 which is below the category average of 1 39 The fund s respective returns are 23 2 and 8 2 for the one and three year annualized periods Want key mutual fund info delivered straight to your inbox Zacks free Fund Newsletter will brief you on top news and analysis as well as top performing mutual funds each week |
MS | Trump says popular retirement program will be unscathed in tax plan | By Susan Heavey and Ginger Gibson WASHINGTON Reuters President Donald Trump on Monday dismissed the possibility of curbing a popular tax deferred U S retirement savings program to help pay for his sweeping tax cuts and voiced doubts about adding another top bracket targeting the wealthiest Americans The potential scaling back of 401 k plans which for four decades have helped millions of workers save for retirement is one of several important details yet to be ironed out in a major tax overhaul that Trump promised as a candidate and wants his fellow Republicans who control Congress to pass by year s end The White House and its congressional allies have floated the idea of paring certain tax deductions to make up for revenue that would be lost because of their proposed tax cuts the centerpiece of which is a sharp reduction in the corporate income tax rate The Wall Street Journal and the New York Times reported on Friday that Republicans were considering an annual cap of about 2 400 on pre tax contributions to 401 k plans roughly 13 percent of what workers under age 50 currently can contribute on a tax deferred basis That would slash the amount of money that workers can save for retirement in 401 k plans which typically are invested in a portfolio of mutual funds There will be NO change to your 401 k Trump wrote on Twitter This has always been a great and popular middle class tax break that works and it stays Tampering with 401 k plans which have largely replaced defined benefit pensions in the United States would risk alienating tens of millions of workers as well as Wall Street which generates fees from managing the plans Many companies match a percentage of their employees 401 k contributions It also would provide ammunition to Democrats who have painted Trump s plan with its 6 trillion in tax cuts as a gift to the rich and corporate America that would balloon the federal deficit Senator Ron Wyden the top Democrat on the tax code writing Senate Finance Committee criticized Republicans for not making decisions on issues related to middle class taxpayers while having already decided to cut taxes for corporations I am really struck with how the Republicans are handling this question of retirement accounts which are a real lifeline for working families and as of this moment it is still not clear whether they are going to include a really bad idea that would make it harder for working families to prepare for retirement Wyden said More than 94 million Americans are covered by defined contribution plans like a 401 k according to a recent study by asset manager Vanguard Total assets in such plans exceed 7 trillion NEW TAX BRACKET Securing congressional passage of his tax plan is critically important to Trump who has yet to get major legislation through Congress since taking office in January including a healthcare overhaul he promised as a candidate last year The White House argues that tax cuts are needed to boost economic growth and create jobs but has shown sensitivity in recent weeks to arguments that it is endangering America s long term fiscal health Based on the outline of the plan that was unveiled last month independent experts have concluded that corporations and the highest earners would benefit the most and many upper middle income people would face higher taxes There are signs Republicans may add a fourth income tax bracket for high earners to the tax blueprint which envisions reducing the number of brackets to three from the current seven The idea of an additional top tax bracket was floated by Republican House of Representatives Speaker Paul Ryan In an interview broadcast on Fox Business Network on Monday Trump appeared to pour cold water on the idea It may not happen Trump said The only reason I would have it is if for any reason I feel the middle class is not being properly taken care of There is also pressure from investors to pass the tax overhaul The expectation of deep tax cuts has helped fuel a stock market rally during Trump s first year as president with the broad S P 500 index up more than 13 percent The index hit record highs every day last week although it retreated on Monday The question becomes what happens if tax reform doesn t happen in 2017 does the market sell off into the year end said Andrew Slimmon portfolio manager at Morgan Stanley NYSE MS Investment Management in Chicago Trump is expected to participate on Tuesday in Senate Republicans weekly policy lunch He said he would press the lawmakers to act on taxes and that he thinks there are enough votes to pass the plan While its broad parameters have been made public the detailed legislation has not yet been unveiled
Democrats have urged Trump to include them in the development of the legislation The Republican blueprint was devised without Democratic input The last major tax restructuring Republican former President Ronald Reagan s 1986 overhaul received significant input and support from Democrats |
MS | Morgan Stanley plays catch up on Boyd Gaming | Morgan Stanley NYSE MS issues positive comments on Boyd Gaming NYSE BYD and lifts its price target on the casino stock to 28 The investment firm points to Boyd s increased focus on expense control as it looks to boost margins The new PT from Morgan Stanley is still slightly below last night s closing price Source Reuters Morning Call Shares of Boyd Gaming are up 41 YTD vs the 25 performance of the VanEck Vectors Gaming ETF Now read |
MS | China s New Silk Road Runs Mostly Through Junk Rated Territory | Bloomberg Chinese President Xi Jinping s new Silk Road to Europe traverses territory where most bond investors fear to tread
Of the 68 nations China lists as partners in its Belt and Road Initiative the sovereign debt of 27 are rated as junk or below investment grade by the top three international rating firms Another 14 including Afghanistan Iran and Syria are either not rated or have withdrawn their requests for ratings
President Xi s vision first proposed in 2013 and this week elevated to an official policy enshrined in the Communist Party s constitution involves spending as much as 1 2 trillion on railways roads ports and power grids over the next decade according to Morgan Stanley NYSE MS The intent is to open new business opportunities for domestic companies and extend China s reach even though the route cuts through multiple conflict zones and some of the world s most corrupt countries
Outlining a road map for his nation through 2050 at this month s 19th Party Congress Xi said the Belt and Road Initiative is pivotal We hope to make new ground in opening China further through links running eastward and westward across land and over sea Xi said
The National Development Reform Commission China s top planning body and the Ministry of Commerce didn t respond to written requests for comment on the financial risks in the Belt and Road Initiative
While the idea of China reaching out to the world via trade along its Silk Road is centuries old this time around the economic heft behind the move stands a better chance of transforming the fortunes of the mostly developing countries along its route According to McKinsey Co the undertaking has the potential to boost a region that will contribute 80 percent of global economic growth and vault 3 billion more people into the middle class by 2050
Geopolitical Project
It is best to see the initiative as a vast geopolitical project aimed at cementing China s political and trade role over that of the U S not an economic one in the sense that each project will generate a return said Michael Every head of financial markets research at Rabobank Group in Hong Kong
China has so far spent or committed more than 500 billion on the plan according to data compiled by Bloomberg from official statements and company releases The figure is considerably higher if lending by China s big commercial banks is included though comprehensive data on their activities isn t readily available
The financing comes in various forms including from dedicated institutions like the 40 billion Silk Road Fund and others that aren t directly linked such as state owned banks and the 100 billion Asian Infrastructure Investment Bank Even part of China s 2 trillion yuan 300 billion National Pension Fund will be invested
Though their official documents don t give specifics Bank of China said it has lent more than 80 billion to 470 projects along the Belt and Road route as of the end of June and other big state owned lenders including Industrial Commercial Bank of China and China Construction Bank have also lent billions
Where the government goes companies follow In the first nine months of 2017 domestic companies have invested 9 6 billion in 57 countries along the route
