*China stocks rally on higher probability of MSCI global index inclusion:
Shanghai Composite jumped 3.3% on Tuesday, its biggest in nearly three months. Bloomberg said rally attributed to comments out of Goldman Sachs, which raised probability of Chinese stocks securing inclusion in MSCI’s global indexes next month to 70% from 50%. JPMorgan predicted inclusion on Monday. Last June, MSCI decided against including China A shares in the index, a global benchmark for ~$1.5T of assets, due to investment restrictions. Goldman highlighted Beijing’s recent move to clarify beneficial ownership rules and curb trading halts. Added conditional probability for a “yes” would be significantly higher if Shenzhen-HK Connect were to be announced. Despite market excitement, Reuters said inclusion would only translate into a net $15B in inflows into A shares, tiny in comparison to daily turnover or size.
*Sector performance fairly bunched:
Pretty limited read-throughs from sectors today. Defensive plays like telecom and utilities outperformed. However, consumer staples a laggard with weakness in HPC, tobacco and select beverages (Nielsen data got some blame). Materials also underperformed with some drag from chemicals. However, precious metals rallied. CLF-US led a mixed industrial metals group on new pellet supply agreement and JPMorgan upgrade. Energy weaker as crude lost momentum. Financials trailed tape. Most banks saw modest pullbacks. Industrials just a tad weaker. Ag equipment (DE-US upgrade) strength helped. Tech firmer. AAPL-US hit by Nikkei report of extended iPhone cycle, though HDDs rallied. Health care outperformed on biotech strength (M&A helped with CPXX-US to be acquired by JAZZUS for $1.5B). Icahn also announced large stake in AGN-US.
*Renewed Brexit concerns:
Brexit concerns back in focus after recent momentum behind “remain” camp cited as supportive for global risk appetite. Sterling under some pressure, while both European and US equities headed lower on the latest headlines. ICM/Guardian telephone poll showed 45% of respondents in favor of leaving the EU, ahead of the 42% who said they would vote to stay in the bloc. Note previous ICM telephone poll on 16-May put the “remain” camp eight percentage points ahead. ICM noted latest telephone poll was first to put “leave” camp in the lead. Separate ICM/Guardian online poll showed 47% in support of “leave” compared to 44% for “remain”. Last week’s online poll had both sides at 45%. When looking at both polls, 52% in favor of “leave” and 48% for “remain”. Latest polls conducted between May 27 and 29.
*Spending up the most in April in more than six years:
Consumer spending up 1.0% m/m in April following a downwardly revised flat reading (was +0.1%) in March. Better than consensus for a 0.7% increase and biggest gain since August 2009. Real spending up 0.6% in biggest gain since February 2014. Followed little change in prior month. Spending on durables increased 2.3%, while spending on services was up 0.6%. Personal income increased 0.4% following a similar gain in March, in line with expectations. Wages and salaries up 0.5%. Core PCE price index, the Fed’s preferred measure of inflation, increased 0.2% m/m following a 0.1% gain in March. However, y/y rate of growth remained unchanged 1.6%, below central bank’s 2% target.
*OPEC meeting may be a non-event:
Nothing really expected from Thursday’s OPEC meeting. Production freeze deal off the table given Saudi Arabia’s insistence that Iran must participate. However, Tehran has long been vocal in its plan to ramp production back up to presanctions level. Lot of discussion in press about how rebound in prices has dampened the need for a freeze and put some additional credibility behind Saudi Arabia’s decision to prioritize market share. Also some focus on Khalid al-Falih, Saudi Arabia’s new energy minister. WSJnoted that pressure to overhaul the Saudi economy, along with rising tensions between the kingdom and Iran, mean that Falih is operating with much flexibility when OPEC’s ability to smooth internal differences and make coordinated decisions is already being tested.
