Turnaround Tuesday | Lets focus on the data | What not to say before opening up negotiations

Tuesday, June 28th, 2016

Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata

 

TODAY

What a difference a day makes.  For now the sellers are exhausted and buyers in Europe have stepped in to buy discounted shares and currencies.  Euro exchanges are up 2.5% in early trading after mixed results in Asia and the pacific regions.  Sterling are also moving higher, by a couple of p against the US$, but at the current U$1.338/£ is a long way from the U$1.50/£ is was on Thursday night.

Alongside the pound barely reversing course are bond yields.  Treasury bonds are lower, but only mildly, while French debt is slightly higher in price on the day and Germany 10 year bunds are just 2 basis points off their low yield of -0.11%… we live in interesting (or should we say negative interesting) times indeed.

We are still swimming in Brexit comments and analysis, but thankfully we will be able to focus on some economic data with the US GDP print due out this morning (see below).  With US rates now pricing in a modest probability of a cut in interest rates, it will be important to see some fundamental, home-grown economic data.  Housing data will be out later in the morning, so we will make a mandatory mid-morning spot to the Calculated Risk blog to check in with Bill McBride about midday.

Even though markets were still falling yesterday, it was interesting to see the VIX index trading way off its highs by the end of day yesterday.  It continues much lower this morning, now down to 21.5 after visiting 26.5 early Monday.  We looked for some analysis, but just found “it doesn’t always go opposite of stocks” posts.  Price Action Lab notes: “What traders need to know is that there is no perfect correlation in the markets and most correlations are random variables.”, while Eric Hunsader charts out the various tradeable VIX ETFs for the day.

Ben Carlson, takes stock of European equites noting recent performance of each country, the cyclical relationship between U.S. and international stocks as well as the large divergence in valuations between the two. Put briefly, Europe is a mess, its stocks are cheap.
You see, markets don’t necessarily trade on absolutes. Markets are all about expectations. And when expectations go too far in either direction, investors tend to be surprised by the future results. There is no such thing as a good or bad investment; just a good or bad price to be paid.

One of our key tenants on the evolution of the market and why we believe volatility swings will increase in frequency is because of the growing use of ETF for short term trading. ETF flows are larger and more erratic than flows into traditional funds. Barron’s notes that last Friday, ETFs accounted for 31% of all stock trading.

The video on this page where U.K. Independence leader Nigel Farage tells members of the European Parliament to allow the U.K. to pursue its own global ambitions is pretty great. He noted it is imperative for negotiations to move quickly on a number of fronts, but it may be difficult since “virtually none of you have ever done a proper job in your lives.” I thought step one was to find common ground, not blatantly insult those you are trying to negotiate with.

Africa has suffered as a result of falling oil prices; however, there are divergences within the continent. Oil importing countries such as Kenya have fared much better than exporters such as Nigeria, Angola & South Africa. The latter accounted for ~60% of Sub-Saharan GDP in 2015.

Africa is also marked by divergences in debt ratios. Some countries have borrowed to invest in power generation and infrastructure while others have borrowed to “expand the public sector and boost governments’ chances in hotly-contested elections.” Countries that have been diversifying away from commodity exports will reap the benefits going forward. Others that have been careless with their finances will struggle. More from Bloomberg here.

Diversion:  Good wholesome fun, or slightly disturbed?  The Marshmallow Crossbow.  Sure.  It’s for marshmallows

Tuesday, June 28th, 2016

Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata

TODAY

What a difference a day makes.  For now the sellers are exhausted and buyers in Europe have stepped in to buy discounted shares and currencies.  Euro exchanges are up 2.5% in early trading after mixed results in Asia and the pacific regions.  Sterling are also moving higher, by a couple of p against the US$, but at the current U$1.338/£ is a long way from the U$1.50/£ is was on Thursday night.

Alongside the pound barely reversing course are bond yields.  Treasury bonds are lower, but only mildly, while French debt is slightly higher in price on the day and Germany 10 year bunds are just 2 basis points off their low yield of -0.11%… we live in interesting (or should we say negative interesting) times indeed.

We are still swimming in Brexit comments and analysis, but thankfully we will be able to focus on some economic data with the US GDP print due out this morning (see below).  With US rates now pricing in a modest probability of a cut in interest rates, it will be important to see some fundamental, home-grown economic data.  Housing data will be out later in the morning, so we will make a mandatory mid-morning spot to the Calculated Risk blog to check in with Bill McBride about midday.

Even though markets were still falling yesterday, it was interesting to see the VIX index trading way off its highs by the end of day yesterday.  It continues much lower this morning, now down to 21.5 after visiting 26.5 early Monday.  We looked for some analysis, but just found “it doesn’t always go opposite of stocks” posts.  Price Action Lab notes: “What traders need to know is that there is no perfect correlation in the markets and most correlations are random variables.”, while Eric Hunsader charts out the various tradeable VIX ETFs for the day.

Ben Carlson, takes stock of European equites noting recent performance of each country, the cyclical relationship between U.S. and international stocks as well as the large divergence in valuations between the two. Put briefly, Europe is a mess, its stocks are cheap.
You see, markets don’t necessarily trade on absolutes. Markets are all about expectations. And when expectations go too far in either direction, investors tend to be surprised by the future results. There is no such thing as a good or bad investment; just a good or bad price to be paid.

