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Stocks Tumble As Emissions Scandal Spreads To BMW; NOK Plunges On Unexpected Norway Rate Cut
Two days ago, when observing how the Volkswagen scandal could become a systemic threat to both the German and the European economies we quoted Theo Vermaelen, a finance professor at INSEAD who said "if nobody else has done it, the damage would be limited. If it looks like it's more companies, not just Volkswagen, it would be a major problem for the German car industry, and the German economy overall." We added "that's the question German investors are wrestling with: was it just one cockroach. If it was more, the ultimate outcome will (not may) be more QE from the ECB because with Europe tentative recovery also sputtering after 6 months of ECB QE, a steak through the heart of Germany's most important industry, will be just the black swan that sends Europe into a recession."
Earlier this morning it seems the case for more ECB easing is pretty much set following a report by German Autobild that BMW's X3 xDrive 20d sport utility vehicle "emitted as much as 11 times the European limit for air pollution in a road test, adding to concern that the investigation weighing on Volkswagen AG may spread to other manufacturers."
According to Bloomberg the SUV was road-tested by the International Council on Clean Transportation, the same group whose tipoff led U.S. regulators to investigate a gap between Volkswagen AG diesels’ emissions in tests and on the road.
The company denied: "There is no function to recognize emissions testing cycles at BMW,” the Munich-based company said in a statement in response to the report. “All emissions systems remain active outside the testing cycles" adding that BMW said that there’s no system in its cars that responds to tests differently than it would operate on the road, but by then the damage was done and
BMW shares traded down 6.2 percent to 74.9 euros at 11:59 a.m. in Frankfurt after dropping as much as 9.3% earlier.
"There’s no suggestion BMW has done anything illegal,” said Juergen Pieper, an Frankfurt-based analyst with Bankhaus Metzler. “However, there are concerns for the long-term damage on the business with diesel cars for every manufacturer that builds cars with these engines."
Perhaps now we know the reason why BMW's new CEO Harald Krueger fainted last week during the Frankfurt motor show.
Shares of other German carmakers also declined. Daimler AG tumbled below €63 for the first time since November 2014. Volkswagen, which is at the heart of the probe and has lost about 20 billion euros in market value since Monday, recovered some of its losses, rising as much as 7.8 percent.
The news promptly ended the brief kneejerk rebound higher in European equities, which had rebounded earlier on positive German IFO data with expectations and business climate beating surveyed expectations, while current assessment missed expectation, however this failed to have a sustained reaction in the EUR, while elsewhere the USD-index heads into the North American crossover lower by around 0.1 % after seeing relatively muted price action overnight. Finally of note, NZD/USD saw strength after Fonterra revised its 2015/16 milk forecast upward, however mixed trade figures capped further advances in the pair.
In global central bank news - because lately that's all that matters - ahead of Janet Yellen's first post-FOMC speech in Amherst, MA on Inflation Dynamics and Monetary Policy in which the Fed chair will be expected to elaborate on last week's disappointing FOMC announcement, overnight two central banks lowered their interest rates with the Norges Bank unexpectedly lowering their deposit rate by 25bps to a record low 0.75%. 7 of the 17 surveyed analysts forecast a rate cut, citing weaker consumer and business surveys as well as a weaker oil outlook, however the majority of analysts believed that the central bank would hold off until later in the year.
As a result of the rate decision, NOK saw substantial weakness on the back of the release, slumping to its weakest level in more than 13 years versus the dollar after the nation’s central bank unexpectedly cut interest rates to an all-time low and said it may ease monetary policy further to support an economy that’s been battered by the collapse in oil prices.
The krone slid 2.1 percent to 8.4471 per dollar as of 10:11 a.m. London time after reaching 8.4861, the weakest since April 2002. It fell 2.3 percent to 9.4636 per euro, having touched 9.5076, the weakest level since Aug. 26. The Norwegian currency dropped the most against the Swiss franc among its major peers, slumping 2.7 percent. "The move is logical given what they did today,” Carl Hammer, chief foreign-exchange strategist at SEB AB in Stockholm, told Bloomberg. “I thought it was equally likely that they would remain on hold and send a very dovish message, because the krone is already weak. The rate path was reduced substantially. It’s a very dovish message.”