Most Chinese spending under One Belt One Road will see no financial payoff said Derek Scissors resident scholar at the conservative leaning American Enterprise Institute in Washington The firms and banks involved are quite aware of the high likelihood of financial losses in many OBOR countries even if they will not admit to it publicly
Read More China Codifies Crackdown on Irrational Outbound Investment
Sovereign debt ratings matter less than the financial stability of each specific project said Cao Yuanzheng chairman of BOCI Research Limited in Beijing Even in the poorest countries projects like public water system electricity grid and railway are all commercially viable as long as there is income generated from user fees he said
While the risks may be high the investments could have long term benefits for China if they succeed and in the meantime could help utilize China s excess industrial capacity and expand the use of the yuan abroad according to Michael Taylor Moody s chief credit officer for APAC
These countries have high growth and growth potential and often what is holding them back from achieving that potential is a lack of infrastructure Taylor said If the investments succeed in raising productivity then the countries would generate the kind of economic growth that would be necessary to repay any debts he said |
JPM | JPMorgan Twitter sell off overdone | JPMorgan NYSE JPM says the Twitter NYSE TWTR sell off after Citron s comments is overdone Analyst Douglas Anmuth TWTR s platform health efforts will ultimately have a positive impact on engagement and advertising over time The firm reiterates its Overweight rating and 45 price target and calls Twitter one of its top picks for 2019 Source Bloomberg First Word Twitter shares are down 10 8 to 29 36 Previously Twitter 8 on Citron mention 20 target Dec 20 Now read |
JPM | Mexico Raises Key Rate as Inflation Stays Above Target | Bloomberg Mexico s central bank raised interest rates to the highest level since 2008 as a peso rout and high energy prices kept inflation above the official target range
Led by Governor Alejandro Diaz de Leon Banxico increased borrowing costs 25 basis points to 8 25 percent in line with 17 of 25 economists in a Bloomberg survey The rest saw rates on hold The central bank warned in its statement Thursday that the inflation outlook has deteriorated that there are risks of second round effects on prices and that measures should be taken to buoy investor confidence
The central bank has extended a hiking spree to just over three years now after the nation s currency plunged following President Andres Manuel Lopez Obrador s decision to cancel a 13 billion airport already under construction Inflation has also persisted above the 4 percent upper limit of the target range as farm and energy prices kept rising But it s the policies of Mexico s new leftist president such as a recent push to raise the minimum wage that have both economists and policy makers watching closely for impacts on monetary policy
It was a hawkish hike said Alonso Cervera chief Latin America economist for Credit Suisse SIX CSGN There s nothing in the statement that suggests the bank is done hiking
In addition to raising alarms about inflation and a deterioration in the economic growth outlook Banxico warned against policies by the new administration that could increase market uncertainty It s particularly important that in addition to continuing a prudent and firm monetary policy that the adoption of measures that foment an environment of confidence and certainty for investment be promoted along with higher productivity and that sustainable public finances are consolidated reinforcing transparency and accountability
Autonomy Pledge
Mexico s new president has pledged to keep Banxico autonomous but is also planning a steep rise in spending on social programs in his 2019 budget The budget is largely seen as prudent by the market although Moody s Investors Service said it lacks a cushion in case of economic shocks Other skeptics wonder if the president would cut spending in case of a revenue shortfall
Can AMLO Afford to Pay for What He Promised Mexico QuickTake
Banxico is forecasting higher inflation than before Lopez Obrador won the July 1 election and last month warned of new risks such as the possibility public policy decisions would generate a loss of confidence in Mexico as a destination for investment In addition inflation slowed far less than expected in November
Thursday s decision was the last one before board member Manuel Ramos Francia generally regarded as hawkish retires and Harvard trained Gerardo Esquivel who has floated the idea of a dual mandate for the central bank likely secures Senate confirmation
Also expected to join the board that s been short one member since Roberto Del Cueto recently resigned is Jonathan Heath who s spent more than three decades as an independent economic researcher and at firms including HSBC Lopez Obrador tapped both Heath and Esquivel Esquivel had been then president elect s deputy finance minister designee working on the spending portion of the budget before Del Cueto s resignation prompted Lopez Obrador to shift his assignment to Banxico
There s a regime shift Gabriel Lozano chief economist at JPMorgan Chase Co NYSE JPM said before the rate decision You can t send a more relaxed monetary policy signal when you don t know what will happen in a few months
Adds economist comment starting in fourth paragraph |
JPM | Powell Discovers Juggling Three Fed Communication Tools Is Hard | Bloomberg Jerome Powell the Federal Reserve chairman who vowed to speak in plain English is finding out just how vexing central bank talk can be
The problem that flared up for Powell this week is partly inherited The Fed now speaks with an unwieldy information apparatus that s challenged by turning points in policy and the economy This week s confusion about the Fed s intentions were they hawkish or dovish resulted from a mixed message and investors didn t like it
It is difficult to communicate uncertainty and a baseline outlook said Adam Posen a former member of the Bank of England s Monetary Policy Committee who now leads the Peterson Institute for International Economics in Washington Saying you re uncertain or that there are risks around that path can spook investors Posen said It is never going to be perfect
Stocks tumbled into the worst decline for any Federal Open Market Committee announcement day since 2011 and the selloff deepened Thursday Here s a look at the Fed s communication tools and how they worked or didn t this week
The Statement
The oldest form of FOMC decision day communication the group statement reflects the consensus view of what are currently 10 members who vote on monetary policy A broader group of 17 FOMC participants discussed the outlook in the Fed s boardroom this week Achieving unanimity among diverse views requires brokering an agreement on words The flimsier the deal the fuzzier the words become
On Wednesday the statement s first paragraph on the economic assessment changed very little from early November It didn t address the softening in inflation data and said price expectations were little changed rather than acknowledging a decline
After telegraphing in November s meeting minutes that a reference to further gradual increases might come out of the statement it showed up again with the addition of the ambiguous word some as in some further gradual increases in the policy rate That language gave no sense of an a approach more responsive to incoming information
Some does not describe one and it probably doesn t describe two said Andrew Levin a former FOMC adviser on communication who is now a professor at Dartmouth College The statement could have been made more flexible and data dependent
The statement also didn t capture the sense of risk management Powell in particular had been trying to communicate While there was a new nod to global economic and financial developments the message was this had little bearing on the plan to keep hiking for now
The Dot Plot
This is the policy forecast of all 17 participants Financial markets focus on the median estimates not the range The median is simply a handy number to latch on to That reinforces a baseline outlook but doesn t get across a message about the diversity of views
Even so the dot plot may be in line with the language allowing for some further gradual increases Some could cover the median projection for halting after three hikes in the next two years or it could allow for the majority of participants who foresee either two or three hikes in 2019 But futures market expectations were for one hike next year at most
The Press Conference
This offered a contrast between Powell s opening statement which attempted to communicate the committee s views and the questions from reporters where he veered closer to his own
In the opening remarks Powell embraced the median path citing two more increases forecast for 2019 and noted that committee s projections still called for relatively strong growth and low unemployment There was a nod to tighter financial conditions and weaker growth abroad adding headwinds for 2019 though not enough for the committee to deviate from continued hikes However he also cautioned that the median estimate on the rate path certainly does not represent a committee plan
