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Financial Insights (06-June-2016)

Australia
2016-06-06 13:59

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*Goldman sees rising risk of yuan depreciation:

Goldman Sachs sees growing risk capital outflows from China may accelerate as yuan weakens. Said as PBoC guides yuan lower vs the US dollar, the risk is that this re-ignites capital flight in the same manner it did in August (during the mini-devaluation) and around January. Noted this is because Beijing has shifted its management of the yuan, keeping it steady against a basket of currencies while downplaying the significance of the exchange rate versus the greenback. Goldman said such a strategy may not succeed in stemming capital outflows because it is the dollar-yuan exchange rate that Chinese households and companies are most sensitive to. Added that in turn, the yuan’s decline threatens to slow the pace of Fed’s policy tightening. Firmed add it sees good chance of renewed speculation over need for a one-off devaluation.

*Strategies employed to profit from weaker yuan:

Investors using different methods to profit from weaker yuan. Reuters highlighted use of fake invoicing, citing banking industry officials who said China’s State Administration of Foreign Exchange intensively scrutinizing authenticity of crude oil trades. Bitcoin also popular in helping move cash across borders. Citing industry sources, article noted price recently hit highest in almost two years with ~95% of bitcoin trading conducted on Chinese exchanges. Other analysts pointed to correlation between yuan and Hong Kong stocks. Piece added volumes in non-deliverable yuan forwards (NDFs) also recovered to highest since December. Analysts attributed increase to anticipation ahead of potential Fed rate hike. Fed hike dynamic highlighted in separate Reuters article, which noted poll of 60 currency analysts found median expectation for yuan to weaken to 6.69 by November end and 6.75 at end of May 2017.

*Financials lead sectors lower: 

Financials the worst performer today, with rate-sensitive stocks getting hit on a repricing of the front-end of the curve. BKX-US down more than 2.5%, while many insurers off more than 3%. Consumer discretionary underperforming, though some pockets of strength in the retail space. GPS-US stronger after posting better-than-feared comps. Autos lagging, extending this week's weakness. Tech also trailing the tape, with many of the high-beta internet plays underperforming. AMBA-US andAVGO-US two standouts among the semis after posting earnings beats. Defensive sectors outperforming. Utilities a bright spot, with the move lower in rates offering attractive yields. Dow Jones Utilities Index jumping to a record high today.

*Big nonfarm payrolls miss:

May nonfarm payrolls came in at +38K, well below consensus for +160K, which was also April’s level. Lowest level of job creation in five years. Unemployment rate fell to 4.7% as labor force declined 458K. Previous months also revised downward, March from +208K to +186K and April from +160K to +123K. Private payrolls increased 25K vs consensus for 150K, below the downwardly revised 130K April reading. The participation rate fell to 62.6% from 62.8% last month. Average hourly earnings rose 0.2%, in line with consensus. However, April earnings revised down to a gain of 0.3% from 0.4%. Average hours came in at 34.4, same level as downwardly revised April reading. Number of workers employed part-time for economic reasons rose 468K. Reading was expected to be volatile due to the impact of VZ strike, though magnitude of move outweighs that potential impact. Release represents last major gauge of job market before Fed's June 14-15 meeting.

*Nonmanufacturing ISM weaker:

May’s ISM nonmanufacturing survey came in at 52.9, still in expansion territory but down from April’s 55.7 and below consensus from 55.3. Four nonmanufacturing industries reported contraction, while the other 14 reported expansion. New orders notably weaker, down to 54.2 from April’s 59.9. New export orders ticked into contraction, down to 49.0 from last month’s 56.5. Business activity index decreased to 55.1 from 58.8 April level. However, prices index was higher, rising to 55.6 vs April’s 53.4. Employment posted a notable drop, with May falling into contraction at 49.7 against last month’s 53.0 level. Respondent commentary was mixed, with some reporting slowing momentum on projects and shipments and others noting strong outlook. Some focus on cost concerns. Report compares with Markit’s services PMI, which declined to 51.3 from April’s 52.8, but remained in expansion territory.

