We detect a theme. It may be that with financial markets becalmed a new subject is needed. Perhaps it reflects the way Piketty has become an instant bookshop-to-shelf classic, but something has investment strategists reaching for insight from an eighth century theologian. “And those people should not be listened to who keep saying the voice of the people is the voice of God, since the riotousness of the crowd is very close to madness.” — Alcuin to Charlemagne, 798 A.D.
First take a trip down Gavyn Davies way where he’ll explain that macro prudential controls are nothing new, that they’re making a comeback post-Greenspan and that they are aimed at stabilising the financial cycle rather than the economic cycle (not always mutually exclusive, of course): The case for macro prudential controls is straightforward. During economic upswings, the behaviour of the financial system can become destabilising. Banks’ balance sheets are flattered by the expanding economy and low interest rates, so credit supply expands aggressively. This fuels the boom until risk taking becomes excessive, and even a moderate rise in interest rates produces a financial crash.Direct intervention in the financial system to head off these problems early, through increased capital and liquidity standards, seems to be justified.
Peace. Love. Higher Returns: Camp Alphaville is on in London on July 2nd featuring, in no particular order: beer, robots, Michael Pettis, a large tent, a vastly upgraded FTAV pub quiz, Carson Block, Andy Haldane, a mystery convict, Charles Goodhart, George Magnus, Craig Pirrong, Lucy Kellaway on stage with Cardiff, and load of other people and stuff we’re still working on. Do come. (Camp Alphaville tickets and details) Markets: The mood across Asia-Pacific bourses was upbeat after stocks on Wall Street extended their push into record territory in anticipation of continued policy accommodation from global central banks. Among commodities, the price of gold stabilised in Asia trading at $1,264.82 per ounce, after falling 2.2 per cent overnight – the biggest daily drop since mid-December – to its lowest since early February. (FT’s Global Markets Overview)
Markets: “Asian stocks dropped, pushing the regional gauge down from a four-month high, as the yen held gains and Japanese companies including Sony Corp. forecast weaker earnings. Bonds rose as central banks signal additional stimulus is needed while nickel slumped. The MSCI Asia Pacific Index lost 0.3 percent by 11:51 a.m. in Tokyo, after closing at the highest since Jan. 13 yesterday. Japan’s Topix gauge slipped 0.8 percent while Standard & Poor’s 500 Index futures were little changed after the underlying gauge slipped from a record yesterday. The yen held near the highest in almost a week at 101.84 per dollar. South Korea’s government bonds advanced, sending the 10-year yield to a six-month low. Oil lost 0.3 percent and nickel dropped the most since 2011.” (Bloomberg) Russian companies are facing tougher lending restrictions from western banks as sanctions against the country start to bite. Banks are insisting that new loans to Russian businesses that are not directly targeted by sanctions carry clauses forcing immediate repayment or default if sanctions affect those companies. (Financial Times)
Markets: Asian markets rallied, taking their cue from a strong session on Wall Street and shrugging off data showing that Chinese credit creation has slowed. On Wall St the S&P 500 closed at a record high of 1,896.6 and investors bought back in to technology stocks after a lengthy sell-off. Financials led the advance in Japan, with this sector of the Nikkei average gaining 2.9 per cent. (FT’s Global Markets Overview)
Welcome to boom time in the UK. There, we said it. Or rather we’ve spotted that the optimistic Jonathan Stubbs at Citi has said it. There is a buzz, and it is all about the Bs. Bull Market — Boom, Bids, Base Rates, Builders & Big-Caps Global recovery, UK boom — Our economists expect progressive recovery of global economy in 2014-15 with GDP growth of 3.1% this year rising to 3.5% in 2015, from 2.5%in 2013. Recovery led by US and Europe/UK. EM headwinds not strong enough to derail growth. UK survey data very strong, eg new orders, hiring and investing intention. Boom time.
