Gold Wins As Financials And USD Deteriorate

Monday, June 4th, 2012

With Europe’s credit traders on vacation, volumes overall were muted today in Europe but average in the US. The lack of discipline that normally occurs when the credit boys leave the room helped lift sovereign credit in Europe and implicitly US equity futures (ES) into the open today, which marked the top for the day (back in the green after an ugly Sunday night) as dismal macro data dragged debt and and equity markets back down to overnight lows. Credit and equity moved in sync in general but across broad risk-assets, correlations were loose at best as Gold was very stable holding gains from Friday while Silver exhibited its high beta ebullience and Copper and Oil followed stock’s path down and back up. Treasuries leaked higher in yield with a steepening in the curve (though 10Y and 30Y outperformed 7Y as the Twist pivot maturity seemed most active). EUR strength was sustained from early morning in Europe with JPY weakness providing some support for stocks but it seemed both VWAP and the 200DMA were the key levels today and despite two stop-runs in the afternoon, we flushed down at the last minute (off near day’s highs – thanks to Egan-Jones’ UK downgrade news) to close red for ES (2nd day in a row below 200DMA). Financials (which are close to red for the year and about to cross below Healthcare and Staples) did not participate in the swings as much with JPM and MS worst today -3% (with the latter now 25% lower than the March 2009 market trough levels) and the other TBTFs around -1.9%. VIX oscillated rather like ES today – as usual but popped back above 26% to close marginally lower on the day. While correlations did drift today, stocks remain a little too full of hope still against overall risk markets but with UK closed again tomorrow, we may have to wait for Wednesday to see how Europe (and implicitly the rest of the world) feels.

S&P 500 e-mini futures had quite a day. Limping higher from a horrible overnight dip into the US open where heavy volume and large average trade size dominated and pushed the market lower as macro data disappointed. The leak lower progressed until Europe closed and then again we pushed higher on low volume stop-runs each time halted by heavy and large average trade size hitting the tape… the close brought the UK news and snapped ES back below VWAP.

YTD S&P 500 Sector performance… financials converging down to Unch, Staples, and Healthcare

and from the March 2009 market lows, financials’ performance is very dispersed… (MS -25% and WFC +206%)

Gold outperformed as the USD leaked back ‘down’ to resync from Friday’s moves. Treasuries are selling off a little but so are stocks as it would appear for now that Euro repatriaton from liquidating US assets is occurring and Gold is benefitting from more safety bod…

HYG remains an underperformer – holding below its intrinsic value – and we worry that this kind of weakness will leak back into real bonds and drive down an already illiquid market as today saw dealer net buying (buy-side net selling) for the first time in a while…

and the hump-shaped move in the Treasury curve was clear as 7Y underperformed 5s, 10s, and 30s…

as 5s7s10s butterfly bounces off record lows…

Charts: Bloomberg

Tags: 30y, Correlations, Drift, Ebullience, Egan Jones, Futures, Gold, Jpm, Macro Data, Maturity, Overnight Lows, Pivot, Rest Of The World, Risk Markets, Staples, Treasuries, Trough Levels, Ugly Sunday, Vix, Vwap
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Flight From Risk: Treasury Plummets To Record Low Yield As Gold Surges

Thursday, May 17th, 2012

Now its getting interesting. 30Y yields fell the most in 5 months today back to 5 month lows, 10Y yields crashed to all-time closing lows, and Gold surged by its most in 4 months (and 2nd most in 7 months) as stocks started to accelerate lower. Gold is unch on the week now as 30Y is -21bps and 10Y -14bps – incredible. Between the Philly Fed’s confirmation of deceleration in US macro data and Europe’s increasingly crescendo-like implosion, is it any wonder that the decoupling thesis has given way to reality. S&P 500 e-mini futures repeated the early rally late fade pattern of the last 8 days but this time it was more aggressive as ES pushed towards 1300. CAT was a dog today accounting for 25% of the Dow’s losses and AAPL tumbled further – heading towards a 20% retracement off its highs. Financials tumbled further with Citi inching very close to red YTD (and JPM falling rapidly). Credit markets, which led the selloff, continue to slide but this time with equities in sync. Equities went out at their very lows of the day – at 3.5 month lows as VIX soared over 24% to close at its highest in 5 months.

Is BTFD DOA?

30Y Treasuries plunged but 10Y fell to record closing low yields!!!

and Gold is back near unch of ther week as the PMs soared today…

Financials are rapidly losing ground with Citi and JPM about to go red YTD…

Tags: 4 Months, 5 Months, 7 Months, Aapl, Confirmation, Credit Markets, Crescendo, Deceleration, Dow, Futures, Jpm, Losing Ground, Lows, Macro Data, Pms, Retracement, Selloff, Treasuries, Unch, Ytd
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Hatzius On The Three Reasons The Recovery Is Overstated

Tuesday, March 20th, 2012

Economic Surprise Indices have been rolling over for a month or two now. The trend of US macro data has also disappointed in a period when it would be expected (empirically) to accelerate. However, taken anecdotally or cherry-picked managers can find plenty of ammunition to support the to-infinity-and-beyond Birinyi forecast (though often it relies on the most manipulated and adjusted government provided time-series). Overnight’s concerns on China show just how quickly confidence can be upset but Goldman’s Jan Hatzius sees three main factors for why their GDP-tracking estimate is weakening already (more like 2% than 3-3.5% growth) and that we are seeing slightly softer data already. The end of the inventory cycle, the pulling forward of demand thanks to the warm weather aberration, and the already clear impact on consumption from higher gasoline prices will likely shift from an overstated economic trajectory to more muddle-through or worse for Q2 onwards.