He hedged those views even more in the Q A while coming off as more dovish
For example Powell said there s a fairly high degree of uncertainty about both the path and the ultimate destination of any further increases
Similarly Powell said inflation has continued to surprise to the downside That message could have been easily inserted in the economic update paragraph of the FOMC statement It communicates risk about a central variable that is one leg of the Fed s mandate
The statement seemed oblivious to reality Levin said
In response to another question Powell elaborated on data dependence Once the policy rate is in the range of estimates of a rate that neither speeds up or slows the economy I think it s appropriate to be putting aside individual estimates of that and be looking at what the incoming data are telling you about the outlook
That expresses a lot more flexibility than either the statement or the forecasts communicated
The apparatus they have built up constrains the chair in terms of how much they can feel the market said Michael Feroli chief U S economist at JPMorgan Chase Co NYSE JPM in New York They could have been softer and gentler |
JPM | Saudi Banks Reach 4 5 Billion Settlement Over Islamic Taxes | Bloomberg Major banks in Saudi Arabia reached settlements worth a combined 16 7 billion riyals 4 5 billion with the kingdom s tax authority over a religious levy the lenders had been kicking against
The deals come as the world s largest crude exporter predicts a budget shortfall of 131 billion riyals or 4 2 percent of gross domestic product for 2019 The deficit was worsened as the nation boosted spending and benefits for government employees worth billions of dollars The tax authority had extended the 2 5 percent religious levy known as the Zakat by including items that were previously exempt while eliminating some deductions
Al Rajhi Bank was hit with the highest payment agreeing to pay 5 41 billion riyals the lender said in a statement posted on the Saudi Stock Exchange Alinma Bank didn t pay any settlement and said in a separate announcement that there will be a credit balance with the authority
Change Is Coming
The back taxes are being paid amid changes to the country s banking landscape which saw Saudi British Bank and Alawwal Bank strike a deal to combine in May in a 5 billion stock deal That was followed a month later with JPMorgan Chase Co NYSE JPM agreeing to sell its 7 5 percent stake in Saudi Investment Bank back to the Riyadh based lender
The merger of HSBC Holdings Plc LON HSBA affiliate Saudi British Bank with Alawwal which was backed by Royal Bank of Scotland Group LON RBS Plc has been seen as a precursor to more deals in the country s financial services industry where about 25 local and international lenders compete in a market of about 33 million people The merger is due to be completed in the first half of 2019
The Tadawul Banks Index has climbed 27 percent this year even in the face of 37 percent drop in oil prices since October as the economy struggles to recover from 2017 s contraction
Saudi Arabia released its 2019 numbers this week with revenue estimated at 975 billion riyals versus 895 billion riyals in 2018 Taxes are projected to contribute 183 billion riyals to the budget in 2019 up from 166 billion riyals in 2018
Here is a list of the settlements from statements released by the lenders
Al Rajhi Bank settlement to decrease shareholders equity by 5 41 billion riyals
Saudi British Bank to pay 1 63 billion riyals reducing shareholders equity by 1 13 billion riyals
Samba Financial Group settlement of 2 32 billion riyals to cut shareholders equity by 1 82 billion riyals
Banque Saudi Fransi s 1 51 billion riyals deal to drop shareholders equity by equivalent amount
Alawwal to pay 374 5 million riyals with shareholders equity taking a knock of 100 4 million riyals
Riyad Bank settlement of 2 97 billion riyals to decrease shareholders equity by 787 3 million riyals
National Commercial Bank to pay 182 7 million riyals with a 105 million riyals reduction to shareholders equity
Bank AlJazira to pay 551 5 million riyals slicing its shareholders equity by the same amount
Arab National Bank agrees to 649 million riyals payment yet it will increase its shareholders equity by 1 11 billion riyals
Saudi Investment Bank to pay 775 4 million riyals cutting shareholders equity by the equivalent amount
Bank Albilad to pay 392 8 million riyals with the equivalent decline in shareholders equity
Updates with share price oil in sixth paragraph |
MS | Talk On The Street Is That We Are Overdue For A Correction And Bear Mark | As forex traders we must always be attuned to the stock market for signals regarding future directions and trends Currencies and stocks tend to be heavily correlated but these correlations can vary almost reverse in mid stream Consequently predictions related to stocks in general must also be factored into our overall appraisal of market conditions At present more and more articles are beginning to forecast some form of imminent doom on the horizon This past week 1 800 hedge fund managers from around the industry met in Las Vegas to share their insights but more on that later
The major concern is that our current Bull market just keeps on truckin Analysts have pulled out charts that suggest a correction is due any day now and then opposing analysts pull out charts that say otherwise that the current Bull has more months or even years to roam While the current Bull market has been lengthy it only ranks Number 3 on the hit parade since 1949 as depicted in the following diagram
For those of you that are scrambling for a detailed definition of what constitutes a Bull market in the first place the definition is purely a technical computation Our current Bull uptrend will conclude when the Dow or the S P 500 or some other major index drops from a high point by 20 or more Yes we have seen corrections from time to time since 2009 but those only amounted to 10 or less the common correction expected for profit takers to exit and for new investors to board the train
To put it in a single word analysts today are jittery Everyone is looking for the secret signal that will tell when Big Money decides that the dance is over and no one wants to be holding long positions in anything when the music stops Central bankers have been warning that a liquidity crunch is coming a time when sellers abound and buyers cannot be found When will the music end One insightful quote about market endings comes from the strategists over at Morgan Stanley Business cycles don t die of old age Business cycles tend to die of overheating excessive hubris and debt This bit of wisdom was created a year ago when the market went into one of its 10 tailspins
This time around event risk fundamentals and monetary policy are the keys to the future Yes stock P E ratios are at all time highs which some could interpret as a form of hubris but considering how deep the economy plunged and how many new ideas were deployed to jumpstart the engines it is only natural to assume that things are really different this time around Central bankers have admittedly tied our infrastructure into a new form of Gordian Knot that will require a major force to break it down Coincidentally geo politics are also in disarray from Greece to the Ukraine to the Middle East
SALT Conference in Las Vegas brought better minds to bear on the issues
Hedge fund managers make their living based on their ability to out guess the market While there may be a few that are successful on an occasional basis at this peculiar art form the words of Yogi Berra ring true and jokingly allude to what comes with the territory Yogi quipped It s tough to make predictions especially about the future Although there are stars among these managers they are often wrong as many times as they are right The averages speak for themselves as depicted in the graphic below
Even when you go back to when the Great Recession ended in 2009 and factor in the amazing recovery in stock valuations from that point forward these gurus on average cannot beat the indices If you were to add back their hefty management fees then you might achieve positive values in the last column but the message is clear Are you really buying better performance when high percentage incentive fees rob you of any benefits Someone is getting rich on their predictions but they are doing it by using other people s money in the process It is no wonder that the average investor believes that the entire investing system is rigged against them
At the end of the day these hedge fund gurus however are one of the best sources for what may unfold in the days to come Yes they have had a rocky road primarily because trying to guess which way a group a central bankers will go beforehand is fraught with peril The SALT Conference the largest confab of hedge fund types for the year was the latest attempt to glean valuable insights from the best in the business The guest list and speakers agenda were impressive including the best names in the industry various politicians both foreign and domestic and entertainers to keep it all sane and interesting
