*Aussie dollar weaker after RBA Governor Stevens justifies rate stance:
Aussie dollar a notable laggard today. Currency hit after RBA Governor Stevens said inflation is a bit too low at the moment and this fact had to condition monetary policy. Added that central bank sees exchange rate as a shock absorber and Aussie was doing what it expected. Stevens dismissed recent calls to change the inflation target, arguing that 2-3% target is not a rigid requiring knee-jerk response. Pointed out continuing economic growth and while stronger growth would be better, did not think it was too bad. Note that despite the RBA's 25bp May rate cut being a close call, the prevailing view is for further rate cuts this year from current record low of 1.75%.
*China flip-flops on currency policy in favor of stability over reform:
China’s yuan under renewed scrutiny with recent re-pricing of near-term Fed policy normalization expectations. Yuan has lost more than 1% against the dollar in May thus far, while firmer tone today reportedly a function of intervention on the part of state banks. Yesterday afternoon, WSJ reported that after the PBoC announced last August it would make the yuan’s value more market-based in an effort to promote economic liberalization, the daily exchange is now back under tight government control. Paper said the reversal in policy, which was decided on in early January but has not been officially announced, driven by concerns about capital flight, the potential to trigger competitive currency devaluations and worries that a cheaper yuan would make debt servicing more difficult.
*New home sales hit best level since January 2008:
New home sales increased 16.6% m/m to a 619K SAAR in April, ahead of the 523K consensus and highest level since January 2008. Percentage increase was biggest since January 1992. March revised up to 531K from 511K, while February revised up to 538K from 519K. Sales up in all regions except Midwest, where they fell 4.8%. Northeast the standout with sales up 52.8% to hit best level since October 2007. Sales in the West jumped 18.8% following a 15%+ contraction in March. South increased 15.8%. Tight supply in focus as months’ supply fell to 4.7 from 5.5 in March. Median price up 9.7% y/y to a record $321,100. Not all good news from the economic calendar today, however. Richmond Fed latest regional manufacturing index to miss for April, falling to (1) from +14 and below the +8 consensus.
*All sectors higher with risk-on trade:
Tech best performer with some upside leadership fromWDC-US and MSFT-US, both of which caught upgrades at Cowen. Banks and other rate-sensitive plays drove rally in financials. No fallout from lower long-term targets out ofWFC-US. Strength in healthcare fairly broad based, though ANTM-US lagging on Sterne Agee CRT downgrade amid heightened M&A scrutiny. Consumer discretionary largely in line. Retail capped upside onBBY-US and DSWUS earnings, but homebuildersjumped on strong data and TOL-US results. Industrialslagged a bit on weakness in select rail names. Multis, machinery and airlines largely outperformed. FWRD-USboosted by an upgrade at RBC. Materials trailed tape with weakness in precious metals, while ag chemicals gave back some recent M&A related gains. MON-US rejected Bayer offer. CF-US has seen a couple of downgrades.Energy worst performer despite crude strength.
*Odds of Brexit lowest since start of election campaign; Carney defends decision to flag risks:
Latest betting odds from UK firm William Hill put odds of Brexit at just 15%, the lowest since the EU referendum campaign began. Another OBR EU referendum poll for the Telegraph also indicated widening pro-EU support at 55% vs pro-Brexit supporters at 43%, out of those people that intended to vote. When including all voters, pro-EU supporters now hold a 20-point lead at 58%. Telegraph said it was due to men, Conservative voters and over-65s increasingly turning to pro-EU campaign. Separately, BoE Governor Carney defended central bank’s decision to highlight Brexit risks. Stressed the fact that it is important for businesses and households, not just those in financial markets, to understand that the outcome of the 23-Jun referendum could require a big reassessment from the bank on how it sets policy.
*Abe aide in favor or proceeding with planned sales tax increase:
Headlines out of Japan continue to push back against widespread expectations that Abe government will once again postpone a sales tax increase currently scheduled for April 2017. Deputy Cabinet Secretary Koichi Hagiuda told Reuters that raising the sales tax to 10% from 8% as planned would be the best way to win the trust of international society. Added that he did not think the current economic situation warranted a change in plan. Comments follow some disappointment out of the recent meeting of G7 finance officials in Japan stemming from reports that Japanese Finance Minister Aso told US Treasury Secretary Lew that Japan will proceed with the sales tax increase. A Nikkei report earlier this month had said Prime Minister Abe already reached a decision to delay the increase.