Goldman Sachs: Sticking With Sluggish

The US economic data over the past few months have clearly outperformed expectations. Our current activity indicator (CAI) is running at 3.5% in February given the data in hand so far, and is tracking 2.9% for the first quarter as a whole. However, we expect the numbers over next 2-3 months to slow to a pace that looks more consistent with a 2% overall activity growth pace rather than 3% or even 3.5%.

1. Warm weather has pulled forward activity.

 

Some of the recent strength in the CAI is likely to reflect the exceptionally mild 2011-2012 winter. To be sure, there are some areas where mild weather has a negative impact on economic activity, such as utilities output and perhaps some retailers that sell seasonal goods. But this is likely to be offset by areas where the impact is positive, as construction and other outdoor activities decline by less in not seasonally adjusted terms than the seasonal factors “expect” and this gets translated into a large seasonally adjusted increase. Overall, we found that the weather has contributed an estimated 0.3 percentage points to the 2.9% annualized growth rate of the CAI in the first quarter so far (see Zach Pandl, “Growth Impact of a Mild Winter,” US Daily, March 1, 2012). The impact on a more comprehensive measure of activity that includes both the CAI and GDP would be a bit smaller, perhaps 0.2 points, as GDP is probably less weather-sensitive.

 

2. The inventory cycle has helped.

 

The pickup in inventory accumulation from -$2 billion (annualized) in the third quarter to +$54 billion in the fourth quarter contributed 1.9 percentage points to the Q4 growth rate. Moreover, inventory accumulation seems to have picked up a bit further in the early part of the first quarter, judging from the Commerce Department’s book-value inventory numbers for January as well as the ISM manufacturing survey for January/February. This suggests that inventories may still be making a positive growth contribution for the time being. But while we are not close to a situation where inventories start to look “heavy,” a further positive impact in coming quarters is not likely.

 

3. Gas prices are starting to cut into real income.

 

Gasoline prices rose sharply in January and February. Using weekly data from the US Department of Energy, they are now up 9.1% from their end-2011 level on a seasonally adjusted basis, with most of the increase likely to show up in February and March on a month-average basis. According to our models of the link between gasoline prices and growth, such a hit might take 0.3-0.4 percentage points off real GDP growth over the subsequent year. Moreover, using monthly data on the link between gasoline prices and consumption, we find that the impact becomes visible about 1 month after the initial hit, so this would imply that the impact would show up in March and April.

There may be some early signs of deceleration in the data.

The data surprises have indeed turned a bit less positive in recent weeks, although it is too early to say definitively whether this is noise or a more lasting shift. In March so far, our US-MAP scoring system for the economic data relative to consensus expectations has averaged a slightly negative reading, despite the better-than-expected February employment report. Of course, some of this just reflects the fact that consensus expectations have caught up with the better data. However, there are also some faint signs in the more forward-looking indicators that the tone of the data may be shifting down a notch. In particular, the new orders indexes of the February ISM, March NY Empire State, and March Philly Fed survey all fell moderately.

Our bottom line is that there are several reasons to believe that the recent data may have overstated the strength of the US economic data. For the first quarter as a whole, our current best guess is that a broad measure of activity growth that puts most of the weight on the CAI but also some weight on the GDP bean count is currently running at a 2.6% pace; we believe that this might overstate true growth by perhaps 0.2 percentage points because of weather, so that the second quarter is likely to understate growth by 0.2 percentage points (for a “swing” of 0.4 percentage points); the end of the inventory cycle might take a couple of tenths off growth; the impact of the gas price increase might take another few tenths off growth; and we may be seeing some signs of softer growth in the most recent data already. All told, we believe that the numbers are likely to slow to a pace that looks much more consistent with a 2% rather than a 3% or even 3.5% growth pace through the end of the second quarter.

Tags: Aberration, Ammunition, Anecdotally, Birinyi, Economic Activity, Economic Data, Gasoline Prices, Goldman Sachs, Growth Pace, Inventory Cycle, Macro Data, Mild Weather, Muddle, Negative Impact, Q2, Seasonal Factors, Seasonal Goods, Time Series, Trajectory, Warm Weather
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ECRI’s Achuthan: The US Recession Still Is Happening

