Germany shrank, and France stagnated in the second quarter. Italy we’ve all agreed not to talk about until Matteo Renzi waves his magic liberalisation wand, right? Here’s the FT: The data from the currency bloc’s two largest economies came as the embattled French government said the disappointing growth meant it would miss its budget deficit this year and halved its gross domestic product forecast for 2014. Germany’s economy, which provides more than a quarter of the euro area’s output, shrank 0.2 per cent between April and June, according to official figures. The French economy recorded zero growth during the period.
Russia sends own aid convoy to Ukraine || Sanctions have low impact on Russian oil || UK evolving into self-employment capital of western Europe || Serco pays price for outsourcing scandals as profits tumble || London house prices to slow to 3% next year, says Hamptons || UK retail sales weaken as supermarket price war hits food trade ||Markets
Some board members are not the best judge of value when it comes to their own stock, but overall you might expect buying by insiders to be a good sign. That theory has prompted Citi to take a look at purchases by directors, as they try to work out whether stock markets are overvalued. More on the details below but to cut to the conclusion, the data is inconclusive for the UK, while European boardrooms do not appear to be flush with confidence.
Money managers have been stung hard this year due to US government bonds not performing the way their traditional mean-reverting strategies suggested they would. Taper was supposed to imply sell-off. That didn’t happen. And now everyone is trying to understand why not. At FT Alphaville we’ve presented the flow explanation on a number of occasions. The theory is that taper talk prompts dumb money to sell safety, and the smart money — which knows there’s no such thing as underpriced principal safety these days and that taper implies risk-off — to pile into safety at an even faster rate. In this theory the whole process is then exacerbated by a feedback loop. Sellers of safety buy risky assets, like emerging market debt, instead. But the sellers/issuers of that debt then recycle that cash back into safe US dollar securities, rather than goods or services in the emerging market. So every risk-on signal from the Fed only ends up creating more buyers for dollar denominated bonds.
Markets: “Asian stocks rose, with a gauge of Chinese shares in Hong Kong heading toward a bull market, while Treasuries and oil slipped as investors await data on U.S. services before the Federal Reserve meets this week. Soybeans and corn rallied… U.S. reports on services activity and pending home sales are due before the Fed meets to discuss monetary policy, while Goldman Sachs said last week rising yields may spur a retreat in global stocks and bonds over the next three months.” (Bloomberg) And have a weekly calendar of events (click to enlarge) for what Citi are calling “a volatile week in a boring month”:
RBS have joined the chorus of concerns about dangers in credit markets from thin trading volumes and a lack of risk takers making markets. The bank also, it turns out, has a measure for trading lubricacity: Our Liquid-o-Meter shows liquidity in the credit markets has declined around 70% since the crisis, and it is still falling. We define liquidity as a combination of market depth, trading volumes and transaction costs: all have worsened. We also measure the premium for illiquidity: it is at a record low, meaning investors are not getting paid to take liquidity risk.
Markets: Chinese equities led Asia-Pacific bourses higher on hopes that the manufacturing sector in the world’s second-largest economy is expanding at a quickening pace. HSBC’s “flash” purchasing managers’ index for July – an early indicator of factory activity – rose to an 18-month high of 52. A reading above 50 indicates growth. Other markets in the region were also buoyed by a positive tone from Wall Street, where the S&P 500 closed at record high. (FT’s Global Markets Overview) Mark Carney on Wednesday sent the strongest signal yet that the Bank of England was preparing to raise interest rates. But the bank governor voiced deep concerns over the ability of UK households to cope with higher borrowing costs. Speaking to business leaders in Glasgow, Mr Carney said the economy “is starting to head back to normal” and as it does so, “[the] bank rate will need to start to rise in order to achieve the inflation target”. (Financial Times)
Elsewhere on Wednesday, - Senate literary critics don’t like fictional derivatives. - The history of autocorrect and why Word couldn’t very well go around recommending the correct spelling of mothrefukcer. - Crime, punishment and the Citi settlement. - Monetarism and the great depression.
Markets: Asia-Pacific equities made a modest rebound after breaking a two-month winning streak last week. Haven assets were out of favour, underscoring the improved sentiment. The price of gold was down 0.3 per cent at $1,334.80 per ounce, while the Japanese yen slipped 0.1 per cent to Y101.4 per US dollar. (FT’s Global Markets Overview)
Markets: The influential head of the US House Financial Services Committee has called on US Treasury secretary Jack Lew to investigate whether sweeping financial reform has impaired the $10tn market for US corporate debt and risks amplifying an interest rate shock for large companies.In a letter sent this week to Mr Lew, Congressman Jeb Hensarling argued that it was the responsibility of regulators to ensure that the Volcker rule, a core element of the Dodd-Frank financial reforms that bans banks from proprietary trading, does not harm US capital markets. (Financial Times) UK ministers, led by business secretary Vince Cable, have ordered a review into the sell-off of state assets, just days before MPs publish a report that is expected to criticise last year’s privatisation of Royal Mail. Lord Myners, former City minister, will lead a panel of experts to examine alternatives to initial public offerings for privatising state assets, as well as whether the process of gauging what investors are willing to pay for shares can be improved. (Financial Times)
Markets: Asia-Pacific equities were on a downward path after a sell-off on Wall Street, where the S&P 500 notched its sharpest fall in nearly a month. Regional data were no help in Asia, with Chinese inflation more subdued than anticipated and Australian consumer confidence failing to rebound much. (FT’s Global Markets Overview) Citigroup is set to pay more than $7bn to resolve a long-running US government investigation into the bank’s sale of mortgage-backed securities, people familiar with the matter said on Tuesday night. The bank will pay roughly $4bn in cash to the Department of Justice and $3bn will be paid in mortgage relief to homeowners – such as principle reduction – as well as other payments to nearly half a dozen state attorneys-general, one person familiar with the matter said. Negotiations are continuing but if they stay on track a deal could be announced as early as next week, the people said. (Financial Times) (WSJ)
Ukraine, Georgia and Moldova agree closer ties with EU || Italy leads calls to slow sanctions against Russia || Merkel to limit Juncker fallout || Berlin drops Verizon over US spying fears || Banks start to drain Barclays dark pool || NYSE has won the coveted listing of Alibaba || The World Bank has issued its first ever catastrophe bond || Wall Street banks create corporate bond trading platform || GoPro Shares Jump 31% in Debut || American Apparel faces loan repayment || Markets
A counterpoint to worries about the stuffy air of silence settling on markets arrives from Citi. Fear not the market calm, it is an unreliable sign of things to come. There is little relationship between market volatility and future equity returns over any time horizon. Current low levels should not be seen as a clear sign of investor complacency and an imminent market correction. Pickers of stocks cannot relax, however, because while market level volatility is low, it turns out that “style volatility” is up.