*Japanese Finance Minister Aso satisfied with dollar/yen around 109 level:
Japanese Finance Minister Aso told parliament it would be good if dollar/yen stabilizes around its current level of ~109. A Nikkei article noted that it is rare for a finance minister to refer to a specific level in verbal intervention. Earlier this month, dollar/yen fell to an 18-month low of 105.50, prompting a pickup in verbal intervention from Japanese officials. However, the market has been skeptical about the potential for direct intervention given the lack of sympathy from the rest of the G7, particularly the US. This theme received more attention at the recent meeting of G7 finance officials in Japan. While Japanese officials continued to express concern yen strength has been a function of one-sided, speculative moves, US Treasury Secretary Lew reiterated his belief that moves have been orderly.
*Moody’s cuts Deutsche Bank credit ratings amid risks to strategic plans:
Deutsche Bank (DBK-DE) under some scrutiny today afterMoody’s downgraded its credit rating Monday. Cut senior unsecured debt rating to Baa 2 from Baa1, two notches above junk territory. Also cut the long-term deposit rating by one notch to A3. Cited increased risks to bank’s ability to successfully execute an ambitious, creditor-friendly plan. Added substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm. Also said firm unlikely to o achieve its targeted profitability improvements unless there is a material and sustained improvement in the operating environment. In response, CFO said all key ratings remain investment grade, with counterparty risk assessment and long-term deposit rating remaining in the A territory.
*Investors continue to flock to low-volatility ETFs:
Big theme from a positioning perspective continues to revolve around the influx of funds to low-volatility ETFs. Move a function of the lingering fears from the selloff in global risk assets last August and this January. Bloombergpointed out that a PowerShares ETF tracking the S&P 500 Low Volatility Index attracted $769M on Friday, the biggest single-day inflow in its history. Added that investors have piled $1.7B into the fund since the S&P 500 fell to a 22-month low in February. Noted that inflows are coming as investors flee equities in general, having pulled nearly $60B from ETFs and mutual funds this year, on track for second-highest outflows for any 1H since 1984. Also discussed how money is flowing to low-volatility ETFs at the same time that conventional measures of volatility remain depressed.
Aussie dollar a notable laggard today. Currency hit after RBA Governor Stevens said inflation is a bit too low at the moment and this fact had to condition monetary policy. Added that central bank sees exchange rate as a shock absorber and Aussie was doing what it expected. Stevens dismissed recent calls to change the inflation target, arguing that 2-3% target is not a rigid requiring knee-jerk response. Pointed out continuing economic growth and while stronger growth would be better, did not think it was too bad. Note that despite the RBA's 25bp May rate cut being a close call, the prevailing view is for further rate cuts this year from current record low of 1.75%.
*China flip-flops on currency policy in favor of stability over reform:
China’s yuan under renewed scrutiny with recent re-pricing of near-term Fed policy normalization expectations. Yuan has lost more than 1% against the dollar in May thus far, while firmer tone today reportedly a function of intervention on the part of state banks. Yesterday afternoon, WSJ reported that after the PBoC announced last August it would make the yuan’s value more market-based in an effort to promote economic liberalization, the daily exchange is now back under tight government control. Paper said the reversal in policy, which was decided on in early January but has not been officially announced, driven by concerns about capital flight, the potential to trigger competitive currency devaluations and worries that a cheaper yuan would make debt servicing more difficult.
*New home sales hit best level since January 2008:
New home sales increased 16.6% m/m to a 619K SAAR in April, ahead of the 523K consensus and highest level since January 2008. Percentage increase was biggest since January 1992. March revised up to 531K from 511K, while February revised up to 538K from 519K. Sales up in all regions except Midwest, where they fell 4.8%. Northeast the standout with sales up 52.8% to hit best level since October 2007. Sales in the West jumped 18.8% following a 15%+ contraction in March. South increased 15.8%. Tight supply in focus as months’ supply fell to 4.7 from 5.5 in March. Median price up 9.7% y/y to a record $321,100. Not all good news from the economic calendar today, however. Richmond Fed latest regional manufacturing index to miss for April, falling to (1) from +14 and below the +8 consensus.
