*RBA lowers cash rate:
RBA's decision to cut cash rate by 25 bp to 1.50% met consensus expectations. Statement noted recent data confirmed Aussie inflation remains quite low and is expected to remain so for some time. Officials noted house price growth had moderated this year. Coupled with expectations of a surge in apartment supply, and slowing household lending growth, RBA believed the likelihood of lower interest rates fueling housing market risks had diminished. Also noted recent data consistent with Australia's economy continuing to grow at a moderate pace. Added labor market indicators continued to be somewhat mixed, and repeated its warning that a strengthening currency could complicate the economy's adjustment. RBA will release its updated quarterly forecasts on 5-Aug.
*JPMorgan quant head expects pickup in volatility, says systematic strategies have elevated exposure to equities:
JPMorgan’s widely followed quant strategist, Marko Kolanovic, out with a new note today. Noted that he does not believe recent price behavior of S&P 500 in terms of drop in volatility and correlation to other assets is sustainable over the long term given that it was not caused by fundamental change. Argued realized volatility of US stocks should rise, while current divergences between S&P 500 and other assets such as oil, the Chinese yuan, Eurostoxx 500 and Nikkei are likely to close. Also discussed positioning, which has been a point of obsession for market in recent months. Estimated equity exposure of various systematic strategies is elevated and in the 80 th percentile. Added that speculative S&P 500 futures positions at highest level, suggesting that non-systematic investors also long. Not post-Brexit resilience has partly been attributed to notion of bearish positioning keeping pain trade to the upside.
*Oil unable to sustain early rebound:
Despite an early rebound, oil declined again today, with WTI settling down 1.4% to hit $39.51, remaining in bear market territory. Unable to take advantage of today's dollar selloff. Nothing particularly incremental today. Technical deterioration continues to get attention (recent break of 200dma). Some talk of concern going into inventory data after close. Also reports Nigeria has resumed payments to former militants to help establish a cease-fire. Recent themes have revolved around resolution of high-profile supply disruptions, elevated gasoline inventories, and softer crude and product demand. Also some focus yesterday on continued increase in US rig count (data out last Friday), bearish hedge fund positioning, price war between Saudi Arabia and deal to reopen three Libyan ports that had been shuttered since late 2014.
*Why were stocks lower Tuesday?:
Tough to find a specific catalyst behind the pullback. Market has struggled for direction as of late following surprising resilience in the first few weeks following Brexit. Continued oil weakness got more attention. Also some focus today on backup in JGB yields (see WSJ). Cautious-leaning sell-side commentary, including latest today from JPMorgan's widely followed quant strategist Marko Kolanovic, another area of interest. Some thoughts market may be suffering from policy fatigue following lackluster reaction to Japan fiscal stimulus package (another yen spike). Aussie also up big despite RBA rate cut. Growth concerns have crept back into market in recent days with softer Q2 GDP data. In addition, Fed Senior Loan Officer Opinion Survey out yesterday showed banks tightened C&I lending standards for a fourth straight quarter (leading indicator for slowdown in loan demand).
*Consumer discretionary leads market lower; energy stronger despite oil selloff:
Consumer discretionary worst performer with retail weakness. Earnings read-throughs and cautious sell-side commentary flagged. Most autos under outsized pressure despite solid July sales. Industrials underperformed on airline selloff. Group hit by DAL-US update. Financials underperformed. Banks down with the tape. REITs and asset managers fared the worst. Tech lagged on fairly broad-based weakness. Semis hit with broader cyclical pullback. Healthcare a relative outperformer. Biotech helped by BIIB-US takeover speculation. Also some better results out of managed care and distributors. Materials also beat tape on precious metals strength. Despite another selloff in oil, energy rallied. Sector has been a notable underperformer as of late. Most refiners fared well.
*Big Three miss, but July vehicle sales still beat:
F-US, GM-US and Chrysler (FCAU-US) all reported softer than expected July auto sales. However, according to Ward’sJuly light vehicle sales came in at a 17.8M SAAR, ahead of its 17.6M forecast (SA consensus was 17.7M) and better than the 17.1M recorded ytd through June. Usual discussion in press about demand shift to SUVs, crossovers and pickup trucks, as well support from healthy labor market. However, also more talk about recent warning from Ford regarding peak demand (though did say today sales still at healthy levels), along need for incentives to help drive growth. Reuters article noted that according TrueCar, incentive spending represented 9.9% of average vehicle selling prices in July, up from 9.6% in year-earlier period. On a more upbeat note, GM said there is still potential for US light vehicle sales to hit a new record in 2016.
