The World Doesn’t Care About The Greenback This Morning, Lower Open
Despite softer equities around the world, the most action is in currencies this morning, where the big dollar is under pressure, with pundits once again pointing to the Fed and the likelihood of rate hikes being hiked any time soon. The US dollar index is down a full penny which is a considerable move – there have only been 7 days this year with moves greater than a penny on this index.
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Keeping it simple, we will look at the 2 year Treasury yield as a predictor of rate hikes and note that since the big runup into the end of 2015 when the Fed actually lifted rates, the 2 year has failed several times to get close to that high yield north of 1%.
Chart of the Day – with the C$ having strengthened to 78 cents earlier this morning we thought it a good time to update our purchasing power parity chart. The C$, which was undervalued by 15% in early 2016 is now about 5% undervalued. The chart, which goes back 30 years clearly indicates parity is seldom reached or maintained for very long. However, extremes in either direction often lead to a pretty big mean reversion. The question is whether this mean reversion still has legs? While not shown in the chart, the yen purchasing power parity history is even more dramatic. At the end of 2015 the yen was undervalued against the US dollar by 40%, the exact opposite of 1985 when it was overvalued by 38%. Today the yen is only undervalued by 24%….it has closed the gap, likely because we decided six months ago our fall 2016 trip will be to Japan….you know, to take advantage of the weak yen. Should have gone sooner.
The dollar reverberations can be seen throughout the world. Emerging markets continue their run, EEM is up 37% from the Jan. lows. It’s not just the equites, even EM bonds are doing well, YTD returns are more than double HY bonds. The carry trade is working very well indeed.
U.S. homebuilder sentiment beat expectations, with financial conditions as easy as they are and housing inventory relatively tight, new homebuilders are feeling quite good about themselves. Residential investment was a slight drag on the economy last quarter, but the resilient sentiment measures suggest that this should not carry forward to the third quarter. Homebuilder stocks are still doing quite well, after undergoing their biggest sell-off in years in the first quarter.
Gold’s up today on the dollar weakness, but on of the biggest bulls this year has now largely exited his big stake in Barrick. George Soros exited the trade last quarter according to the latest regulatory filing. It went from being his biggest holding in Q1 to his biggest sale in Q2. The 56% Q2 gain must have been too tempting to lock in.
Air BnB? Shmair BnB. Old fashioned hotels are killing it again this year, with 2016 trailing right on the heels of 2015, the best year ever for US hotels. Calculated Risk Blog reports.
Diversion: Did you see that one contestant literally dive for gold yesterday? Just to clarify this was the 400m, with no pool in sight.
Alimentation Couche-Tard “is nearing a deal to buy CST Brands in a big move to consolidate the convenience-store industry.” CST’s market value is ~$3.4 billion at present. It follows that the deal will be valued at that level or higher. Vancouver-based retailer Aritzia LP is preparing for an IPO later this year. The company, which “sells clothes and accessories aimed at 15 to 30 year old female shoppers,” has more than 70 retail locations across North America.
Concho Resources is set to acquire ~40,000 net acres in the Midland Basin in Texas for ~$1.63 billion from Reliance Energy. Praxair and German peer Linde AG are considering a merger that would create a “market leader (in the industrial gas space) with a value of more than $60 billion.” Berkshire Hathaway has increased its stake in Apple by 55%. It now owns 15.23 million shares vs. 9.81 million as of March 31.
Oil and Gold were rallying on the back of USD weakness. That was before FOMC member William Dudley’s comments hit the tape. According to NASDAQ, Dudley believes that we are “closer to when it will be appropriate to raise interest rates.” The knee jerk reaction was negative for both oil and gold. Oil is now down vs. yesterday while gold is trading well off the $1360 level it breached prior to 8:30 AM. The US dollar index is still lower, mostly on the back of a stronger yen, however; it has recovered some of its losses.
Fixed Income And Economics
Take two? All eyes will be on the Bank of England again today as they make their second attempt at purchasing long dated Gilts as part of their post-Brexit QE program. We’ll see if the central bank can this time meet their target mandate to buy £1.17 billion in benchmarks maturing 15 years and longer, that comes just days after they fell more than £50 million short of their goal the first time (that’s right, a central bank failed to find enough bonds to buy). The embarrassment of QE failure aside, last week’s shortfall has raised questions about the new program’s viability and what it means for the economy when holders refuse to let go of their risk-averse positions (even when at a profit). Ultra-low yields in government bond markets have led to sizeable funding problems for U.K. pension funds and insurance companies, which use bond yields to price liabilities. Lower yields mean larger deficits, which in turn encourage investors to buy more long-dated bonds to match their liabilities — pushing yields on bonds down even further. Note that 30 year Gilt yields are at 1.26% at time of writing, higher by seven basis points compared to this time during round one and likely to disincentivize holders further.
The USD is taking it on the chin this morning with the dollar weighted index off by a full point to 94.62 ticks at time of writing. It’s the lowest level we’ve seen for the metric since late June and seeing it down by this much is remarkable when you consider that nothing really has been released to warrant the sell off. Perhaps markets are focusing on the putrid Empire Manufacturing Survey that showed the index dropped to -4.21 points in August — well off the +2.00 expectation and returning to contractionary mode for the fourth month this year (details were actually not too bad with new order and shipments rising and employment conditions less negative from prior). Regardless, the aversion in greenbacks is broad based with every major currency higher led by the Yen (+1.50% and threatening to close below 100.00 for the first time since 2013), EUR (+1.02%), and Swedish Krone (+1.10%). The loonie’s gain is a bit more modest with the CAD higher by just +0.01% and catching the wave from oil.
A pair of CPI numbers are out today and we’ll start in the U.S. where the world’s largest economy failed to see any price acceleration in July. The 0% reading to the headline number can be wholly attributed to the price of oil sliding by 20% during the month so if you strip this component (and food which was unchanged anyway) out, core inflation did manage to eke out a +0.1% gain. Year over year, core inflation fell a tick to +2.2% and slightly slower than prior, but still marked the eighth straight month that it has been above the FOMC’s 2% target. Over in the U.K., July CPI showed little effects of the weaker British pound as annualized prices accelerated by +0.6% to mark the fastest since 2014. With Brexit and an easing bias from the BoE, the USD/GBP is likely to keep weakening (new 52 week high yesterday) and cause some concerns that inflation could eventually overshoot the 2% target.
Chart Of The Day
Quote Of The Day
You’re never going to learn something as profoundly as when it’s purely out of curiosity. — Christopher Nolan
So very true.