*Chicago PMI latest regional manufacturing survey to miss for May:
Chicago Fed PMI fell to 49.3 in May from 50.4 in April, below 50.5 consensus. Lowest level since February and sixth contraction in last 12 months. Both production and new orders fell into contraction. Former fell to lowest since February, while latter hit worst level since December. Employment actually increased slightly, but remained in contraction for tenth time in last 12 months. Report also flagged an 11.7 point decline in inventories to 37.9, the lowest since November 2009. Added that weakness could signify uncertainty about future growth and noted special question showed nearly 69% of respondents do not plan to increase business inventories over next six months. Softer reading fits with disappointments from all of the other regional manufacturer surveys for May.
*Busy day of Eurozone economic data:
Fairly limited market impact from flurry of Eurozone economic data. Eurozone HICP inflation rose to (0.1%) y/y in flash May reading from (0.2%) in April, in line with consensus. Core inflation ticked up to 0.8% y/y from 0.7%, also in line. April M3 money supply growth slowed to 4.6% from 5.0% in March, which was also consensus. Lending to companies increased 1.2%, up from 1.1% in March, marking best rate since November 2011. Household lending increased 1.5%, down from 1.6%. German May unemployment rate eased to 6.1% in May from 6.2% in April, which was also the consensus. Lowest rate since 1990 reunification. However German April retail sales fell 1.9% in April following a downwardly revised 1.4% pullback in March, confounding expectations for a 0.9% increase.
*Payrolls the highlight of the week:
Holiday-shortened week brings some key US economic data amid heightened expectations for a near-term Fed tightening. May employment report expected to be the highlight on Friday. Street looking for a 160K increase in nonfarm payrolls, in line with the April gain, but down from the 200K+ pace seen earlier this year and throughout 2015. However, slower rate of growth has been well-flagged by Fed officials and not expected to take away from central bank’s upbeat assessment of labor market. Verizon strike that occurred during the survey period expected to adversely impact payrolls by ~35K. Unemployment rate expected to hold steady at 5.0% Average hourly earnings seen up 0.2% m/m following a 0.3% gain in April. However, y/y rate of increase expected to remain unchanged at 2.5%.
*Barron’s does not see imminent market crash:
Barron’s cover story over the weekend it does not see an imminent market crash. Noted with rare exceptions, market crashes are accompanied by recessions. However, odds of a recession now are quite low. Also noted while house prices are rising, still below the peaks of 2007. Virtually all recessions preceded by an oil-price spike, while today the price stands at ~$49, on the rebound from multiyear lows. Another indicator of imminent recession is a flat or inverted yield curve, but right now, yield curve relatively normal with spread between three-month and ten-year paper at 154 bp. Valuation not concern when looking at the yield on the WisdomTree Dividend Index. Currently stands at 3.2% vs 2.9% in 2007, despite Treasury yields meaningfully lower.
*Both sector and stock selection weigh on fund performance:
Goldman Sachs noted large-cap mutual funds have lagged S&P 500 by 110 bp in 2016, while hedge funds have lagged by 444 bp. Sectors that have delivered negative returns thus far this year account for 70% of aggregate hedge fund portfolios and 64% of large-cap core mutual fund core portfolios. Funds overweight Consumer Discretionary, Information Technology, Financials and Healthcare, all of which have lagged S&P 500. Both also underweight defensive sectors Telecom and Utilities, which have beat S&P by 10 pp and 11 pp, respectively. Stock selection another headwind as basket of most popular hedge fund positions has lagged hedge fund short positions basket by 810 bp ytd. Basket of most overweight stocks held by large-cap mutual funds has trailed mutual fund underweights by 590 bp.
*JPMorgan sees Eurozone equities relative value improving vs US:
JPMorgan remains cautious on Eurozone equities, but sees potential for some unwinding of their recent underperformance of ~8% YTD vs the US, on a relative value basis. Argued that Eurozone relative valuations have improved materially YTD as 12m forward P/E vs the US has moved from expensive territory at the start of 2016 to the cheap side of fair value currently, to be the most attractive in three years. Said macro fundamentals are supportive, unlike US, citing Eurozone economic momentum and credit conditions appearing stronger. Added ECB’s stimulus expansion in contrast to Fed tightening, has helped credit spreads to narrow. Also welcomed reduction in Brexit odds and recent Greek debt deal. Likes France and Spain (overweight both). Within sectors, reiterated that Banks could find some support, as a hedge for Fed tightening.
