Hedging the unknown

Even though “Grexit” has now entered the vocabulary of official policymakers, financial markets have not panicked. It could well be that the majority of investors consider that Greece, with its Balkan-style governance and administration of Marxists and anarchists, really is an aberration that deserves a special treatment, writes Francios Chauchat from GavekalDragonomics. This report emphasises the widening gaps between Greece and other perceived, or otherwise, vulnerable peripheral countries such as, Portugal and Spain at a political and economic level. The report reviews the events of the Cyprus bail in. They write that the Cypriot precedent demonstrates that in the absence of a direct impact, the implications of negative psychological shocks are unpredictable. Nasty domino effects may or may not result, and forecasting them is a highly speculative exercise. The report closes out with some ideas on hedging their overweight European equity position via the Bund market.

What happens to European equities if Greece defaults?

Last week BAML’s latest Fund Managers Survey showed that cash positions were at a six-year high, hedging activity was the most prevalent since the GFC, and a majority expected either Grexit or a default. BAML reckon that this cautiousness is reflected in the fact that European equities are little changed in the past week despite the deterioration in negotiations between the European and Greek negotiators. So what are the likely scenarios for equity market performance in the wake of a default, or a positive outcome? BAML suggest there perhaps a higher delta on the top side, and the explain in more detail in this piece. How to play this? Merrill suggest optionality is probably the best strategy, and the offer suggestions on structures to conclude the report.

UK-US labour markets run in parallel, but their Central banks’ don’t

UBS have done doing interesting comparison work on the similarities between the UK and US labour markets, with many if the indicators heading in the same direction and more or less at the same pace. The starkest thing to note, writes UBS’s David Tinsley, is that there is reasonable evidence that wage growth in both the US and UK is picking up. Yet, the market’s view on interest rate hikes is more equivocal about the timing of the first rate hike by the Bank of England, than it is about the Fed, say UBS. Why so? Read the report.

A new US housing boom?

We highlighted last week the positive NAHB builder sentiment index for June, which seems under affected by the recent rise in US Treasury yields. So we thought we would point you to this piece by John Burns, of John Burns Real Estate Consulting. According to Maudlin Economics, Burns knows the industry better than anyone, and when he makes a call, he is typically early, and right. That is, US homebuilders are getting ready for a new construction boom, and it appears counterintuitive to most of the research on this subject.

Handing over the baton of global earnings leadership

MRB yesterday published an extensive strategy report on global equities and regional positioning, underpinned by a pro-growth bias. Their key points are that equity market leadership is in the midst of passing from the US to non-US markets. That’s because these markets have greater leverage to an economic recovery given the stage of the relative earnings cycle. The sectors to benefit the most will be the non-resource cyclical sectors, including Germany, Japan, and Sweden, while those to suffer the most will be Australia and Canada. As we say it’s an extensive report, running to 32 pages, but it’s thorough and covers a huge amount of ground.

Shifting from hawkish to neutral

Neil Azous from Rareview Macro writes that there were a lot of similarities between the June and March FOMCs in terms of the path of pricing heading into the meeting. In March, Eurodollar futures priced in a moderately hawkish scenario, and this was similar heading into the June FOMC. So given the interpretation that this week’s FOMC was dovish, the market’s pricing of interest rate probabilities for the rest of the year is moving from a hawkish profile to something that is more neutral with the potential to overshoot on the dovish side. Azous then explains what that means for the Eurodollar strip out to March 2016. There’s also some interesting thoughts on how the curve could be impacted by a Greek default. It’s a new twist to the market and Azous reckons it hasn’t been priced into people’s risk systems.

Nearly time for the BOE hawks to take flight

Wednesday’s FOMC perhaps overshadowed some pretty significant labour market data in the UK that came out the same day, where the headline Average Weekly Earnings series showed pay growth rising strongly. In this report UBS suggest that the data could force the MPC to reassess their two key concerns for the economy (speed of wage rises and H2 economic bounce back) and also reconsider rate hikes sooner. On current form, both could surprise to the upside, says UBS. UBS expect to see some dissent from the hawks at the next few meetings, concludes David Tinsley, the author of the report. The report also provides some analysis on the front end of the UK and curve and GBP.

Go on America, loosen those purse strings

Its been a question economists have been asking for six-months. When would the US economy start to see a positive consumer response to the decline in energy prices? The latest data seems to indicate that it maybe finally coming, writes Louise Purtle and Isaac Codrey from CreditSights. They reference retail sales, positive consumer sentiment surveys, and wage growth as reasons to feel positive about rising spending. Perhaps the most interesting point about this piece is the analysis CreditSights have done on the financial metrics of the US consumer, which have improved significantly in recent times, and there a couple of illuminating charts to tell the story, and that suggest there is scope for a pick up in spending. What will be the catalyst for next leap in spending? CreditSights conclude that the consumer just needs to be convinced that these favourable conditions are here to stay.

Capex: Corporate Asia’s engine slows

How companies allocate capital varies differently across the globe. For European and US companies mergers and acquisitions the most popular destination for capital, followed by capex. In Asia, capex remains the largest use of capital. Morgan Stanley has just published this piece that paints a less-than encouraging picture for Asia capex. After a some improvement in Q1 –largely as a result of public sector capex – the improvement hasn’t been sustained in the second-quarter. They point to higher-frequency capex indicators such as steel and cement which have slipped after a positive start to the year, while capital goods are falling too.

Don’t NOK a ‘no-change’ from Norges Bank today

Today is rate decision time for Norges Bank, with all but one out of 17 surveyed analysts by Bloomberg expecting a 25bp cut by Norges Bank to 1.00%. That’s because many of the key economic indicators that the central bank looks at have showed further weakness since the beginning of May, writes Henrik Gullburg from Deutsche Bank. That said, core inflation has accelerated to 2.4% YoY in May from 2.1% in April, helped by the 5% depreciation of the NOK on a trade-weighted basis, he says. Furthermore, there is a concern that the housing market may be overheating as well as the high levels of household credit that exist. Bottom line is another ‘no change’ cannot be ruled out. Gullburg provides some good charts on imported inflation and ”fair-value” on NOK.