What are a few of the major predictions made public at the SALT Conference
In the betting capital of the world it was not surprising that quite a few of the speakers were willing to place a bet or two on future outcomes Here are a few tidbits
Oil prices drew a lot of attention According to T Boone Pickens Oil is going to rise to 70 a barrel by the end of the year Demand is very very good this year for oil but supply is going to get tight due to the number of oil rigs that have shuttered production In a related prediction Jim Chanos famous for his short selling bravado opined Shares of oil company Royal Dutch Shell LONDON RDSa are headed down Big oil is pumping negative cash flow Shell s play for BG s liquid natural gas resources won t fix the problem because there s more supply than demand
Leon Cooperman head of Omega Advisors and hedge fund of the same name shared the opinion of many other managers about what will happen to stocks when the Fed finally moves on raising interest rates when he said Stocks are going to rise between 7 to 9 this year There s consternation about interest rates but I personally don t quite get it Stocks can easily withstand a slight up tick in historically low rates
Trying to predict when the Fed will actually move on rates also drew attention David McCormick president of hedge fund Bridgewater Associates pushed his rate increase expectations out into 2016 Lee Partridge chief investment officer of asset management firm Salient Partners admitted that I was in the camp that they would go in the first half of this year but that has been pushed way back back into the first half of 2016
Economist Peter Schiff offered a different twist on possible monetary policy outcomes This is the biggest bubble the Fed has ever grown and the Fed won t raise rates because they can t They won t hike in June or in September and we will get another stimulus package Schiff s main complaint was that the Fed has missed every prediction for GDP growth in the past eight years except for once when it hit the bottom of its range prediction in 2010 His fear is that the Fed is not really forecasting at all but cheerleading With these assumptions baked into portfolio dispositions investors risk being caught wrong footed when the ugly truth is finally accepted
Eventually the general discussion came around to politics Greg Fleming president of Morgan Stanley NYSE MS s brokerage operations summed up in a lightening round of questioning that Hillary Clinton will face off against Jeb Bush in the coming presidential election When T Boone Pickens was on the stage the interviewer asked for his opinion on the prospects for these two candidates His pick was for Bush to triumph over Clinton in 2016 but there was no general consensus from other delegates As is the norm when politics are raised the discussions suddenly became heated and diverse
Concluding Remarks
If you allow these experts to guide your thinking then their predictions would seem to support the continuation of the present Bull market for yet another undisclosed period of time Monetary policy changes will likely be frozen or more dependent on the political influences of election year politics For those that point to the high P E values as a clue that the Bull must run aground Janet Yellen almost provided support in a recent speech She agreed that stock valuations are quite high but she quickly added that she does not see a bubble forming
When and if the bubble does burst forex traders need to be prepared for major trend shifts If it is the rush for the exits that many are predicting then by all means be ready to jump on the flight of capital to safe havens Go long on safety but then be prepared for the wave to reverse when the dust settles It is during these chaotic periods that a great deal of money can be made by following the prevailing trends in the market
Yogi Berra was not one to make predictions about the future and you do not have to have the best crystal ball on the planet to guide your effort to fame and fortune either Patience and discipline are the keys along with having a strategy that is well thought out beforehand The uncertainty in this market is increasing day by day an indicator that a major shift is coming Even if the status quo remains the market is jittery It will jerk back and forth according to wave function analysis and in line with accepted Fibonacci ratios Chart your course Be patient and get ready for a wild ride Stay tuned
Risk Statement Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors The possibility exists that you could lose more than your initial deposit The high degree of leverage can work against you as well as for you
by Tom Cleveland |
MS | IForex Daily May 15 2014 | The dollar continues to drop reaching four month lows most major currencies on Thursday despite the fact that jobless claims figures from the U S fell unexpectedly last week The U S Department of Labor that individuals filing for initial jobless benefits in the week ending May 9 fell by 1 000 to 264 000 when analysts expected a rise by 10 000 to 275 000 However this failed to spark market confidence regarding the health of the economy and combined with the weak report on U S producer prices the greenback is kept under pressure The euro was supported as German and U S bond yields rose to the highest level in five months as the major selloff in global bond markets continues German bond yields act as benchmarks for European financial markets and an increase in yields provides strong support to the euro Today the U S will be closing the week with reports on industrial production manufacturing activity in the New York region and consumer sentiment
EUR USD
The euro rose to three month highs against the dollar on Thursday as investors took into consideration the positive growth data from Europe earlier in the week in comparison with weak U S growth and retail sales data from the U S Despite the slightly better than expected unemployment claims from the U S the pair reached 1 144 the highest level since early February Elsewhere Greek officials said Thursday it could request an emergency meeting of euro zone finance ministers at the end of the month at which Greece hopes to reach a deal on reform measures needed to unlock a critical stimulus package For today investors will be focusing on industrial production data from the U S on manufacturing activity in the New York region and on consumer sentiment
Pivot
1 134
Support
1 134
1 126
1 1195
Resistance
1 145
1 153
1 1645
Scenario 1 Long positions above 1 134 with targets 1 145 1 153 in extension Scenario 2 Below 1 134 look for further downside with 1 126 1 1195 as targets Comment The pair has rebounded above its support and remains on the upside
XAU USD
Some profit taking took place as Gold posted a slight drop on Friday after the metal reached three month highs on weak inflation data from the U S With the continued focus on the timing of a rate rate hike by the Federal Reserve gold prices were supported by recent data indicating a slowdown in U S growth including a decrease in exports a drop import prices and in retail sales and a contraction in GDP Gold traders will be watching closely on manufacturing and industrial production data from the U S but the main focus will go to the consumer confidence index
Pivot
1212
Support
1212
1200
1191
Resistance
1237
1245
1255
Scenario 1 Long positions above 1212 with targets 1237 1245 in extension Scenario 2 Below 1212 look for further downside with 1200 1191 as targets Comment Even though a continuation of the consolidation cannot be ruled out its extent should be limited
OIL USD
Oil prices pulled back on Thursday as the global supply problem weighed on prices while future contracts head towards expiration Some bullish signals were given by the market recently including recent drops in U S inventories rising demand in Asia and Middle East due to unrest however the market remains oversupplied as OPEC is still increasing production and claiming its share of the market Prices briefly received support from news that Iran s Revolutionary Guard fired warning shots over Singapore flagged oil tanker in international waters in the Gulf in order to settle legal disputes A U S summit with Persian Gulf nations at Camp David will be in focus for further indications on the global oil production outlook
Pivot
60 85
Support
59 3
58 75
58 15
Resistance
60 85
61 85
62 6
Scenario 1 Short positions below 60 85 with targets 59 3 58 75 in extension Scenario 2 Above 60 85 look for further upside with 61 85 62 6 as targets Comment As long as 60 85 is resistance likely decline to 59 3
S P 500
