*MSCI delays China A-share inclusion in its indexes:
MSCI delayed including China A shares its Emerging Markets Index. Noted satisfactory resolution of beneficial ownership rule, but more time needed to effectiveness of QFII quota allocation and capital mobility policy changes, as well as effectiveness of new trading suspension policies. Also noted 20% monthly repatriation limit remains significant hurdle for investors faced with redemptions. Added local exchanges’ pre-approval restrictions on launching financial products remains unaddressed. However, would not rule out potential off-cycle review. Some uncertainty heading into the announcement, though market seemed to be leaning toward inclusion. However, China shares resilient overnight. Note many previews played down initial tailwind from inclusion (~$15B-$30B estimate range).
*Mixed May credit and lending data out of China:
Chinese banks extended RMB985.5B of new yuan loans in May, ahead of the RMB750B consensus. Nomura said more than half of new loans made to household sector, consistent with the rapid growth in property sales in May. Outstanding yuan loans grew 14.4% y/y, unchanged from April, but better than the 14.2% consensus. Total social financing (TSF) fell to RMB659.9B in May from RMB751B in April, well below the RMB1T consensus. Crackdown on shadow banking highlighted as a likely drag. Elsewhere, M2 growth slowed to 11.8% from 12.8%, worse than expectations for a deceleration to 12.5% y/y. However, central bank officials have flagged the likelihood of a slowdown given the high base from last year’s liquidity injections surrounding the stock market swoon.
*Fed takeaways dovish:
Fed left policy unchanged as expected. Also as expected, statement noted pace of improvement in labor market has slowed. However, no surprise that Fed cushioned downgrade by noting it expects labor market indicators will strengthen. Also pointed out household spending has strengthened. Reiterated it continues to closely monitor inflation indicators and global economic and financial developments. No change in forward guidance. Median estimate continued to be for two rate hikes in 2016, though six officials now (vs one prior) looking for just a single hike. Projections for 2017 and 2018 fell more than expected. Longerrun Fed funds rate projection fell to 3.0% from 3.25%. Yellen flagged Brexit risks, international uncertainties, productivity headwinds and said Fed quite uncertain about where rates heading over long term.
*Defensives lag, some cyclicals outperform:
Sectors mixed. Defensives underperformed despite rates. Still some concerns bond proxies may be overbought/overcrowded. Healthcare another laggard. PRGO-US gave back Tuesday rally on M&A skepticism. Tech underperformed, though a number of moving pieces. Large-cap plays like INTC-US, AAPL-US, ORCL-US and CSCO-US (downgrade) among worst performers. Energy lower. Oil down for fifth straight day. Financials slightly higher with modest rebound in most banks/cards following SYF-US warning Tuesday and REIT strength. Industrials eked out small gain. Machinery one of the better performers. Retail a standout in consumer discretionary. Good day for dept. stores after recent drag from credit fears and more cautious sell-side commentary. Materials best performer on industrial and precious metals strength (dollar weakness, X-US upgrade, report China considering stockpiling base metals).
*Flurry of Brexit headlines continues; Osbourne warns of higher taxes:
Usual flurry of Brexit headlines today, though not seeing the accompanying pickup in risk aversion that has been the big theme over last few days. Latest ComRes Brexit poll in The Sun put “Remain” with one point lead at 46% vs “Leave” on 45%. Not as a big of a lead as the four other polls out earlier this week, though still compares with 11 point lead for Remain last month. Betfair said implied probability of British vote to stay in EU currently stands at 62%. Reuters noted it had fallen to ~55% at one point on Tuesday. Separately, Bloomberg also discussed how bookies remain fairly confident Britain will stay in the EU. Cited confidence in tendency of undecided voters to swing back to incumbent as voting day approaches. Note Chancellor Osborne warned of higher taxes if there is a Brexit.
*DoubleLine's Gundlach says central banks are losing control, Brexit unlikely:
Policy failure/loss of confidence in central banks still viewed as one of biggest tail risks for global markets. Theme has been around for a while, but continues to generate headlines. Jeff Gundlach, manager of the $60.3B DoubleLine Total Return Bond Fund, told Reuters flight to safety flows due to markets losing faith in central banks. Argued Fed appears confused (inconsistent tone), which has spilled over into investor psychology. Added negative interest rates implemented by some major central banks, notably in Japan, backfiring.. Reckons it is a dangerous price appreciation game to purchase German Bunds at current levels. Gold and gold miners are still an attractive place to put money to work. Does not expect Brexit despite Leave camp leading in several recent polls.