Friday, December 9th, 2011

While destroying the myths and biases of the plenitude of long-only talking-heads seems to have been the mission of Mr.Market for the last decade or so, Lakshman Achuthan of ECRI does an excellent job of dismissing the coincident indicator trees for the leading indicators forest in an interview with Bloomberg TV. His ‘recession is happening’ call from September 30 still stands, proving he does not flip flop like all other so called experts on every up or downtick in the SPY, and is expecting a formal recessionary print in GDP within three quarters, though noting that the recession very likely did not start in Q3. The constant clamoring of the consensus that we will ‘muddle through’ or that we are firming in hopes we repeat the Keynesian love-fest of 2009 (which he rejects as nothing being indicative of this at all) is eschewed as the man-with-the-best-name-for-anagrams-in-finance gives Tom Keene a little history lesson on the foibles of minute-by-minute coincident (or short-leading) macro data watching (and prognosticating). The ongoing deterioration in the ECRI index (and leading indicators) combined with his noting that GDP tends to revise/revert towards GDI (even though the two should be the same given their either-side-of-the-same-coin nature) and the previous GDI print was much weaker. He ends on a less than optimistic note pointing out that the pace of each economic recovery since the 1970s has been getting lower and lower and cycle volatility has increased helping to confirm his recession-is-happening call.

Tags: Anagrams, Biases, Coincident Indicator, Economic Recovery, Ecri, Flip Flop, Foibles, Gdi, History Lesson, Lakshman, Last Decade, Leading Indicators, Macro Data, Optimistic Note, Plenitude, Recession, Talking Heads, Three Quarters, Tom Keene, Volatility
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Roubini Sees 60% Chance of A Double Dip in 2012, China and Brazil Also at Risk

Thursday, September 1st, 2011

By EconMatters

Party heardy NYU economist Nouriel Roubini went on Bloomberg TV on Aug. 31 to give his latest prediction of the global economy:

“We’ve reached a stall speed in the economy, not just in the U.S., but in the euro zone and the UK. We see probably a 60 percent probability of recession next year, and, unfortunately, we’re running out of policy tools…..and sovereigns cannot bail out their own distressed banks because they are distressed themselves”

Regarding markets and QE3

“There’ll be more monetary easing and quantitative easing done by the Fed and other central banks, but the credit channel is broken. …the market is rallying on the expectation of QE3, but I think it will be a short-lived rally. The macro data, ISM, employment, and housing numbers will come out worse and worse, the market will start to correct again.”

The bond market is already expecting a recession,

“…After the S&P downgrade, bond yields fell from 2.5% to 2% or below. The bond market is telling as a recession is coming and the flattening of the yield curve is telling us that.”

But since the short-term interest rate is artificially held down low by the Fed,

“Traditionally, you can have inversion of the yield curve. Right now, we have policy rates at 0……We cannot have an inversion because you can have negative long-term interest rates. That’s the reason we don’t see the inversion.”

Dr. Doom did not forget about China either,

“I see a hard landing in China as the likely event, not this year or next year, but by 2013 when this over investment move will go bust….. Fixed investment has gone now to 50% of GDP. this over investment boom is going to go into a bust in a hard landing.”

“[Chinese banks] have several trillion dollars yuans and we estimate 30% of these loans will go into default and become underperforming. The heat will be on the Chinese banks.”

After the C, he then went on to cover the B in BRIC,

“Brazil has its own other domestic problems, if they do the structural reform that’s needed. It could have high potential growth, but the question is whether the new president will be willing to do those structural reforms to reduce the distortion and increase the potential growth of the country.”

Commentary by EconMatters

Shortly after the interview, Bloomberg ran this headline – U.S. Stocks Pare Gains After Rubini Says Recession Is Starting. It might be that markets really rise and fall on the words of Roubini or it could just be Bloomberg pumping its TV news show; regardless, we believe there’s not enough clear indication to declare a coming recession yet.

Remember, this is the traditional summer doldrums, and markets are still reeling from the unprecedented downgrade of the U.S. debt by S&P, black swans flocking in Europe certainly has only added to the market turmoil and volatility. So it is logical to see some mixed and somewhat pessimistic data coming out of this current environment, but they are not indicative enough to extrapolate out a recession.

Also keep in mind that 2012, the year when Roubini predicts the recession would hit, is an election year. You can bet the Fed, the Obama Administration, and the Democratic Party will pull out all the stops to stave off a downright recession.

So we think a slow / anemic growth is a more likely scenario; however, this is not to say there’s no possibility that Roubini could be right…..again. After all, the man has been predicting double dip for the past four years, and even a broken clock could be right at least twice a day.

(Pardon our tech inept unable to post the vid on ZH, but the essense of the interview is captured in the post already. If interested, the Bberg vid is available at our site)

© EconMatters 2011

Tags: Bond Market, Bond Yields, Brazil, Central Banks, Chinese Banks, Double Dip, Dr Doom, Economist Nouriel Roubini, Euro Zone, Global Economy, Inversion, Investment Boom, Macro Data, Nyu, Policy Tools, Qe3, Recession, Sovereigns, Stall Speed, Term Interest, Yield Curve
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It Sure Looks Like 2008

Friday, August 19th, 2011

From Tony Pallotta of Macro Story

It Sure Looks Like 2008

“He observed that human emotions collectively had major impacts on the on stock prices and the patterns seen in the Stock Markets in general.” – From a book on the teachings of Jesse Livermore

When you think of it in the short term markets are nothing more than a group of people trying to process data and understand what others are doing all under the stress of losing personal wealth. They are trying to solve a problem that in may ways is not solvable unless one can adapt. Similar to a group of Navy SEALs on a mission. They are successful only if they can adjust to the changing situation. There’s a reason few are SEALs and few are successful in this business.