U S stocks posted a sharp rise on Thursday as the dollar weakens with the S P 500 reaching a new all time high The Technology Health Care and Consumer Goods sectors posted big gains as multinationals will now benefit from a weaker dollar and this led the S P 500 more than 1 higher slightly above its previous record of reached in late April The top performer on the S P 500 was Computer Sciences which gained 4 29 Today the U S will be closing the week with reports on industrial production manufacturing activity in the New York region and consumer sentiment
Pivot
2039
Support
2039
1972
1904
Resistance
2125
2180
2215
Scenario 1 Long positions above 2039 with targets 2125 2180 in extension Scenario 2 Below 2039 look for further downside with 1972 1904 as targets Comment The RSI is around its neutrality area at 50 The index is shaping an ascending triangle pattern
FACEBOOK
Facebook NASDAQ FB stock posted a sharp rise on Thursday as analysts point out to its strong mobile business The social networking giant received very good comments from analysts regarding its strong mobile business J P Morgan said Facebook remained its top pick as recent data from comScore found that users had strong engagement with the site especially on mobile Users accessing the site via their smartphones reached 24 in April up two percentage points March and according to J P Morgan this increase is meaningfully higher and stood far above other social networking services
Morgan Stanley NYSE MS according to a report stated Facebook is the main driver of the continued movement of ad dollars to mobile
Pivot
86 2
Support
77
73 3
70 35
Resistance
86 2
89 5
94 5
Scenario 1 Short positions below 86 2 with targets 77 73 3 in extension Scenario 2 Above 86 2 look for further upside with 89 5 94 5 as targets Comment As long as the resistance at 86 2 is not surpassed the risk of the break below 77 remains high |
MS | Daily Shot Markets Slide On Greece | The weekend ended without a deal between Greece and its creditors The goal supposedly was to reach an agreement before markets open on Monday but not surprisingly they didn t get there
Sticking points seem to be items such as the value added tax VAT increases on electricity for example and cuts in pension pay
The creditors are targeting sufficient fiscal improvements to achieve some hope of eventual debt repayment even a partial one But the Greek side would not budge Greek leadership may be hoping for a massive selloff on Monday that would force the creditor institutions to rethink their position The markets are definitely reacting negatively with DAX futures down 0 6 The euro is down 0 4 And the VIX futures are up about 1 4 below While the markets have certainly turned cautious on the news this is by no means the kind of reaction we would have seen in 2011 12 There is significant deal fatigue here and most market participants still believe that some sort of an emergency compromise will be reached at the last moment We have two weeks left until the full June IMF payment is due Also it s worth noting that unlike in 2011 12 the run on banks and the rising Target2 imbalances seems to be limited to Greece alone Some interpret this as evidence that contagion from Greece to the rest of the Eurozone periphery can be contained That should give the Eurogroup negotiators quite a bit of confidence to stay the course In other Eurozone developments we had quite a sharp increase in fixed income volatility in recent weeks particularly for Bunds
This chart shows how implied volatility reacted to the announcement and the start of QE the first and the second flash crash the rapid selloff in German government bonds And here is how the Bund term structure moved during these events Switching to India investors have been getting out of the nation s stock markets This is partly due to the possibility of a weak monsoon this year and the lack of confidence in the strength of economic growth to support current valuations In the United States the expectations for the Fed s June dot plot shows significant reduction in the rate trajectory The green squares below are Morgan Stanley NYSE MS Morgan Stanley s forecast That means the central bank is looking at the Fed Funds rate below 2 5 in 2017 a rather mild pace of increases One metric that the Fed will be considering is inflation expectations It s important to point out that the gap between how consumers perceive future inflation and where the markets are pricing it remains quite wide Speaking of inflation is Canadian CPI increase which had consistently surprised to the upside still transient It will be interesting to see how the BoC reacts to a slowing economy and rising inflation Now let s revisit the massive dislocation now taking place in the US coal industry Coal futures gave up 2 3 on Friday alone The biggest driver of this price correction is the rising US natural gas production chart below There is also the tougher EPA regulation In particular the Mercury and Air Toxics Standards MATS is making it too expensive to refurbish some coal based power plats And then of course there is China where coal imports have collapsed To be sure coal will remain a major source of electricity production in the United States Even if the EIA projection chart below is too optimistic on the future of coal usage the survivors of the coal crunch stand to profit handsomely
Moreover some diversified energy firms are still making money on coal even at these prices
Nevertheless the industry is undergoing a historic shakeup which a number of industry participants particularly those who are highly leveraged may not survive Disclosure Originally published at Saxo Bank TradingFloor com |
MS | Tactically Trading The ECB | Bearish Greek news being bullish for the EUR puts the ECB in an awkward position says Morgan Stanley NYSE MS
A Greek exit requires loose and not tighter monetary conditions The higher EUR tightens conditions In addition the higher EUR has blocked the currency transmission channel the ECB was hoping to help bring EMU s economy back to life Should EMU s economic performance surprise negatively from here the ECB is unlikely to tolerate a higher EUR for very long
This is why a EUR breakout to the upside does not see us participating beyond very near term tactical bullish positions
Morgan believes that a Greek deal would see the euro move lower
So far the Greek government has not shown any significant change to its stance but all parties are still working towards resolution Equity market investors may respond positively to an agreement suggesting looser monetary and fiscal conditions Cross border flows would increase pushing the EUR away from its autopilot which has seen commercial EUR buying needs calling the EUR shots A Greek agreement would see the EUR falling again in our opinion
MS runs a tactical long EUR USD from 1 1325 targeting 1 1525 with a stop at 1 1225 |
MS | China s 370 Billion Margin Call | tumbled on Friday to near bear territory further deepening the sell off that started two weeks ago The Shanghai Composite down 7 4 on the day has fallen 19 from its June 12 high wiping out 1 25 trillion in market cap The smaller Shenzhen and Chinext indices also has plunged 20 from its recent peak
Margin Lending Blessed by Beijing Even with recent declines the Shanghai Composite Index has surged nearly 30 year to date Authorities have allowed local investors to borrow tons of money from brokers to speculate in the stock market i e Margin Lending while the central bank PBOC has cut interest rates three times since November Beijing also introduced new easing measures in the past couple of days a proposal to remove a cap on banks loan to deposit ratio and injecting cash into the financial system Margin Debt Soared to 370 Billion Investors have poured into the market opening 33 million new brokerage accounts between the start of January and the end of May According to Macquarie Research Chinese margin debt has risen 123 year to date reaching a new record of 2 3 trillion yuan 370 billion on June 18 Margin debt in China has reached 8 5 of the value of China s tradable shares For comparison purpose that ratio was only at 4 6 during the peak of the Taiwan Stock Market Bubble back in the late 80 s
Margin Debt Could Get Even Worse It gets even better from there Macquarie believed that the brokers should have enough capital available to push margin lending higher from here as reported by
We think that the peak should be somewhere around RMB 3 trillion and at the current run rate ie 16 month on month the market would reach that level around September
Analysts Cutting Price Target Investors have started to pull out of the market on concerns the government could be looking to rein in this debt fueled rally Meanwhile more and more analysts are also sounding louder alarms about the over heated China market For example citing concerns like valuations and high margin debt Morgan Stanley NYSE MS just lowered its price target for the Shanghai benchmark in a report Thursday
Plunge Leaves State Media Speechless The usually quick tongued state media like Xinhua are staying unusually quiet not giving out clues about the government s view on the current market sell off quoted Zhang Xiaojun a spokesman for the China Securities Regulatory Commission on Friday
It s a self adjustment of the market after earlier excessive gains Recently there has been more volatility in the stock market That requires all sides to treat it rationally
