David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Goldman Says Market Melancholy Is Recipe for Big Earnings Season

    This article by Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section:

    Relax, says Goldman Sachs -- enough has changed that a replay is unlikely. Bulls should take heart, says David Kostin, the firm’s chief U.S. equity strategist, because whatever euphoria infected markets in the first part of the year has long ago dissipated. Hedge fund clients who were aggressively positioned heading into April are more conservative now, with exposures sitting near the bottom of their 12-month range.

    “Going into Q1 earnings season, it was peak optimism,” Jeff Schulze, an investment strategist at ClearBridge Investments in New York, said by phone. “Now you have exactly the opposite situation where that optimism has been converted to pessimism.

    As long as companies can hit those estimates, I think the market will reward those, rather than punishing them.”

    Fundamentally, the second quarter will look a lot like the first as far as results go. S&P 500 companies are forecast to report 20 percent growth from a year ago and sales are likely to rise 8 percent, mirroring the previous period, which was the best since 2011.

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    Email of the day on currencies and stock market performance:

    Thank you for your always articulated views on the general macro. Highlighting the China risk (“China deserves an additional risk premium”) and the direction of credit spreads (“EU junk spreads have been on the rise in 2018”) are particular eye opening

    One point on USD though. In your videos resp. online reports, you say / write that the USD should get stronger. One of the reasons you add to the commentaries is that the FED is on its hiking path and the interest rate differential makes the USD interesting relative to zero / negative interest currencies. In addition, you write that Gold suffer when nominal rate rise less than inflation (i.e. real rates rise) and when the USD is on the rise. I hope I am correct in the summary. Otherwise please correct me.

    If I look at the recent history I am puzzled to note following: the FED started to raise rate in Dec 2015 and EUR/USD was at around 1.08 USd per EUR. Likewise gold was trading at something like 1’100 USD / Oz.  at the same time.

    How is it that 1+6 hikes later (1 in 2015, 1 in 2016, 3 in 2017 and 2 in 2018), EUR /USD is at 1.17 and gold is at 1.250 (and was 1300 just 2 weeks ago)? shouldn’t rate hikes make the USD interesting relative to ZIRP / NIRP countries like the EU Area or Japan?

    Isn’t it that the current dollar strength is nothing more than an adjustment of a USD oversold condition prevalent until April? (due to lots of carry trades with EM currencies accumulated last year, most of which are done via a cross on the USD because of liquidity constraints with smaller currencies)

    And that when the entire market hysteria around tariffs and on Trump tweets on NATO, on Germany and China retaliations threats etc. etc. calm, we will see the normal path of rising US interest rates and a falling USD combined with a rising JPY and EUR and rising Gold again? at the end of the day this makes sense. Otherwise it would be like a free lunch (buy USD, invest at higher rate and gain on the exchange rate). it cannot last forever.

    Negative interest rates and ZIRP are deflationary policies. It makes sense for the EUR and JPY to appreciate.

    Am I missing something?

    Ps: if I look at history on other countries, higher rates are not supportive for a currency. Look at Turkey, Argentina, etc. All down sharply. the higher the rates to stem a crisis, the lower the currency.

    On the other end, when the Bank of Russia reversed its super high interest rate policy after the 2014 crisis, RUB (and its equity market) started to recover. And RUB was also relatively stable during the most recent EM crisis

    I would not be surprised to see TRY doing the same if the new governor reduces rates (the FT reported that Erdogan is not a fan of high rates) and the ministry of finance enact a policy aiming at reducing the current account deficit. Then TRY should recover despite the bad-to worst governance structure of the country

    I would be interested in hearing your view on that

    Best regards and nice holidays in China!

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    Crude Crumbles Under Trade War That Imperils Economic Growth

    This article by Jessica Summers for Bloomberg may be of interest to subscribers. Here is a section:

    “There’s no doubt that that uncertainty continues to weigh, not only on the crude oil markets, but really all markets,” said Brian Kessens, who helps manage $16 billion in energy assets at Tortoise. As for the storage report, “there was a little bit of noise in the data. It just depends when the ships actually hit the docks.”

    Oil topped $75 a barrel last week amid actual and anticipated supply disruptions from Canada to the Persian Gulf.

    Saudi Arabia has promised to ramp up output to help cover shortfalls from other major suppliers, though some observers questioned the kingdom’s capacity to do so.

    In the U.S. Gulf Coast region that includes refining centers in Texas and Louisiana, oil imports plunged by 1.13 million barrels last week, the steepest decline since September 2012, according to the EIA.

    “There’s a sense that Saudi Arabia’s going to increase their exports to the U.S.,” Kessens said. “There’s a lingering sense in the back of people’s minds that we’ll see that a little bit later this summer.”

