MORNING BID – Copper, China and currencies

Mar 12, 2014 12:58 UTC

Markets start on the back foot this morning, with weakness overseas – and particularly in emerging markets – feeding through to a bit of strain on U.S. futures and a bit of flight to quality to the U.S. bond market.

The outlook for China once again comes into play, with the most recent fears being more corporate defaults in the world’s second-largest economy and the way in which copper imports are used in China as collateral to raise funds. So it’s all nicely intertwined here and has had a detrimental effect on both China’s stocks, stocks in various exchanges around the world, and of course the price of copper, which was down 5 percent in Shanghai.

What that’s done is hit the currencies more sensitive to the commodity complex – the Aussie dollar in particular – and the outlook has both worsened for that and commodity prices, while we see improvement in the dollar, Swiss franc and the yen. “Yesterday’s price action warns investors with broad commodity exposure of increased risks of a downside, and a possibly sharp correction is likely,” wrote strategists at Brown Brothers Harriman this morning.

This would also seem to undercut demand from commodity-sensitive economies of which China, to some extent, is one, but U.S. strategists still see a favorable outlook for the capital spending trend among big companies. Indeed, both Bank of America and Citigroup have noted, of late, how capex has been stronger than expected and spending plans are looking favorable right now.

MORNING BID – Janet Yellen’s rain (snow) check

Feb 27, 2014 14:16 UTC

This is the thing about delaying the new Fed chair’s follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that’s potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That’s mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There’s also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the “Fed put” option has become in the discussion of Fed activities, so we’ve really lowered expectations here.

Meanwhile, Boston Fed head Eric Rosengren said the Fed is looking very closely at activities in emerging markets, which is sort of obvious in a sense but contradicts, if only modestly, Yellen’s thoughts two weeks ago. And really, the Fed’s ability to influence economic activities overseas in some of the world’s developing markets or troubled spots is even weaker than what it can exert over U.S. demand. So maybe it’s just one to grow on.
Either way, Yellen would probably want to comment on the situation, if, again, a smart senator would think to … well, never mind.

Overnight, the situation in the Ukraine has worsened, with armed gunmen taking control of regional government headquarters in Crimea, vowing to be ruled from Russia. The Ukrainian hryvnia continues to sink while the Russian ruble plumbs new five-year lows, surpassing the previous day’s losses, and a bit of risk-off action can be seen in the zloty and a bit of better buying in Treasuries, where the 10-year yield was lately at 2.66 percent. Fund flow figures will be key to watch here to see if overseas flows increase to the U.S. or at least to the developed areas of Western Europe and Japan.

MORNING BID – Only a dream in Rio

Jan 15, 2014 17:35 UTC

Among the BRIC nations, Brazil’s the one that’s been repeatedly whacked with a brick in the last couple of years, seeing its currency depreciate and its stock market trashed as it steadily ratchets up interest rates to an expected 10.25 percent this evening (or perhaps even 10.50 percent).

Most emerging nations were hit hard in the last year as the Federal Reserve announced it would start changing its strategy toward reduced bond buying, which will reduce some liquidity among dealers and result in less cash sloshing around in the vast ocean of world markets.

The last year was a rough one for Latin America overall, with most major averages sinking anywhere from 25 to 35 percent, but Brazil was in the unlucky position of already being kicked when it was down.

The MSCI Brazil Index now posts just a 4.1 percent return (annualized) over the past five years, which compares unfavorably with the other BRIC giants of China, India or Russia, to say nothing of Indonesia, Korea, Mexico or Peru.

So like Joe Btfsplk of the Li’l Abner comic, always walking with a dark cloud following him around (nobody got that reference to a Depression-era comic strip? Ok, never mind), Brazil has been faced with the poor choices of letting inflation get out of hand or continuing to try to pull a Volcker-style situation out of one’s hat, breaking inflation’s back in a way that somehow still results in things getting better later.

The IPCA consumer price index rose nearly 6 percent in 2013, as price increases have outpaced expectations for four years running (economic predictions in Brazil being about as accurate as they are in the United States).

Optimism in Brazil has dimmed of late, falling for the first time since the 2009 global financial crisis, according to public polling firms there.

The inflation problem is likely to get worse, according to Brown Brothers Harriman researchers, who said controlled prices were up just 1.5 percent in 2013 – meaning all other prices rose at more than a 7 percent clip in that year – adding “it’s likely that the pass-through impact from the weaker currency has not yet shown up fully in the numbers.” So, they’re forecasting a bump in the Selic rate to 10.5 percent from 10 percent, rather than the half-measure implied by a quarter-point hike.