At times like these markets are more about human psychology and less about technical and or macro data. That is why I wrote about the 2007 topping pattern as compared to the market in June and July. The macro data in both instances was deteriorating yet equity markets refused to listen to falling bond yields, falling commodity prices and countless credit products. Then the recession hit, the data deteriorated fast and ill prepared markets were forced to catch up.

Now I believe it is time to fast forward to the fall of 2008. Once again the 2008 market is a road map of how human emotion reacts when credit events happen. When economic data deteriorates at an exponential pace. When the unthinkable becomes reality.

The volatility skew relative to the vix captures market sentiment very well. Overlay any such chart with the SPX and the similarities are without question. So for all those pundits who say this is not 2008 I present the following chart. Once again markets are pricing in the unthinkable. In 2008 history witnessed the failure of Lehman, AIG and the GSEs. Today history is bearing witness to sovereign nations on the brink of failure. In 2008 there was the threat of bank runs. Today there is the threat of currency runs. In 2008 there were government bailouts. Today there are central bank bailouts.

Through it all market participants have not changed. They are still a group of individuals trying to process data and understand what others are doing all while real money is on the line. As history has proven once again they will get it wrong. Once again leverage will destroy balance sheets. Denial will get in the way of rational thought. History truly does repeat and the patterns are present in the charts.

Tags: Bearing Witness, Bond Yields, Commodity Prices, Economic Data, Exponential Pace, Human Emotion, Human Emotions, Human Psychology, Jesse Livermore, Macro Data, Market Sentiment, Navy Seals, Pallotta, Personal Wealth, Sovereign Nations, Spx, Stock Markets, Stock Prices, Term Markets, Vix
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Inside Information (Sonders)

Monday, April 18th, 2011

Inside Information

Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.,
Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, and
Michelle Gibley, CFA, Senior Market Analyst, Schwab Center for Financial Research

April 15, 2011

Key points

• Earnings season is ongoing and gives an “insider” look at economic growth. Businesses see and react to changes in the economic environment before the broader macro data shows a clear trend.
• The Federal Reserve has floated some trial balloons about reining in its extremely accommodative policies, the time for which we believe is overdue. Budget issues remain a problem at all levels of government, but likely won’t derail the recovery at this time.
• Despite ongoing debt problems in peripheral European nations, the European Central Bank (ECB) hiked interest rates. While we don’t expect too much damage in the short-term, Europe still faces significant issues that make it more likely to underperform other investable areas of the world.

We are often asked how we can be optimistic on the US stock market when there are so many obvious problems. From the Middle East to Japan, inflation and debt concerns, budget fights and political uncertainty, there is certainly no shortage of things that seemingly could derail the bull market we’re currently experiencing. But that’s the point. All of these items, and more, are already well known by the stock market, which is the ultimate forward looking indicator, meaning the affects of which have likely been largely reflected in stock prices already. It’s important for investors to look beneath the headlines and the “knowns” and look at what may be coming down the road.

We admit some surprise at the resiliency of the stock market over the past month or so. After the much-needed and well anticipated correction we saw during the first part of March, the major indices have recovered those losses and have again moved solidly into positive territory for the year. While dips will undoubtedly continue to occur, which should help keep sentiment grounded, we continue to believe that the general trend of the stock market will be higher. Of course, the ultimate “inside” information is that nobody can predict the future and that diversification remains the key to achieve your financial goals. For a time over the past several years, it seemed to some that the power of diversification was lost as assets largely traded in a “risk on-risk off” scenario. Recently, however, correlations have again started to recede and the beneficial affects of having a diversified portfolio are again reasserting themselves.

Animal spirits returning?
It’s been a while since the “animal spirits” phrase has been tossed around on Wall Street but we believe this could be one of the surprises of 2011. The focus has been on macroeconomic reports, but during this earnings reporting season we believe we can glean some important “insider” views on where the economy is headed. We are especially watching for comments regarding margins as cost pressures have increased with the rise in commodity prices. We’ll also get further information on the level of supply disruption due to the disaster in Japan. Comparisons have gotten more difficult as we continue to progress in the economic expansion, but we believe many of those challenges are already reflected in stock prices, leading to the continued possibility of upside surprises. The aggregate corporate information we have gotten recently points to those animal spirits returning. We’ve started to see business loans increasing, which, along with a jump in merger and acquisition activity, indicate increasing confidence by the corporate sector.

Business loans are turning upward

Source: FactSet, Federal Reserve. As of Apr. 12, 2011.

