Markets Watching G20 Meeting… More Low Inflation News

Markets Watching G20 Meeting… More Low Inflation News

Markets Watching G20 Meeting… More Low Inflation News

February 26, 2016

Finance Ministers and central bank chiefs from the Group of Twenty economies began a two-day conference in Shanghai.  The Governor of the Peoples Bank of China denied the yuan will be devalued and said other tools are available to support demand in the world’s second biggest economy.  Chinese property prices rose 2.5% in January.  More Chinese cities reported an on-year rise in than had in December.

Scheduled U.S. data releases today included revised quarterly GDP, monthly income and personal spending, and consumer sentiment.

The dollar hardly changed overnight with 0.1% downticks against the yen, sterling and Australian dollar and 0.1% upticks relative to the loonie, Swissie and yuan. The EUR/USD relationship is unchanged.

Stocks continue to show a bid tone, aided by a 0.8% rise in crude oil prices.  Share prices rose 1.8% in Singapore, 1.6% in Indonesia, 2.3% in Hong Kong, 1.0% in China, 0.8% in India, 0.5% in Taiwan and 0.3% in Japan.  In Europe, equities show increases of 1.3% in Germany and France, 1.2% in Italy, 4.1% in Greece, 0.9% in Spain and the U.K. and 0.7% in Switzerland.

West Texas Intermediate crude oil firmed 0.8% to $33.33 per barrel.  Russia and Iran are in talks over oil production.  Comex gold is 0.3% higher at $1,236.75 per troy ounce.

Four of five reporting German states (Saxony, Hesse, Brandenburg, and Bavaria) had negative on-year consumer price inflation in February.  Each case was a switch from above-zero results in January.

On-year hourly wage growth in Italy slowed to 0.7% in January from 1.3% in December. 

Core consumer prices in Japan were unchanged on year in January versus a 0.1% 12-month increase in December.  Energy prices sank 2.6% on month and 10.7% on year.

French consumer prices recorded their first on-year drop in February (-0.2%) since last March and the largest 12-month decrease in a year.

Total French producer prices fell 2.0% on year in January.  Domestic industrial producer prices were 2.5% lower than a year earlier.

Spain’s flash February CPI was 0.8% lower than in February 2015 after dropping 0.3% on year in January and being unchanged in December.

Belgian consumer prices ticked up 0.1% in February and were 1.4% above their year-earlier level.

Harmonized Icelandic consumer prices were 1.1% higher than a year before in January.

Euroland sentiment indicators were reported for February.  The economic sentiment index dropped 1.3 points to an 8-month low of 103.8.  The business climate index fell 0.22 to 0.07, lowest since October 2013.  Industrial confidence dropped 1.3 points to its weakest level in a year.  Consumer confidence (-8.8) matched the preliminary report.  Sentiment in services and retail recorded 5- and 7-month lows.  Only construction improved, rising 2.5 points to a 3-month high of -17.5.

Industrial production in Taiwan posted a third consecutive monthly decline and was 5.7% lower in January than a year earlier. 

French real consumer spending rose 0.6% on month and on year in January.

Swedish retail sales rose 0.7% in January and recorded an unchanged on-year advance of 4.0%.

Austria’s manufacturing purchasing managers index improved 0.7 points in February to a 4-month high of 51.9.

Australian markets were shut for Australia Day.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: Euroland economic sentiment, G20, German consumer prices, Japanese consumer prices




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Time to Go Long the Stock Market Again? Trend Following

Time to Go Long the Stock Market Again? Trend Following

We have had several nice up days…so all clear? Well, there were no breakouts today of leading stocks. The lack of buy able stocks is a cause for caution and I would take new position very carefully if at all, but this follow through looks a bit better. We are still below the 50 day and 200 day exponential moving averages. We are not on a buy on my Andrew Abraham Trend following model. One day above support is positive but not a complete positive.

My leaders are not the most dynamic…You want to see in growth stocks tech companies or new unique product companies….rather we only have food stocks, utilities and metals. Not impressive…

Watching
FB
TTWO
XRS
EW
HA
MXL
ELLI

qqq

Can Binge Drinking Really Cure Alcoholism?