Markets: Japanese investors returned from a four-day weekend to send shares down by more than 2 per cent, prompting bourses around the region to follow suit. In China, HSBC’s purchasing managers’ index for the services sector slipped from 51.9 in March to 51.4 in April, while the tracking employment part of the survey fell to a seven-month low. (FT’s Global Markets Overview)
UBS plans special dividend as part of legal structure overhaul || Saab offers Swiss business deals in vote over Gripen jet fighter || Barclays to lose senior US tech banker || BMW beats profit expectations fuelled by demand in China || France to oppose GE’s $13.5bn Alstom deal || Zoopla revenues ride UK property boom || Balfour Beatty chief quits after fresh warning || Markets
Ukraine PM warns of ‘most dangerous 10 days’: “Ukraine’s interim prime minister said on Thursday his country was entering its “most dangerous 10 days” since independence in 1991 and was struggling to counter pro-Russian separatists on the verge of taking over the industrialised eastern heartland. Arseniy Yatseniuk, in an interview with the Financial Times, accused Moscow of plotting to foment more clashes during the May Day holidays when nostalgia for Soviet victories and achievements tends to peak.” (Financial Times) Third Point puts pressure on Dow Chemical: “Third Point, the hedge fund led by activist investor Daniel Loeb, has raised the pressure on Dow Chemical to improve shareholder returns, setting out a detailed critique of the company’s strategy. In a letter sent to its own investors on Thursday, Third Point said that Dow had taken some “shareholder-friendly actions”, but had still failed to address concerns that it was “under-earning its potential in its petrochemical businesses”.” (Financial Times)
Stress tests in Europe maybe aren’t the mugging by reality they used to be… they’re putting up a little bit more of a fight this time. Though how much? Here’s Citi cruelly putting the European Banking Authority’s recently released methodology against the US’s CCAR: In the EU, the proposed adverse scenario leads to an overall cumulative deviation of EU GDP from its baseline level by 7.0% over the 3-year period to end-2016, with EU unemployment deviating by 2.9% versus the baseline scenario. This would imply a cumulative real GDP decline of -2.1% over 3-years, notably less than the stress applied in the US CCAR (a -4.75% decline over 15 months) and a peak unemployment rate of 13.0% versus US CCAR 11.25%. Equity prices are expected to decline by 19% relative to the baseline (US CCAR -50% decline), residential house prices by -21% (US CCAR -25%) and commercial property prices by -15% (US CCAR -35%). Also, no deflation in the EU adverse scenario?
Before going any further read Matt Levine. He nailed a lot of this already, including the ever worthwhile point that the Dow is ridiculous: Apple’s stock is trading at around $565 today. Apple thinks that number is too high, and so is going to cut it by six-sevenths, to some number around $80, by giving everyone six extra shares for each share they currently hold. This is not the sort of story where I explain to you that changing the nominal price of a stock doesn’t change the economic value of the company; I hope we are all grown-ups here. So, if the split doesn’t have any economic impact, why bother? Indeed. And with that in mind there are a few things worth adding
Paging Bruno Iksil. It’s well known that JPMorgan lost $6bn in its ill-fated “London Whale” investment. What is less known is that shortly before the bank’s unwieldy multi-legged play on corporate credit ballooned to unsustainable proportions, the positions taken on by JPMorgan produced almost half a billion dollars worth of profits thanks to the bankruptcy of a single company — American Airlines. In fact, one could easily make the case (as the US Senate did) that the easy money reaped by JPMorgan from the AMR filing helped catalyse the CIO’s doomed love-affair with low-cost default protection.
Markets: Asian markets are struggling to maintain an upbeat tone in spite of solid gains on Wall Street, but Hong Kong stocks were outperforming as Beijing cut the reserve requirement ratio for some rural banks. Wall Street prospered as a decline in the US dollar lifted the yen and hurt Japanese exporters. (FT’s Global Markets Overview)
Actually, the way Creditsights frames the question about credit issuance is “can it continue?” which points to their answer: probably, even if not at peak levels. Speaking of which, if you have an investment grade credit rating, you must have been enjoying the party. USD fixed-rate investment grade corporate issuance totaled $265 bn in the first quarter, which was a $75 bn increase over 4Q13 numbers and $30 bn greater than the amount seen in the first quarter of 2013. The 1Q14 tally only trails two prior periods: the $285 bn in 1Q09, when issuance was boosted by the TLGP program, and the $278 bn seen in 1Q12.