Elsewhere the Taiwan central bank also unexpectedly cut their key interest rate by 12.5 bps to 1.75%, with the news reported by sources ahead of the official release.
So much for all that underappreciated global growth. As a result of the two latest rate cuts, expect the US to import even more deflation, making any case for a US rate hike that much more improbable.
Asian equity markets traded mixed following the tepid close on Wall Street, with Japan underperforming on return from the elongated weekend . Nikkei 225 (-2.8%) played catch up to the recent weakness seen in global equities as Japanese manufacturing PMI (50.9 vs. 51.2) missed expectations, with the auto sector also pressured as it reacts to the Volkswagen emission scandal. ASX 200 (+1.5%) was underpinned by gains in banking names, while Shanghai Comp. (+0.9%) is mildly positive, albeit off its best levels after the PBoC injected CNY 80Bn at a longer term of 14 days which resulted to a net weekly injection of CNY 40Bn vs. Prev. CNY 140Bn drain. JGBs traded higher amid softness in Japanese equities, while the BoJ also entered the market to purchase JPY 780b1n in government debt.
As noted above, European equity markets (Euro Stoxx: -0.7%) have swung between gains and losses, initially moving higher after the IFO data, before moving back into negative territory, weighed on by BMW (-8.5%) after reports in German press that BMW emission tests for their X3 model could show worse results than that of the Volkswagen Passat . Elsewhere, notable US earning reports today include Accenture before the open on Wall St and Nike after the closing bell.
Fixed income markets have seen muted price action so far in today's session, with T-notes heading into US hours in modest negative territory ahead of the US USD 29b1n 7y Note auction, with the most recent auction saw the highest B/C since Nov'14.
The commodity market has seen strength this morning, bolstered by USD weakness with gold stronger by over USD 5, while WTI trades around the USD 45.00 handle to retrace some of the losses seen after yesterday's DoE inventories saw a smaller drawdown than yesterday's API headline, allied to an increase in US crude output. Looking ahead, today sees the EIA NatGas storage change data, expected to come in at 99bcf.
Of note Platinum fell to a 6-1/2-year low on Wednesday, on fears about reduced demand from the auto sector, where it is used in diesel catalysts to clean up exhaust emissions, while palladium, used in gasoline vehicles, surged 7 percent. Platinum has been hurt by news of Volkswagen AG's falsification of U.S. vehicle emission tests as investors believed it could affect demand for diesel cars. The price of palladium, the predominant metal used in gasoline catalysts, rose on speculation that the Volkswagen scandal could increase demand for gasoline vehicles.
Key events on today's calendar include US weekly jobs data and durable goods orders as well as comments from ECB's Praet and Fed's Yellen. Of note US data, including jobless claims, durables and home sales will be delayed today & not released to newswires 1st due to Pope's visit.
Bulletin Headline Summary
- European equity have been weighed on by BMW after reports in German press that the Co.'s emission tests for their X3 model could show worse results than that of the Volkswagen Passat
- The Norwegian and Taiwanese central banks have both cut interest rates, taking the number of central banks to cut rates this year to 40
- Today's highlights include US weekly jobs data and durable goods orders as well as comments from ECB's Praet and Fed's Yellen. Of note US data, including jobless claims, durables and home sales will be delayed today & not released to newswires 1st due to Pope's visit
- Treasuries steady with global markets in disarray before Yellen speech at 5pm ET; week’s auctions conclude with $29b 7Y notes, WI yield 1.859% vs 1.930% in August.