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    China in Ten Charts A New Impossible Trinity

    Thanks to a subscriber for this report from ANZ which may be of interest. Here is a section:

    However, China faces a new policy trilemma: if President Xi Jinping truly prioritises reforms over growth, we must see more corporate defaults or foreign borrowing. But if the government does not want higher offshore USD debts, they must sacrifice some growth. They can’t have all three. 

    Removing the implicit government guarantee is a necessary evil. Since the national fiscal audits in 2013 and 2015, the central government has tried to detach itself from ill-defined liabilities, notably the local government financing vehicles (LGFVs). 

    This is done via taming shadow lending (slide 5). Since these activities were a key funding source for LGFVs, SMEs, and other borrowers which major banks do not serve, we must see credit spreads surge as a result of the deleveraging process (slide 6).

    Many corporates opted to borrow from offshore (slide 7) in 2017. However, the rapid rise of foreign debt has triggered policymakers’ concern (slide 8). In Q1 2018, China’s foreign liabilities hit a record high of USD1.8trn (29% y/y), extending its uptrend since Q1 2016. 53% of it was USD debt and 64% were short-term debt. Meanwhile, Q1 also saw China’s first current account deficits since 2001 (slide 9). Going forward, the outlook for China’s FX reserves position deserves attention. 

    We believe that slowing GDP growth is not a risk; the temptation to pump prime the economy is. The RRR cuts in April and July are unlikely to be monetary policy responses to growth risks. Any impact from the US-China trade war is still insufficient to halt the deleveraging process (slide 10). Thus, we believe the cuts are a response to the normalised ‘M1-M2 gap’ (slide 11) which indicates shadow lending is under controlled. Chinese regulators are tackling credit allocation on banks’ balance sheets under the flag of ‘structural deleveraging’. GDP growth will still slow (ANZ: 6.3% for H2, slide 12). Market sentiment will be poor. But targeting growth over reform will be worse, in our view.

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    Email of the day on Brexit and likely outcomes

    On the latest events, I think this table in attachment is reasonable and persuasive in content.

    Basically, it indicates the following as yet the most likely scenario:

    “Soft Brexit - Stay in the EEA and Customs Union, or never-ending Transition”

    Then expanding to say:

    “The EU sticks to its principles and does not allow the Single Market to be broken up. The government and the public become more fearful of the impact of a hard Brexit. No other option solves Irish border issues. Alternatively, the Tories implode or delay Brexit until after the next election, which Labour wins”

    It would then become – in my opinion – imperative to open a serious debate re how referenda are done and forbid those on international agreements… I think it has been abundantly demonstrated they are a folly. With good governance restored the country would finally be able to move forward.

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    Electric vehicle demand will double nickel price as soon as 2022

    This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section:

    While stainless steel production – currently nearly 80% of total demand for nickel – is expected to stay solid over the coming years, booming demand from the electric vehicle battery market is set to fundamentally alter the structure of the industry.

    Michael Sinden, WoodMac Research Director, and Senior Research Analyst, Rory Townsend say in their long-term outlook for nickel that demand for nickel in EV batteries will contribute 1.26 million tonnes to nickel demand in 2040.

    That compares to total primary nickel production last year of not much more than 2 million tonnes.

    Slightly more than half the total is from so-called Class 1 producers which is suitable for conversion into nickel sulphate used in battery manufacture. Class 1 nickel powder for sulphate production enjoys a premium of as much as a third over LME reference prices, but for miners to switch to battery grade material requires huge investments to upgrade refining and processing facilities.

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    Shipowners on Pace to Scrap $1 Billion in Oil Tankers This Year

    This article by Costas Paris for the Wall Street Journal may be of interest to subscribers. Here is a section:

    Some 1,000 vessels are broken up every year and their steel and other metals are melted or simply stacked up and sold to factories. The yards in the Indian subcontinent recycle around 80% of all ships, with the remainder going to China and Turkey, although Beijing has said it will suspend scrapping starting next year.

    The average age of VLCCs going to scrap this year is 18.8 years, the youngest since 2013, according to VesselsValue. A ship’s average operational age is around 25 years, but after 15 years in the water, the vessel has to go through an extensive survey to determine if it is seaworthy. “An average survey costs about $2 million, and you have to do it again at 20 years, so a number of owners opt to scrap instead,” Mr. Sharma said.

    The oil glut is also sending offshore rigs to scrapyards. It is a relatively new business that has boomed over the past five years, as the cost of drilling at sea is much higher than inland exploration. At least 18 rigs have been broken up so far this year, compared with 46 last year, according to GMS.

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