*All sectors higher with risk-on trade:
Tech best performer with some upside leadership fromWDC-US and MSFT-US, both of which caught upgrades at Cowen. Banks and other rate-sensitive plays drove rally in financials. No fallout from lower long-term targets out ofWFC-US. Strength in healthcare fairly broad based, though ANTM-US lagging on Sterne Agee CRT downgrade amid heightened M&A scrutiny. Consumer discretionary largely in line. Retail capped upside onBBY-US and DSWUS earnings, but homebuildersjumped on strong data and TOL-US results. Industrialslagged a bit on weakness in select rail names. Multis, machinery and airlines largely outperformed. FWRD-USboosted by an upgrade at RBC. Materials trailed tape with weakness in precious metals, while ag chemicals gave back some recent M&A related gains. MON-US rejected Bayer offer. CF-US has seen a couple of downgrades.Energy worst performer despite crude strength.
*Odds of Brexit lowest since start of election campaign; Carney defends decision to flag risks:
Latest betting odds from UK firm William Hill put odds of Brexit at just 15%, the lowest since the EU referendum campaign began. Another OBR EU referendum poll for the Telegraph also indicated widening pro-EU support at 55% vs pro-Brexit supporters at 43%, out of those people that intended to vote. When including all voters, pro-EU supporters now hold a 20-point lead at 58%. Telegraph said it was due to men, Conservative voters and over-65s increasingly turning to pro-EU campaign. Separately, BoE Governor Carney defended central bank’s decision to highlight Brexit risks. Stressed the fact that it is important for businesses and households, not just those in financial markets, to understand that the outcome of the 23-Jun referendum could require a big reassessment from the bank on how it sets policy.
*Abe aide in favor or proceeding with planned sales tax increase:
Headlines out of Japan continue to push back against widespread expectations that Abe government will once again postpone a sales tax increase currently scheduled for April 2017. Deputy Cabinet Secretary Koichi Hagiuda told Reuters that raising the sales tax to 10% from 8% as planned would be the best way to win the trust of international society. Added that he did not think the current economic situation warranted a change in plan. Comments follow some disappointment out of the recent meeting of G7 finance officials in Japan stemming from reports that Japanese Finance Minister Aso told US Treasury Secretary Lew that Japan will proceed with the sales tax increase. A Nikkei report earlier this month had said Prime Minister Abe already reached a decision to delay the increase.
*Japanese Finance Minister Aso satisfied with dollar/yen around 109 level:
Japanese Finance Minister Aso told parliament it would be good if dollar/yen stabilizes around its current level of ~109. A Nikkei article noted that it is rare for a finance minister to refer to a specific level in verbal intervention. Earlier this month, dollar/yen fell to an 18-month low of 105.50, prompting a pickup in verbal intervention from Japanese officials. However, the market has been skeptical about the potential for direct intervention given the lack of sympathy from the rest of the G7, particularly the US. This theme received more attention at the recent meeting of G7 finance officials in Japan. While Japanese officials continued to express concern yen strength has been a function of one-sided, speculative moves, US Treasury Secretary Lew reiterated his belief that moves have been orderly.
*Moody’s cuts Deutsche Bank credit ratings amid risks to strategic plans:
Deutsche Bank (DBK-DE) under some scrutiny today afterMoody’s downgraded its credit rating Monday. Cut senior unsecured debt rating to Baa 2 from Baa1, two notches above junk territory. Also cut the long-term deposit rating by one notch to A3. Cited increased risks to bank’s ability to successfully execute an ambitious, creditor-friendly plan. Added substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm. Also said firm unlikely to o achieve its targeted profitability improvements unless there is a material and sustained improvement in the operating environment. In response, CFO said all key ratings remain investment grade, with counterparty risk assessment and long-term deposit rating remaining in the A territory.
*Investors continue to flock to low-volatility ETFs:
Big theme from a positioning perspective continues to revolve around the influx of funds to low-volatility ETFs. Move a function of the lingering fears from the selloff in global risk assets last August and this January. Bloombergpointed out that a PowerShares ETF tracking the S&P 500 Low Volatility Index attracted $769M on Friday, the biggest single-day inflow in its history. Added that investors have piled $1.7B into the fund since the S&P 500 fell to a 22-month low in February. Noted that inflows are coming as investors flee equities in general, having pulled nearly $60B from ETFs and mutual funds this year, on track for second-highest outflows for any 1H since 1984. Also discussed how money is flowing to low-volatility ETFs at the same time that conventional measures of volatility remain depressed.
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