*Japanese Prime Minister Abe to announce sales tax delay tomorrow:
Japanese Prime Minister Abe to use a Wednesday press conference to announce plan to increase sales tax to 10% from 8%, currently scheduled for April 2017, will now be delayed until October 2019. Delay had been widely expected given Japan’s economic struggles and recent emphasis on doing its part to combat global growth risks. Note reports yesterday said Abe also plans to propose a fiscal stimulus package of as much as ¥10T after July’s upper house election. While Finance Minister Aso has been against the sales tax delay, he reportedly has relented on his call for Abe to dissolve the lower house. In addition, Nikkei article said Abe has decided to forgo a lower house election. Aso also told reporters today government will maintain target to achieve a primary fiscal stimulus by fiscal year 2020.
*Japan data generally better than expected:
Japan macro data better than feared. April industrial production rose 0.3% m/m following a 3.8% gain in March, ahead of consensus for a 1.5% decline. Overall impact of Kumamoto earthquake disruptions not as onerous. Output led by chemicals, electrical machinery and production equipment, while transport equipment (including autos) declined only 0.6%. Current survey projections point to 2.2% increase in May, revised from 2.3% decline, and 0.3% gain in June. Shipments rose 1.5% in April to outpace production, leaving inventories down 1.7%. METI maintained overall assessment that output is tracking sideways. Other data showed April unemployment rate held steady at 3.2%, matching expectations. Household spending fell 0.4% y/y following a 5.3% decline in March, better than consensus for a 1.3% contraction.
*Apple to extend iPhone product cycle?
AAPL-US iPhone cycle under more scrutiny in the press.Nikkei reported company will likely take three years between full-model changes, longer than its current two-year cycle. Noted under the typical two-year term, fall 2016 was supposed to see a major upgrade. However, changes on model this fall will be minor. Expected to include improvements for camera, water resistance and battery capacity, along with removal of headphone jack. Article said longer cycle largely a function of diminishing opportunities for major enhancements. Also flagged slowing market. However, did point out 2017 will feature major enhancements and design changes, including adoption of organic electroluminescent display.
Shanghai Composite jumped 3.3% on Tuesday, its biggest in nearly three months. Bloomberg said rally attributed to comments out of Goldman Sachs, which raised probability of Chinese stocks securing inclusion in MSCI’s global indexes next month to 70% from 50%. JPMorgan predicted inclusion on Monday. Last June, MSCI decided against including China A shares in the index, a global benchmark for ~$1.5T of assets, due to investment restrictions. Goldman highlighted Beijing’s recent move to clarify beneficial ownership rules and curb trading halts. Added conditional probability for a “yes” would be significantly higher if Shenzhen-HK Connect were to be announced. Despite market excitement, Reuters said inclusion would only translate into a net $15B in inflows into A shares, tiny in comparison to daily turnover or size.
*Sector performance fairly bunched:
Pretty limited read-throughs from sectors today. Defensive plays like telecom and utilities outperformed. However, consumer staples a laggard with weakness in HPC, tobacco and select beverages (Nielsen data got some blame). Materials also underperformed with some drag from chemicals. However, precious metals rallied. CLF-US led a mixed industrial metals group on new pellet supply agreement and JPMorgan upgrade. Energy weaker as crude lost momentum. Financials trailed tape. Most banks saw modest pullbacks. Industrials just a tad weaker. Ag equipment (DE-US upgrade) strength helped. Tech firmer. AAPL-US hit by Nikkei report of extended iPhone cycle, though HDDs rallied. Health care outperformed on biotech strength (M&A helped with CPXX-US to be acquired by JAZZUS for $1.5B). Icahn also announced large stake in AGN-US.
*Renewed Brexit concerns:
Brexit concerns back in focus after recent momentum behind “remain” camp cited as supportive for global risk appetite. Sterling under some pressure, while both European and US equities headed lower on the latest headlines. ICM/Guardian telephone poll showed 45% of respondents in favor of leaving the EU, ahead of the 42% who said they would vote to stay in the bloc. Note previous ICM telephone poll on 16-May put the “remain” camp eight percentage points ahead. ICM noted latest telephone poll was first to put “leave” camp in the lead. Separate ICM/Guardian online poll showed 47% in support of “leave” compared to 44% for “remain”. Last week’s online poll had both sides at 45%. When looking at both polls, 52% in favor of “leave” and 48% for “remain”. Latest polls conducted between May 27 and 29.