Can Binge Drinking Really Cure Alcoholism?

Have you ever wondered who these people are? The people who decide how much capital should cost, how much credit and cash should be issued. You know, the twits who dream up QE, ZIRP and NIRP.

Where do they come from? Who pays their wages? Where do they get these hair-brained ideas? Are they on medication?

Sadly we probably know most of the answers…

Central bankers are like alcoholics – drunk on stupidity and arrogance; and, like a suffering alcoholic, reticent to address the real problem.

Reading up on the dangers of alcohol, I’m told that it rots your liver, kills brain cells, makes you impotent, fat, gives you stomach ulcers, and eventually causes death.

Obviously too much of it is bad juju.

In a similar fashion, central bankers had an opportunity in the GFC to put the bottle down. But instead they raided the liquor cabinet and have turned our financial system into something grotesque.

Just as an alcoholic can’t cure alcoholism with binge drinking, central bankers cannot and will not cure the current economic malaise with “monetary” binge printing.

Sovereign debt is pretty high on my list of asymmetric opportunities. In fact, in 2014 we published an extensive report covering global debt which included both sovereign and private debt.

I had my chief analyst “V” and his team thoroughly revisit where we’re at today in the world of drunken debt orgy, and the results are quite staggering. They could be summarized with:

“Deleveraging? What do you mean by deleveraging?”

Government debt has been growing since 2007 at an annual rate of 9.3% with three quarters of this coming from advanced economies. Talk about binge drinking to cure alcoholism…

One of the wonderful things about binge drinking is that reckless behaviour is best shared with friends. To really let your hair down and release the shackles it’s wonderful knowing that not only are you going to have a wild time, but when the morning comes you can share the hangover with similarly afflicted friends. Commiseration is so much better with company.

So Who Are These Binge Drinking Friends?

Well, here we have a list of the drinkers who need to endure a hangover and deleverage. The chart below is taken from a McKinsey study where they estimated what it would take for a dozen OECD countries to begin deleveraging in terms of fiscal policy and GDP growth.

The chart below shows what additional GDP growth and fiscal adjustment (as % of GDP) would be required to begin deleveraging:

Source: Based on data from McKinsey.

Source: based on data from McKinsey.

The main conclusion: it’s just not possible. And here’s why…

In order to begin deleveraging these countries would need to sustain current GDP growth and budget surplus continuously.

Not gonna happen!

Instead, debts are expected to continue rising.

Missing from the above group is the Middle Kingdom and this is where a lot of asymmetry lies. Principally because few market participants are looking at it.

By international standards, China’s public debt level is rather benign – a mere 50% or so of GDP. But, as with virtually every animal in our sovereign debt zoo, it has a number of peculiarities worth looking at.

It is interesting to note that data on China’s government debt has changed since we did our original Global Debt Report. Below is the chart we took from the Trading Economics website in June 2014:

China 1

And this is the chart updated:

China Government Debt to GDP

The sources have changed, with China’s Ministry of Finance replaced by the IMF, and we can see now with IMF “stats” that in fact the numbers for the previous ten years of data show an almost doubling. Funny that.

This shows how cryptic the Chinese authorities are in disclosing their financial data and how difficult it is to get to the truth. If something is being hidden, it’s probably not a mere omission.

Notably, more than half of China’s government debt is that of local governments, whose borrowing grew at a an annual rate of 27% between 2007 and 2014 – 2.5x faster than central government borrowing. Local government debt reached $2.9 trillion in 2014.

No Way Out

Capital moving into increasingly risky assets accelerated by credit formation have turned the banking sector into a truly enormous $34 trillion monster. At 340% of GDP and finding themselves at the end of the cycle, the need to recapitalize their banking system will become ever more apparent as loan impairment rockets higher.

The market seems to think that the PBOC has sufficient reserves to deal with this problem.

Not so fast…

Using up China’s foreign reserves for debt repayment will put pressure on the Chinese currency. A scenario we’ve already seen playing out. The country’s foreign reserves have declined by 20% since their $4 trillion peak in 2014.

China FX

Remember, since 2004 the yuan has appreciated some 60%. This has been a result of the influx of capital chasing Chinese growth as well as deliberate and consistent weakening of its trading partners currencies including the BOJ, ECB and, until recently, the US Fed.

