Deutche Bank’s Alan Ruskin had this interesting piece out yesterday on oil that argued when compared with 2015/6, there are at least six good reasons why lower oil prices would likely remain a relatively benign for global risk appetite this time around. Indeed, if oil contagion is going to show up at all, it will almost certainly going to show up in the EM commodity currencies next, while the developed world should remain well insulate, wrote Ruskin. DB clients can read teh full note on DB’s research portal.
Kinger Lau from Goldman Sachs had the most succinct piece out today following the decision by MSCI to add China A-shares to its benchmarks, as part of its 2017 Annual Market Classification Review. Implementation will be done in two stages: in May and Aug 2018. Lau covers the basics well first. Looking at the universe of stocks included, which indexes will change, the inclusion factor (5%), index weights, and flow impact, as well as which other markets will be impacted. Secondly Lau assesses the strategy around the decision, suggesting that such an inclusion has had mixed results in other markets, although GS does favour China A shares from a growth/valuation/sentiment point of view. They also provide some recommendations on sets of stock. GS clients can read the full note on Goldman 360.
Hani Sabra, Eurasia Group’s practise head for the Middle East gives his take on the decision by King Salman to promote his son, Mohammed bin Salman, 31, to the crown prince position, and relieved Mohammed bin Nayef of all his official duties. Sabra argues that Mohammed bin Salman will back a more aggressive regional approach (already on display with the Qatar crisis) and he will also champion Vision 2030 related economic reforms. Domestically, the move, while massive, will not spark a destabilizing royal family crisis, Sabra adds. For more insight on the Middle East from Eurasia, click below to enquire about their very generous trial terms.
The recent decline in highflying FANGs somewhat relieved an overbought condition, but it did not alter broader technical, macro, and valuation indicators, writes Ed Clissold from New Davis Research.
In this report Clissold assesses the merits of growth stocks after this recent pull back versus value stocks and the macro backdrop. NDR, while looking for a tactical reentry point into Growth, do not expect a repeat of the first five months of 2017. For access to this report, click below to contact provider directly.
Advocates of a ‘soft Brexit’ hope that the tide has turned in their direction, while the Leavites insist that nothing has changed, writes Peter Ludlow, author of the EuroComment newsletter and a prominent historian of the European Council. In this, his latest note, he makes the the underlying assumption that a fresh start might be possible, but only if the lessons of twelve mismanaged months are taken to heart by the government’s critics as well as by the government. Ludlow discussed three ways in which the British could enhance the quality of the post-Brexit settlement. Firstly, by altering the way in which the Brexit process is handled on the British side. Secondly by making partnership rather than confrontation the leitmotiv of their strategy and thirdly by buying time through an imaginative approach to the discussion of transitional arrangements. The paper finishes by proposing an initiative which EU27 could and should take on their side that might also enrich the negotiations. Ludlow’s insights are unique from anything else you will read in the analsyts community. Click below to request access or take a trial to this newsletter.
With US internet companies in the spotlight, some of the more traditional technology areas which are determined more by supply and demand are being overlooked, argues Jefferies Equity Strategist, Sean Darby. The demand for silicon and the semiconductor industry has strengthened in recent quarters. This report shows a detailed outlook of the silicon global wafer market and the consolidation of the semiconductor industry. We also wanted to flag up this report from Southbay Research. For capital goods, SouthBay tracks the semiconductor sector. During the industrial age, oil and steel were the universal common denominators of economy, silicon is the equivalent in the digital age. Simply put, what happens in the semiconductor world typically foreshadows what is about to happen in the rest of the economy. With semiconductors being a macroeconomic indicator, silicon wafer shows a clear picture of actual demand and production growth. This piece, argues that the demand for wafers has picked up suggesting an increase in global goods production. Jefferies clients can access this note on the bank’s research portal.
Greg Gibbs of Amplifying Global FX Capital is a veteran macro strategist, with a strong focus on FX markets. In this piece he examines the trend of flattening curves (not just in the US), what he thinks is driving it, and what it means for FX markets. Gibbs argues that flattening curves are a pivot to the way currency markets are set to trade. Until recently, a weaker USD trend, falling yields and oil, plus rising equities have boosted demand for EM currencies. However, risks are mounting for equities and investors may soon switch to seek out more traditional safe havens, such as gold and the JPY. Investors should also begin to worry that the US Federal Reserve will stick to its plan to normalize policy. Therefore the balance of risks is swinging towards out-performance in JPY vs EM and commodity currencies. This piece is available on SmartKarma
While all the attention is on technology stocks last week, investors need to be aware of a growing problem in US High-Yield credit, writes Simon Goodfellow of Harlyn Research. Harlyn’s analysis compares the total returns of every asset class and every sector in US dollars against medium-dated US Treasuries, with the probability of risk-adjusted outperformance ranked between 0-100%. The results show that Europe and some smaller EM markets are more bullish, while the US has fallen slightly from its March 10th score of 100%. Harlyn also provides useful long-term charts that look at equity performance relative to the 7-10 year bond return). Within the US sector breakdown things get really interesting. The only two sectors where things are improving are Utilities (equities) and Telecoms (IG), everything else is flat to down, says Goodfellow. Energy is singled out as the worst, with negative signals across equity, IG and HYL. Looking at specific sectors, the worst performers are Financials and Consumer Discretionary, which is where auto-loans are classified. High-Yield is bad across all sectors and for the index as a whole. Until recently most of the problems relating to high-yield were centred on Energy, now it is much broader, and Harlyn now sees evidence of contagion into Investment Grade. So while everyone else is fretting about the valuation of technology stocks, Goodfellow suggests investors devote a little time to credit analysis. This piece is available for purchase on RSRCHXchange.
Julian Brigden of MI2 Partners has done some interesting work on bubble stocks in recent weeks.In a report on May 30, he looked at the heightened risks of a sharp correction if a stock, in its parabolic phase of a classic bubble, started to lose momentum. This past week’s correction in many of the tech stocks that he referred to in that piece have clearly raised a red flag. In this follow up note Brigden – while conceding that he does not have enough evidence to call an emphatic top – suggests this is a time for ‘’unemotional risk management.’’ He draws some interesting parallels with the dot.com bubble, using MSFT and CSCO as examples of the parabolic bubble stocks of that era. Comparing them to today’s vogue tech stocks on the charts shows an uncannily similar pattern. This piece is available for purchase on RSRCHXchange.
The disconnect between the Fed’s hawkishness and the bond market’s dovishness continues to widen, with the US yield curve collapsing to its flattest level since 2007, observes BMI Research. In this report they outline a number of potential scenarios for the US bond market, and note that the risk of a Fed policy reversal is rising. That said, they still see US bonds outperformance to other DM bond markets. Mean time their very constructive on some EM bond markets, such as South Africa, where they have a strong recommendation. On the yield curve, BMI attach probabilities to 5 different possible scenarios that could play out.