Additionally, we got a look at the service sector in the form of the ISM Non-Manufacturing Index, which pulled back a bit from a 5-year high but remains at a solid level of 57.3 (anything above 50 indicates expansion). Another area we believe can surprise the market on the upside is the jobs market. Again looking beyond the headline number shows us numerous regional manufacturing surveys with solid employment readings; while a measure of small business confidence, vital to a recovery in the job market, continues to creep higher. Additionally, jobless claims continue to slide generally lower, although we did see a tick up in the most recent reading, and the unemployment rate has now dipped to 8.8%, down 1.3% from its high, and has dropped more in the last four months than any similar time period since 1984. We believe job growth will pick up speed throughout the year as confidence improves and businesses look to keep up with stronger demand. Should this happen, we would likely see a snowball effect where more people working leads to higher demand, which leads to more workers needed to meet that demand, and so on.

Employers are picking up the hiring pace

Source: FactSet, U.S. Labor Dept. As of Apr. 12, 2011.

Fed floats trial balloons
It’s the employment picture that has kept the Federal Reserve from moving off its extremely accommodative stance, in contrast to its European counterpart, which has a single mandate of keeping inflation under control. We have been advocating for some time that the longer the Fed maintains this exceptionally stimulative policy, the more the risks of inflation taking hold rise, leading to the possibility of a more severe response by the Fed than otherwise might be required. And now it seems that some Fed members are starting to head down that path as well. Several Federal Open Market Committee (FOMC) voting members have spoken up recently, suggesting that QE2 could end early (which we think is unlikely), and that rate hikes may be coming before the end of the year (which we believe is more likely).

In contrast to some opinions on the Street, however, we don’t believe these are “rogue” members breaking ranks with Chairman Bernanke, but more of a coordinated effort to prepare the market for the inevitable return to a more normal monetary policy. So far the results have to make the Fed relatively happy. The stock market has continued to move higher despite increased expectations of rate hikes later this year, indicating that stock investors won’t be deterred by a slightly tighter policy in the coming months.

Government budgets remain a mess
Likewise, the stock market seems to be largely ignoring the constant squabbling over budgetary issues in Washington. Indeed the near-term implications of the recent budget deal are likely to be relatively small, with $38.5 billion being cut out of a $3.7 trillion budget. It is the longer-term path about which we are concerned, and the next budget fight over the debt ceiling and 2012 budget is likely to garner more investor attention. It’s quite obvious to both sides of the aisle that the current path of the budget, including Social Security, Medicare, and Medicaid cannot continue for much longer without restructuring. But the question is what are they going to do about it? Proposals continue to be made but it appears the kicking-the-can-down-the-road option is favored by many on the Hill, which will eventually come back to bite the United States. We are hopeful that some progress toward stabilizing the fiscal train wreck can occur, but remain skeptical.

European debt crisis claims Portugal
Pursuing irresponsible fiscal spending policies while also holding high levels of government debt is ultimately unsustainable; it is only a question of timing. Countries in the eurozone have the additional factor of a common currency despite having differing cultures, economies, governments and hence fiscal policies, making economic adjustment very difficult.

Additionally, political differences resulted in the lack of definitive action to address the eurozone sovereign debt overhang and created a crisis of confidence. With Portugal now asking for assistance, let’s review the three countries that have asked for aid:

• Greece: elevated debt-to-GDP and continued negative revisions to its already high deficit drew market attention. The large size of needed deficit reduction, poor history of reform, lax tax collection, and lack of labor market competitiveness remain impediments to recovery. Greece likely cannot grow out of its debt problem, and will probably need a restructuring before 2013, keeping government bond yields elevated.
• Ireland: suffered one of the biggest credit-induced property bubbles in history, resulting in massive bank bailouts. When the government stepped in and guaranteed bank losses, its debt spiraled out of control. Despite the large adjustment needed to return to stabilize debt, Ireland’s growth outlook is the best of the debt-ridden eurozone nations because it initiated deficit reform early, has a good track record of retrenching, and has a more dynamic economy with a skilled manufacturing workforce. Irish debt yields have fallen from high levels after bank stress tests resulted in additional bank capital requirements that appear to be within the amount set aside, and after the new government backed off a threat to force losses on senior bank bondholders.
• Portugal: despite having a lower debt-to-GDP than the group, lack of progress on deficit reduction, high reliance the European Central Bank (ECB) for funding because previous foreign sources of capital disappeared, lack of labor competitiveness and low economic growth, and a non-majority government hurt market confidence. The crisis came to a head after austerity measures were voted down, causing the Prime Minster to resign; and after Portuguese banks balked at buying more government debt heading into funding needs on April 15 and June 15. Portugal may end up with a short-term loan to tie it over until the June 5 election, after which negotiations can be held with the new government.

Market separating European nations

Source: FactSet, iBoxx, Tullett Prebon Information. As of Apr. 12, 2011.

Despite Portugal’s decline, the risk of contagion- where one large failure results in problems elsewhere- may be averted, a dramatic shift versus a year ago. This is because the elephant in the room, Spain, should avoid a bailout, and current measures have ring-fenced problems elsewhere.

Spain has made progress by implementing austerity measures including labor reform and reducing the fiscal deficit, and is addressing bank problems. While Spain’s banks likely need more capital due to possible future property-related losses, they have a bigger cushion to absorb property price declines than Ireland and the United States due to higher loan-to-value ratios.

