The Launch Pad: Chinese markets up on MSCI speculation, U.S. personal spending rises, higher open via @connectedwealth
Tuesday, May 31st, 2016
Qualivian Investment Partners Up 30% YTD; Long ORLY Thesis
Qualivian Investment Partners commentary for the second quarter ended July 30, 2020. Q2 2020 hedge fund letters, conferences and more “Short-term investors will accept a 20% gain because they didn’t spend the time to develop the conviction and foresight to see the next 500%.” - Ian Cassell Executive Summary Readers of investment letters fall into Read More
With American and U.K. traders back at their desks, we would have thought markets would be set to move a little more than yesterday. The surprise is all the action is taking place in China. Besides a little flash crash (more below) equities are now up over 3%, their biggest one-day gain in almost three months on continued speculation that they will be included in the MSCI Global benchmark. The chatter is based on a Goldman report released early this morning, and what we’re seeing today the stampede of investors trying to gain a poll position.
Besides the big move in China, yields globally are up a few bps as demand for ‘safe’ assets dwindles. Commodities are pretty flat, with oil and gold up only modestly.
Maybe global growth isn’t so slow. US personal spending rose 1.0% in April, that is the highest since 2009. Given the US consumer comprises between 15-20% of the global economy, that matters. European economic growth was 0.6% in Q1, that is 2.4% on an annualized quarterly basis (that is how we report Canadian and US GDP). The Atlanta Fed’s GDPNow forecast for Q2 is at 2.9%. Add these up, it’s all pretty good news. Also, we should note that the PCE Deflator (the Feds preferred inflation measure) rose 0.3% MoM.
Breaking news: Right before the memorial day weekend, Myspace was hacked and user login data was made available online. Wait, Myspace still exists? I bet the 5 users are pretty angry about this.
While not available until 9am this morning we’ll get an updated picture of the U.S. real estate market with the release of the S&P/Case-Shiller Index for March. Home sales and residential investments are starting to rise, if we see further confirmation of the market rallying, expect some moves from anything housing related.
Factors are more like male fashion than female fashions. The trends extend much longer than just a season or two and can sometimes last a decade or so. Like pleated pants, value stocks have been out of favour for a decade or so. Will they make a comeback? Bloomberg has more. Note: in this analogy, the momentum factor might just be the skinny tie or suit pants that are hemmed way too short.
Flash Crash in China
In the overnight session, Chinese stock-index futures fell by 10% and then recovered in less than a minute. The move was immaterial for investors; however, it raises concerns about the stability of the markets. According to Bloomberg, “the slump follows a similar drop in Hang Seng China Enterprises Index futures on May 16.”
Futures volumes, which are down >90% from their peak, have been in decline since China’s equity market crashed last summer. This is problematic because low liquidity increases the market’s vulnerability to big trades. More from Bloomberg here.
Diversion: Tony Hawk attempts weightless skateboard ticks in zero gravity.
Disney’s newest Hollywood release “Alice through the Looking Glass” was a flop at the box office this weekend. The miss will likely cause a meaningful write-down on the project. All hasn’t been lost at the box office with year to date sales up 4.1% from last year. Marvels, X-Men was the big winner this Memorial Day weekend. Macquarie is cutting roughly 30% of their equity related capital market jobs in Asia after falling trading volumes impact revenues.Great Plains is purchasing Westar for $8.6bb, the largest utility in Kansas. This comes amid a slew of takeovers in the industry as incumbent’s battle growing competition from residential solar installations. Scotiabank profits fell 12% in the quarter as bad loans from the energy patch weighed on results. They also incurred a meaningful restructuring charge from their strategic shift towards digital banking.
Oil futures are going to close the month up again, that is the fourth consecutive month of gains and the longest streak since 2011 for the commodity. This month was aided by outages both domestically and in Nigeria. The OPEC meeting on June 2nd is likely to be the next major catalyst for prices. Gold is up this mornings, if it closes higher this morning it would be the first advance in 10 days. Prices broke through the $1,200 level yesterday, the first time since February 17th. Copper is set to close out the worst month since November as demand from China and other emerging markets is softening and supply continues to flood the market.
FIXED INCOME AND ECONOMICS
It is the last trading day of the month and we are getting hit with a bevy of global economic data to digest. First on the wire is German retail sales that fell by -0.9% in April, the second consecutive month of declines and taking markets by surprise despite upbeat labor markets and buoyant consumer sentiment (a likely indicator of slowing consumer momentum in the coming months). Total sales rose +2.3% year-over-year, that did manage to beat the +1.7% consensus on the backdrop of two extra working days in April this year compared to the same period a year ago. The DAX is trading lower in sympathy to the release with 10 year Bund yields rising to +0.18%. Earlier in the overnight session, Japan saw a trifecta of data updates with household spending in April leading the way with a +0.2% increase — better than the -0.6% drop seen month-on-month. Additionally, their unemployment rate held steady at 3.2% as expected, while provisional industrial production for April rose +0.3%, beating the consensus for a -1.5% decline. The Yen weakened post-news to 111.18 against the USD.
In Canada, March GDP contracted by -0.2% to follow up on the -0.1% drop in Februaryand mark consecutive months of lower growth for the first time since May 2015. On an annualized pace, output accelerated by +2.4% to fall short of pundits’ calls for a +2.8% increase. Goods-producers were down -0.8% at the end of Q1 with mining/quarrying activity (-2.8%), agriculture (-0.5%) and manufacturing (-0.2%) all falling. No help came from the service-producing sectors that failed to post any growth for a second straight month. This is not a good release as the hand off to Q2 is a weak one given that national GDP for April and May will be expectedly weak due to the production cutbacks from the wildfires in Alberta. The loonie is taking it on the chin post-release, falling by over 60 pips to 1.3080 and shrugging off the gains in WTI and gold. Not to be outdone are our American counterparts, whom releasedApril PCE numbers that showed prices accelerated by +0.3% last month and faster than prior. Annually, core PCE is tracking +1.6% and ever so closely to the Fed target of 2.0% (recall that the PCE Deflator is the Fed’s preferred gauge of inflation). Throwing more fuel on a June tightening move is personal incomes and spending, both of which were higher by +0.4% and +1.0% respectively and reflecting that Americans were comfortable dipping into their savings to increase consumption. Treasury markets are accelerating their losses after the numbers with the 10 year down 1/3 of a point at time of writing.
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