BRL: Will the Central Bank do Damage

The Brazilian real has come under considerable pressure in the last few weeks amid the general weakness of emerging market currencies. Against this backdrop, tomorrow’s central bank meeting is particularly important, write Commerzbank FX strategists. At its last meeting in March, the central bank surprised the markets with its dovish stance. If it maintains this tomorrow, the BRL could face additional headwind. These implications are discussed in this note. Commerzbank clients can read the full note on the bank’s research portal.

EM Equities: Peak Smartphone

With the mobile app landscape certainly becoming stagnant, China tech earnings are under pressure, writes Sean Maher from Entext in this note published April 25th. Contrarily to the argument made in this Data Trek report, Maher argues that the drop of the MSCI China Index, which is concentrated in around 30 – 40 consumer names in tech, and the peak in several tech industries is leading to a larger than expected slowdown in Chinese growth. He maintains his neutral stance on EM equty allocation have downgraded his 2-year long overweight in January, however he points there are increasing signs of earnings weakness beyond China, with both Taiwan and Korea tech companies experiencing particularly weak net earnings revisions. In this report, Maher also discusses those emerging markets which are undergoing contractions and those where economic data seems more promising.

Equities; The Quiet American

With all the focus on trade disputes between the US and China and global political tensions, investors may be overlooking the potential of Europe. That is the view of INTL FCStone’s Vincent Deluard, who believes rather than becoming irrelevant on the world stage in the light of power struggles between Trump, Xi Jingping and Putin, there are signs of life on the European continent. He points out that European indices have outperformed the US and China since the announcement of steel and aluminium tariffs. In wars, he says, it is those that sit on the side lines that tend to come off best. Furthermore he believes Macron’s reforms in France, the performance of the Italian equities and the pound all point to bright investment opportunities on the continent, while a discrete growth miracle in Eastern Europe is under-appreciated by investors.

OPEC, not Iran Holds Key to Oil Prices.

Yesterday saw the release of OPEC’s monthly report where they forecast rising global demand and a market that could fall into deficit as Iranian oil sanctions bite. Analysts such as Bill Farren-Price from Petroleum Policy Intelligence says that supply issue with regard to Iran has probably been overplayed somewhat, but the truth is, we do not know what it will add up to at this stage, as we have to wait and see whether Europe will hold its course or buckle to US, says Farren-Price. Venezuela probably still more critical in supply terms. Therefore the most immediate issue for the geopol-energy nexus is the June OPEC meeting, where the GCC will be itching to relax the cuts and make up for any putative Iran losses, says Farren-Price, adding that he cannot see why Iran or its friendly neighbour Iraq would agree to that. Therefore, it could be a very rocky meeting for an organization that is already struggling badly to be meaningful without the help of Russia, who as yesterday’s OPEC report showed are hardly cutting anymore .

Vacation as an Economic Indicator

Nick Colas and Jessica Rabe at Datatrek have done some off-beat analysis on US vacation trends in a attempt to understand how the Americans might be feeling about their own job security and the state of the economy. Their source material are a collection of travel industry surveys and the use of the Google trends function, which Datatrek often use as part of their research on industry disruption, an underlying theme of their work. So as we head into the summer holiday season what does the data say that might be instructive for investors? From a top down point of view, the US economy is still on solid footing going into the end of Q2. Datatrek shows that it takes a lot to get Americans out of the office, and the Google Trends data shows they are gearing up for summer vacation season. From the bottom up, Datatrek says it would be very cautious on traditional summer travel-related plays even in the face of this good news. That includes hotels, theme parks, and rental car companies. The Internet and mobile has clearly disrupted their business models and pricing power. Online travel companies are the Amazon to their bookstores. And even with a strong summer season, they will feel that impact. Datatrek’s Morning Briefing is a essential morning email if you like to understand disruption, millennial trends and how this interplay’s with markets. And it’s great value for money. Click below to subscribe.

Oil and Retail Sales; When Will it Start to Bite?

Analysts expect a pick up in retail sales momentum when the latest US retail sales data is released tomorrow, but as Bob Savage from Track Research points out, oil and the relationship to consumers will be key focus with US retail sales going forward, as oil price rises counterbalance any tax cut effects. The rise in oil prices follows a year of OPEC production output cuts, significant global growth and disruptions from places like Venezuela and Libya. No one is sure where oil prices matter to consumers, says Savage, but the crunch time is far closer now than at $40 bbl. Savage publishes an excellent weekly note each Sunday that previews the upcoming week which we find very useful. Savage says the big question to ask this week, following last week’s lower than expected CPI number is: Does the USD and inflation matter to markets in 2Q? His argument is that while short-term, the inflation readings may be on the soft side, the bigger picture here is that the drop in Service CPI and moderate wage inflation has been countered by rising food and energy costs. Click below to request access to, or a trial to Track’s weekly preview.