*Spending up the most in April in more than six years:
Consumer spending up 1.0% m/m in April following a downwardly revised flat reading (was +0.1%) in March. Better than consensus for a 0.7% increase and biggest gain since August 2009. Real spending up 0.6% in biggest gain since February 2014. Followed little change in prior month. Spending on durables increased 2.3%, while spending on services was up 0.6%. Personal income increased 0.4% following a similar gain in March, in line with expectations. Wages and salaries up 0.5%. Core PCE price index, the Fed’s preferred measure of inflation, increased 0.2% m/m following a 0.1% gain in March. However, y/y rate of growth remained unchanged 1.6%, below central bank’s 2% target.
*OPEC meeting may be a non-event:
Nothing really expected from Thursday’s OPEC meeting. Production freeze deal off the table given Saudi Arabia’s insistence that Iran must participate. However, Tehran has long been vocal in its plan to ramp production back up to presanctions level. Lot of discussion in press about how rebound in prices has dampened the need for a freeze and put some additional credibility behind Saudi Arabia’s decision to prioritize market share. Also some focus on Khalid al-Falih, Saudi Arabia’s new energy minister. WSJnoted that pressure to overhaul the Saudi economy, along with rising tensions between the kingdom and Iran, mean that Falih is operating with much flexibility when OPEC’s ability to smooth internal differences and make coordinated decisions is already being tested.
*Chicago PMI latest regional manufacturing survey to miss for May:
Chicago Fed PMI fell to 49.3 in May from 50.4 in April, below 50.5 consensus. Lowest level since February and sixth contraction in last 12 months. Both production and new orders fell into contraction. Former fell to lowest since February, while latter hit worst level since December. Employment actually increased slightly, but remained in contraction for tenth time in last 12 months. Report also flagged an 11.7 point decline in inventories to 37.9, the lowest since November 2009. Added that weakness could signify uncertainty about future growth and noted special question showed nearly 69% of respondents do not plan to increase business inventories over next six months. Softer reading fits with disappointments from all of the other regional manufacturer surveys for May.
*Busy day of Eurozone economic data:
Fairly limited market impact from flurry of Eurozone economic data. Eurozone HICP inflation rose to (0.1%) y/y in flash May reading from (0.2%) in April, in line with consensus. Core inflation ticked up to 0.8% y/y from 0.7%, also in line. April M3 money supply growth slowed to 4.6% from 5.0% in March, which was also consensus. Lending to companies increased 1.2%, up from 1.1% in March, marking best rate since November 2011. Household lending increased 1.5%, down from 1.6%. German May unemployment rate eased to 6.1% in May from 6.2% in April, which was also the consensus. Lowest rate since 1990 reunification. However German April retail sales fell 1.9% in April following a downwardly revised 1.4% pullback in March, confounding expectations for a 0.9% increase.
*Payrolls the highlight of the week:
Holiday-shortened week brings some key US economic data amid heightened expectations for a near-term Fed tightening. May employment report expected to be the highlight on Friday. Street looking for a 160K increase in nonfarm payrolls, in line with the April gain, but down from the 200K+ pace seen earlier this year and throughout 2015. However, slower rate of growth has been well-flagged by Fed officials and not expected to take away from central bank’s upbeat assessment of labor market. Verizon strike that occurred during the survey period expected to adversely impact payrolls by ~35K. Unemployment rate expected to hold steady at 5.0% Average hourly earnings seen up 0.2% m/m following a 0.3% gain in April. However, y/y rate of increase expected to remain unchanged at 2.5%.