European Central Bank hikes rates, could result in slowdown
Despite Portugal’s need for funds, the ECB followed through on its “strong vigilance” on inflation by hiking rates in early April. We remain concerned about a rate hike cycle when economic growth in the eurozone remains fragile and the full impact of fiscal austerity is yet to be felt. But the possibility of upward inflation in Germany, the region’s largest economy, suggests the need to prevent inflation expectations from rising, which could feed through to wages and create broad-based inflation.

It is possible the market may be expecting too much tightening by the ECB, as it has priced in three more rate hikes by the ECB in 2011, while the ECB could pause to determine the impact on growth before moving further. We are closely watching credit growth, as well as the impact on consumer spending, as many mortgages, particularly in peripheral nations, are based on variable rates. Additionally, the euro has strengthened on the ECB hike, which could hamper export prospects outside the eurozone for both Germany and Spain.

European stocks appear to be attractively valued. However, outside of companies with high exposure to growth coming from the United States and emerging world, we remain suspect of the ability for European stocks in general to outperform in the face of growth headwinds.

Dollar decline led by relative monetary policy
Thus far this year, the main factor influencing a weakening of the US dollar has been differences in monetary policy between the United States and the ECB. The ECB’s rate hike, while the Fed remains on hold, has resulted in growing interest rate differentials, attracting traders to the euro. Despite the rise in the euro, BCA Research indicates that the 2-year swap spread of rates is above the level seen at end of 2009, when EUR/USD reached 1.50, possibly indicating further upside in the euro, and downside for the US dollar.

However, the US dollar could bounce short-term if the ECB falls short of the market’s expectation of three hikes this year or if strong US growth results in an rate hike earlier than the current market expectation of early 2012. Read more in our currency Q&A and weak dollar articles.

Emerging markets well into tightening cycles
Strong and early economic recoveries in emerging markets resulted in inflation and the need to tighten monetary policy. However, it is possible that the pace of inflation increases is peaking, indicating tightening cycles could slow down and provide a more healthy backdrop for stocks. We point to the performance of Chinese stocks, which have outperformed despite continued increases in bank reserve requirements and rates. We believe emerging market stocks could be poised to outperform due to differing directions of monetary policy, with developed nations either embarking on or close to beginning tightening cycles, while emerging markets could begin to slow rate hikes.

Chinese stocks outperforming despite rate hikes

Source: FactSet, Shanghai Stock Exchange, Standard & Poor’s, People’s Bank of China. As of Apr. 12, 2011.

Visit www.schwab.com/oninternational more international perspective.

Important Disclosures

The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. As of May 27, 2010, the MSCI EAFE Index consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The MSCI Emerging Markets Index^SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the MSCI Emerging Markets Index consisted of the following 21 emerging-market country indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

The S&P 500® index is an index of widely traded stocks.

Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.

Past performance is no guarantee of future results.

Investing in sectors may involve a greater degree of risk than investments with broader diversification.

International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.

The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Copyright © Charles Schwab & Co.

Tags: Brazil, Budget Issues, Canadian Market, Charles Schwab, Chief Investment Strategist, China, Debt Problems, Earnings Season, Economic Environment, Growth Businesses, India, Levels Of Government, Liz Ann, Losse, Macro Data, Major Indices, Market Analyst, Political Uncertainty, Resiliency, Russia, Sector Analysis, Senior Vice President, Stock Prices, Trial Balloons, Us Stock Market
Posted in Brazil, Canadian Market, Credit Markets, India, Markets, Outlook | Comments Off

Goldman Refuses To Take Profits On Tactical EURUSD Trade, Extends Target From 1.37 To 1.40

Wednesday, January 26th, 2011

via ZeroHedge.com

Thomas Stolper’s Goldman FX team, who a little over a week ago put on a tactical target of 1.37 on the EURUSD, refuses to take profits on the EURUSD, and instead has extended the target from 1.37 to 1.40 (with a 1.33 stop). Since this is the first time we have seen the firm continue selling into the close, we wonder just how big the pain for the prop side of GS is if it must be hoping to cut its losses on a reversal. With the pair trading well north of 1.37 Goldman may be forced to keep pushing the target ever higher on Asia’s ongoing rescue of Europe.

From Goldman Sachs’ Thomas Stolper

Mixed macro data and mixed price action across cyclical assets was the flavour of the last 24 hours.

On the macro front good news on the substantially oversubscribed EFSF bond  and US consumer confidence contrasted with weaker-than-expected business sentiment in the Richmond Fed survey and, in particular, an unexpectedly weak UK GDP. Instead of growing +0.5% qoq, as consensus thought, the UK economy shrank by -0.5% in the final quarter of 2010. Typically the first take on UK GDP is subject to substantial revisions, but it appears weather related effects in the service and construction sector are to blame, as well as a snow-disrupted holiday shopping season. Fiscal tightening may have started to have an impact as well.

In two important speeches yesterday, Bank of England Governor Mervyn King signalled continued accommodation in monetary policy in light of weak growth and an expected fall in inflation. In his State of the Union address President Obama proposed a 5-year spending freeze, with little immediate impact on the debt trajectory. The proposal likely foreshadows as debate on spending caps later this year.