Asset Allocation: Lacking Reasons to Reallocate

Tim Hayes, Chief Investment Strategist at Ned Davis Research, describes the 2018 weakness as a correction within an ongoing cyclical bull market, expecting new highs ahead. Looking at the VIX and bond yields in the last couple of months as potential signs of market sell-offs, bond yields and market indices have maintained their positive correlations, while the VIX has continued to correlate inversely with both the market indices and bond yields. Hayes believes this inverse correlation is related to the unwinding of the crowded inverse volatility trade, and rather than responding to the market’s contra-trend move by cutting exposure, NDR maintains their overweight equity allocation of 65%. Focusing on the MSCI Europe ex. U.K. and U.K. indices, MSCI Emerging Markets Index and U.S. Dollar Index and gold, this report describes NDR’s model and scorecards for each of these allocations. In their models’ valuation assessment, Hayes explains that the improvement has not been great enough to be a significant positive influence on the European index allocation while the negative considerations have been insufficient to influence the EM Index allocation. Click below to request access to the full note.

EM Crisis? What Crisis?

Four out of the last five Federal Reserve tightening cycles have ended up with crises in emerging economies, but the consensus is that this time it will be different. That is a view shared by Philip Suttle at Suttle Economics, who points to the fact that EM equity indices, heavily weighted towards China, are merely mirroring equity performance in developed markets. He accepts that the rising risk of trade protectionism adds a new risk factor for small open, US-dependent economies and that rising offshore dollar rates has made EM economies more vulnerable to a reversal of USD-denominated credit inflows. Overall, however, he believes that the risks of contagion that have categorised recent previous EM crises have greatly reduced. That is because most EM economies have come to realise that the costs of tightly pegged FX rates far outweigh the benefits, while EM economies’ balance sheets have improved as leverage, especially short-term debt, has been reduced relative to FX reserves. Click below to request access to the full note from Suttle Economics directly.

Italian Coalition Talks: Seven Things we Know and Don’t Know

A Five Star/League government seems to be taking shape in Italy, which according to this report from Yvan Mamalet and Ciaran O’Hagan of SG, was their worst-case scenario three months ago. However, given only a small majority in parliament and divergences between the parties on economic issues, their ability to deliver large fiscal stimulus seems limited. Nonetheless, an increase in the fiscal deficit and tensions with the rest of the EU appear likely. Surprisingly, say SG, the market is taking the news rather well for now. SG offer an opinion on why this maybe, arguing that investors possibly think Italy will go the way of Portugal, where the new government unpicked reforms. But there are key differences, SG say, and Italy is on negative outlook with Moody’s, perched a little above junk status. This report looks at the prospects for ratings and they concludes that the outcome is likely to be rather binary, justifying option strategies such as a put backspread. SG clients can read the full report, or dial into a conference call on the topic at 3 pm (UK time) today. All details are on their research portal.

Iran Oil Sanctions; Supply Reductions Could Hit Market Sooner than Expected

Hedgeye’s Joe McMonigle conducted a thoroughly informative conference call last week to discuss the US withdrawal from the JCPOA. On the call he said the political risk of lower oil supply from Iran has now become a reality after the US re-instated all US nuclear sanctions on the Tehran regime, and is likely to come sooner than the market currently expects. Although there is a wind-down period of 180 days until the sanctions come into effect, conservative European companies with interests in the US are likely to bend to Washington’s demands sooner rather than later, he says. Meanwhile the prospects of the EU being able persuade the US to provide exemptions for European companies from the sanctions are slim as it would take the teeth out Washington’s policy. Indeed, he says the chance that Iran will restart its nuclear programme could be another catalyst for lower oil supply and higher prices as the EU joins the US and re-imposes sanctions. McMonigle has some excellent contacts within OPEC, and he warns market participants to NOT expect OPEC to end its production cut at its meeting next month, while Saudi Arabia is unlikely to make good on its promise to mitigate supply disruptions any time soon. If you’d like access to the recording of this call, click below to request access from Hedgeye directly.