*More hawkish leaning Fedspeak from Kaplan and Evans:

Some more hawkish Fedspeak Friday. Chicago Fed’s Evans (non-voter) said two rate hikes may be appropriate before end of year, although same the precise timing of the hikes was not so important. Noted however that he saw a reasonable case for delaying higher borrowing costs until core inflation reaches the Fed's goal of 2%. Said unlikely 2% met for another three years and saw downside risks to growth this year. Overnight, Dallas Fed’s Kaplan (non-voter) reiterated view that Fed should raise rates soon because US is close to full employment and inflation starting to creep higher. Added he was not sure if the rate hike should come in June or July, but that he would advocate for one in the near future. Sees immediate tail risk from Brexit vote and said the Fed needs to take into account US presidential elections in November.

*Oil volatile as OPEC takeaways digested:

Crude oil back under pressure in choppy session. Brent slips below $50. DOE data yesterday showed lower inventories/strong gasoline demand seen as supportive. OPEC meeting being digested. Despite no agreement on output targets, Saudi Arabia pledged not to flood the market – seen as broadly supportive for crude prices. Morgan Stanley described meeting as uneventful, as expected, but had some notable takeaways, citing 3 main highlights; 1) production limits/quotas were discussed, but not implemented; 2) OPEC inaction due to belief in recovery and uncertainty in market dynamics; 3) Officials suggested OPEC /non-OPEC cooperation is alive and well, implying cartel may not want to take sole responsibility for any supply side action. Also noted Gabon rejoining cartel in July and Nigeria’s Barkindo appointed as new Secretary General.

*Flow data highlights return of risk appetite favors equities:

Latest weekly BofA Merrill Lynch Flow Show data pointed to reversal in risk with first equity inflows in 8 weeks. Global equity funds attracted $1.5B, while EM equity funds saw inflows of $300M for first time in 5 weeks. Around $1.5B was pumped into US equity funds, marking first gain in five weeks, and there was milder withdrawals for European equity funds, which have suffered 17 straight weeks of outflows, losing just $700M - the smallest outflow in 14 weeks. In contrast, government bond funds lost $1B, marking 14th outflow out of the last 15 weeks. A notable beneficiary of the recent hawkish Fed turn were bank loan funds, which mirror interest rate rises. Bank loans attracted $400M, the largest inflows to in 12 weeks. Thanks to ECB corporate QE, IG bond funds attracted inflows for 13 straight weeks, with $2.7B booked this week.

*Trump as US President a notable headwind for equities:

Barclays pricing in US presidential election risk in latest note. Said while difficult to assess the market impact of Trump, declines in S&P futures after he won Republican primaries (Indiana, Nevada and New Hampshire) suggests that an increase in his chances becoming President could be considerable headwind for equities. Argued Trump perceived as the more uncertain candidate over Clinton based on his comments made throughout the primaries on trade, immigration, large tax cuts, debt, currency manipulators and Fed. Noted business and investor surveys seem to show a clear preference for Clinton. Overall, sees November election introducing another layer of uncertainty amid backdrop of mid-tolate cycle developments, including mediocre growth, potential for Fed hikes, above average equity valuations and China slowing.

*Japanese wage growth decelerates in April:

Japanese wage growth decelerated markedly in April. Real average wage growth of 0.6% y/y down on March’s revised 1.6% increase. Average contracted earnings growth fell to 0.2% from March’s 0.7%. Driven in part by base wage growth of 0.2% falling from prior month’s revised 0.7% increase. Sluggish wage growth occurred as manufacturers’ total hours worked increased to 0.4% m/m after 0.4% fall in March. Deteriorating wage growth perhaps seen supporting Abe’s case for delaying sales tax hike. Recall data this week showed household spending growth fell to 0.2% m/m in April after March’s 0.5% increase. Note also BoJ’s Kuroda has often highlighted importance of wage growth in boosting private consumption.
 
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