We continue to think that the Chinese will be forced into a binge drinking session of their own, instituting a QE program which will put additional pressure on the yuan. After all, they’ll only be following from their already drunk American and European drinking buddies.

Right now they’re trying to stem capital outflows by opening up their bond markets under the guise of liberalizing their currency and internationalizing it.

As Dow Jones reports:

“China’s latest move to open up its over $6 trillion interbank bond market allows money to flow into the country at a time of rising capital outflows, and follows smaller moves last year to give foreign investors greater access to China’s labyrinthine capital markets. Foreign investors hold approximately 2% of China’s interbank bond market, which is the third-largest in the world.”

This isn’t the first time we’ve seen this game played. Don’t be fooled.

Buying into Chinese corporate or sovereign bonds will be an excellent trade. But certainly not here and not now.

As this plays itself out there will be opportunities to get long, once the currency has crashed and we’ve closed out short yuan positions, we’ll almost certainly find some Chinese blue chip corporate debt trading in double digit yields.

Right now the game is decidedly on… and that game involves being short.

Great investments are forged in difficult times, and times they are difficult.

– Chris

“Always do sober what you said you’d do drunk. That will teach you to keep your mouth shut.” – Ernest Hemingway

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U.S. Stocks, Down Early, Stage Sharp Turnaround, With Help From Oil

U.S. Stocks, Down Early, Stage Sharp Turnaround, With Help From Oil

Welcome to Evening MoneyBeat, WSJ’s closing-bell roundup of all the news and developments in the capital markets. To receive this newsletter, click here: http://on.wsj.com/MoneyBeatEveningSignup

HOW WE GOT HERE

You may be getting tired of hearing this, but the oil and stock markets are rather tightly coiled these days. Wednesday was another example.

U.S. stocks rose in the afternoon, after plunging pretty sharply in the morning, following a similar turnaround for Nymex crude oil, which managed the feat despite the latest stockpiles report showing yet another record build.

There were other headwinds as well. New home sales fell sharply in January, and the president of the Richmond Fed, Jeffrey Lacker, said the choice to raise interest rates this year is still “the logical one.” Moreover, hopes are fading for a grand bargain at next week’s meting of G20 finance minsters and central bankers. In forex trading, the U.K. pound hit a seven-year low amid the “Brexit” debate.

That backdrop had the bulls on the defensive, but the selling didn’t last. Both crude oil and stocks were down sharply in the morning, and while their turnarounds weren’t identical, they were very close. Oil bottomed out at 9:30 a.m. The S&P 500 bottomed out at 10:30. Crude oil started rising sharply around 11:18 a.m. The S&P 500 also started rising around 11:18 a.m.

This year has seen a sharp increase in the number of days that stocks and oil move in the same direction, data from LPL Financial shows. The firm looked at the market going back to 1983, and found that crude and stocks moved in the same direction 51% of the time – essentially a coin flip. This year, though, that percentage has jumped to 74.3%, “the highest correlation we’ve seen since 1983,” the firm said.

COMING UP

Data Front: January durable goods report (8:30 a.m. ET), weekly jobsless claims (8:30), FHFA housing price index (9:00), EIA natural gas report (10:30).

Fedpseak: Dennis Lockhart (8:15), Kansas City Fed manufacturing index (11:00), John Williams (12:00 p.m.), Fed balance sheet (4:30).

IPOs: Mapi-Pharma, 3.1 million shares, $15-$17; Cancer Prevention Pharmaceuticals, 1.9 million shares, $12-$14.

International: Germany: GfK consumer survey (2:00 a.m. ET); UK: GDP (4:30); Italy: retail sales (5:00); Japan: consumer prices (6:30 p.m.)

MONEYBEAT PODCAST

Author and former banker Satyajit Das discusses the factors that led to a sluggish global economy and the ways in which economic growth can be sustainable — all highlighted in his latest book, “The Age of Stagnation: Why Perpetual Growth is Unattainable and the Global Economy is in Peril.”

