Morning,
After a strong performance in Europe on Friday and US markets adding to the recent gains, I expected a bit more optimism in the press over the week.
With Europe and the Euro clearly dominating the headlines, along side the US QE3 program, I was expecting a more upbeat sentiment, like talks of improving growth targets, increased liquidity supporting lower rates and talks of "now we can concentrate on jobs". We didnt get it.
Headlines in the FT and Economist, highlight, Spain's reluctance to apply for the bailout. Rajoy's stalling, they blame, is due to the Spanish elections due on 21st October. This has part to play, but the main reason comes from the lack of clarity regarding the terms attached to the bailout. Current procedure is, you ask for support, then you get the cash and terms.
Rajoy's fears are justified. With his Government desperately trying to cut is deficit, currently 8.9% of GDP, conditions under the bailout could put additional austerity measures, further hurting employment. A major concern, when Spanish unemployment is at 24.7%, and protests for independence are increasing in size.
This is sounding more and more like Greece's predicament. Once again, fears are creeping in that delays could hamper job creation and in turn, the growth outlook.
Now moving to the US. Headlines in the FT highlight mortgage processing delays slowing US growth. In reality, regards of QE3, real interest rates across the globe have not reflected central bank rates. For example, with FED rates at 0.25%, mortgages rates are still at 3.50%. Now that is for a 30 year fixed rate, however, it has not changed over the last 6 months, despite 30 year treasuries getting as low as 2.5%.
Banks are still extremely nervous of NPL's. Given the pressure they face from new regulation, capital adequacy requirements and constraints on selling packaged debt products, it is not surprising that they reluctant to lend.
In addition to this, mortgage brokers and alternative lending sources have been squeezed out of the space, reducing competition. Prices have been impacted and with barriers to entry, now higher than ever, I suspect its a long time before we see this environment changing. A more relaxed stance on capital requirement and lighter regulation, would certainly support the market. But with the presidential election due, and lack of regulation being blamed for the recession, a policy of less regulation could be political suicide.
Its a good job people quick to forget the bad.
Markets.Given the recent rally in everything from basic materials to industrials, I expect to see some outflows today. Ok, we have QE3, but QE1 and QE2 outcomes have been shorted lived. Investors now want to see the data improving.
This should encourage profit taking, especially in gold miners, which looking at the junior gold miner ETF, GDXJ US, has rallied over 30% since July.
I agree with many, that the Euro squeeze has more to go, given how heavily underweight the market is, but the sudden movement will soon run out of steam as the data is slow to react. For example, Spanish unemployment is highly unlikely to come in below 18% before 1Q 2013.
With the weakness in the US$ supporting basic materials, coal, iron and copper should continue to run, but with inventories so high, physical prices have a very heavy ceiling as firms look to maintain revenue through increased sales. Oversupply will continue for some time to come.
China banks.
Have seen some strength, mostly on the back of short covering. Time to look at shorting again. With Reserve Rate Requirements(RRR) and interest rate cuts due, margins will decline whilst NPL's increase. Not a pleasant position to be in.
HK Property.
Very strong performance last week as the US signal low rates til 2Q 2015. With the HK$ peg, HK property is seen as a strong US$ hedge and investors are looking for a strong pick up in demand. My issue here, HK property prices have hardly corrected. Property developers for years have controlled supply, supporting prices and the mark to market of its inventory. My fear is, the HK government have already shown concerns of a property bubble, which will need to be addressed. Looking to short the sector into strength.
China utilities and telecoms. Looking to buy on weakness. Recent strength has seen yields fall, but with a strong pull back as investors increase risk, should leave these names look attractive. Not a buyer at these levels, but are on the radar.
China railway.
Huge short covering on the back of the rail minister pushing of increased roll out of projects. Near term earnings look dramatically improved, however, the outlook passed 2015/16 is limited. Increasing competition for maintenance contracts has reduced margins, and unless exporting products and services increase, new projects will once again start to slow. Short into strength
China oils.
Very strong rally helped by pump price increases, weaker US$ pushing crude higher and to a less degree, improving growth outlook. Time to take profits in the sector. PTR(857) up HK$1 in a week, now trading at $10. We can look at buying again on the pull back.
Markets today, open at the highs and trade sideways early session, then in the afternoon as Europe come in, we should see them trend easier.
Events.Merkel Q&A with Journalists in Berlin, Romney speaks in LA
Data.13:30 Indian repo rate
15:00 Turkey unemployment rate
16:00 Eurozone current account
16:00 Italian trade balance
17:00 EU labour costs and trade balance
20:30 US empire manufacturing
Also due is China FDI, Russian industrial production
Stoddart
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