In terms of price action, the mixed data coincided with a continued notable drop in oil prices, while industrial metals remained under pressure as well. EM currencies were generally slightly weaker, whereas most major currencies drifted stronger against the Dollar. EUR/USD hit the 1.37 target in tactical long recommendation and we extend the target to 1.40 with a new stop on a one-day close below 1.33.

Appropriately the biggest moves could be observed in Sterling crosses as they reflected the weakness in UK activity data. Interestingly the sharp Sterling move coincided with a notable rally in the CHF frank, which suggests positioning related activity as we discuss below.

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Tags: Bank Of England, Business Sentiment, Construction Sector, Consumer Confidence, England Governor, Fed Survey, Gold, Goldman Sachs, Holiday Shopping, Industrial Metals, Macro Data, Mervyn King, Pair Trading, Qoq, Richmond Fed, State Of The Union Address, Stolper, Substantial Revisions, Target, Uk Economy, Uk Gdp
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Goldman Cuts Oil Price Projection From $96 To $87, Whacks Copper, Grudgingly Likes Gold

Tuesday, June 22nd, 2010

This article is a guest contribution from ZeroHedge.com.

Goldman’s Allison Nathan is out tonight with a report that will leave an unpleasant taste in the mouths of growth/BRIC bulls. In an analysis whose key catalyst is a downward revision of demand growth expectations, Goldman materially cuts its short and mid-term forecast prices for key commodities oil and copper. “Commodity markets are generally rebounding strongly off their lows but sentiment remains fragile on European and Chinese concerns and potential signs of slowing positive economic momentum, despite generally healthy macro data and further improvements in commodity fundamentals. These concerns have caused the market to revise down expectations for future growth, and, in turn, discount future commodity supply constraints.” Specifically, Goldman has revised its 3 Month oil forecast to $87 from $96 (old forecast can be found here), nat gas unchanged, copper to $6,800 from $8,125, and zinc to $2,000 from $2,600. What is most amusing is the sheer loathing that comes of the page in which Nathan is forced to be constructive on gold. “We see upside risk to our forecast should investor demand continue to support further flows into the gold-ETFs or central banks continue to accumulate gold. For example, if gold-ETF buying were to continue at its current pace for the remainder of the year, we would expect gold prices to rise to $1,400/toz by the end of 2010.”

Broader commentary from Goldman on commodities in general:

Commodity prices are generally rebounding strongly off their recent lows, but sentiment clearly remains fragile on European and Chinese concerns and potential signs of slowing positive economic momentum, despite generally healthy macro data and further improvements in commodity fundamentals. These concerns have caused the market to revise down expectations for future growth, and, in turn, discount future supply constraints across the commodities complex. We believe that the market is overestimating the impact of current concerns on trend economic growth. However, the markets will likely remain fragile until there is further evidence that sovereign pressures are stabilizing and trend economic growth remains intact – both of which we expect. As a result, we have lowered our 3-mo oil and base metals price forecasts, but to levels still above current prices, and maintain a positive medium term view on many key commodities, especially crude oil, copper, zinc and platinum. We also believe that gold prices will remain supported over the medium term.

We believe that the market is overestimating the impact of current policy and economic concerns on trend economic growth, with little evidence that current developments will have longer-term economic implications. Further, we maintain that sentiment is too bearish on both the sovereign debt risks as well as the effects of macroeconomic momentum slowing and emphasize the below points:

1. Goldman Sachs economists have identified several key differences between the current sovereign crisis and the 2008 mortgage crisis that precipitated the global recession, which suggest that the severe funding problems and transmission to global growth that occurred in 2008 are far less likely this time around (see Dominic Wilson, Global Economics Weekly: Comparing the Sovereign Crisis and the Mortgage Crisis, June 9, 2010.) Further, a slowdown in economic momentum has long been expected and fully embedded in our views.

2. Despite some macro slowing, absolute growth indicators are still firmly positive, and increasing commodity demand to levels beyond pre-recession highs are what matters for rebounding prices, not just sequential growth rates.
3. Commodity fundamentals have held up well and, if anything, have improved beyond expectations. Implied demand for key commodities has remained at exceptionally high levels in the emerging markets, developed market demand has generally surprised to the upside, and inventories have once again begun to track on a tighter path, particularly for the metals where draws have accelerated and are now occurring across all regions for most of the complex.

Nevertheless, we believe that the markets will remain fragile until there is further evidence that sovereign pressures are stabilizing and trend economic growth remains intact. Further, we acknowledge that we have a lot of ground to make up to reach our prior near-term price targets. As a result, we have lowered our 3-mo price forecasts across key oil and metals commodities, which have the most exposure to the macro economy, although to levels still moderately above current prices. Specifically, we have lowered our 3-mo WTI price forecast to $87/bbl from $96/bbl, which is the bottom edge of our  anticipated $85-$95/bbl trading range during 2H1010. As the inventory path for oil has remained a bit softer than we had anticipated driven by supply growth, we have also lowered our 6 and 12-mo WTI forecasts moderately to $87/bbl and $98/bbl, respectively. For 2011 as a whole, we have lowered our average expected price to $100/bbl from $110/bbl previously.

