Month: July 2019

Overnight saw surveys confirm that factory activity collapsed in June across Asia and Europe. China’s manufacturers saw sales, exports and production fall, while Germany suffered from weaker foreign demand. Exports from South Korea plunged almost 14%, and Japan’s Tankan confidence index dropped to a three-year low.

This comes on the heels of the total, broad-based collapse in US regional Fed manufacturing business surveys…

So, expectations were for a downshift in US Manufacturing ISM/PMI headline surveys (Goldman warned that a simple analysis based on the historical deviations between the ISM and our survey tracker suggests slightly more than a one in three chance of the ISM manufacturing index falling into contractionary territory).

But that’s not what happened!!

Markit US Manufacturing PMI beat expectations, rising from 50.1 to 50.6 in June (this was nonetheless the second-lowest figure since September 2009).

However, under the hood, not everything was awesome with employment expanding at its slowest rate since Aug 2016.

Chris Williamson, Chief Business Economist at IHS Markit said:

“US manufacturers reported business conditions to have remained the toughest for nearly a decade in June. The past two months have seen the lowest readings since the height of the global financial crisis in 2009.

“The survey provides accurate advance indicators of comparable official data, and paints a worrying picture of marked declines in both output and jobs. The June survey sub-index readings are consistent with manufacturing output contracting at a quarterly rate of 0.7% and factory payrolls falling by 18,000.

“A major development in recent months has been the deteriorating performance of larger companies, where the last two months have seen the lowest PMI readings for a decade. After inventories rose sharply earlier in the year, large companies have moved to destocking in May and June amid a sharp slowing in new order inflows.

“Although business optimism about the future lifted slightly higher, it remained close to survey lows to indicate persistent low morale. Worries centred on signs of slowing demand both at home and internationally, weaker sales, and geopolitical uncertainty.

“Tariffs meanwhile continued to push up prices, but weak demand often limited the ability of firms to pass higher prices onto customers, suggesting overall inflationary pressures have weakened compared to earlier in the year.”

Additionally, ISM’s Manufacturing PMI beat expectations, printing 51.7 (better than the 51.0 expected) but still down from the 52.1 level in May – to the weakest since October 2016.

New orders fell to 50, from 52.7 – the lowest since Dec 2015 (and new export orders also slowed).

Respondents are unhappy:

“China tariffs and pending Mexico tariffs are wreaking havoc with supply chains and costs. The situation is crazy, driving a huge amount of work [and] costs, as well as potential supply disruptions.” (Computer & Electronic Products)

“Demand for the remainder of 2019 has softened significantly, due to issues in the aerospace industry. The 2020 outlook is looking stronger. Overall, state and local economies remain strong. Recruiting for open positions still requires time to find the right candidates.” (Transportation Equipment)

Is this “bad” enough to help The Fed?

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US Treasury yields are slumping back to unchanged – 10Y hitting 2.00% – as US equities extend overnight gains to new record highs…

WTF!

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A left-wing agitator using the artwork and a pseudonym associated with a Rolling Stone and Playboy journalist has made serious threats to use muriatic acid for attacks conservatives at the upcoming Demand Free Speech rally on July 6 in Washington DC, according to Big League Politics. 

“I just want to toss as many balloons of Muriatic acid in the faces as many Proud Boys I can [sic],” wrote the user “POUND ON YOUR BOY” on a popular right-wing Telegram channel, prompting event co-organizer Enrique Tarrio to contact the FBI and DHS, who will now assist with security at the event.

“I just want to blind as many of you cock suckers are possible [sic],” said the user, adding “We already have the Muriatic acid, wax, and balloons.” 

Tarrio told BLP that the threat is particularly dangerous due to the use of wax. 

Muriatic acid can be purchased in virtually any pool store or home improvement store, and is already dangerous on its own with the ability to cause minor burns, but can quickly be washed off with water. By combining the muriatic acid with wax, it will immediately form a film similar to candle wax on the injured person’s skin.

Tarrio explains that this could allow the burn to become severe, and even lead to the wax and acid entering the injured person’s blood stream and causing cardiac arrest.