Whether that brings back investors is another story: Latin American flows have been weak all year, according to Lipper data. The region hasn’t seen steady inflows since 2009, and that didn’t change in 2013, with more outflows.

The weakening real and slipping equity market would seem to provide an opportunity – this is, after all, the world’s seventh largest economy, as the World Bank says.

Years of rapid growth, though, have given way to the more recent 2 to 2.5 percent rate of growth, fine for a fully developed economy like the US (ok, it’s not, but work with me), but not so much for a faster-growing nation, and 2013 saw more than $12 billion in net forex outflows, the worst in a decade.

With Brazil’s current account deficit large and growing ($54 billion at the end of 2012, ranking it seventh worldwide), if sentiment turns even further from emerging markets, it’s Brazil, already getting hit this year, that could get it worse.

Morning Bid: Dollar Bills and Dollar Bulls

Jan 9, 2014 13:58 UTC

The dollar’s performance hasn’t been anything to write home about in the last few years. It has weakened against major currencies like the euro and the Swiss franc, and been held back by lower interest rates thanks to the Federal Reserve’s triple-dose of quantitative easing, but there’s been a turn of late, though it’s too early to say whether it will have lasting power.

In 2013, the dollar was at least better than the yen, amassing a 35 percent move against the Japanese currency, which countered the Fed’s QE with Abenomics and a massive monetary dose of its own.

Now in 2014, the U.S. dollar index – measuring the dollar against six currencies, including the euro, yen, and pound – has reached a six-week high, and those expecting a steady move higher in interest rates wouldn’t be out of line to expect the dollar to appreciate, along with bond yields. It didn’t happen in 2013, which is sort of counterintuitive – higher rates would seem to be a boon for the buck, but the volatility exhibited in the Treasury market was too much for the dollar types.

That’s probably not going to be the case this year, according to Jens Nordvig, strategist at Nomura. He notes that if volatility is relatively low as rates go up, that’ll support dollar appreciation against the big currencies, other than yen. His firm is also going short the euro against the Mexican peso, with the latter benefiting from U.S. growth and the former still struggling.

Flows into the U.S. from overseas have been strengthening, which helps the dollar story, and it wouldn’t be surprising to see additional strength in the greenback if jobs figures are better than anticipated, as suggested by the ADP figures (even though they come with their own problems).

The dollar’s gains come at a time when long dollar bets have fallen to their lowest levels since November, perhaps out of concern the recent run has been fueled by too much optimism.
Speculators are net short in the yen, Aussie, and Canadian dollar, but they’re still long the euro, pound, Swiss franc, peso and the New Zealand dollar (known as the kiwi, or the “Peter Jackson,” if you’re into Tolkien).

The jobs data could force more of those positions in the direction of the U.S. currency. Oddly, the steady rise in U.S. rates wasn’t much of a catalyst for the dollar in the mid-1990s, and it was only later that the dollar picked up, Morgan Stanley researchers noted in a recent report.

While various emerging markets aren’t the disasters they were in the 1990s, the private sector depends a lot on dollar funding. And if borrowing costs are rising and growth isn’t quite what it was, those flows aren’t going to be robust as in the past – particularly with the Fed cutting its massive stimulus. Taken in total, it bodes well for the buck, but only if there’s an ongoing sense of improvement, which will be something to watch for on Friday.

RETAILERS, DISCOUNTS AND DEMAND
The last of the same-store sales figures, meanwhile, are coming out, including the likes of Costco, The Gap and L Brands, and all of the good cheer reported at this higher level (better consumer spending and hiring trends, more positive sentiment) seems to have eluded the retailers. Indeed, they mostly say things stink, either because of surprises in the calendar, cold weather (and it’s been damned cold, so we’ll let that one go), and lots of promotions that promise almost everything just to lure people into the store.

Consumer discretionary shares were among the best performers in the S&P 500 last year, but repeating that trick won’t be easy. L Brand cut its earnings forecast for the holiday quarter after its lousy numbers, and Family Dollar and Zumiez also cut estimates in response to their weak showing.  One thing we’re sure of – few are going the JC Penney route, in tersely saying that the company is “pleased with its performance for the holiday period, showing continued progress in its turnaround efforts,” without offering, y’know, any numbers or anything.

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