Chinese authorities are already trying to discourage speculative bets on the highest flying stocks So these rare public comments from the Regulatory Commission seem to suggest authorities are comfortable with the declines 370 Billion in Margin Trades A stock market collapse would be devastating to China with slowing economy and during from a manufacturing based economy to private business and consumer supported People are already freaking out that Greece is just days away from defaulting on a 1 72 billion loan payment Just wait for the margin call on the 370 billion margin debt in China s stock markets should Beijing decide to take a page from Saudi Arabia s oil book |
C | China s Gold Hoard Swells | Bloomberg Central banks are going after gold in 2019 boosting holdings as economic growth slows trade and geopolitical tensions rise and some authorities seek to diversify their reserves away from the dollar
The People s Bank of China said Monday it raised reserves for a seventh month in June adding 10 3 tons following the inflow of almost 74 tons in the six months through May Last week Poland said it more than doubled its gold assets over this year and last becoming the top holder in central Europe
Bullion has rallied to a six year high in 2019 as investors bet on rate cuts by the Federal Reserve although robust jobs figures on Friday clouded that view Gold purchases by central banks are adding to overall demand with Russian authorities a substantial and sustained buyer of the traditional haven
Aside from its attempt to diversify its holdings of dollars owning more gold reserves is also an important strategy in China s rise as a superpower Howie Lee an economist at Oversea Chinese Banking Corp in Singapore said in an email Additions are likely to continue in coming months according to Lee
Last year central banks bought 651 5 tons 74 up on the previous year the World Gold Council said in January Official sector purchases could reach 700 tons this year assuming the China trend continues and Russia at least matches 2018 volumes of about 275 tons Citigroup Inc NYSE C said in April
China s recent bullion accumulation as well as that by other central banks has come against a backdrop of firming prices Spot bullion traded 0 5 higher at 1 406 90 an ounce on Monday after a 9 1 climb in the second quarter |
C | Citigroup Says Fed Rate Cut in July Still Not a Done Deal | Bloomberg Citigroup Inc NYSE C economists are growing more confident in their forecast for the Federal Reserve to leave interest rates unchanged this month a call that leaves them at odds with many investors and fellow analysts
The nation s 224 000 surge in payrolls in June and recent de escalation of trade tensions between the U S and China are reasons to think the Fed may take a wait and see approach before reducing their benchmark when officials gather on July 31 economists Andrew Hollenhorst and Veronica Clark wrote in a report to clients on Friday
With policy makers set to enter their blackout period the Citigroup economists said this week marks to last opportunity for them to shift market expectations Chairman Jerome Powell addresses lawmakers on Wednesday and Thursday
We do not expect any statements that are too conclusive but we may get a sense of which options remain on the table as the committee prepares to debate action at their July meeting said Hollenhorst and Clark
Upcoming data releases will also be important they said This week will see the publication of the consumer price index which the Citi economists expect to keep the lack of inflationary pressure narrative in place Reports on retail sales and business investment will also be worth monitoring
Bloomberg Economics also expects the Fed to hold fire this month
While the Fed dropped patient from its policy guidance at its June meeting the strength in the pace of hiring will enable the FOMC to delay until September the onset of a mini easing cycle Bloomberg economists Carl Riccadonna and Yelena Shulyatyeva wrote in their latest report |
C | Wall Street Dons Tinfoil Hat to Ponder U S Currency Intervention | Bloomberg A growing chorus of Wall Street foreign exchange analysts is writing about the risk that U S President Donald Trump may move beyond words in his quest for a weaker dollar
From ING to Canadian Imperial Bank of Commerce more analysts in recent weeks have been openly contemplating the wild card notion that the administration could intervene to cheapen the dollar The research comes as Trump has intensified criticism of both the Federal Reserve and other countries currency practices The U S leader tweeted last week that Europe and China are playing a big currency manipulation game and called on the U S to MATCH or continue being the dummies
The U S last intervened in FX markets in 2011 when it stepped in along with international peers after the yen soared in the wake of that year s devastating earthquake in Japan While that effort boosted the dollar ING says the American administration may move to do the opposite and weaken the greenback should the European Central Bank pursue further monetary stimulus The U S hasn t taken that step since 2000
Fed Link
Could frustration with the Fed prompt the President to take matters in his own hands and weaken the dollar ING s Chris Turner and Francesco Pesole wrote in a note Monday Though the U S last month reaffirmed a Group of 20 commitment to refrain from competitive devaluation the lure of a weaker dollar to support the U S economy into 2020 may be too great the strategists wrote
The market has yet to put any stock in the notion of U S intervention Global currency volatility is at a five year low and the Bloomberg dollar index is barely changed this year But a Fed trade weighted measure of the dollar is not far below the strongest since 2002 underscoring the headwind American exports face overseas
Below is what some banks are saying about the prospect that the U S could act to weaken the dollar
ECB Trigger
So far the White House has exerted indirect pressure on the dollar via the need for Fed easing wrote ING s Turner and Pesole If the dollar doesn t start to fall later in the year we suspect pressure will grow for the U S Treasury to take more direct action on the dollar
Were the ECB to cut rates in late July or enact a fresh round of quantitative easing in September such that EUR USD comes under fresh pressure Washington could potentially respond
The wild card of FX intervention is another reason why we prefer the dollar to be topping out this summer and retain year end forecasts for EUR USD and USD JPY at 1 15 and 103 respectively
Tinfoil Hat Scenario
Trump s repeated comments on the Fed and dollar s misalignment with the CNY and the EUR mean we can t rely on the old paradigm that the Treasury won t intervene and undermine the strong dollar policy at some point said CIBC s Bipan Rai North American head of foreign exchange strategy
Unilateral FX intervention by the U S would likely spur only a temporary dollar sell off given that the average daily dollar flow dwarfs the reserves available in the Treasury Department s Exchange Stabilization Fund he wrote
While not CIBC s base case a tinfoil hat scenario could see the Treasury pressure the Fed to liquidate its balance sheet to provide more dollars for intervention purposes
This could create a lasting downward effect on USD valuation given the incredible size of the Fed s balance sheet
While multi lateral intervention in the style of the 1985 Plaza Accord is the most likely method to achieve lasting greenback weakness Trump s antagonism on the trade front has done him no favors Rai wrote
China Japan Switzerland Russia India South Korea Brazil and the euro zone all have reasons not to cooperate according to Rai
Highly Unusual
Although it would be highly unusual for a U S government to attempt further measures to weaken the USD it is not beyond the realms of possibility that the Trump administration will try Rabobank s Jane Foley head of currency strategy wrote in a July 5 note
While the Fed now has more room than many other central banks to cut rates going into the downturn the dominance of the U S in the global payments system points to an ongoing underlying demand for USDs which could temper the pace of any decline
Since it is the Treasury rather than the Federal Reserve that is in charge of USD policy in the U S it is technically possible that the U S government could order the Fed to intervene in the market to sell USDs in the market
Administration s Options
More quantitative easing by developed market central banks could lead to a further metastasis of trade wars into currency wars Citigroup NYSE C economists Cesar Rojas and Catherine Mann wrote in a July 2 note
The Trump administration s options for curbing dollar strength include a stabilizing mechanism and countervailing intervention against currency manipulators
The Treasury could use the Exchange Stabilization Fund and swap acquired currencies for dollars with the Fed |
