From Societe Generale’s analysts over the weekend, with our emphasis, on the fallout from the weakening yuan on the European Central Bank, and why that might circle back (and back again): Global currency markets have taken their cue from China and commodities, and the resulting shifts are causing something of a headache for the major central banks. Since the low of last spring, the euro has bounced back by just over 9% trade-weighted. Similar moves have been observed for the JPY and USD, with the bulk of depreciation coming from EM commodity currencies. Their status as funding currencies has even seen the euro and yen gain against the dollar in recent weeks
Farewell then, David Bowie. A great musician, artist and (this is a compliment) financial opportunist. In 1997 he hit upon a wheeze, he would sell the rights to future royalties from his extensive body of work. Securitisation — effectively a loan backed by the future payments — was in its innovation stage, a more innocent time before finance moved onto mass destruction world tours. Bowie’s was actually the first in a line of “Pullman Bonds”, developed by David Pullman. David Bowie was thinking of selling his masters
Back in 2007, during the early months of that year, before the financial crisis broke, there was a particularly comic rush-to-market amongst the alleged new breed of financial firm, eager to IPO before reality dawned. It was a time when Fortress Investments floated — at circa 40 times prospective earnings, four times Goldman Sachs’ valuation multiple. Blackstone joined the market as a “limited partnership,” offering ‘units’ rather than stock. And a Wall Street old-timer called Thomas Peterffy took Interactive Brokers public with a calculated snub to the industry that had made him risk: sure, investors could put a value on his business, but a dual-class share structure would leave outsiders with just 5 per cent of the voting power.
After reading John McDermott (formerly of these pixels) on the latest independence vote poll numbers and why he reserves the right to panic… Take a moment to reflect on this late (potential) addition to the No-vote campaign, via Citi’s Jonathan Stubbs: The history of the union has been kind to UK equity investors. Since the Acts of Union were passed by the Parliament of England (1706) and Parliament of Scotland (1707), UK equities have returned c12,700,000,000% (Figure 1) with a slightly less impressive annualised return of 6.3%. Our back-test concludes that equity investors have been well served by the Union, to date.
UK manufacturing activity at 14-month low || Factory slowdown heightens concern over China’s economy || Eurozone industrial recovery slows to a standstill || Burgers and BMWs highlight the rise of North Korea’s private economy || Cameron looks to reap dividend from backing Tusk for top EU job || Hong Kong democracy activists vent their anger against Beijing || Citi pays allowances to avoid bonus cap || Markets
Nato to hold emergency Ukraine summit || Tesco issues profit warning and slashes dividend by 75% || Japanese economy flounders after sales tax rise || Baidu and Tencent join Dalian Wanda in $814m China ecommerce deal || Eurozone inflation hits fresh five-year low at 0.3% || Markets
In which Citi look for the next Apple, our emphasis: Apple’s valuation has been through a spectacular round-trip over the past couple of years (Figure 2). Its total market cap first broke through $600bn in August 2012, but then collapsed to $341bn in April 2013. Since then, the recovery has been equally remarkable, moving back above $600bn in the past month. In the process, it has regained the title of the world’s most valuable company ($187bn ahead of Exxon at number 2). To put this in context, Apple has lost and then regained the value of the Russian stock market in just two years. The narrative associated with this spectacular journey often focuses on the never- ending pressure for Apple management to maintain the company’s product pipeline. A lower share price reflected concerns that Steve Jobs’ midas touch had been lost. The subsequent rebound was associated with increasing conviction that it had not.
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).