There’s been a slew of long-term outlooks released by ‘big oil’ of late, as well as the release of the BP Statistical Review last week. UBS equity research has published this report that takes stock of these energy outlooks and how they fit with some of the consensus views on the outlook for energy markets, including primary energy demand, the end of the oil’s share of global energy demand, and the future of natural gas, nuclear, renewables and the decline of coal. Makes for interesting reading on where ‘big oil’ stand on these issues, and who the outliers are.
With rates for 30-year fixed rate mortgages keyed off the 10-year Treasury yield -which has risen almost 50 basis points in the past two-months – you might expect that housing demand to have taken a hit. Not so according to June’s NAHB builder sentiment index, which gained five points in June to return to a cycle high level of 59, writes Deutsche Bank. Overall, the June index reading argues that housing demand has remained strong late in the spring selling season, despite rising interest rates. Further sharp rate increases do, in DB’s view, pose a risk to current housing strength; however, rate increases to date do not seem to have put a meaningful dent in housing’s recovery path, they say. Deutsche also examines the seasonal patterns around the behaviour of the index, which yesterday’s numbers run counter to, and they urge investors not to get overly excited about the latest figures.
With all of the volatility in European government bond markets over the past month, levels of issuance in the European high-yield bond market have fallen off a cliff, but last week saw the market kick start again with 3 billion euros of issuance versus an average of the prior 5-weeks of just 535 million, writes CreditSights. This came even amid continued volatility in the Bund market. There’s a good round up of the issuers that came to the market, and some interesting metrics that show that despite all the turmoil, European high-yield is still the best-performing fixed income asset class year-to-date.
At the risk of ever-so-slight exaggeration, in macro terms the country might as well not exist, writes Jonathan Anderson from Emerging Advisors Group. The conventional thinking is that being the world’s third-largest economy there must be a flow on effect to the emerging universe from the weak yen, zero interest rates, super-expansionary monetary policy and export competitiveness. However, according to analysis from EMA, it turns out that in the context of neighbouring Asia, Japan has become almost irrelevant as a macro theme. This is sure to surprise many investors, but EMA’s analysis focussed on five areas: trade links, asset flows, FX influence, interest rates and profits and competitiveness. They found it surprisingly hard to find a single sphere where it had a meaningful impact. This piece is essential reading.
The FX strategy team at Royal Bank of Canada have just introduced a new barometer for measuring Euro area market conditions after creating their Euro area Conditions Gauge (ECG). Using the gauge they hope to quantify something that seems intuitively plausible; That a very rapid rise in yields and/or EUR will tend to be self-correcting, particularly if the rise is not fully justified by better economic prospects. But if the ECB is showing no signs of concern over market developments, so it is fair to ask, should RBC care? Well they argue that it is something to monitor as rapid rises in this ECG tend to come ahead of softening survey/business sentiment data. This might prove to be useful, and the report takes the reader through its construction and historical price action to provide context on how the index is behaving currently.
While equity markets have by-and-large avoided the fall out from the sell-off in global bond markets, rotation within the equity market may be just about to begin, writes Sean Darby from Jefferies. This comes amid new lows for implied stock correlations, some poor equity positioning (large US equities outflows in 2015), and non-uniform economic performance across regions in the US. Meanwhile, the implied volatility of the VIX has fallen while US bond volatility has climbed sharply. Watch this space, says Darby. This report has an extensive screening of US equity names that exhibit good forecast dividend pay out growth as well as positive momentum in target prices and earnings.
In Erik Nielson’s Sunday comment, he focuses in on the increasingly troublesome world of EM – which he says is increasingly getting the attention of investors – and where there are multiple factors that provide a fairly negative picture for the asset class. Firstly, he points out the results of Unicredit’s latest proprietary Global Leading Indicators and last week’s EM fund outflows and then his reasoning behind his bearish outlook, which is that this is no cyclical downturn but something much more structural. It will be much harder to turn this around. There’s also a breakdown of what this means for China, Brazil, Turkey and Russia. Finally there is some recommendations for EM investors, the European corporate sector, and some solace for the Euro area and US economies.
The prospect of a Greek default no longer poses a serious threat to the rest of Europe, writes Anatole Kaletsky from GavekalDragonomics. The sad thing from a Greek perspective is that Prime Minister Alexis Tsipras does not seem to understand this, given his belligerence in the ongoing negotiations, and belief that Europe needs Greece as desperately as Greece needs Europe. This now risks catastrophe for his country and humiliation for his Syriza party, or both, says Kaletsky. There is a very sound basis for this view, and Kaletsky lays the ECB’s quantitative easing program at the core of his argument because it has now effectively created fire-breaks at each point in the contagion process. This is a great read, and if you’re a Gavekal subscriber there is some other interesting comments from fellow subscribers to follow up from this piece that offer some useful insight too.
This week’s FOMC meeting is technically a ‘’live’’ meeting but the chances of raising interest rates are effectively zero, writes JPMorgan’s chief economist Michael Feroli. Investors should be instead focused on what is signaled in the interest rate forecasts, or “dots,” of the Committee participants, with the most immediate issue being what the 2015 dots say about the timing of liftoff, says Feroli. In this piece he discusses a few possible scenarios if there is an increase in those who forecast less-than-two hikes in 2015, as well as JPM’s own prediction on how many of the committee will lower their dots, from two hikes in 2015. How the dots are rearranged will be crucial to the market’s understanding of whether the Fed still believes September lift-off is viable. There’s also some interesting discussion on lower 2016-17 dots, lower longer-run rates, the merits for raising rates at ‘’off’’ meetings and whether that raising them in increments of 12.5 basis points would ever be possible option for the Fed.
The euro is now about 8-big figures higher from its mid-March lows and could threaten to undermine the euro zone’s exporter competitiveness potentially curbing the economic recovery. We need not worry, writes Credit Suisse, because recovery, which is beginning to emerge in Europe is being driven by domestic factors; the exchange rate and external demand may matter at the margin. Instead, the recovery rests with the euro area firms and households react to the improving sentiment that is emerging. The revival in consumer and corporate spending, as well as the end of fiscal tightening, is what matters. If domestic demand falters, so will the recovery, the report’s authors say. Credit Suisse provide plenty of detail and charts on pages 4-5 that look at measures of consumer spending, nominal incomes, and corporate profits, for useful context and then round out the piece by outlining the positives for the euro area versus the US economy, from an employment and corporate margin perspective.