- Global stocks have fallen every day since Fed refrained from hike last week, with emerging market stocks falling more today, ZAR approaches record low, NOK tumbles after surprise rate cut
- Norway’s central bank cut rates to an all-time low and said it may ease policy further as it seeks to rescue an expansion in western Europe’s biggest petroleum producer amid a plunge in oil prices
- Germany’s Ifo institute business climate index climbed to 108.5, more than forecast, from a revised 108.4 in August; almost all responses were received before the news of Volkswagen AG’s emissions scandal
- BMW AG fell as much as 9.3% after a German magazine reported that the X3 xDrive 20d sport utility vehicle emitted as much as 11 times the European limit for air pollution in a road test, adding to concern that the investigation weighing on Volkswagen AG may spread to other manufacturers
- Martin Winterkorn amassed a $32 million pension before stepping down as CEO of VBW Wednesday, and may reap millions more in severance depending on how the supervisory board classifies his exit.
- China’ leaders will further cut growth objective to 6.5%-7% for 2016, according to eight of 15 economists in a Bloomberg News survey conducted Sept. 17-22. Four said they expect a 6.5 percent goal.
- Japan’s Abe unveiled a new economic growth target, switching his policy focus to children and the elderly after the passage of unpopular defense bills last week sparked scuffles in parliament and undermined public support
- ECB handed EU15.5b to euro-area lenders in the fifth round of its long-term loan program to funnel money into the real economy; estimates in Bloomberg survey ranged from $35b- $120b
- Wall Street is close to cutting billions of dollars from the cost of a derivatives rule as a debate among regulators over how tough the provision should be shifts in banks’ favor
- Up and down the West Coast, home to the nation’s first $15 minimum wage laws, business owners are grappling with higher labor costs by experimenting with no-tip policies, employee ownership and trimming part-timers’ hours by working longer themselves
- $7.7b IG priced yesterday, no HY. BofAML Corporate Master Index widens 1bp to +168; YTD range 172/129. High Yield Master II OAS holds at +598; YTD range 614/438
- Sovereign 10Y bond yields mostly lower. Asian stocks mostly lower led by Nikkei, European stocks and U.S. equity-index futures decline. Crude oil, gold and copper gain
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, Aug., est. 0.24 (prior 0.34)
- 8:30am: Initial Jobless Claims, Sept. 19, est. 272k (prior 264k)
- Continuing Claims, Sept. 12, est. 2.240m (prior 2.237m)
- 8:30am: Durable Goods Orders, Aug., est. -2.3% (prior 2%, revised 2.2%)
- Durables Ex-Transportation, Aug., est. 0.1% (prior 0.6%, revised 0.4%)
- Cap Goods Orders Nondef Ex Air, Aug., est. -0.2% (prior 2.2%, revised 2.1%)
- Cap Goods Ship Nondef Ex Air, Aug., est. 0.5% (prior 0.6%)
- 9:45am: Bloomberg Consumer Comfort, Sept. 20 (prior 40.2)
- 10:00am: New Home Sales, Aug., est. 515k (prior 507k)
- New Home Sales m/m, Aug., est. 1.6% (prior 5.4%)
- 11:00am: Kansas City Fed Mfg Activity, Sept., est. -6 (prior -9)
- 1:00pm: U.S. to sell $29b 7Y notes
- 5:00pm: Fed’s Yellen speaks in Amherst, Mass.
DB Conludes the overnight wrap
There wasn’t a whole lot of direction in markets yesterday. The initial soft opening we got in European equities on the back of the weak China manufacturing data was quickly cancelled out as the sectors which had tumbled on Tuesday, namely autos and miners, reversed course. ECB President Draghi made mention that the asset purchase programme has sufficient flexibility to increase the scope or size of purchases if necessary, but ultimately struck a somewhat cautious tone around emerging markets in particular. The US session was characterized by a decent selloff in the energy complex, while Atlanta Fed President Lockhart – who’s been busy of late – highlighted some concern around the divergence of market pricing of Fed liftoff timing versus what committee members think and also suggested that markets are overreacting to developments in China.