*Mixed economic data on backburner with Fed focus:
Industrial production fell 0.4% m/m, worse than consensus for 0.2% decline. Manufacturing production also down 0.4% and also softer. Auto sector a headwind. Business equipment another drag. However, some better news elsewhere in terms of manufacturing after all five regional surveys signaled respective contraction in May. Empire manufacturing index improved to +6.0 in June from (9.0) in May. Details better with big jumps in new orders and shipments back into positive territory. Headline PPI up 0.4% m/m in May, driven by 2.8% increase in energy prices. Food prices up for first time in three months. Consensus was for a 0.4% increase. However, index still down 0.1% y/y. Core PPI up 0.3%, also above expectations, pushing y/y rate of increase to 1.2% from 0.9%. Both core goods and services prices higher.
*More focus on Fed struggles with natural rate:
In an article out on Sunday, WSJ discussed uncertainty surrounding the so-called natural rate, which the paper described as the inflation-adjusted rate that is consistent with the economy operating at its full potential, expanding without overheating. Pointed out most economists believed natural rate was around 2% shortly before the financial crisis, while current estimates are now around or just below zero. Also highlighted struggles with assessment of why natural rate so low. Highlighted theories such as a global savings glut, secular stagnation and cyclical headwinds that have weighed on growth since the financial crisis. Reuters had a similar article late Tuesday. Noted paced of tightening likely to be much slower than expected. Also highlighted challenges for policy to respond to future crises/recessions.
*Cautious strategist comments from JPMorgan:
A couple of cautious notes from strategists at JPMorgan. Firm’s widely followed lead quantitative strategist, Marko Kolanovic, said yesterday recent gains did not have much justification in fundamentals or investors psychology, but were significantly driven by systematic strategies. Added that most of the technical buying now exhausted. Also said other key market participants less likely to provide significant support for market near term, while weak technical, seasonal and flow trends pose elevated downside risks. Separately, head US equity strategist Dubravko Lakos-Bujas said firm sees equity market risk asymmetric to the downside with potential for higher tail risk outcomes. Reiterated positive stance on high dividend stocks.
*Credit Suisse reckons fiscal QE likely over next 3-5 years:
Credit Suisse global equity strategy report reckons markets underestimating the probability of fiscal QE. Fits in with recent commentary pointing to of helicopter money on the horizon. Credit Suisse said likelihood of some form of fiscal QE being used by G4 central banks over the next 3-5 years is high due to five key factors. i) the age of the US cycle; ii) conventional QE is having increasingly unwelcome side-effects; iii) fiscal QE is effective; iv) it's more acceptable politically; and v) strong structural disinflationary forces will continue to make it hard for central banks to hit their inflation targets. Thinks Japan is most likely to conduct some form of fiscal QE, followed by the UK, the US and lastly the Eurozone. Favors stocks that would benefit from infrastructure QE, such as European construction.
MSCI delayed including China A shares its Emerging Markets Index. Noted satisfactory resolution of beneficial ownership rule, but more time needed to effectiveness of QFII quota allocation and capital mobility policy changes, as well as effectiveness of new trading suspension policies. Also noted 20% monthly repatriation limit remains significant hurdle for investors faced with redemptions. Added local exchanges’ pre-approval restrictions on launching financial products remains unaddressed. However, would not rule out potential off-cycle review. Some uncertainty heading into the announcement, though market seemed to be leaning toward inclusion. However, China shares resilient overnight. Note many previews played down initial tailwind from inclusion (~$15B-$30B estimate range).
*Mixed May credit and lending data out of China:
Chinese banks extended RMB985.5B of new yuan loans in May, ahead of the RMB750B consensus. Nomura said more than half of new loans made to household sector, consistent with the rapid growth in property sales in May. Outstanding yuan loans grew 14.4% y/y, unchanged from April, but better than the 14.2% consensus. Total social financing (TSF) fell to RMB659.9B in May from RMB751B in April, well below the RMB1T consensus. Crackdown on shadow banking highlighted as a likely drag. Elsewhere, M2 growth slowed to 11.8% from 12.8%, worse than expectations for a deceleration to 12.5% y/y. However, central bank officials have flagged the likelihood of a slowdown given the high base from last year’s liquidity injections surrounding the stock market swoon.
*Fed takeaways dovish:
Fed left policy unchanged as expected. Also as expected, statement noted pace of improvement in labor market has slowed. However, no surprise that Fed cushioned downgrade by noting it expects labor market indicators will strengthen. Also pointed out household spending has strengthened. Reiterated it continues to closely monitor inflation indicators and global economic and financial developments. No change in forward guidance. Median estimate continued to be for two rate hikes in 2016, though six officials now (vs one prior) looking for just a single hike. Projections for 2017 and 2018 fell more than expected. Longerrun Fed funds rate projection fell to 3.0% from 3.25%. Yellen flagged Brexit risks, international uncertainties, productivity headwinds and said Fed quite uncertain about where rates heading over long term.