*Personal income, spending rise in June:
June personal income rose 0.2% vs consensus for 0.3% and May’s 0.2% growth. Primarily reflected increases in private wages and salaries, with some offset from decreases in personal dividend and interest income. Real disposable personal income up 0.1% for the month, primarily on increased spending for electricity and gas, healthcare services, and other nondurable goods. New motor vehicle spending declined. Real personal consumption expenses rose 0.4% in June, the third consecutive monthly increase, with core PCE (excluding food and energy) up 0.1%. Monthly breakout follows report of strong 4.2% (SAAR) PCE increase in Friday’s Q2 GDP report. Personal savings rate came in at 5.3%, a slight decline from May's 5.5% level.
*August has not been a great month for stocks:
Following unexpected post-Brexit resilience in July that saw S&P 500 rally 3.5%, some recent focus on the more difficult seasonal setup for August. Evercore ISI (technical strategist Rich Ross) noted last week that the setup for August is “terrible”. Pointed out August worst month for S&P 500 in over past twenty years with an average decline of 1.2%. Added that over the last six years, things have been even worse, with an average decline of 2.3%. In addition, Bespoke Investment Group pointed out that in the last six years, equities have been up two times during the first two-week period of the month. Noted that energy, which has really come under pressure from the renewed selloff in crude, has been the worst performing sector with a median decline of 1.39% and positive returns just twice.
*European banks hit by Commerzbank warning, ongoing Italian woes:
European banks under further pressure after stress tests results unexpectedly failed to remove overhang yesterday. Commzerbank (CBK.GR) abandoned its 2016 profit target, highlighting continued headwinds from depressed rates and customer caution. Italian banking sector still in the crosshairs. No surprise when it comes to continued concerns surrounding Monte dei Paschi (BMPS-IT), though UniCredit’s (UCG-IT) 7% capital ratio heavily scrutinized since results. Italian PM Renzi today on CNBCreiterated he will not enforce EU rules to hit investors in any bank restructurings, keeping him at odds with Brussels. While he continued to push for private solution, some recent backlash from chairman of the association of Italian pension funds regarding unfavorable terms.
*Policy support focus continues shifts to fiscal stimulus:
More discussion about the heightened importance of fiscal stimulus with global monetary policy increasingly seen pushing on a string. Bloomberg discussed how around the world, governments are planning fresh spending to boost growth and support wages. Argued that global sentiment now different from most of the period since last financial crisis as political narrative has shifted from austerity to a focus on topics like higher-quality jobs, investment, or the dangers of inequality. Pointed out that the in the US, both Clinton and Trump have highlighted support for a ramp infrastructure spending. Also noted u-turn in the UK following Brexit, along with increased spending in China, Canada and South Koea. However, Eurozone countries still constrained, while German unwilling to loosen purse strings.
*Cost to hedge equities falls to one-year low:
Big theme in market coming out of Brexit has been cautious sentiment and positioning on equities keeping pain trades higher. However, WSJ article noted that at the same time, cost of hedging against decline in equities fell to oneyear low last month. Cited data from Credit Suisse that showed cost of a put option expiring in three months is ~1.3% of S&P 500’s spot price, down from ~2.5% when UK voted to leave EU and ~3.3% when negative feedback loops wreaked havoc at the beginning of the year. Report’s author, Credit Suisse equities derivatives strategist Mandy Xu, told WSJ that this trend is telling you that options investors are not seeing any macro risks in the market. Paper highlighted better some support from better corporate earnings and rally in emerging markets, which have pushed VIX to lowest level in a year.