The end result was one of modest gains in European equity markets with the Stoxx 600 closing +0.09%, but markets across the pond failing to recover from the energy related weakness with the S&P 500 (-0.20%) and Dow (-0.31%) declining for the fourth session in the last five post last week’s FOMC decision. It’s been fairly quiet so far in terms of data but with capital and durable goods orders and new home sales data this afternoon in the US there should be a bit more for markets to sink their teeth into. Arguably, the bigger focus however will be on Fed Chair Yellen who is set to speak this evening (10pm BST). The speech is due to be on ‘inflation dynamics and monetary policy’ and while no Q&A is scheduled, given the uncertainty in markets since the Fed last week there will be a lot of investors hoping for some calming words from the Fed Chair. Before we get there, it’s straight to the latest in Asia.
Refreshing our screens, it’s been a fairly mixed start across bourses in Asia this morning. Mainland China bourses have seen modest gains, with the Shanghai Comp and CSI 300 up +0.27% and +0.20% respectively at the midday break. The Kospi (+0.07%) is also up a tad while the ASX (+1.15%) is leading gains this morning. Elsewhere, it’s been a weaker start for the Hang Seng (-0.93%), while Japanese equities appear to be playing catch up with the rest of the region after markets opened for the first trading session this week following a public holiday. The Nikkei and Topix have tumbled -2.11% and -1.66% respectively as we go to print. Not helping sentiment in Japan this morning was a softer than expected flash manufacturing PMI (50.9 vs. 51.2 expected), down 0.8pts from August.
Back to yesterday and starting with ECB President Draghi first of all. In his quarterly testimony to European Parliament lawmakers, Draghi’s comments came across as one which highlighted a sense of patience and caution most of all. Specifically he said that ‘more time is needed to determine in particular whether the loss of growth momentum in emerging markets is of a temporary or permanent nature’. He then went on to say that the ECB needs to look closer at assessing the driving forces behind the recent slump in commodities and market turbulence. There were however some more reassuring words with regards to the ECB’s reaction function. Draghi told the audience that the ‘asset purchase programme has sufficient in-built flexibility’ and that ‘we will adjust its size, composition and duration as appropriate, if more monetary policy impulse should become necessary’.
Meanwhile and speaking for the third time this week, the Fed’s Lockhart largely reiterated much of what we had already heard this week, although the policymaker highlighted that with regards to market pricing of Fed liftoff, ‘if the probabilities put on various dates are way out of whack with what the committee members seem to be thinking, I would be concerned about that’. On the subject of China, Lockhart was of the view that ‘China is slowing to a still respectable pace of growth’ and that ‘there is a decent chance that the world is overreacting’.
Price action in the rates space was fairly muted yesterday. 10y Treasury yields closed the session 1.6bps higher at 2.151%, while 2y yields finished up 2.5bps at 0.701%. It was a similar story in Europe with 10y Bunds up just shy up a basis point to 0.594%. Draghi’s comments supported a stronger day for the Euro which finished firmed 0.59%. Much of the price action was in the Oil complex however where WTI (-4.06%) tumbled back below $45/bbl. Brent (-2.71%) also fell and the latest leg lower came despite a decent drop in US crude stockpiles, although a buildup in Gasoline stockpiles seems to be largely attributed to yesterday’s weakness. That helped lead energy stocks lower in the US while closer to home there was a decent rebound for the bulk of European carmakers, led by Volkswagen which closed up over 5%.
Yesterday was also flash PMI day with the September composite reading for the Euro area coming in a tad softer than expected (-0.4pts to 53.9; 54.0 expected) but as our European Economics colleagues note, still broadly consistent with a quarterly growth projection in Q3 of +0.5% qoq. There were almost identical falls for both the manufacturing (-0.3pts to 52.0; 52.0 expected) and services (-0.4pts to 54.0; 54.2 expected) prints while regionally a fall in the German composite (-0.7pts to 54.3; 54.6 expected) was offset by a larger than expected rise in France (+1.2pts to 51.4; 50.4 expected). Our colleagues note that the monthly fall in the Euro area PMI was driven by the non-core countries and they calculate that the flash reading implies a one point decline in the composite PMI’s of Italy, Spain and Ireland on average. Over in the US, the flash manufacturing PMI showed no change relative to last month’s print at 53.0, although the data was a touch ahead of expectations of a fall to 52.8.
