BOE Delivers A Rate Cut And Nike Just Doesn’t Want To Do It Anymore (Golf)
Bank of England Delivers An Interest Rate Cut – Today
Markets are higher overnight as we come in to hear the much anticipated Bank of England policy decision this morning. This time BoE governor Carney delivered a surprise by cutting UK rates to 0.25% and unexpectedly increasing the quantitative easing program by £60bn PLUS widening the scope of what the Bank will purchase to include corporate bonds. This is the first move in Bank of England rates since they were cut from 1% to 0.5% in March 2009. “The banks have no excuse not to pass along these lower rates” – Mark Carney in the BoE press conference.
Charlie Munger: Invert And Use “Disconfirming Evidence”
Not surprisingly, Pound Sterling are getting creamed on the announcement, giving up much of the gains recovered since the June Brexit vote. Measured both against the USD and the EUR, sterling are within a couple of pence of their recent lows.
Worldwide, equities are pushing higher, especially in London where the decision is pushing risk assets up sharply. The FTSE 100 is still the only major Euro area market in the green, year-to-date (measured in local currency, of course) at +7%. Canada has still been the place to be on that measure, with a YTD of 12% on the SPTSX.
Europe continues surprise to the upside in terms of economic data. The European Citigroup Economic Surprise index has risen to 31.8 the highest level YTD, and does not appear to be losing momentum. The latest PMI data was more positive than expected, which is surprising to some, especially those calling for swift Brexit contagion. Despite European stocks appearing more attractive from a value standpoint, the perceived potential risks are still scaring off equity investors. Looking at ETF fund flows at some of North America’s largest European focused ETFs, the net redemption trend continue.
So Q2 earnings season is past the 80% mark for the S&P 500 constituents and aggregate growth appears to be coming in at a 5% decline from Q2 last year. It does depend on your measure as operating earnings are higher. Sticking with aggregate it seems energy was the big drag once again. Excluding energy earnings growth was positive. There was strong earnings growth from utilities, consumer discretionary and health care. Below our chart provides a breakdown.
Crude had a good day yesterday, candle stick fans would be encouraged by the bullish engulfing pattern. Though the inventory data was actually quite bearish, bulls loved the larger than expected drop in gasoline storage. In our chart of the day, we try to show just how elevated total gasoline inventories are vs. previous years. Gas prices rose considerably, likely more of a short squeeze due to the record high net short positions.
The slump in oil prices has been met with falling US oil production. After peaking at >9.5 million barrels per day (bpd) in the summer of 2015, US oil production has fallen to ~8.5 million bpd. In response, the US has had to import more oil. The latest data from the EIA shows that oil imports are higher than oil production for the first time since January 2014.
Another factor contributing to this trend is US exports. “The US government lifted its four-decade ban on crude exports in December” of 2015. Since then, shipments have risen to more than 0.66 million bpd.
All of these moving parts are important because they affect the US’ financial position. The budget balance has been improving because of the energy renaissance that has taken place over the past decade. Higher production has helped the US to reduce its dependence on foreign energy imports. If US production continues to decline then this trend will reverse. This would lead to a worsening budget balance and to faster debt growth. More from Bloomberg here.
BCA Research released a note yesterday on US banks. “…according to the latest Fed Senior Loan Officer Survey, banks are tightening lending standards even before the Fed has raised interest rates by much, because there has already been an upturn in non-performing loans.” They believe underperformance will continue, and prefer homebuilders and home improvement sectors.
Apparently, Nike just doesn’t want to do it anymore. Following slumping sales, Nike wants out of the golf business. They will no longer sell clubs, balls, and bags for the sport, but will stick with golf shoes and apparel. The Tiger effect strikes again. No word yet on if anything will happen to Mcllroy. He signed a $250 million deal with Nike in 2013. I guess he’ll still be wearing their gear, but we’ll see how long it takes for him to sign a new equipment deal. For those interested, here is the Nike golf revenue trend.