For metals, we are lowering our 3-mo copper, aluminum and zinc forecasts to $6800/mt, $2000/mt, and $2000/mt, respectively, from $8125/mt, $2325/mt and $2590/mt, and raising our nickel price forecast to $21,000/mt from $17,555/mt on extended strike-related Canadian supply disruptions. However, we are modestly raising our 12-mo views across most metals as lower near-term prices potentially worsen the supply outlook against global demand levels that have already exceeded pre-recession highs. We are leaving our agricultural prices unchanged, with prices and fundamentals generally moving as we have expected.

Tags: BRIC, BRICs, Central Banks, China, Chinese Concerns, Commodities, Commodity Markets, Commodity Prices, Commodity Supply, Downward Revision, Economic Momentum, Emerging Markets, ETF, ETFs, Forecast Prices, Future Commodity, Gold, Gold Etfs, Gold Prices, Growth Expectations, Lows, Macro Data, Nat Gas, Price Projection, Supply Constraints, Toz, Unpleasant Taste, Whacks
Posted in China, Commodities, Emerging Markets, Energy & Natural Resources, ETFs, Gold, Markets, Oil and Gas, Outlook | Comments Off

The Importance of Macro-Political Landscape According to David Einhorn (Greenlight Capital)

Tuesday, May 25th, 2010

This article is a guest contribution by Qasim Khan (Shadow Capitalism), via ZeroHedge.com.

Perhaps one of the most overlooked phenomena in this world is the relationship between cause and effect. Financial markets and economics in general are often noteworthy exhibitions of a lack of recognition of this principle. In just a few minutes watching CNBC, you are bombarded with statistics that PROVE our miraculous economic recovery. The macro data has become better; anyone who denies that is disconnected from reality. However, as the markets have vehemently demonstrated recently, the fact is that these numbers have become increasingly irrelevant. Why you ask? Because we don’t live in a society where these numbers represent organic, secular conditions anymore; instead, they reflect the increasingly contradictory and escalating political tension of the world.

Importance of Geo-Politics

While CNBC talks about things like CPI, PMI, and Cramer’s PMS instead of bigger picture geo-political developments, their importance cannot be understated. And while many traders and investors do not heavily account for such macro elements (evidenced by the fact that the global economy could be brought to its knees by a largely unforeseen housing bubble), David Einhorn, whom I have had the fortune of meeting, perfectly explains the importance of this in a speech to the Value Investing Conference in October 2009. Einhorn, known for his bottom up investment style, found a greater appreciation for the importance of macro developments after the recent financial crisis. In the speech he offers several extremely poignant predictions based upon this macro-political perspective, almost completely vindicated by the events in 2010. He said:

At the May 2005 Ira Sohn Investment Research Conference in New York, I recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky than its peers and would hold-up better in a down cycle because it had less leverage and held less land. But this just meant that almost half a decade later, anyone who listened to me would have lost about forty percent of his investment, instead of the seventy percent that the homebuilding sector lost.

I want to revisit this because the loss was not bad luck; it was bad analysis. I down played the importance of what was then an ongoing housing bubble. On the very same day, at the very same conference, a more experienced and wiser investor, Stanley Druckenmiller, explained in gory detail the big picture problem the country faced from a growing housing bubble fueled by a growing debt bubble. At the time, I wondered whether even if he were correct, would it be possible to convert such big picture macro thinking into successful portfolio management? I thought this was particularly tricky since getting both the timing of big macro changes as well as the market’s recognition of them correct has proven at best a difficult proposition. Smart investors had been complaining about the housing bubble since at least 2001. I ignored Stan, rationalizing that even if he were right, there was no way to know when he would be right. This was an expensive error.

The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long- short exposure ratio more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.

Stimulus

This ideological change has become apparent in the market more generally as well. CNBC can toot all the numbers and expectations they want, the truth is economic data has taken a back seat to political circumstances in the new market.

To understand the causal dynamics of the current recovery it is necessary to ask “how” and “why” instead of asking the much trumpeted CNBC question of “what”. From this perspective it becomes clear that the “recovery” that we have experienced draws heavily on exceptionally generous intervention. The government response was in all likelihood necessary and has resulted in improved economic data; however, it seems that the stimulus improved the (certain) numbers simply for the sake of improving (certain) numbers. As this has become increasingly apparent, there has been a paradigm shift where political conditions and events increasingly overwhelm economic data and appear to continue to do so for the foreseeable future.

Tags: Bill Gross, Cause And Effect, China, Cnbc, CPI, Cramer, David Einhorn, David Einhorn Greenlight, David Einhorn Greenlight Capital, Economic Recovery, ETF, Global Economy, Gold, Homebuilder, Housing Bubble, Investment Research, Investment Style, Ira Sohn Investment Research Conference, Macro Data, Macro Elements, Mdc Holdings, Political Developments, Political Landscape, Political Perspective, Political Tension, Qasim
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