It's all about the central banks this week.
Fixed income markets have always focused closely on news about the US macro-economy; while traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks or the market as a whole. Goldman finds that the financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically, now showing about twice as much sensitivity to macro data as it did in the years before the financial crisis. While micro data remains important - especially in quantifying just how much QE-hope the market is 'abiding' by, macro news is likely to be the critical driver of equity markets until the global economic outlook is considerably brighter than it looks today (or macro decouples from Fed/ECB jawboning). On average the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. In the meantime, there are some exceptions to the fairly consistent reactions to economic news that we see between equity and bond markets.
- Draghi Says ECB To Do Whatever Needed As Yields Threaten Europe (Bloomberg)
- Spain not mulling seeking further EU help (Reuters)... and it won't need a Bank bailout either. Oh wait
- Weak lending adds pressure for ECB action (Reuters)
- Sweden's economy still resilient to eurozone woes (Reuters)
- Bo Xilai’s Wife, Zhang Xiaojun, Prosecuted for Homicide (Xinhua)
- China’s Changsha City Unveils $130 Billion Investment Plan (Bloomberg)
- Foreclosure Filings Increase in 60% of Large U.S. Cities (Bloomberg)
- Free ECB’s hand to aid states, says minister (FT)
- Hungarian Premier Says Aid Deal Not Near (WSJ)
- Nomura Chief Resigns Over Insider Trading Scandal (NYT)
Visitor volume to Las Vegas is the highest since 2007, despite rising hotel rates, but gaming revenues are near flat. Online gambling is popular with Europeans – the Brits and Greeks in particular – yet it has slowed over the past 3 months. ConvergEx's latest off-the-beaten-path economic indicator – gambling – shows an increasing global reluctance to leave household finances at the whims of blackjack and poker tables, be they in actual casinos or online betting parlors. Discretionary spending behavior is reliant on consumer sentiment and economic outlook; gambling is the ultimate “luxury item” because there’s absolutely no guaranteed return, so gambling behavior is a near real-time indicator of changes in consumer confidence. Our gambling indicators, both domestic and abroad, show what feels a lot like recessionary behavior and point to another leg down in the latter half of 2012.
Risk-off trade is firmly dominating price action this morning in Europe, as weekend reports regarding Spanish regions garner focus, shaking investor sentiment towards the Mediterranean. The attitudes towards Spain are reflected in their 10yr government bond yield, printing Euro-era record highs of 7.565% earlier this morning and, interestingly, Spanish 2yr bill yields are approaching the levels seen in the bailed-out Portuguese equivalent. As such, the peripheral Spanish and Italian bourses are being heavily weighed upon, both lower by around 5% at the North American crossover.
The Financial Services Authority (FSA) primary role is to make retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. In June 2006, the FSA created its Retail Distribution Review (RDR) programme which they are enacting in order to enhance consumer confidence in the retail investment market. The RDR has a target for full-implementation of 31 December 2012. The RDR is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK. The primary delivery mechanism of financial services to retail customers is via approximately 30,000 Independent Financial Advisers (IFAs) who are authorised and regulated by the FSA. They are expected to bear the brunt of the force of the RDR. Gold bullion is set to benefit from the axing of commission for IFAs and the implementation of the RDR “should be regarded as a game changer” for gold as an investment in the UK, according to the World Gold Council. Managing director of investment Marcus Grubb, says: “These extremely challenging times mean it’s impossible to quantify the risks for UK investors. They are facing an unprecedented combination of threats to their assets including extreme and unexpected market shocks that can trigger widespread value destruction.” “As UK investors reduce allocations to traditional investments such as equities and bonds and increasingly dash to cash, they face a double whammy, with the potential for stagnation of capital due to the lack of returns from cash and the increased possibility of inflation as a result of ongoing monetary stimulation.”
While bad news may be good news for the market hoping that it will spur more stimulative measures from the Fed to boost asset prices - for Main Street America bad news is just bad news. More importantly, the decline in consumer confidence continues to perpetuate the virtual economic spiral. As the consumer retrenches the decline in aggregate end demand puts businesses on the defensive who in turn reduces employment. The reduction in employment, and further stagnation of wages, puts the consumer further onto the defensive leading to more declines in demand. It is a difficult cycle to break.