Looking ahead to today’s calendar now. Much of the focus this morning in the European timezone will be on Germany’s IFO survey for September. Elsewhere we’ll also get French confidence indicators out this morning as well as German consumer confidence. It’s a busy day for US data this afternoon. As mentioned the highlights are durable and capital goods orders and new home sales. On top of this, initial jobless claims, the Chicago Fed national activity index and the Kansas City Fed manufacturing activity index are also due. The aforementioned speech from Fed Chair Yellen this evening will also be a closely watched affair.
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If the Kia Soul had been the People's Car .... Germany would have won the war !
Scandal Spreads To BMW
Looks like everyone in DC is going to have to walk to work today.
German engineering is now a fantasy...best reason for all Muslim refugees to return back to the Middle East.
Yeah the good guys left in the early sixties after the gold std was abandoned.
It's not the engineers who make the decisions. It wasn't the engineers who ruined HP either.
Scandal Spreads To BMW
Looks like everyone in DC is going to have to walk to work today.
VW stands for............... Volatile Wheels
BMW stands for..............Black Mans Wheels ( In the UK )
Are you saying alot of African Americans will be walking to work today?
Are you saying alot of African Americans will be walking to work today?
Depends if they're muslims.....and this is me shutting right the hell up.
Go ask George Stephanopoulos....he probably knows.
Muslims............................Drive Toyota's
Unless they are on a suicide mission or the Toyoata is due for it's 17 virgin time and meet it's maker in the sky
That was after they tried VWs......that crap is tough.
https://www.youtube.com/watch?v=cZlktJu6Khs
http://www.armyrecognition.com/images/stories/news/2011/june/libyan_rebe...
A clear Middle East choice.
what's the difference between a porcupine and a BMW? one has it's pricks on the outside
OT: Where's the news on Victoria Newland?
Fuck Nuland.
/EU
So, is bad news back to 'bad' again? I've gotten used to markets rising on headlines like this over lo the past half-dozen years.
(PS: ECB QE is "a steak through the heart"? Tyler's still got his mind on his breakfast.)
It's a Freudian slip on atherosclerosis.
Emissions scandal?
The Green Pope is on the case!!! ;-)
But, but German engineering...
Perhaps the recent influx of scientists from Syria will come to the aid of us all. Right?
I was just hoping for a decent dentist.
Is it safe?
You should be running.
I was hoping for a decent education.
Peel back that onion skin, mother fuckers. But, oh, how efficient they are....
When a machine is on its way to breaking apart, the wrong kind of noise is the first obvious symptom. Next come vibrations, which create and/or amplify potentially devastating feedback loops.
I'd say that's about the stage at which the world's economy is now.
Japanese transmissions give way without one second of notice.
a) those are components of machines
b) a single component failure rarely leads to the breaking apart of a machine
c) presumably you work for GM
A chain is only as strong as it's weakest link, and with labor costs through the roof it only takes one to ruin the whole thingy, and no, I work for myself.
They've been trying to kill diesel engines since Rudolph Diesel invented them in the late 1800s. They were designed to be run on (at the time) cheap, readily available vegetable oil instead of distillates of crude oil. Obviously, the quickly ramping oil industry at the time saw that as a threat and has been trying to stamp it out ever since.
If this sounds eerily similar to what happened to "hemp" you're not far off.
Interesting side-note... Diesel engines being run on vegetable oil CAN STILL BE DONE TODAY. There's guys who buy used vegetable oil from restaurants and convert it into runnable diesel for their rigs using a simple titration tank and some readily available chemicals. On some older diesel engines you don't even need to go that far- just filter it and run it! What comes out the tailpipe still smells a little like french fries. (No joke!)