MUST READS

Stock Pare Losses After Morning Rout U.S. stocks pared losses Wednesday, though a decline in financial stocks continued to weigh on major indexes.

Why a Global Currency Accord Won’t Happen Currency chaos of late is reminiscent of the violent moves of the mid-1980s, and it has revived hopes for the sort of coordinated intervention used back then to tame them. It’s not going to happen, WSJ chief economics commentator Greg Ip writes.

Cutbacks by Midwest Refiners Pose Fresh Risk for Hard-Hit Oil Market Refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered oil market.

China Corporate Debt Surges, Fueling Economic Concerns A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth.

Putin Makes Diplomatic Push Amid Doubts on Syria Cease-Fire Russian President Vladimir Putin made a diplomatic push Wednesday to build support for a cease-fire in Syria, two days after Moscow and Washington agreed to a deal that has prompted skepticism about Russia’s intentions.

Investors Look to Bookies to Gauge If UK Will Leave the EU Fund managers gauging the likelihood of the U.K. leaving the European Union in a June referendum are largely overlooking political polls and instead scrutinizing betting markets.

Bank-Stock Bloodbath: The Cycle Financials Can’t Escape What is making things so bad for banks? In many ways they are trapped in an adverse feedback cycle that has been made worse by a fall this week in a key proxy for bank profitability.

Oil Executives: We Will Survive Many energy executives gathered in Houston for an industry conference said they were confident their companies would pull through the current period of low oil prices.

Funds Clobbered by Rout in Financial Stocks Heavy weightings in poor-performing financial stocks are weighing down some mutual funds so far this year. But some fund managers say the selling is overdone, and it is merely a matter of time until their undervalued gems shine.

How Islamic State’s Secret Banking Network Prospers More than a year of U.S.-led airstrikes and financial sanctions haven’t stopped Islamic State from ordering supplies for its fighters, importing food for its subjects or making quick profits in currency arbitrage.

LG Electronics Senses Breakout Moment With G5 Smartphone After several years spent lost in the shuffle of Android handset makers, LG Electronics Inc. is giving up on the China market and is making a renewed push in the U.S. with a high-end flagship smartphone, in a bid to regain the world’s No. 3 spot.

CHART OF THE DAY

Markets in Helter Skelter Mode as Trump Wins Big and Oil Drops 3.3%

Markets in Helter Skelter Mode as Trump Wins Big and Oil Drops 3.3%

Markets in Helter Skelter Mode as Trump Wins Big and Oil Drops 3.3%

February 24, 2016

Donald Trump captured the Republican caucus in Nevada with 45.9% of the vote to Rubio’s 23.9% and Cruz’ 21.4% third place showing.  With neither Rubio nor Cruz inclined to drop out, Trump’s bid for the nomination looks unstopable. 

Following Tuesday’s difficult day for U.S. stocks, share prices in Europe are registering their worst day since much earlier this month, with declines of 5.2% in Greece, 2.6% in Spain, 2.4% in Germany, 2.1% in France, 1.9% in Italy and Switzerland and 1.5% in the United Kingdom.  In Australia stocks fell 2.1%.  In Asia, there were loses of 1.4% in India, 0.9% in Japan, 1.3% in Hong Kong, and 2.0% in Singapore.

Fears of a June referendum vote for Britain to leave the European Union depressed sterling below the $1.4000 threshold and all the way to an overnight low of $1.3881.  The pound currently is trading near that level, down 0.9% on the day and 5.8% since the end of 2015.

The dollar and yen are benefiting from safe-haven demand.  The U.S. currency has lost 0.3% against the yen but shows overnight gains of 0.9% relative to the kiwi, 0.4% versus the euro, which slipped below $1.10, and Swiss franc, 0.6% vis-a-vis the Australian dollar and 0.2% against the yuan.  This is the Chinese currency’s fourth straight daily downtick.

West Texas intermediate crude oil fell a bit over a dollar to $30.83 per barrel.  Comex gold strengthened 0.6% to $1,234.59 per ounce.

The 10-year British gilt yield dropped seven basis points to 1.36%.  The Japanese 10-year JGB is off 3 basis points at -0.04%.  Other sovereign debt yields have declined, too.