*ECB QE data soothing some worries over bond scarcity:
Bond scarcity a familiar theme in recent weeks. July dataof ECB QE going some way to allay those fears. July's purchases showed German bonds accounted for 27.4% of the total bought under QE during the month, or 1.8% more than the Bundesbank's share of the ECB capital key. UniCredit economist Luca Cazzulani said amount purchased suggests the ECB is not experiencing difficulties in finding German bonds and QE must be a highly supportive factor for Bunds. Cazzulani added currently, only €300B of German bonds trade with a yield higher than the deposit rate of (0.4%) and as long as yields remain at current levels, QE will most likely remain focused on the extra-long end. Reuters argued this however raises questions about whether QE benefits some countries disproportionately and whether it can comply with its self-imposed constraints.
*Goldman Sachs expects inventory bounce:
Inventories a widely discussed headwind on the disappointing Q2 GDP data out last Friday, subtracting ~120 bp from headline growth. Goldman Sachs also noted inventory accumulation has been a drag on GDP growth for five consecutive quarters, the longest stretch in more than half a century. However, firm expects restocking will boost growth in 2H. Noted that given that inventory contribution was negative in Q2, even a small amount of stock building would translate into a meaningful contribution to growth. Added that the timeliest data suggest pace of destocking in manufacturing sector may be slowing. Added that economy-wide inventory-to-sales rations not particularly high, so even longer period of destocking does not look necessary.
*Renewed concern about yen strength:
Renewed concerns in Japan about yen strength following big rally last Friday on the back of the BoJ’s disappointing decision to only expand ETF purchases (though some reprieve that fallout for global risk assets was neglibible). Finance Minister Aso made another attempt at verbal intervention, noting that FX moves were extremely nervous and he was closely watching currency movements. Note that past forays failed to gain any traction, particularly given skepticism about Japan’s appetite for unilateral intervention amid the lack of support from the US. Separately, “Mr. Yen”, former vice finance minister Sakakibara, told Bloomberg late Monday the yen could strengthen toward 90 per dollar as soon as this month. Cautioned that monetary easing was losing its potency, while fiscal stimulus tailwind may only prove temporary.
*Japan approves fiscal stimulus package:
As expected, Japan’s Cabinet approved ¥28.1T (~$274B) economic stimulus package, the third largest in history. Most importantly, plan includes ¥7.5T in so-called 'fresh-water' spending, or underlying fiscal thrust. However, this will be implemented over multiple years, with ¥4T to come in a supplementary budget this fiscal year and the remainder to be funded next year. While this figure is in line with recent reports and more aggressive than what was initially envisaged, still flagged as a disappointment in comparison to the headline figure. Nikkei report said deficit bonds will not be issued, with the program instead funded by construction bonds. Government also once again ruled out 50-year bonds (which some had hoped could be monetized by JGB). Several press reports noted package only to have modest impact on growth.
*Commonwealth Bank of Australia (CBA):
The big four banks are all holding back part of the Reserve Bank of Australia’s interest rate cut, a move that will bolster profit margins but risk frustrating home loan customers. Within minutes of the decision to cut the cash rate by 0.25 percentage points to 1.5 per cent, Commonwealth Bank of Australia said it would pass through just 0.13 percentage points of the cut to owner occupiers and property investors from August 19. It’s standard variable rate will be 5.22 per cent for owner occupiers and 5.49 per cent for investors. National Australia Bank decided to hold back even more. It has reduced its standard variable interest rate by 10 basis points to 5.25 per cent, also from August 19.
*Westpac Banking Corp (WBC):
Westpac reply to ASIC: $12m profit came from predicting Reserve Bank moves, not from benchmark manipulation Westpac Banking Corp has claimed a senior trader’s ‘‘$12 million buck’’ boast about a profit had nothing to do with manipulating the key benchmark interest rate in the bank’s favour as the corporate regulator alleged, but rather was a reference to profits the bank made from correctly predicting a Reserve Bank of Australia interest rate increase. In the first legal response from any of the three banks being sued by the Australian Securities and Investments Commission for allegedly rigging the bank bill swap rate (BBSW), Westpac has accused the regulator of taking conversations among its traders out of context to prove misconduct and said the regulator had mis-characterised the nature of one phone call between head trader Col Roden and an official from the Reserve Bank of Australia. The 55- page Westpac defence filed with the Federal Court of Australia on Tuesday also argued the bank’s potential trading profits when the BBSW moved were inconsequential relative to the money Westpac is alleged to have ‘‘spent’’ on trying to influence the rate.