C | Wall Street Weighs Wild Card Risk of U S Move to Weaken Dollar | Bloomberg A growing chorus of Wall Street foreign exchange analysts is writing about the risk that U S President Donald Trump may move beyond words in his quest for a weaker dollar
From ING to Canadian Imperial Bank of Commerce more analysts in recent weeks have been openly contemplating the wild card notion that the administration could intervene to cheapen the dollar The research comes as Trump has intensified criticism of both the Federal Reserve and other countries currency practices The U S leader tweeted last week that Europe and China are playing a big currency manipulation game and called on the U S to MATCH or continue being the dummies
The U S last intervened in FX markets in 2011 when it stepped in along with international peers after the yen soared in the wake of that year s devastating earthquake in Japan While that effort boosted the dollar ING says the American administration may move to do the opposite and weaken the greenback should the European Central Bank pursue further monetary stimulus The U S hasn t taken that step since 2000
Fed Link
Could frustration with the Fed prompt the President to take matters in his own hands and weaken the dollar ING s Chris Turner and Francesco Pesole wrote in a note Monday Though the U S last month reaffirmed a Group of 20 commitment to refrain from competitive devaluation the lure of a weaker dollar to support the U S economy into 2020 may be too great the strategists wrote
The market has yet to put any stock in the notion of U S intervention Global currency volatility is at a five year low and the Bloomberg dollar index is barely changed this year But a Fed trade weighted measure of the dollar is not far below the strongest since 2002 underscoring the headwind American exports face overseas
Below is what some banks are saying about the prospect that the U S could act to weaken the dollar
ECB Trigger
So far the White House has exerted indirect pressure on the dollar via the need for Fed easing wrote ING s Turner and Pesole If the dollar doesn t start to fall later in the year we suspect pressure will grow for the U S Treasury to take more direct action on the dollar
Were the ECB to cut rates in late July or enact a fresh round of quantitative easing in September such that EUR USD comes under fresh pressure Washington could potentially respond
The wild card of FX intervention is another reason why we prefer the dollar to be topping out this summer and retain year end forecasts for EUR USD and USD JPY at 1 15 and 103 respectively
Tinfoil Hat Scenario
Trump s repeated comments on the Fed and dollar s misalignment with the CNY and the EUR mean we can t rely on the old paradigm that the Treasury won t intervene and undermine the strong dollar policy at some point said CIBC s Bipan Rai North American head of foreign exchange strategy
Unilateral FX intervention by the U S would likely spur only a temporary dollar sell off given that the average daily dollar flow dwarfs the reserves available in the Treasury Department s Exchange Stabilization Fund he wrote
While not CIBC s base case a tinfoil hat scenario could see the Treasury pressure the Fed to liquidate its balance sheet to provide more dollars for intervention purposes
This could create a lasting downward effect on USD valuation given the incredible size of the Fed s balance sheet
While multi lateral intervention in the style of the 1985 Plaza Accord is the most likely method to achieve lasting greenback weakness Trump s antagonism on the trade front has done him no favors Rai wrote
China Japan Switzerland Russia India South Korea Brazil and the euro zone all have reasons not to cooperate according to Rai
Highly Unusual
Although it would be highly unusual for a U S government to attempt further measures to weaken the USD it is not beyond the realms of possibility that the Trump administration will try Rabobank s Jane Foley head of currency strategy wrote in a July 5 note
While the Fed now has more room than many other central banks to cut rates going into the downturn the dominance of the U S in the global payments system points to an ongoing underlying demand for USDs which could temper the pace of any decline
Since it is the Treasury rather than the Federal Reserve that is in charge of USD policy in the U S it is technically possible that the U S government could order the Fed to intervene in the market to sell USDs in the market
Administration s Options
More quantitative easing by developed market central banks could lead to a further metastasis of trade wars into currency wars Citigroup NYSE C economists Cesar Rojas and Catherine Mann wrote in a July 2 note
The Trump administration s options for curbing dollar strength include a stabilizing mechanism and countervailing intervention against currency manipulators
The Treasury could use the Exchange Stabilization Fund and swap acquired currencies for dollars with the Fed |
MS | Chinese fintech firm Qudian impresses in U S market debut | Reuters Shares of Qudian Inc N QD rose as much as 48 percent in their market debut on Wednesday valuing the online micro credit firm at about 11 67 billion in the biggest U S listing by a Chinese company this year Qudian s initial public offering was priced at 24 per American depository share ADS topping its expected 19 to 22 per ADS range and raised 900 million U S exchanges are set to record their busiest year for IPOs from Asian companies since 2010 as startups from Taiwan Singapore Indonesia and Vietnam join a flurry of Chinese firms that have already listed in the country Qudian backed by Alibaba Group N BABA affiliate Ant Financial runs a mobile platform that allows college students and young workers to borrow amounts as low as 60 to buy apparel concert tickets or smartphones The company targets hundreds of millions of young Chinese who need access to small credit but cannot go to traditional financial institutions mainly for lack of traditional credit data Founded in 2014 by Min Luo Qudian became profitable last year It provided 5 6 billion of credit in the first half of 2017 to 7 million active borrowers according to its IPO paperwork with U S regulators Qudian s profit jumped almost eight times to 144 million in the six months ended June 30 while its revenue rose near five fold to 270 million Qudian sold 35 63 million new shares while shareholders including Kunlun Group SZ 300418 and board directors Li Du and Yi Cao sold 1 88 million existing shares The company plans to use the IPO proceeds on advertising to sign up more borrowers as well as on potential acquisitions and general corporate purposes Citigroup NYSE C China International Capital Corp Credit Suisse SIX CSGN Morgan Stanley NYSE MS and UBS worked as joint bookrunners on the IPO |
MS | Big money stays away from booming bitcoin | By Jemima Kelly and Maiya Keidan
LONDON Reuters Bitcoin is booming digital currency hedge funds are sprouting at the rate of two a week and the value of all cryptocurrencies has surged tenfold this year to more than 170 billion
Yet for all the hype mainstream institutional investors are steering clear of the nascent market taking the view that it is too lightly regulated too volatile and too illiquid to risk investing other people s money in
Bitcoin the biggest and most well known cryptocurrency has outperformed all the world s traditional currencies each year since 2011 except for 2014 But many investors still view it as an opaque esoteric instrument used by gun runners and drug dealers on the Dark Web that should be avoided
This year though a flood of new hedge funds focused on cryptocurrencies has offered institutional investors who might be unfamiliar with the market a potential route into the world of digital currencies
According to Autonomous NEXT a financial technology research house 84 so called crypto hedge funds have been launched this year taking the total to 110 with about 2 2 billion in assets altogether
But the fact most of the funds are relatively small with a limited track record and that cryptocurrency price swings have been so pronounced means the world s pension funds insurance companies and large mutual funds are staying away
While cryptocurrencies are probably here to stay they are difficult to analyze wildly volatile and some may be prone to fraud said Trevor Greetham at Royal London Asset Management RLAM part of the Royal London life insurance company
Diversification is a good thing but that doesn t mean investing in everything just because it s there We favor assets with a long track record in producing returns or reducing risks said Greetham who heads RLAM s multi asset team
For a graphic on top cryptocurrencies click
Autonomous NEXT partner Lex Sokolin said there were probably only a couple of funds worth several hundred million dollars with most in the 5 million to 20 million range well below the threshold most institutional investors would consider
For many institutional discretionary fund managers those funds wouldn t get cleared because the big question would be around liquidity said James Butterfill head of investment strategy at ETF Securities in London
BUBBLES BOOMS AND BUSTS