Bundsbank President Weidmann, a chronic critic, of quantitative monetary stimulus, again asserted that the eurozone recovery trend is secure and that continuing heavy unconventional stimulus carries long-term risks.

Bank of Japan Governor Kuroda reiterated that the central bank may take further counter measures to prevent slippage in its struggle to achieve 2% inflation.

Japan’s index of leading economic indicators printed at 102.1 in December, down 1.1 points from Novemberlowest since January 2013.  The coincident index dropped 1.0 point to a 28-month low.

Small business sentiment in Japan rose 0.7 to 47.9 in February, a 2-month high after hitting a 7-month low in January.

Japanese corporate service prices fell 0.6% on month in January, most in over a year, and was a mere 0.2% above its year-earlier level.

The size of the Bank of Japan’s balance sheet crossed above 400 trillion yen in the middle third of February, reflecting on-going quantitative stimulus.

Australia’s labor cost index posted a non-seasonally adjusted 2.1% on-year advance last quarter, down from 2.6% in the year to 4Q14 and 2.5% in the year to 4Q13.  The on-quarter seasonally adjusted increase was 0.5% from the 3Q level.

Chinese consumer confidence fell 3.1% to a reading of 111.3 in February according to a measure compiled by Westpac.

British mortgage approvals increased to an 11-month high of 47,509 in January according to BBA figures.

The U.K. monthly distributive trades index fell to a 3-month low of +10 in February from 16 in January and 19 in December.

Italian industrial orders sank 2.8% on month in December, as domestic demand plunged 4.8%.

French consumer confidence printed at a 6-month low of 95 in February, 2 points lower than in January.

Between the final quarters of 2014 and 2015, real GDP rose 1.8% in Singapore and 1.9% in Hong Kong.  Singapore growth averaged 2.0% last year.

Business confidence and consumer sentiment in the Czech Republic each deteriorated in February.  From January’s 7-1/2 year high, overall economic sentiment dropped 1.5 points to 12.3.

Norwegian unemployment edged down 0.1 percentage point to 4.5% last quarter.  Finnish producer prices dropped 2.3% in the year to January.

U.S. new home sales, preliminary Markit Economics services PMI, and weekly oil inventories get reported today.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: Australian labor costs, Japanese small business sentiment, Sterling




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AUD/USD approaches 200-day MA

AUD/USD approaches 200-day MA

My, what a difference a couple of hours makes. As U.S. traders trudged into their offices this morning, it seemed as though the sky was falling; continued fears of Brexit were driving GBP/USD to 7-year lows, major equity markets were trading down by about 2% across the board, and oil (WTI) was falling back toward the widely watched $30level. Since then, each of those moves has been unwound to some extent, and in fact, both U.S. equities and oil have turned positive on the day as of writing.

The recovery in global risk sentiment has also had a beneficial effect on AUD/USD, which hit a 7-week high near .7260 yesterday before pulling back overnight. More to the point, the pair is now approaching its widely watched 200-day moving average; the last time AUD/USD traded above its 200-day MA was all the way back in Q3 of 2014. So far today, the price action has created a potential Bullish Pin (Hammer) candle* on the daily chart, underscoring the intraday reversal from selling to buying pressure. With rates essentially holding their own in the .6900-.7400 zone for a couple of months now, a break above the 200-day MA could start to convince some longer-term traders that the trend is finally turning back to the topside.

The secondary indicators are also relatively constructive. The MACD is trending higher above both its signal line and the “0” level, showing bullish momentum, whereas the RSI is rising within a bullish trend, mirroring the recent moves in the AUD/USD exchange rate itself.

Looping back around to the fundamental picture, the biggest report to watch for the rest of the week will be tonight’s AU Private Capital Expenditures report. CapEx has declined Down Under in each of the last four quarters, and another decline of -3.1% is expected in today’s Asian session. That said, if CapEx falls less than anticipated, it could be a sign that the AU economy is on better footing than widely expected and could push AUD/USD up to test the 200-day AM at .7275 later this week. If we see another worse-than-anticipated reading on CapEx though, AUD/USD could fall to the bottom of its near-term bullish channel near .7100.

* A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.

Source: FOREX.com

About the Author

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).