RBA's decision to cut cash rate by 25 bp to 1.50% met consensus expectations. Statement noted recent data confirmed Aussie inflation remains quite low and is expected to remain so for some time. Officials noted house price growth had moderated this year. Coupled with expectations of a surge in apartment supply, and slowing household lending growth, RBA believed the likelihood of lower interest rates fueling housing market risks had diminished. Also noted recent data consistent with Australia's economy continuing to grow at a moderate pace. Added labor market indicators continued to be somewhat mixed, and repeated its warning that a strengthening currency could complicate the economy's adjustment. RBA will release its updated quarterly forecasts on 5-Aug.
*JPMorgan quant head expects pickup in volatility, says systematic strategies have elevated exposure to equities:
JPMorgan’s widely followed quant strategist, Marko Kolanovic, out with a new note today. Noted that he does not believe recent price behavior of S&P 500 in terms of drop in volatility and correlation to other assets is sustainable over the long term given that it was not caused by fundamental change. Argued realized volatility of US stocks should rise, while current divergences between S&P 500 and other assets such as oil, the Chinese yuan, Eurostoxx 500 and Nikkei are likely to close. Also discussed positioning, which has been a point of obsession for market in recent months. Estimated equity exposure of various systematic strategies is elevated and in the 80 th percentile. Added that speculative S&P 500 futures positions at highest level, suggesting that non-systematic investors also long. Not post-Brexit resilience has partly been attributed to notion of bearish positioning keeping pain trade to the upside.
*Oil unable to sustain early rebound:
Despite an early rebound, oil declined again today, with WTI settling down 1.4% to hit $39.51, remaining in bear market territory. Unable to take advantage of today's dollar selloff. Nothing particularly incremental today. Technical deterioration continues to get attention (recent break of 200dma). Some talk of concern going into inventory data after close. Also reports Nigeria has resumed payments to former militants to help establish a cease-fire. Recent themes have revolved around resolution of high-profile supply disruptions, elevated gasoline inventories, and softer crude and product demand. Also some focus yesterday on continued increase in US rig count (data out last Friday), bearish hedge fund positioning, price war between Saudi Arabia and deal to reopen three Libyan ports that had been shuttered since late 2014.
*Why were stocks lower Tuesday?:
Tough to find a specific catalyst behind the pullback. Market has struggled for direction as of late following surprising resilience in the first few weeks following Brexit. Continued oil weakness got more attention. Also some focus today on backup in JGB yields (see WSJ). Cautious-leaning sell-side commentary, including latest today from JPMorgan's widely followed quant strategist Marko Kolanovic, another area of interest. Some thoughts market may be suffering from policy fatigue following lackluster reaction to Japan fiscal stimulus package (another yen spike). Aussie also up big despite RBA rate cut. Growth concerns have crept back into market in recent days with softer Q2 GDP data. In addition, Fed Senior Loan Officer Opinion Survey out yesterday showed banks tightened C&I lending standards for a fourth straight quarter (leading indicator for slowdown in loan demand).
*Consumer discretionary leads market lower; energy stronger despite oil selloff:
Consumer discretionary worst performer with retail weakness. Earnings read-throughs and cautious sell-side commentary flagged. Most autos under outsized pressure despite solid July sales. Industrials underperformed on airline selloff. Group hit by DAL-US update. Financials underperformed. Banks down with the tape. REITs and asset managers fared the worst. Tech lagged on fairly broad-based weakness. Semis hit with broader cyclical pullback. Healthcare a relative outperformer. Biotech helped by BIIB-US takeover speculation. Also some better results out of managed care and distributors. Materials also beat tape on precious metals strength. Despite another selloff in oil, energy rallied. Sector has been a notable underperformer as of late. Most refiners fared well.
*Big Three miss, but July vehicle sales still beat:
F-US, GM-US and Chrysler (FCAU-US) all reported softer than expected July auto sales. However, according to Ward’sJuly light vehicle sales came in at a 17.8M SAAR, ahead of its 17.6M forecast (SA consensus was 17.7M) and better than the 17.1M recorded ytd through June. Usual discussion in press about demand shift to SUVs, crossovers and pickup trucks, as well support from healthy labor market. However, also more talk about recent warning from Ford regarding peak demand (though did say today sales still at healthy levels), along need for incentives to help drive growth. Reuters article noted that according TrueCar, incentive spending represented 9.9% of average vehicle selling prices in July, up from 9.6% in year-earlier period. On a more upbeat note, GM said there is still potential for US light vehicle sales to hit a new record in 2016.