*Defensives lag, some cyclicals outperform:
Sectors mixed. Defensives underperformed despite rates. Still some concerns bond proxies may be overbought/overcrowded. Healthcare another laggard. PRGO-US gave back Tuesday rally on M&A skepticism. Tech underperformed, though a number of moving pieces. Large-cap plays like INTC-US, AAPL-US, ORCL-US and CSCO-US (downgrade) among worst performers. Energy lower. Oil down for fifth straight day. Financials slightly higher with modest rebound in most banks/cards following SYF-US warning Tuesday and REIT strength. Industrials eked out small gain. Machinery one of the better performers. Retail a standout in consumer discretionary. Good day for dept. stores after recent drag from credit fears and more cautious sell-side commentary. Materials best performer on industrial and precious metals strength (dollar weakness, X-US upgrade, report China considering stockpiling base metals).
*Flurry of Brexit headlines continues; Osbourne warns of higher taxes:
Usual flurry of Brexit headlines today, though not seeing the accompanying pickup in risk aversion that has been the big theme over last few days. Latest ComRes Brexit poll in The Sun put “Remain” with one point lead at 46% vs “Leave” on 45%. Not as a big of a lead as the four other polls out earlier this week, though still compares with 11 point lead for Remain last month. Betfair said implied probability of British vote to stay in EU currently stands at 62%. Reuters noted it had fallen to ~55% at one point on Tuesday. Separately, Bloomberg also discussed how bookies remain fairly confident Britain will stay in the EU. Cited confidence in tendency of undecided voters to swing back to incumbent as voting day approaches. Note Chancellor Osborne warned of higher taxes if there is a Brexit.
*DoubleLine's Gundlach says central banks are losing control, Brexit unlikely:
Policy failure/loss of confidence in central banks still viewed as one of biggest tail risks for global markets. Theme has been around for a while, but continues to generate headlines. Jeff Gundlach, manager of the $60.3B DoubleLine Total Return Bond Fund, told Reuters flight to safety flows due to markets losing faith in central banks. Argued Fed appears confused (inconsistent tone), which has spilled over into investor psychology. Added negative interest rates implemented by some major central banks, notably in Japan, backfiring.. Reckons it is a dangerous price appreciation game to purchase German Bunds at current levels. Gold and gold miners are still an attractive place to put money to work. Does not expect Brexit despite Leave camp leading in several recent polls.
*Mixed economic data on backburner with Fed focus:
Industrial production fell 0.4% m/m, worse than consensus for 0.2% decline. Manufacturing production also down 0.4% and also softer. Auto sector a headwind. Business equipment another drag. However, some better news elsewhere in terms of manufacturing after all five regional surveys signaled respective contraction in May. Empire manufacturing index improved to +6.0 in June from (9.0) in May. Details better with big jumps in new orders and shipments back into positive territory. Headline PPI up 0.4% m/m in May, driven by 2.8% increase in energy prices. Food prices up for first time in three months. Consensus was for a 0.4% increase. However, index still down 0.1% y/y. Core PPI up 0.3%, also above expectations, pushing y/y rate of increase to 1.2% from 0.9%. Both core goods and services prices higher.
*More focus on Fed struggles with natural rate:
In an article out on Sunday, WSJ discussed uncertainty surrounding the so-called natural rate, which the paper described as the inflation-adjusted rate that is consistent with the economy operating at its full potential, expanding without overheating. Pointed out most economists believed natural rate was around 2% shortly before the financial crisis, while current estimates are now around or just below zero. Also highlighted struggles with assessment of why natural rate so low. Highlighted theories such as a global savings glut, secular stagnation and cyclical headwinds that have weighed on growth since the financial crisis. Reuters had a similar article late Tuesday. Noted paced of tightening likely to be much slower than expected. Also highlighted challenges for policy to respond to future crises/recessions.
*Cautious strategist comments from JPMorgan:
A couple of cautious notes from strategists at JPMorgan. Firm’s widely followed lead quantitative strategist, Marko Kolanovic, said yesterday recent gains did not have much justification in fundamentals or investors psychology, but were significantly driven by systematic strategies. Added that most of the technical buying now exhausted. Also said other key market participants less likely to provide significant support for market near term, while weak technical, seasonal and flow trends pose elevated downside risks. Separately, head US equity strategist Dubravko Lakos-Bujas said firm sees equity market risk asymmetric to the downside with potential for higher tail risk outcomes. Reiterated positive stance on high dividend stocks.
*Credit Suisse reckons fiscal QE likely over next 3-5 years:
Credit Suisse global equity strategy report reckons markets underestimating the probability of fiscal QE. Fits in with recent commentary pointing to of helicopter money on the horizon. Credit Suisse said likelihood of some form of fiscal QE being used by G4 central banks over the next 3-5 years is high due to five key factors. i) the age of the US cycle; ii) conventional QE is having increasingly unwelcome side-effects; iii) fiscal QE is effective; iv) it's more acceptable politically; and v) strong structural disinflationary forces will continue to make it hard for central banks to hit their inflation targets. Thinks Japan is most likely to conduct some form of fiscal QE, followed by the UK, the US and lastly the Eurozone. Favors stocks that would benefit from infrastructure QE, such as European construction.
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