I have one of the new ecodiesels in a ram 1500 4x4 and absolutely love it. Great mileage AND runs great too. An Italian engine design. VW had an awesome v-10 diesel a few years back and was suddenly recalled due to emmisions. Incredible power and NO smoke, no odor. And then it was gone. Something strange going on.
Europe has embraced the diesel engine like no other contintent. If you attack diesels, you are basically stabbing at the heart of Europe's manufacturing sector. The EPA and manufacturers have been playing footsie with eachother for years over stull like this. They all knew, it was only a matter of when somebody determined it was time to push that button and unleash the scandal. Follow the bread crumbs.
"Fuck the EU."
I agree. Diesel has become the fuel of choice over here. The advent of Common Rail technology has transformed the diesel engine from a smelly, noisy thing you'd fine only in a tractor to the power pack used in Le Mans 24 cars because you need fewer fuel stops. Better fuel economy and better low down torque for pulling away or towing knock a petrol (gasoline) engine into a cocked hat.
"knock a petrol engine into a cocked hat." Awesome! I can honestly say I haven't heard that one before.
It's not the particulates, is the NOX.
But you have to go to a great expense in heating the fuel in the cooler months to make it work and it makes for one hell of a mess to the inside of the engine after just a short while, another costly fix. make um so they run forever with no maintenance and just use diesel fuel, that's the best way.
Damn. Same thing with the transmission invented by Otto Matik.
Another trillion dumped ur 2, b, how many more u wanna dump so funny, lol
Something smells fishy about this whole "scandal" in my opinion. This is a staged event.
No gold repatriation for you, Germany ?
I was wondering if it had anything to do with VW telling the unions to pound sand.
fishy? nah, nothing fishy about this. of course i can't get through the economic bullshit without reading this:
a steak through the heart of Germany's most important industry,
hell, i put a steak through my heart once maybe twice a week. don't know how long that can go on. maybe ZH has it in for ruth's chris or maestro's.
now if you're going after germany's most important industry with a stake, make sure the pointy end there is pointed in the correct direction.
Gee, if they can take control of your car or airplane remotely, this is no surprise.
I applaud the outfits that beat the system, because the System is rigged.
But, hey, we all live in a pseudo communist state.
So, fuck 'em when you can!
If it wasn't for bad news, I wouldn't have no news at all....
You have to go through hell, in order to get to heaven.
The key is to get through it, we seem to have stalled out halfway in.
Panic begins ( rate cuts). Interesting to see the extent of the software shenanagins, but no surprise.... Increasing regulations eventually cause people to try to cheat. Vehicle prices should rise and/or performance drop.
German cars are great .... but, it is in the German nature to overbuild .... make them too heavy .... my Kia Soul is light as a hair on Kim Jong-un´s ass .... yet is tough enough to get me to the hot springs .... on less gas than two 250 cc motorcycles !
Manufacturers have a hard time distinguishing themselves as the technology spreads so quickly. It seems no one has a real advantage now other than cheap labor (which has been largely minimized by automation) and more importantly, government regulation/intervention....exactly as we see with VW and BMW right now. After this, how much will one of them cost for equal product? All costs must be covered, either directly by consumers at purchase...or by consumers through their taxes. Exporters will attempt to recover in the primary price, but given how most governments operate, will have no hesitancy in putting the burden on their own citizens.
These pieces of shit will use any excuse for a falling market. bottom line this is the 7 year cycle and need!!!! to fall naturally not under the fucken federal reserve arm!
Basically what Im saying is these assholes want you to think they have control when in fact!!! they don't!
Sell the bounce, Bullish Divergence 1h chart S&P500
http://tripstrading.com/2015/09/24/sp500-1h-chart-bullish-divergence/
Joke if u ever tell a woman u love her, is that a law broken, friend said sexual harassment? Only 2 times now...