*Personal income, spending rise in June:
June personal income rose 0.2% vs consensus for 0.3% and May’s 0.2% growth. Primarily reflected increases in private wages and salaries, with some offset from decreases in personal dividend and interest income. Real disposable personal income up 0.1% for the month, primarily on increased spending for electricity and gas, healthcare services, and other nondurable goods. New motor vehicle spending declined. Real personal consumption expenses rose 0.4% in June, the third consecutive monthly increase, with core PCE (excluding food and energy) up 0.1%. Monthly breakout follows report of strong 4.2% (SAAR) PCE increase in Friday’s Q2 GDP report. Personal savings rate came in at 5.3%, a slight decline from May's 5.5% level.
*August has not been a great month for stocks:
Following unexpected post-Brexit resilience in July that saw S&P 500 rally 3.5%, some recent focus on the more difficult seasonal setup for August. Evercore ISI (technical strategist Rich Ross) noted last week that the setup for August is “terrible”. Pointed out August worst month for S&P 500 in over past twenty years with an average decline of 1.2%. Added that over the last six years, things have been even worse, with an average decline of 2.3%. In addition, Bespoke Investment Group pointed out that in the last six years, equities have been up two times during the first two-week period of the month. Noted that energy, which has really come under pressure from the renewed selloff in crude, has been the worst performing sector with a median decline of 1.39% and positive returns just twice.
*European banks hit by Commerzbank warning, ongoing Italian woes:
European banks under further pressure after stress tests results unexpectedly failed to remove overhang yesterday. Commzerbank (CBK.GR) abandoned its 2016 profit target, highlighting continued headwinds from depressed rates and customer caution. Italian banking sector still in the crosshairs. No surprise when it comes to continued concerns surrounding Monte dei Paschi (BMPS-IT), though UniCredit’s (UCG-IT) 7% capital ratio heavily scrutinized since results. Italian PM Renzi today on CNBCreiterated he will not enforce EU rules to hit investors in any bank restructurings, keeping him at odds with Brussels. While he continued to push for private solution, some recent backlash from chairman of the association of Italian pension funds regarding unfavorable terms.
*Policy support focus continues shifts to fiscal stimulus:
More discussion about the heightened importance of fiscal stimulus with global monetary policy increasingly seen pushing on a string. Bloomberg discussed how around the world, governments are planning fresh spending to boost growth and support wages. Argued that global sentiment now different from most of the period since last financial crisis as political narrative has shifted from austerity to a focus on topics like higher-quality jobs, investment, or the dangers of inequality. Pointed out that the in the US, both Clinton and Trump have highlighted support for a ramp infrastructure spending. Also noted u-turn in the UK following Brexit, along with increased spending in China, Canada and South Koea. However, Eurozone countries still constrained, while German unwilling to loosen purse strings.
*Cost to hedge equities falls to one-year low:
Big theme in market coming out of Brexit has been cautious sentiment and positioning on equities keeping pain trades higher. However, WSJ article noted that at the same time, cost of hedging against decline in equities fell to oneyear low last month. Cited data from Credit Suisse that showed cost of a put option expiring in three months is ~1.3% of S&P 500’s spot price, down from ~2.5% when UK voted to leave EU and ~3.3% when negative feedback loops wreaked havoc at the beginning of the year. Report’s author, Credit Suisse equities derivatives strategist Mandy Xu, told WSJ that this trend is telling you that options investors are not seeing any macro risks in the market. Paper highlighted better some support from better corporate earnings and rally in emerging markets, which have pushed VIX to lowest level in a year.
