US existing home sales were 2% higher in July, the third monthly increase in a row and the highest level since 2007. BMO Financial Group provides a useful run down of this and other recent numbers that show the US housing market in good health. Admittedly there are problems, especially for first time buyers. But overall the sector is in good health. They also explain how the fall in the leading index can be explained by the ending of a tax exemption in New York for building approvals, which caused many to rush applications ahead of a July 15th deadline. The decline after that date was self-explanatory. The report helps show that at the local level, the US housing market is doing well.
The devaluation of the RMB adds to the competitive threat that many industries already face from China. In the latest report from Credit Suisse’s Connection Series looking at equity themes, a number of sectors are analyzed, looking at which might be most at risk from the increasing, strategic, competitive threat from China. One of the conclusions is that the auto sector is perhaps most at risk. The RMB devaluation comes on top of three other drivers of competitive risk. First, China is exporting its excess capacity. Second, it is moving rapidly up the value chain. Third, Chinese companies are willing to operate at much lower margins than their western counterparts. Throw a weakening currency into this mix, and the competition just got even harder.
Much of the commentary on today’s release of the Fed Minutes has been slightly surprised at the lack of a clarity towards the first rate hike. The markets were clearly expecting a more hawkish release. Unicredit however, feels that the minutes do show that the members of the FOMC are getting closer to the first rate hike. They stick with their call of a September move, especially as the minutes note that the FOMC believes the recent low inflation number are due to temporary factors. However, this is tempered, by the need for more data. As they note, the key sentence in the minutes is: “most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.”
By looking at whether investors in local markets are shifting from local equities to local bonds, Harlyn Research has found that there has been a sharp decrease in risk appetite around the world. Only Switzerland has a positive and increasing appetite for risk. The UK, Eurozone, China, Russia, Australia, Canada, Mexico, Brazil, Korea and South Africa all have negative and falling appetitie for risk. The US is marginally positive but the authors note that it will only take a few bad weeks of equity performance or good performance for the bond market for it to move into negative territory. The reason behind this global shift away from equity exposure is, they believe, because of worries about China and the impact its slowing economy will have around the world. They conclude by suggesting that if China actually starts to export deflation, then a 2.2% yield on US Treasuries might start to look quite good.
The Japanese Prime Minster, Shinzo Abe, has pledged to do whatever it takes to get Japanese economic growth back up to 2.3%. However, many of his moves, while bold, have failed to have the desired effect on growth. Citing an internal government report, Medley Global Advisors today say that in order for growth to reach 2.3% by 2020, there will need to be an additional 600,000 foreign workers in Japan. For a country that prides itself on the homogeneity of its culture, this is a politically sensitive issue. Indeed there are only 800,000 foreign workers at present out of a population of 130 million. But with that population likely to fall to around 100 million by 2050, the need for foreigners is becoming ever more pressing. And yet, Medley believes the politics around this are likely to trump the economics and Abe will not open the gates to hundreds of thousands of foreigners. He may allow those with advanced technical degrees to enter but that would only be tens of thousands.
A report from UBS yesterday lowers their price target for the Malaysian equity market, and says there is a real danger of the economy and the equity markets spiraling lower. Indeed, the KLCI has already fallen 7.2% and the Ringitt by 6.7% over the past month. The country is in the eye of a global storm. The expected fed rate hike, a weakening RMB, and falling oil prices are aggravated by the deepening political crisis that is engulfing the country at the moment. Even if the country has some strong economic fundamentals such as high foreign exchange reserves, a current account surplus and positive real interest rates, these might not count for much in the face of a deepening crisis of confidence. The government now needs to provide clear leadership in policy direction and structural reform.
The latest release of the Westpac-Melbourne Institute Leading Index indicates the Australian economy is losing momentum. The likely pace of economic activity three to nine months into the future is slowing and this is denting optimism that 2016 might be an improvement in growth terms from 2015 and 2014 (around 2.5%). Westpac’s Chief Economist Bill Evans discusses what this implies for the Reserve Bank of Australia’s economic forecasts, which have only recently been revised lower.
The one thing that has been consistent about Chinese authorities is that their decision-making has been unpredictable. Andrew Batson from Gavekal reckons that unpredictability won’t go away anytime soon: in Xi Jinping’s China, it is increasingly clear that the government is not carefully working its way through an economic reform plan, he adds. In this report Batson discusses how things have changed in terms of the reasoning behind key decisions under the leadership of Xi Jinping and how they are defined in the context of nationalist political terms, rather than in pure economic terms. This isn’t widely understood by most observers and investors in China, and Batson attempts to provide some insight on what implications this will have in the ongoing reform process. That’s likely to make markets more unpredictable and volatile.
With FOMC minutes out today we thought we would highlight this extensive work produced by the UBS economics team that seeks to address a myriad of questions around the Fed exit strategy/policy normalisation process from zero-bound interest rates era. It’s in the format of FAQs and indicates a complex process which will face several challenges. This piece sets out to explain these in turn, starting with how the Fed will set the various interest rates it has at its disposal (Fed funds, IOR, RRP, and the discount rate), the return of a corridor system and the impact of the Fed’s balance sheet reduction, and it’s likely impact across the curve. They also look at what this might mean for the equity market. So if you’re in for a quiet morning, click on the link below and you will almost certainly learn something about about policy normalisation and how the probable hike in September is the easy part.
EM outflows are getting more and more attention these days. The FT reported yesterday that there have been over $1 trillion of outflows from EM in the past 13-months. So the release of BAML’s investor survey was particularly interesting with two particular stats of most interest. Firstly, and perhaps unsurprisingly, investors are at record underweights for EM (higher than during China debt scare (Mar’14), Lehman (Dec’08) & Lula (Oct’01), and secondly, relative positioning between EM and DM is now at the most extreme on record (April 2001). Who is the beneficiary? See the full report on BAML Mercury, but we’ll give you a hint, it’s not the USD, which the majority of investors now regard as overvalued and crowded.