One of our key tenants on the evolution of the market and why we believe volatility swings will increase in frequency is because of the growing use of ETF for short term trading. ETF flows are larger and more erratic than flows into traditional funds. Barron’s notes that last Friday, ETFs accounted for 31% of all stock trading.

The video on this page where U.K. Independence leader Nigel Farage tells members of the European Parliament to allow the U.K. to pursue its own global ambitions is pretty great. He noted it is imperative for negotiations to move quickly on a number of fronts, but it may be difficult since “virtually none of you have ever done a proper job in your lives.” I thought step one was to find common ground, not blatantly insult those you are trying to negotiate with.

Africa has suffered as a result of falling oil prices; however, there are divergences within the continent. Oil importing countries such as Kenya have fared much better than exporters such as Nigeria, Angola & South Africa. The latter accounted for ~60% of Sub-Saharan GDP in 2015.

Africa is also marked by divergences in debt ratios. Some countries have borrowed to invest in power generation and infrastructure while others have borrowed to “expand the public sector and boost governments’ chances in hotly-contested elections.” Countries that have been diversifying away from commodity exports will reap the benefits going forward. Others that have been careless with their finances will struggle. More from Bloomberg here.

Diversion:  Good wholesome fun, or slightly disturbed?  The Marshmallow Crossbow.  Sure.  It’s for marshmallows.

COMPANY NEWS

After making a deal with Corning, Dow Chemical is cutting 2,500 jobs and closing plants in Japan and the U.S. Dow paid $4.8bb to buy Corning and expects this synergies to save more than $500mm. Volkswagen seems to have reach a settlement in the emissions scandal. They will have to pay $15bb to try and get 480,000 vehicles off the road. They will also pay $2.7bb to federal and state regulators and make a $2bb investment in clean tech. LendingClub has replaced their CEO and fired nearly 200 employees as they try to combat declining loan volume. Air Canada and Bombardier have finalized their deal for 75 C Series aircrafts. There were rumors the deal was falling apart.

COMMODITIES

Gold is down $10 this morning but still however around the near term highs following the Brexit vote last week. Following the big rise in the commodity price we have seen a slew of gold miners come to market to issue equity to better capitalize their balance sheet. Oil prices are up nearly 3% this morning paring losses from the previous two days which caused a major retracement. It is expected that U.S. inventories fell 2.5mm barrels this past week; that should help support the price. Copper prices have rebounded to where they were before the Brexit vote last week as policy makers sort out how to deal with the exit of Britain from the E.U.
FIXED INCOME AND ECONOMICS

Lost in the shuffle from the Brexit fallout was actually a piece of news that I’d argue probably carries much more significance in the overall macro market. With the USD surging on risk aversion, the People’s Bank of China responded yesterday by weakening its currency fixing for the Yuan by 0.9% to 6.6375 per dollar. That’s a 5.5 year low against the greenback and the largest direct de-pegging of the renminbi by the PBoC since last August when they announced a one-off depreciation of the offshore currency (and we all know what happened in the days shortly following the move). Officials at the Bank said at the time that China had prepared a contingency plan for the British vote and would further improve the yuan rate system to keep the unit “basically stable”. The USD is paring back some of their gains this morning as global selling takes a breather, but additional devaluations of the Yuan over the next little while could occur should the Brexit uncertainty linger.

In the third and final reading of Q1 GDP, the U.S. economy officially grew at a +1.1% annualized pace between the months of January to March. It’s welcome bit of positive news amidst the past few days of strife and we should see the early morning risk trade carry throughout the day. Boosting the release was a surprise improvement in net exports that improved to +0.8% from the previous 0% reading, while gross private investment declined by just -1.8% versus the -2.6% second and -3.5% advance readings. A bit of a downer was the lowered revision on household consumption to +1.5% compared to +1.9% prior (weakest in two years). Recall that personal spending accounts for about 70% of overall output. Government purchases also improved a tick from prior to +1.3% annualized as state and local spending rose. Treasury yields are a touch higher after the numbers with 10’s trading a quarter point lower at time of writing.

In a wholly expected pair of announcements, both S&P and Fitch Ratings slashed the United Kingdom’s creditworthiness yesterday in the wake of the nation’s referendum vote to leave the EU. S&P lowered the U.K.’s credit rating from AAA to AA to reflect “the risk to economic prospects, fiscal and external performance and the role of sterling as a reserve currency” while further adding that Brexit “will weaken the predictability, stability, and effectiveness of policymaking in the U.K., GDP growth, and fiscal and external balances”. History was made in this announcement as it marked the first time ever that S&P had slashed a sovereign debt rating by two notches in one swoop. Fitch, who already had stripped the nation of their coveted AAA rating last year, followed up later in the session with a one notch reduction of the U.K. creditworthiness to AA from AA+. “Fitch believes that uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment” in a release from the agency. We saw risk assets accelerate their losses on the back of the S&P release.

CHART OF THE DAY

Now, I know that virtually none of you have ever done a proper job in your lives or worked in business or worked in trade or indeed ever created a job. But listen, just listen.

– Nigel Farage speaking to the European Parliment