*Barron’s does not see imminent market crash:
Barron’s cover story over the weekend it does not see an imminent market crash. Noted with rare exceptions, market crashes are accompanied by recessions. However, odds of a recession now are quite low. Also noted while house prices are rising, still below the peaks of 2007. Virtually all recessions preceded by an oil-price spike, while today the price stands at ~$49, on the rebound from multiyear lows. Another indicator of imminent recession is a flat or inverted yield curve, but right now, yield curve relatively normal with spread between three-month and ten-year paper at 154 bp. Valuation not concern when looking at the yield on the WisdomTree Dividend Index. Currently stands at 3.2% vs 2.9% in 2007, despite Treasury yields meaningfully lower.
*Both sector and stock selection weigh on fund performance:
Goldman Sachs noted large-cap mutual funds have lagged S&P 500 by 110 bp in 2016, while hedge funds have lagged by 444 bp. Sectors that have delivered negative returns thus far this year account for 70% of aggregate hedge fund portfolios and 64% of large-cap core mutual fund core portfolios. Funds overweight Consumer Discretionary, Information Technology, Financials and Healthcare, all of which have lagged S&P 500. Both also underweight defensive sectors Telecom and Utilities, which have beat S&P by 10 pp and 11 pp, respectively. Stock selection another headwind as basket of most popular hedge fund positions has lagged hedge fund short positions basket by 810 bp ytd. Basket of most overweight stocks held by large-cap mutual funds has trailed mutual fund underweights by 590 bp.
*JPMorgan sees Eurozone equities relative value improving vs US:
JPMorgan remains cautious on Eurozone equities, but sees potential for some unwinding of their recent underperformance of ~8% YTD vs the US, on a relative value basis. Argued that Eurozone relative valuations have improved materially YTD as 12m forward P/E vs the US has moved from expensive territory at the start of 2016 to the cheap side of fair value currently, to be the most attractive in three years. Said macro fundamentals are supportive, unlike US, citing Eurozone economic momentum and credit conditions appearing stronger. Added ECB’s stimulus expansion in contrast to Fed tightening, has helped credit spreads to narrow. Also welcomed reduction in Brexit odds and recent Greek debt deal. Likes France and Spain (overweight both). Within sectors, reiterated that Banks could find some support, as a hedge for Fed tightening.
*Japanese Prime Minister Abe to announce sales tax delay tomorrow:
Japanese Prime Minister Abe to use a Wednesday press conference to announce plan to increase sales tax to 10% from 8%, currently scheduled for April 2017, will now be delayed until October 2019. Delay had been widely expected given Japan’s economic struggles and recent emphasis on doing its part to combat global growth risks. Note reports yesterday said Abe also plans to propose a fiscal stimulus package of as much as ¥10T after July’s upper house election. While Finance Minister Aso has been against the sales tax delay, he reportedly has relented on his call for Abe to dissolve the lower house. In addition, Nikkei article said Abe has decided to forgo a lower house election. Aso also told reporters today government will maintain target to achieve a primary fiscal stimulus by fiscal year 2020.
*Japan data generally better than expected:
Japan macro data better than feared. April industrial production rose 0.3% m/m following a 3.8% gain in March, ahead of consensus for a 1.5% decline. Overall impact of Kumamoto earthquake disruptions not as onerous. Output led by chemicals, electrical machinery and production equipment, while transport equipment (including autos) declined only 0.6%. Current survey projections point to 2.2% increase in May, revised from 2.3% decline, and 0.3% gain in June. Shipments rose 1.5% in April to outpace production, leaving inventories down 1.7%. METI maintained overall assessment that output is tracking sideways. Other data showed April unemployment rate held steady at 3.2%, matching expectations. Household spending fell 0.4% y/y following a 5.3% decline in March, better than consensus for a 1.3% contraction.
*Apple to extend iPhone product cycle?
AAPL-US iPhone cycle under more scrutiny in the press.Nikkei reported company will likely take three years between full-model changes, longer than its current two-year cycle. Noted under the typical two-year term, fall 2016 was supposed to see a major upgrade. However, changes on model this fall will be minor. Expected to include improvements for camera, water resistance and battery capacity, along with removal of headphone jack. Article said longer cycle largely a function of diminishing opportunities for major enhancements. Also flagged slowing market. However, did point out 2017 will feature major enhancements and design changes, including adoption of organic electroluminescent display.
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