The Launch Pad: Oil is flat as OPEC meets, ECB holds rates steady, GBP volatility on the rise via @connectedWealth
hursday, June 2nd, 2016
Morningstar Investment Conference: Using Annuities In A Portfolio For Added Stability
Markets are, well, pretty much doing nothing this morning despite some potentially market moving news. The ECB is set to start buying corporate bonds next week as part of their latest stimulus. They had a meeting today with no changes to rates. Draghi wants more fiscal reform to coincide with the ECB’s effort. Good luck with that. Oil is sitting quiet at $49 as OPEC meets.
Tomorrow is the big day with US payrolls. We had the sneak peek ADP payrolls today which were right in line with expectations, so that doesn’t tell us anything. A strong number tomorrow will open a door a bit more for a potential rate hike later in June. A miss pushes it off. We have already had an ISM Manufacturing data point stronger yesterday. Yet implied probability of a hike is down to 20% for June. Nonfarms will be key and as my friend D-Mak likes to say just every month, this is the most important data release of the century.
Year to date the S&P 500 is up a meager 2.7%, over the past 12 months however, the index is down a little less than a percent. Looking at the individual names, over 54% of stocks within the index are down over the past year. Of those which are in negative territory the average rate of decline is 16.41%. Of those which are positive the average gain is 16.2%. What this shows is that there is a decent amount of dispersion within the index. It’s a stock pickers market. We wrote previously that the ingredients for active managers are in place to make 2016 a traders market.
For those who think we spend too much time talking about the U.S. market, we also rant the numbers for the TSX. Here, 56% of stocks are down over the past 12 months, yet the average decline is -23.6%. Those that are positive, the average gain is 24.5%. The greater dispersion within the index, is one of the reasons why more Canadian portfolio managers typically beat the index than in the U.S.
Polls are showing the race is still tight in the U.K. Depending on who is polling, the slight edge shifts from one side to another. A recent Guardian poll showed a 52-48 split in favour of leaving the UE. One of the few to give the edge to a ‘Brexit’ scenario’. The difference was in the methodology, as they explain in this article. Online, and telephone polls show a lead for leave, while polls just over the phone have a larger portion citing don’t know. All this uncertainty is playing havoc with the British pound. Cable volatility is surging, as the chart below shows. With rising volatility, the cost to protect against currency swings is increasing. One month volatility rose beyond 20 this morning after the Guardian poll.
The end of the Chinese miracle
China has been in a period of rapid growth for decades. That may be coming to an end as the “demographic and productivity dividend” fades. Hundreds of millions of migrants have moved into Chinese cities to find work. But that flow is slowing down because jobs have become harder to find. A slowing global economy means fewer job openings and higher worker retention ratios. As a result, there is a supply deficit of cheap labor. This is is putting upward pressure on migrant wages, which more than doubled from Q4’08 to Q4’15. Some Chinese companies have resorted to importing labor from countries such as Vietnam, where salaries are half of what they are in China.
277 million migrants moved from rural areas to cities in the biggest migration in history. If the surplus of rural labor continues to shrink then wages will continue to grow, limiting China’s competitiveness. These trends have major implications for the global economy. According to the IMF, China’s share of global GDP is expected to fall through 2020. This will weigh on export-driven countries who depend on Chinese demand for commodities. More from the FT here.
BMO is buying Greene Holcomb Fisher to increase their capital markets business south of the boarder. The company has been part of the consortium of more than 100 deals over the past five years. Terms of the deal were not mentioned. Iovate Health Science, the private supplement manufacture is being looked at by a Chinese firm Xiwang Group. The deal is worth an expected $800mm. Redkneee jumped as much as 10% intraday yesterday as they renewed a multiyear contract with a tier 1 operator in Europe. They also received an upgrade from Raymond James.Lululemon was being slammed yesterday on CNBC by their founder Chip Wilson for not innovating and losing share the competitors. He says he was denied the chance to speak at the latest shareholder meeting. Chip, the founder still owns 14.2% of the company.
Oil prices have been oscillating around yesterday’s close as the market braces for the decision from the OPEC meeting that begins today in Vienna. Any deal would rest on the shoulders of Iran, which seems unlikely to agree to any such deal that will cap production. Yesterday Iranian Oil Minister Bijan Namdar Zanganeh said an output ceiling has “no benefit” to their country. Iran is currently producing 3.8mm barrels and expecting to reach its near term target of 4mm barrels very soon. Gold prices are relatively flat this morning despite ECB officials meeting and payrolls data coming out today.
FIXED INCOME AND ECONOMICS
The European Central Bank has come and gone with no changes to the current policy as expected. The marginal lending facility, main refinancing, and deposit facility rates remained at 0.25%, 0% and -0.40% respectively while monthly asset purchases will be maintained at €80 billion. Policy makers have updated their previous plans to outright purchase corporate bonds as per said asset purchases, with June 8 being targeted for the kick-off. Much was made of this decision during winter meetings as it questions abounded as to the specifics of the bonds the ECB would buy, and we’ll get an update on this from President Mario Draghi when he takes the podium at 8:30AM EST. Reaction to the announcement see 10 year yields in Germany (+1.2 bps), Spain (+2.6 bps), France (+1.9 bps) and Italy (+3.2 bps) all higher while the EUR strengthened modestly to 0.8933 against the greenback.
While we await tomorrow’s nonfarm payroll number, markets are digesting this morning’s ADP employment survey that showed 173K Americans found work in the private sector last month. That was on the screws and improved from the 166K revised gain from April. Big, bellwether corporations only accounted for 20% of the gains as most work was found in smaller sized companies. All of the jobs gained were in the service-producing category as goods-producers actually fell from prior. We have argued many times in the past about the correlation between the ADP and the more widely scrutinized NFP release (it used to be poor but has steadily improved over the past couple years due to the changes in the former’s methodology), so the best we can say in lieu of the release is that tomorrow’s unveil should be mostly in line with the +160K consensus. Little follow-up after the numbers with Treasuries unchanged.
WTI and Brent crude are mostly flat ahead of the OPEC meetings that have just begun in Vienna. It’s the first coordinated meeting between all members since December and while prices have been volatile to say the least since then, analysts do not expect any changes to the current output policy despite. Despite rising output by OPEC’s Middle Eastern producers, the group’s overall production has remained largely flat this year currently standing at 32.5 million barrels per day, capped by disruptions especially in Nigeria, Libya and Venezuela. High yield indices (comprising many energy-related issuers) are a touch wider at time of writing while the loonie drifts north of 1.3140 against the USD to its weakest level in two weeks. Expect an extremely volatile morning as the meetings should likely conclude around the same time as the DOE’s weekly inventory update.
CHART OF THE DAY