One way mainstream money managers could get exposure is by investing in a basket of hedge funds that includes a crypto fund But the head of hedge funds at a major European bank that invests in more than 100 hedge funds said there were no crypto funds in his portfolio
It s a very controversial proposition said the banker who declined to be named It s unlikely that the most established hedge funds will make big bets on this because you could put your core business at risk
Determining the value of bitcoin and other cryptocurrencies is tricky There are almost 17 million bitcoins in existence now but the total supply is limited to 21 million and that won t be reached until the next century
Bitcoin s total value or market capitalization is close to 100 billion bigger than U S investment bank Morgan Stanley NYSE MS At the start of the year it was just 15 billion Ethereum the second biggest cryptocurrency is now worth almost 30 billion
If the supply is truly fixed then the price of these securities are determined purely by demand which in turn is determined largely by sentiment said Ken Dickson investment director money markets and FX at Aberdeen Standard Investments
This means huge price swings with bubbles booms and busts Unless the supply processes of these instruments are reformed then it is unlikely that they will play any part of an investment portfolio he said
Bitcoin has been on a rollercoaster ride this year After hitting what was then a record high just below 5 000 in early September it lost about a third of its value in less than two weeks It has since almost doubled in price again to new highs near 6 000
Ethereum has been even more erratic Its price surged almost 50 times from the start of the year to June before falling back by about a fifth according to industry website CoinDesk
That kind of volatility means committees at institutional investment firms looking at the relative risks of asset classes are likely to rule out cryptocurrencies asset managers said
Your risk budgeting committee will say you can t hold a lot of that because of the amount it increases risk in your portfolio said Butterfill I do expect volatility to decrease over time but risk budget teams tend to look historically
EARLY DAYS
For now those investing in crypto funds are high net worth individuals companies managing money for wealthy families private wealth managers and some venture capital investors
It s clear there s money piling into these funds said Emad Mostaque co chief investment officer at the London office of South African hedge fund firm Capricorn Fund Managers There s just not that institutional investor comfort yet
Alistair Milne co founder of the Mayfair based Altana Digital Currency Fund likens investment in crypto funds to the start of the hedge fund boom in the early 1990s when wealthy individuals were the first to invest in a raft of new funds making high returns
It always starts with the high net worth individuals he said It wasn t until 2004 2005 that institutional investors started getting involved in those
The new crypto hedge funds take a variety of approaches betting on new coins issued to raise funds via so called initial coin offerings ICOs price direction or differentials between rates on the many cryptocurrency exchanges
One new fund the London based BitSpread says its 25 million market neutral fund which trades on price differentials alone gives major investors a way into the market without exposing them to violent price swings
The fund is up 32 percent so far this year having managed to exploit the kind of arbitrage possible in a young market where large price gaps exist
Institutional investors haven t invested in this ecosystem yet because they haven t yet found the right vehicle said Cedric Jeanson BitSpread s founder |
JPM | Pros Are Ditching the Bitcoin Market JPMorgan Says | Bloomberg The prolonged digital asset slump is scaring off institutional players according to JPMorgan Chase Co suggesting a fulcrum for cryptocurrency markets is giving way
Participation by financial institutions in Bitcoin trading appears to be fading analysts including Nikolaos Panigirtzoglou wrote in a research note dated Dec 14 Key flow metrics have downshifted dramatically including in futures markets and in average volumes they said
While the surge of institutional interest a year ago was cheered by cryptocurrency enthusiasts as a signal the industry was here to stay last December s debut of Bitcoin futures a key product for professionals also coincided with Bitcoin s apex
Meanwhile open interest on Cboe Global Markets has dwindled and in the past month reached the lowest levels since trading began a year ago An equivalent gauge for the more widely used contract on CME is near the bottom of 2018 s range according to data from the Commodity Futures Trading Commission
The daily median transaction size which reached highs of around 5 000 a year ago during the speculative frenzy has since fallen to less than 160 the report said citing data from BitInfoCharts com
After the speculative bubble in digital assets burst last year markets have pummeled Bitcoin the most valuable and well known cryptocurrency Since peaking at highs of 19 511 a year ago the token has lost more than 80 percent of its value The sell off spilled over into host of alternatives including Ethereum Ripple and Litecoin
Other cryptocurrencies continue to suffer disproportionately during this correction phase JPM s note added
The declines have forced some unprofitable Bitcoin miners to exit the market Miners provide the server power that underpins transactions on the blockchain and receive new supplies of currency as a reward The Bitcoin hashrate a measure of computational difficulty in running a blockchain that s used as a proxy for mining activity has declined since October this year according to Blockchain com
This suggests that prices have declined to a point where mining is becoming uneconomical for some miners who have responded by turning their mining rigs off JPMorgan NYSE JPM said |
JPM | Credit Suisse is telling its wealthiest clients to hurry and move their money out of the UK before Brexit | Private bankers at Credit Suisse SIX CSGN have reportedly told ultra wealthy clients to accelerate moving assets out of the UK by January A lack of clarity around Brexit could cause turmoil ahead of a rescheduled parliamentary vote on the Brexit deal on January 14 The move comes at a time when the super rich are already leaving UK assets and diversifying their portfolios Credit Suisse is sounding the alarm on Brexit uncertainty after advising some of its wealthiest clients to consider accelerating plans to move assets outside the UK ahead of a rescheduled vote on Prime Minister Theresa May s deal in January Private bankers at the Swiss lender reportedly contacted key clients to suggest that many customers had already opted to move assets outside of the UK already and that they should consider doing the same Credit Suisse made the suggestion in the aftermath of Prime Minister May s decision to postpone a vote on Brexit until the new year which the bank said prolonged a period of turmoil to the Financial Times Meanwhile UK businesses will be told to prepare for a no deal Brexit immediately Read more The bank pushed back against the FT story with a Credit Suisse spokesman saying that this advice is not the bank s official line Credit Suisse does not currently hold a house view that clients should move assets out of the UK due to Brexit or other political developments in the UK the spokesman said Still it s another sign that market uncertainty over the UK s decision to leave the EU elevated with investors wary of a potential no deal or a left wing government led by Jeremy Corbyn in the event of a general election It follows a trend of banks and asset managers funds and businesses out of the UK since the Brexit vote ahead of the official leaving date of March 29 2019 The pound has been down for much of 2018 as has the UK housing market and the benchmark FTSE 100 share index The FTSE is trading down 0 7 as of 9 05 a m in London 4 05 a m EST |
JPM | Blythe Masters steps down as CEO of blockchain startup Digital Asset | Reuters Blockchain startup Digital Asset s chief executive officer and one of the most prominent supporters of the distributed ledger technology on Wall Street Blythe Masters is stepping down after about four years in the role the company said on Tuesday AG Gangadhar a former Uber executive who joined Digital Asset s board in April has been appointed as the chairman and will serve as the acting CEO while the company looks for a new chief executive it said Blockchain which first emerged as the software underpinning cryptocurrency bitcoin is a shared record of transactions that is maintained by a network of computers on the internet Masters a former JPMorgan NYSE JPM banker led Digital Asset through its global expansion and helped it raise millions of dollars including from some of the world s largest banks Masters will remain as a board member strategic advisor and shareholder Digital Asset said |
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