All eyes have been on the regional business surveys this week and it’s been a pretty lacklustre performance, with the most depressed being Kansas where the survey’s main components for production, orders, shipments, and employment all deteriorated significantly during March and April, and didn’t recover this month, writes Yardeni Research. Yesterday the Dallas survey also painted a fairly depressing picture coming in well below expectations. Yardeni’s research suggests that the average of these six surveys’ regional composite indexes is much better correlated with the national M-PMI than is Markit’s flash M-PMI. Their conclusions are that the Fed’s headwinds are blowing harder through the soft patch than they believe. If so, then none-and-done (rate hikes) is still on the table too.
Recent comments from ECB’s Coeure, where he said the central bank will accelerate the pace of purchases over May and June to avoid the summer lull only reinforce the fact that European rates markets are nor pricing any ‘scarcity premium,’ says the Royal Bank of Canada. Their fixed income strategists make particular reference to how Bund asset swap spreads have now cheapened to pre-QE levels. In this report, RBC reaffirms earlier trade recommendations, and adds further favourable rationale for these trades.
After months of range-bound activity, USDJPY broke the 122 level and traded to 7-year highs, and should it breach 124.14, next stop could be 135. Therefore, with this significant technical break in the pair, it’s important to review the drivers for the move and whether this will prove to be the launching pad for a significant further move higher in USDJPY. Saxobank’s FX strategy team examine the likely key drivers going forward, and produce a mix of possible scenarios, but conclude USD strength, driven by US economic data will be key. If there’s a return to stronger data, then a combination of USD strength and light positioning, then the move higher could be aggravated and front-loaded if traders fear getting left out of a new trend in the days ahead.
China’s 3 main equity benchmarks are showing the largest positive back-to-back risk-adjusted returns across ALL regions and assets on both a 5- and 90-day basis, writes Rareview Macro. The headline writers, says Rearview, point to backdrop of this performance – weak economic data and too much liquidity – as an indicator of an ominous stock market correction. This is the wrong narrative, says Rareview. The Chinese economic slowdown needs to be seen as a ”China restructuring” theme, that sits comfortably alongside the “Japanese reflation” or “European recovery” themes. Like Japan and Europe, Chinese markets were priced for insolvency and any reversal of a generational loss will result in a multi-year asymmetric outcome. In simpler terms, this is only just the beginning. This piece then provides a detailed analysis on what is really going on with China’s state-owned enterprises and those worrying levels of debt that has had so many investors worried about China, as an investment destination.
It’s like a slow motion train wreck. For months Greece has been edging its way to what seems the inevitable Grexit. Most analysts see this as a binary situation. But there could be another way, says Bank of America’s Athanasios Vamvakidis. Leave them alone. If Europe prefers to avoid Grexit, Vamvakidis offers a theoretical scenario that’s worth considering given the high risks ahead for Grexit. It involves, to name just a few, repaying the Greek bonds held by the ECB, re-profiling loans to the Greek government, and leaving Greece alone to achieve its fiscal targets, with no more ESM or IMF. Who knows, it might work. Top marks for originality.
A change in the price dynamics of the US Treasury market is a foot, says the Royal Bank of Canada, which could see the recent back up in yields continue. RBC provides some excellent analysis to validate this view based on cumulative daily changes in US 10-year yields across the three main time zones, and bond market reaction to economic data in the second-quarter, which looks markedly different to how markets reacted to data throughout 2014.
As markets head into the long weekend (In the UK and the US), professionals will probably be doing some soul searching as to whether the short term trends have just resolved themselves inside longer-term trends. Indeed they may well return to their desks on Tuesday and realize they have very little exposure to risk after the recent clearing process, writes Neil Azous, from rareview macro. The cleanest trade to express across all markets at the moment to express this is being long USDJPY, says Azous. The call is based on a recent evidence of BOJ actions in the JGB market and some interesting technical analysis to points to the top side.
Fed liftoff took another hit this week after the April’s Fed minutes showed that policy makers had become nervous about the economic outlook in the US. Rate rises will most probably be delayed till later in the year. However, Charles Gave of Gavekal Dragonomics worries that the US may be in fact sliding into a more serious downturn. In his note ‘’Towards A US Recession’’ Gave provides his analysis based on the thesis of a growing ‘’financing gap’’ for US corporations, which has historically been a leading indicator for a recession.
Yesterday’s China manufacturing PMIs for May paints a picture of persistent weakness in the world’s second-largest economy, says Unicredit. Just how China’s weaker growth outlook manifests itself in across the global economy is a key question. Unicredit provides some key analysis to this debate, by stress testing the global economy, across regions, for deceleration of Chinese growth. Contrasting the Eurozone with the global economy, and contrasting economies within the Eurozone makes for some interesting findings.