Tuesday, June 2Hamish Risk | June 2, 2015
There’s a degree of wait and see in the tone of research being published at the start of the week, with so much market risk concentrated at they back-end of the week. We’ve seen a plethora of notes on Greece as we look to Friday’s so-called D-day, but we sense there’s a fair bit of fatigue from the ”he said” and then ”she said” volleying that readers have had to absorb, we will wait to see what happens at the end of the week. Much of the European macro research focuses on the ECB meeting and press conference this week, and the continued dovishness of its statements on QE. As Citi notes in its weekly currency strategy note, this is likely to have consequences for the Euro, and perhaps a further leg lower in the euro. In the dollar-bloc, the easing bias seems to be taking a breather, after the RBA left rates unchanged today following some very weak capex data last week. NAB suggest further rate cuts are necessarily the panacea to an Australian economy in transition.
1. RBA pausesNational Australia Bank notes a few substantive changes to the perceived RBA view of the economy revealed in today’s Monetary Policy Decision Statement. For NAB, the key changes or important continuing themes were: 1) Recognition that the economy has been doing better recently, 2) But in the medium term greater certainty that weakness in business capital spending in both mining and non-mining will be a key drag on the economy, which is likely to persist over the next year (the greater certainty revealed here likely reflecting the weaker Q1 capex survey released last week); and 3) The Bank’s continuing desire for a lower $A which it sees as “both likely and necessary, particularly given the significant declines in key commodity prices”. NAB concludes ”We would also increasingly question the general suitability of interest rate policy in targeting business investment and see the role for monetary policy more in countering any second-round impacts from weaker mining investment into the non-mining economy.”
2. EUR – worse to have tried and failedDespite the Euro holding its own around 1.0900 in recent days, the pullback from its mid-May highs of 1.1400 has further to go, and the main driver isn’t the ongoing nervousness on how Greece will evolve, says Citi. Writing in their Strategy Weekly, Citi’s FX research team have produced a comprehensive breakdown of the drivers of a lower Euro, that are encapsulated by macro risk, shifting economic momentum and emerging technical signals. Furthermore, they note renewed weakness in the Eurozone surprise index, which gives a reasonable tradable signal for further EUR weakness. A compelling read
Emerging markets Rareview macro
3. Changing DM-EM dynamicsAs noted in yesterday’s newsletter, emerging markets are facing some serious head winds, and much of that has to do with uncertainty about US growth and expectations of Fed rate hikes. Rare-view macro point out a great statistic that tells us a lot about the shifting dynamics between developed and emerging markets at the moment, and that’s EEM/SPY ratio, which currently stands at -6.75% since the end of April. It’s a measure of how EM equities are underperforming US equities. Rare-view points to South Korea’s most recent export numbers illustrate one of the drivers here; subdued global demand. While South Korea can hardly be classified as an emerging market these days, its export numbers are a helpful barometer for EM’s reliance on markets in China, Japan, Europe and the US. South Korea’s exports fell by almost 11% in USD terms between May 2014 and May 2015, the biggest annual decline since August 2009.
4. Bund flatteningPicking through the ECB’s May QE report, Unicredit’s fixed income research team have come up with an interesting observation on the Bund spread. In looking at the reduction in the average maturity of purchased government and agency bonds, they find that the main contributor to this decline was Germany where at the end of May the PSPP had an average maturity 1.7 years lower than its outstanding debt. Unicredit analyst Chiara Cremonesi notes that this may explain some of recent bear steepening of the 10/30Y Bund spread. In this report Cremonesi outlines her rationale as to why the Bund spread is likely to flatten from here.
US equities Jefferies
5. Strong dollar, misbehaving saversThe Jefferies equity strategy team brings together a cluster of themes in this piece that look at the recent return of USD strength, and changes in US household and corporate sector behaviour. They note that the US dollar is acting as a double edged sword. Great for domestic liquidity conditions but terrible for profits and relative competitiveness. Meanwhile the US consumer has increased its savings rate while the corporate sector has seen investment spending drop – another form of ‘saving’. Jefferies sees three key equity themes developing around these dynamics and they outline them in more detail in this note.
6. What Brexit really means for UK growthLombard Street Research has cut through all of the noise surrounding the potential economic impact – and the risks brought about by – a ‘Brexit’ referendum with an excellent piece that explores various exit negotiation scenarios. Should there be a ‘no’ vote in the referendum, the crucial aspect investors will need to consider will be the degree of access the UK retains to the European Single Market (ESM). The article also looks at the impact of varying degrees of success that the UK might have in negotiating free trade agreements with non-EU countries. In summing up, Lombard makes some very interesting conclusions on what a ‘no’ would mean for medium-to-long-term economic growth in the UK which you may find surprising, so this piece is well worth a read.