As JPM takes off, US equities go vertical, and EURUSD overdoses on erectile dysfunction stop-hunting-algo medicine, the good old US consumer - that bastion of demand and foundation of all things GDP-based just said sentiment levels are the worst of the year so far. UMich Consumer Confidence Sentiment just printed 72.0 against expectations of 73.4 - the biggest miss since December 2009. Worst still is the plunge in expectations (economic outlook) to the lowest in 7 months as the 2-month drop is the biggest in a year. It would appear all is not well on Main Street - as the massive schism between ISM Composite relative strength and the reality of the economy remains. As an aside, given this morning's hotter than expected inflation data, 1 year ahead forecasts for inflation fell to their lowest in 19 months.
While GM can still fool some of the people, most of the time with near record channel stuffing, even as more and more are waking up and suing the company for just this, it seems the same type of strategy of load up dealers with unsellable electric cars has failed miserably in Europe. From WSJ: "General Motors Co. said Karl-Friedrich Stracke has stepped down as president of its loss-making European division, though the restructuring program initiated under his leadership will continue. GM said Mr. Stracke will take another, unnamed position at the U.S. auto maker and that Opel supervisory board chairman Steve Girsky will serve in his place on an interim basis. "Karl Stracke worked tirelessly, under great pressure, to stabilize this business and we look forward to building on his success," GM Chief Executive Dan Akerson said in a statement." The 'success' that as pointed out, has led to a loss-making divions. With successful leaders like these who needs failures?
June macro data is giving a 'cleaner' picture of the economic state of our great nation. With seasonal affectations (unusually warm weather and the rebound in auto production) out of the way, June macro data has very much surprised consensus to the downside as BofAML's economics team notes that 14 of the last 20 June indicators has come in below expectations. Over the next several weeks we will get more 'hard' data for June. The most important will be retail sales, industrial production and the durable goods orders report. Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales. And given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft. This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE). BofAML remains more concerned with the consensus outlook for H2 - particularly Q4 (with 14% YoY EPS growth expected despite just a 1% GDP growth rate) - as the recession in Europe and high level of uncertainty ahead of the US fiscal cliff will likely lead to slowing growth in H2. And for those hanging their hats on the housing recovery, it will not be enough to save the rest of the economy - Housing construction is now only 2.3% of GDP compared to more than 6% prior to the crisis. This means we need a decisive turn to significantly matter for GDP growth. In addition, we believe it would take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing collapse. Households remain skeptical about the home as a store of wealth or an investment.
European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.
In a market which was left for dead with virtually no hope of a CTRL-Peus Ex Machina, and which otherwise would have tumbled to close at the lows, we realized that something was missing. In fact we noted it less than an hour ago:
Need a Hilsenrath rooomer
— zerohedge (@zerohedge) July 6, 2012
Sure enough, moments ago, with minutes left in the trading day and week, here comes the Fed's favorite leaking scribe, advising the market that not all is lost, and that Pavlovian dogs can, and in fact should continue to salivate at ever poster of a half naked toner cartrdige.
- Beggars can't be choosers after all: Greece Drops Demand to Ease Bailout Terms (FT)
- It took journalists 4 years to get that under ZIRP all banks have to be hedge funds: US Banks Taking Risks in Search of Yield (FT)
- Made-In-London Scandals Risk City Reputation As Money Center (Bloomberg)
- Merkel Approval Rises to Highest Since 2009 After EU Summit (Bloomberg)
- Judge orders JPMorgan to explain withholding emails (Reuters)
- U.S. hiring seen stuck in low gear in June (Reuters)
- Germans Urged to Block Merkel on Integration (WSJ)
- Crony Capitalism Rules: Countrywide used VIP program to sway Congress (Reuters)
- Barclays’ US Deal Rewrites Libor Process (FT)
- Cyprus Juggles EU and Russian Support (FT)
- Delay Seen (Again) For New Rules on Accounting (WSJ)
- Lagarde Says IMF to Cut Growth Outlook as Global Economy Weakens (Bloomberg)
While it is seeming common knoweldge that the state of the economy has a significant bearing on the outcome of the presidential election in the US, Barclays notes that in the case of an incumbent running, economic performance appears to be most important. The three presidents who failed in a re-election bid in the post-war period (Gerald Ford in 1976, Jimmy Carter in 1980 and George Bush, Sr. in 1992) did so against a backdrop of weak growth, high unemployment, and low consumer confidence. These same factors all pose significant headwinds to the current incumbent. To overcome them, history suggests that unemployment would need to keep trending down and consumer sentiment would need to strengthen prior to the vote in November.