Germany is under attack for breaking ranks with the Anglo-American Establishment over the Ukraine and normalising relations with Russia. I called it out here Now BMW will get fucked and I'll GUARANTEE Mercedes will get clobbered if they faked tests and a German Bank will be investigated or charged by the SEC, most probably Deutsche Bank. I'll bet my fucking life on it and when proven correct, the retarded naysayers on ZH will have to eat humble pie and bow in reverence to me. The U.S is conducting payback in the public arena. Will the U.S overplay her hand? Given the invertebrates in power in Europe, the U.S has nothing to fear.
Oktoberfest is in a week right?
It looks like Mr Vermaelen reads ZH
http://www.zerohedge.com/news/2015-09-23/volkswagen-scandal-becomes-inve...
Edit:
Why does a link to a specific post take you to page 1 of an article rather than directly to the post in question?
Let's make that a stake.
I prefer this visual of a steak. The sharpened end of a t-bone rammed straight to the center of the chest and then slowly turned
According to Bank of America Merrill Lynch:
http://is.gd/5vle0j
Strategy Snippet
You can have too much of a good thing
The Fed is helping so much it hurts
We have noted that each incremental instance of monetary stimulus has been met with diminishing returns for risk assets. We think further easing, or a lack of tightening, in the U.S. is a negative for stocks. The expectation for Thursday’s FOMC policy decision was a rate hike and dovish commentary, or no hike and hawkish commentary. Instead, the Fed left rates unchanged and delivered a dovish message. In response, the S&P 500 sold off into the close and was down the next day. As we have noted recently, the biggest risk to equities could be another round of QE—suggesting that $4.5tn was not enough to prop up the U.S. economy. Also, the read across for global risk assets could be that significant liquidity provided by central banks may not always be sufficient to drive markets higher.
Tactical delay or real economic deterioration?
Our base case is that the Fed’s lack of action is a tactical delay, and therefore does not impact our outlook. We are maintaining our recently lowered S&P 500 year-end target of 2100. We note that our technical team sees risks to the bull market, and our global quant team’s Global Wave has been declining for the last eight months. Our economists’ real- time indicator of global growth, the GLOBALcycle, softened in August (led by EMs), and we will be closely watching for signs of stabilization or further deterioration.
The Fed on hold = more of the same
The story for the last five years looks set to continue for at least the next few months. With easy monetary policy and a scarcity of growth and value, we would expect to see positive momentum in Growth and Dividend Yield stocks continue. But, given our economists’ expectations for a pick-up in global growth over the next several quarters, buying cheap, unloved cyclicals could start to play out. This would also be true for Energy, which is the ultimate pain trade. Energy has record low valuations, ownership and investor sentiment, and our commodity strategists forecast a year-end rally in oil prices.
Multinationals: intersection of quality & weak dollar beneficiaries
Buying multinationals looks increasingly attractive. These high quality stocks are beaten- down, inexpensive and under-owned by active funds. The companies have produced upside earnings surprises, and the stocks have been outperforming since mid-August, despite the volatility associated with concerns about global growth. The performance of foreign- exposed stocks is now more correlated to moves in the US dollar than at any point in nearly a decade. Dollar strength has been a source of pain for multinationals so far this year, but this could reverse if a dovish Fed exerts more downward pressure on the dollar.
China risks - avoid Materials
With the recent slowdown in China, we are mindful of the risk of a recession. The area most exposed to China is the Materials sector. This sector’s performance is most highly correlated with China’s stock market, as well as with monetary conditions in the region. Metals and Mining looks particularly unattractive given overcapacity in China, and screens as a Value Trap in our work. Health Care is the least correlated with China.
Comrades! Pay no attention to the thick black smoke and soot emanating from US military tanks, buses, trucks, aircraft and ground support equipment & vehicles; this is OKAY! However 50 M.P.G. TDI's with no visible smoke or soot are a disaster waiting to happen! You slaves had better not question this because your government would never lie to you, would it? Shalom bitchez!
Elon Musk and his Tesla crew must be laughing quite a bit. I'm quite sure they never even dreamed of getting free advertising for their electric cars offered by VW, BMW et al. ...