Ukraine raises rates as west discusses more sanctions || Diageo offers $1.9bn for greater stake in United Spirits || Google swoops on dronemaker Titan || AngelList sees $25m investor fund || ‘Heartbleed’ steals social security and mums’ messages || Hong Kong regulators move to safeguard bank liquidity || Copper miners look past present pain to future gain || UK inflation falls to 1.6% || Markets
Markets: Asian markets were under pressure in the face of fresh tension in Ukraine and after the S&P 500 dropped to a two-month low on Friday. However, action was muted as investors waited for key Asian data later in the week, including China GDP figures on Wednesday. The US earnings season also ramps up, with about 10 per cent of S&P 500 companies set to report this week. (FT’s Global Markets Overview)
Yes, the Nasdaq has fallen out of bed and is rolling towards the window, off 7 per cent from its March high. Crash or correction, watch this space. But, in a bid to remember why everyone is so excited about tech, a reminder of the potential for the internet of things. First, some Cisco numbers delivered via Citi: Soon there will be more than 6 devices leaking information connected for every man, woman and child on the planet.
Markets: Japanese stocks were on pace for their worst week of declines since 2011, leading a broader Asia-Pacific sell-off. A 6 per cent drop in US biotech shares spooked markets, sending the S&P 500 down by 2.1 per cent in its worst session since early February. The tech-heavy Nasdaq Composite tumbled 3.1 per cent for its worst day since November 2011. The negative tone spread across Asia, with Japanese stocks under added pressure following the release of minutes from the Bank of Japan’s March 10-11 meeting, which depicted a central bank that sees little reason to unleash further stimulus. (FT’s Global Markets Overview)
Here’s where another €2bn or so of freshly-issued Greek bonds would go. Chart via Citi: And that’s after the largest sovereign debt restructuring in history. Bracing isn’t it? And yet maybe Greece is better off paying up to issue a bond to private bondholders on Thursday. In the long run, it could well beat taking ‘free’ money from the Troika.
Returning to that theme of sticky risk, the search for yield and returns and what happens when the Federal Reserve et al point towards the exit, here are some charts of the divergence between fundamentals and markets courtesy of Matt King at Citi. The point, as ever, is that while the Fed is handing out donuts then you want to grab your share. But everyone has been eating free food for a long time now, and there are a lot of fat and happy credit investors to fit through the door when the donuts run out…
About that European bull market. Enthusiasm is there, but the earnings not so much yet. With little support from earnings, European equities continue to be re-rated in P/E and price/book terms. From 10x in late 2011 to 17x now, European equities trade above both post-1980 and post-1990 average P/Es. Citi strategist Jonathan Stubbs finds that it’s not just the average, value stocks no longer offer great value either. So, look for places where corporate earnings are actually, y’know, growing.
Markets: Asian markets were in a near-frozen state ahead of the US jobs report due to be released later on Friday, which influences the Federal Reserve’s thinking on monetary policy. A retreat from risk was apparent among some Asia tech stocks, however, which followed their US counterparts lower. Wall Street paused for breath after two successive record closing highs for the S&P 500. (FT’s Global Markets Overview)
FCA rules could force quarter of payday lenders out of business || Hollande fires prime minister in bid to relaunch presidency || Bob Diamond re-enters world of banking || Corporate America’s overseas cash pile rises to $947bn || Growth in UK manufacturing activity slows || Factory output points to stabilisation in Chinese economy || BHP weighs asset spin-off to focus on core business || Former Citigroup co-chief John Reed warns of ‘managerial turmoil’ || Markets
Markets: A solid end to the first quarter on Wall Street, aided by a dovish Yellen, prepared Asian equity markets for an upbeat start, but a deluge of mixed data took the wind out of a potential rally. In Japan, sentiment was dented by Bank of Japan’s Tankan survey, which revealed that companies are bracing for a slowdown. (FT’s Global Markets Overview)