*ECB QE data soothing some worries over bond scarcity:
Bond scarcity a familiar theme in recent weeks. July dataof ECB QE going some way to allay those fears. July's purchases showed German bonds accounted for 27.4% of the total bought under QE during the month, or 1.8% more than the Bundesbank's share of the ECB capital key. UniCredit economist Luca Cazzulani said amount purchased suggests the ECB is not experiencing difficulties in finding German bonds and QE must be a highly supportive factor for Bunds. Cazzulani added currently, only €300B of German bonds trade with a yield higher than the deposit rate of (0.4%) and as long as yields remain at current levels, QE will most likely remain focused on the extra-long end. Reuters argued this however raises questions about whether QE benefits some countries disproportionately and whether it can comply with its self-imposed constraints.
*Goldman Sachs expects inventory bounce:
Inventories a widely discussed headwind on the disappointing Q2 GDP data out last Friday, subtracting ~120 bp from headline growth. Goldman Sachs also noted inventory accumulation has been a drag on GDP growth for five consecutive quarters, the longest stretch in more than half a century. However, firm expects restocking will boost growth in 2H. Noted that given that inventory contribution was negative in Q2, even a small amount of stock building would translate into a meaningful contribution to growth. Added that the timeliest data suggest pace of destocking in manufacturing sector may be slowing. Added that economy-wide inventory-to-sales rations not particularly high, so even longer period of destocking does not look necessary.
*Renewed concern about yen strength:
Renewed concerns in Japan about yen strength following big rally last Friday on the back of the BoJ’s disappointing decision to only expand ETF purchases (though some reprieve that fallout for global risk assets was neglibible). Finance Minister Aso made another attempt at verbal intervention, noting that FX moves were extremely nervous and he was closely watching currency movements. Note that past forays failed to gain any traction, particularly given skepticism about Japan’s appetite for unilateral intervention amid the lack of support from the US. Separately, “Mr. Yen”, former vice finance minister Sakakibara, told Bloomberg late Monday the yen could strengthen toward 90 per dollar as soon as this month. Cautioned that monetary easing was losing its potency, while fiscal stimulus tailwind may only prove temporary.
*Japan approves fiscal stimulus package:
As expected, Japan’s Cabinet approved ¥28.1T (~$274B) economic stimulus package, the third largest in history. Most importantly, plan includes ¥7.5T in so-called 'fresh-water' spending, or underlying fiscal thrust. However, this will be implemented over multiple years, with ¥4T to come in a supplementary budget this fiscal year and the remainder to be funded next year. While this figure is in line with recent reports and more aggressive than what was initially envisaged, still flagged as a disappointment in comparison to the headline figure. Nikkei report said deficit bonds will not be issued, with the program instead funded by construction bonds. Government also once again ruled out 50-year bonds (which some had hoped could be monetized by JGB). Several press reports noted package only to have modest impact on growth.
*Commonwealth Bank of Australia (CBA):
The big four banks are all holding back part of the Reserve Bank of Australia’s interest rate cut, a move that will bolster profit margins but risk frustrating home loan customers. Within minutes of the decision to cut the cash rate by 0.25 percentage points to 1.5 per cent, Commonwealth Bank of Australia said it would pass through just 0.13 percentage points of the cut to owner occupiers and property investors from August 19. It’s standard variable rate will be 5.22 per cent for owner occupiers and 5.49 per cent for investors. National Australia Bank decided to hold back even more. It has reduced its standard variable interest rate by 10 basis points to 5.25 per cent, also from August 19.
*Westpac Banking Corp (WBC):
Westpac reply to ASIC: $12m profit came from predicting Reserve Bank moves, not from benchmark manipulation Westpac Banking Corp has claimed a senior trader’s ‘‘$12 million buck’’ boast about a profit had nothing to do with manipulating the key benchmark interest rate in the bank’s favour as the corporate regulator alleged, but rather was a reference to profits the bank made from correctly predicting a Reserve Bank of Australia interest rate increase. In the first legal response from any of the three banks being sued by the Australian Securities and Investments Commission for allegedly rigging the bank bill swap rate (BBSW), Westpac has accused the regulator of taking conversations among its traders out of context to prove misconduct and said the regulator had mis-characterised the nature of one phone call between head trader Col Roden and an official from the Reserve Bank of Australia. The 55- page Westpac defence filed with the Federal Court of Australia on Tuesday also argued the bank’s potential trading profits when the BBSW moved were inconsequential relative to the money Westpac is alleged to have ‘‘spent’’ on trying to influence the rate.
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