2011: $623 million
2012: $726 million
2013: $792 million
2014: $789 million
2015: $769 million
2016: $706 million
Diversion: When to drink beer vs. when to drink coffee. Idea vs. execution.
BCE added nearly 70,000 new wireless subscribers last quarter, significantly more than the expected 47,000. The saw earnings grow by 2.5% last quarter. CCL Industries reported record earnings this morning as sales increased 33% last quarter and strong profits aided by their Avery, Label and Container businesses. They also announced a bolt on Healthcare acquisition in Germany. Penn West released guidance this morning expecting to add 3,000 barrels of production in the second half of the year bringing annual production to as much as 57,000 barrels. Teva Pharmaceuticals which closed the $40bb deal to acquire Allergan Tuesday reported earnings this morning. Despite now being the world’s largest generic drug maker that don’t want to pigeon whole their approach to just generics, their “strategy and vision are much broader than that”. QSR, the parent company of Burger King and Tim Hortons beat estimates this morning by keeping costs low and experimenting with new menu items.
Oil prices are relatively flat this morning despite better than expected inventory numbers out of the U.S. yesterday are being offset by a growing supply out of Iran and Canada. Canadian production has come back online now that the wildfires in Alberta have subsided and moved away from oil sand assets. This comes of the back of the largest up move yesterday since April. Black Sea corn yields are being threatened by a heat wave in the Ukraine and Bulgaria which is causing draught like effects on the region, which is the third largest exporter of corn. The Middle East is ramping up their LNG import capacity, taking advantage of lower prices. They plan to increase capacity to 97.3bb cubic meters in five years from the current capacity of 39.1 cubic meters.
Fixed Income And Economics
It’s all about the Bank of England today with Governor Mark Carney and the MPC deciding to lower benchmark rates from 0.50% to a record low 0.25%. The vote was in favor by a unanimous 9-0 margin in an attempt to mitigate economic pressures from the U.K. referendum in June. Additionally, the MPC also expanded their asset purchasing program by £60 billion (bringing the total to £435 billion) and announced a new Term Funding Scheme (TFS) aimed at providing funding (up to £100 billion) for banks close to the base rate. Also, a £10 billion corporate bond buying program will be introduced and this point piques our interest the most (see more below). Carney also signaled additional easing measures could be forthcoming including taking the interest rate close to zero despite being divided on the expansion of QE at this meeting. GDP was simultaneously downgraded with growth forecasts in 2017 revised down to +0.8% year-over-year (from +2.3% prior) with the BoE expecting just a paltry +0.1% growth in the third quarter this year. Reaction to the move is what you would largely expect — the FTSE is higher (+1.3%), the pound is weaker (-1.7% intraday), and yields on 10 year Gilts falling 15 basis points from 0.80% to below 0.65%. Lastly, the drop in the GBP is expected to accelerate inflation with the bank now anticipating a return to its 2% target by the end of next year.
The BoE’s introduction of a £10 billion corporate bond buying program stoked our interest a little more than usual in part because we’re wondering if this was really necessary at this time. The ECB started introducing this idea earlier this year by saying it would include all investment grade, EUR domiciled issuers under their umbrella of bond purchase. It’s a curious move for Carney especially when you consider that three members of the MPC actually rejected the plan to increase the current asset-purchase target (of which only consisted of government quality debt). Making this a head scratcher further is the incredibly expensive state of the GBP bond market — the Financial Times is noting that Sterling-denominated corporate bond yields have plunged to record lows. BAML indices noted that the average corporate bond yield in the U.K. has fallen 70 basis points to 2.38% since Brexit, more sharply than the 25 and 27 basis point tightening seen in EUR and USD debt. Credit markets aren’t actually tight at the moment and with U.K. corporate bond issuance at an 11 year low, the BoE risks inflating an already expensive market. Just doesn’t seem to make sense to intervene at this point.
Chart Of The Day
Quote Of The Day
Courage is grace under pressure. — Ernest Hemingway