Dubai stocks went bonkers last year, along with Qatar, distorting the performance of the (anyway tiny) frontier markets index. Locals rediscovered their lust for equities, while foreigners were excited by a potential upgrade to emerging market status and the billions of dollars of inflows from index funds that would represent. In total the index more than tripled in two years. In the past month it’s all gone wrong, and strategist Andrew Howell at Citi has a good reason why: the performance of Dubai, represented by the MSCI UAE index, looks very much like the out-of-control price inflation represented by the Nasdaq during the dotcom bubble. If his comparison has more to it than similar percentage gains and a matching double-top pattern, investors may rightly worry about prospects for the next couple of years. Dotcom investors, after all, only had to worry about bonkers prices, without any risk of a religious war in the region. (The x-axis represents days before and after the peak.) Those looking for a reason to buy could look further back (chart below).
Citi analysts have read 38 European banks’ annual reports for last year. People who value their sanity are not supposed to do that. (HSBC’s 2013 report, all 590 pages of it, is pictured below.) So it’s interesting to note what Citi found.
Camp Alphaville reminder: You turn your back for five minutes and there’s a mystery anthropologist added to the lineup. (Details here) Markets: Asia-Pacific bourses were on the ascent after a dovish outlook from the Federal Reserve propelled the S&P 500 to a fresh record high, jumping 0.8 per cent to 1,956.98. The CBOE Vix volatility index fell 12 per cent, closing at its lowest level since February 2007. Perceptions that the Fed will hold interest rates low helped drive investors into Treasuries, sending the yield on the 10-year note down 6 basis points to 2.59 per cent. (FT’s Global Markets Overview) A paragraph so good it goes straight to the top:
Camp Alphaville reminder: Requests to bring drones to the afterparty will be considered on an individual basis. (Details here) Markets: Most Asian indices were drifting lower in spite of a third consecutive positive session for Wall Street, although Japanese markets continued to climb. The mixed performance followed a somewhat positive session in the US, where the S&P 500 rose 0.2 per cent and the yield on 10-year US Treasuries rose 6 basis points to 2.66 per cent. However, there were some concerns that robust inflation figures could elicit a more hawkish stance from the Federal Reserve which concludes a two-day meeting on monetary policy later on Wednesday. (FT’s Global Markets Overview) An FOMC scenario analysis from Nomura:
Most of you should know by now that FT Alphaville is staging a finance themed festival on July 2, at the HAC. But it’s not going to be your average run of the mill conference thing. No! There will be telepresence robots, courtesy of Awabot. There will be drones. There will be a mystery convict. There will be finance-themed comedy standup. There will be burlesque cabaret. There will be a pub quiz. There will be Paul Murphy in full interactive mode. There were will be a top-rate speaker line-up on the main stage. And last and not least there will be igloos. So what the heck is an igloo anyway, we hear you ask? Well, here’s the idea.
It might be scary, but Mario Draghi is here to help. Yes, you’ve climbed a long way, European stocks are up 160 per cent from their 2009 lows, including 7 per cent or so this year. Now is not the time for faint hearts, however. So says the still optimistic Jonathan Stubbs at Citi, at least. Halfway through the year and the strategy team budge not from their forecast: 20 per cent total return from European equities this year. Shares are no longer cheap in absolute terms, but we stay bullish due to: 1) progressive global economic recovery in 2014-15, 2) return to double-digit earnings growth in 2014-16E, 3) super-cheap relative valuations, eg vs credit, 4) rising risk appetite, eg M&A, demand for equity. ECB QE later this year should also be supportive.
For all practical purposes we have reached the lower bound… But also: Are we finished? The answer is no… within our mandate, we’re not finished yet. Both were statements by Mario Draghi on Thursday. It’s really the swarming effect of the policies the ECB announced on Thursday, after all, right? Not so much the Outright Monetary Transaction-style bravura, which (let’s not forget) the market also underestimated two years ago.
Camp Alphaville reminder: Tickets to nerdstock available here. Markets: Asia-Pacific equities fell back from Tuesday’s six-month highs as investors adopted a cautious stance ahead of a key meeting by Europe’s central bank on Thursday and influential jobs data from the US. Wall Street’s session overnight added to the subdued tone. The S&P 500 was flat, after striking new record highs in each of the three prior sessions, as signs of rally fatigue emerged. The CBOE Vix volatility index – Wall Street’s “fear gauge” – was up 2.4 per cent in late trade, but still at a historically low level. (FT’s Global Markets Overview)
Something to keep in the back of your mind as once remote political events become everyday, is that the Catalan question still lingers. Here’s Citi’s recent assessment of the local but in no-way endorsed by Madrid poll set for the Autumn: Catalonian independence (due in November 2014).