Wednesday, 27 MayHamish Risk | May 26, 2015
Two key themes continue to predominate the markets; the lacklustre US economic data and the torturous negotiations between Greece and its creditors, with a deadline that draws ever closer, and where predicting a likely outcome has become a fruitless exercise. As for the US, economists continue to try to look for any signs of a second-quarter recovery, but its hard to find, and the term ”secular stagnation” has begun to appear in several reports in recent days. China’s surging equity market is an interesting case, given all the talk from a majority of analysts about a potential ‘hard landing.’ Equity markets suggest something else may be a foot, and we highlight an interesting piece of research below that suggests the ”China restructuring” theme may just be beginning.
Equities Bank of America
1. The rise of generation Y
Also known as Millennials, a demographic born after 1980, this group of the population is set to become a dominant economic force, both in terms of accumulated wealth and consumer spending usurping the Baby Boomers, according to Bank of America Merrill Lynch, who have published their analysis on Millennials, as part of their ”A Transforming World” series. It makes for fascinating reading, full of interesting statistics, and a catalogue of labels that define and represent this generation. The piece also highlights eight entry points for investors wishing to play the Millennials theme.
US economy Yardeni Research
2. What’s the matter with Kansas?
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.
European rates Royal Bank of Canada
3. A ‘scarcity premium’ where none exists
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.
4. USDJPY breaks the boredom
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 Rareview macro
5. China’s equity market surge
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.