“It starts with milk shakes, then it escalates to what happened to Andy Ngo” said Tarrio – referring to the conservative journalist who was brutally attacked during a demonstration in Portland, Oregon last weekend. “and now they’re threatening us with acid attacks,” Tarrio continued. “All because we want to defend free speech in Washington, D.C.” 

“We will not be intimidated with these tactics of fear and fascism. We will celebrate our First Amendment without apology.” 

Who is POUND ON YOUR BOY? 

Both the phrase and artwork associated with the name “POUND ON YOUR BOY” were created by Rolling Stone and Playboy journalist Fagan Kuhnmuench, who according to Big League Politics, has written extensively in support of Antifa. 

Free art. Share widely. pic.twitter.com/0g0HzGjcVY

— gnarlyheadache 🇵🇸🇮🇪 (@gnarlyheadache) May 21, 2019

Kuhnmuench told Big League Politics via Twitter DM that he didn’t make the threats over Telegram, and that he doesn’t have a Telegram account. And while he encouraged people to use his art, Kuhnmuench had no explanation for why someone would use his pseudonym. 

via ZeroHedge News https://ift.tt/2Nk1yXp Tyler Durden

This weekend’s “truce” outcome may have been just as the market expected, and yet that did not prevent stocks from reacting as if what happened was the best possible – and unexpected – case. And, as we noted earlier, and as Nomura’s Charlie McElligott notes, global equities, risk FX and Asian Commodities-futures go “mongo” overnight in standard “relief rally euphoria” fashion.

At the same time, while equities are set to explode to new all time highs, Treasuries and rates remain well-bid despite the “feel-good” for risk-asset sentiment off the G20, as Monday brought another atrocious round of Global Mfg PMIs, with Germany at an eye-watering 45; Spain back “contracting” for the first time in more than 5.5 yrs; UK “back-to-back” contractions for first time in 6 yrs; China Caixin Mfg PMI at 49.4 lows since January, with 21 of 22 releases thus far declining vs the prior month and expectations for US to continue trend “lower” later today, all of which “capture the spectacular breadth of the global economic deterioration”, according to McElliogtt.

What is most surprising in the context of a positive US-China “truce”, Nomura observes that “we are seeing virtually no adjustments to the market’s already remarkable “Fed rate cut” expectations, still  at approx. 100bps of easing looking-out over the next 1Y”, even though odds for a July 50bps cut now are down below 20% vs nearly 40% at the start of last week. Still, as McElligott adds…

… the market knows that “when the Fed goes, they go hard and fast” (i.e. of the last four easing cycles, 70% of the aggregate “easing” has occurred within the first six months of the initial cut), especially with the potential for negative “business investment” sentiment to remain high as legacy trade-tariffs stay “in-place.

There is a negative flipside to that of course, because as we noted over the weekend, there are two signals which are pretty much fail safe coincident recessionary indicators:

• The Fed has never cut 100bp within a year in an easing cycle outside a recession.
• The Fed has never started an easing cycle with a 50bp cut outside a recession.

So while the US – and global economies – may be headed for a day of reckoning, traders have yet to extract some upside from the market and as McElligott observes, the US equities “Melt-Up” continues to be the most-likely early Summer scenario, for the same “under-positioning” dynamics he has been discussing over the past few months, which again are as follows:

• Street PB data showing median Equities HF “Net Exposures” at sub- 10th %ile ranks across 1-, 3-, 5- year ranks and since 2010 overall
• Not surprisingly then, we see “extreme” Leveraged Fund “Net Short” positioning in US Eq futures, shorting -$59.2B YTD and now -$36.2B overall across SPX-, NDX- and RTY- futures—a remarkable (“just”) 13th %ile since 2006
• Within the overall make-up of underlying portfolios, we continue to see a very “Slow-flation / end-of-cycle” lean from both Mutual- and Hedge- funds being heavily “Low Vol” (long / overweight the “Duration-Sensitives” of Defensives- and Secular Growers- vs short / underweight high-beta Cyclicals-):
  • Long-Short “Beta to S&P 500” just 3rd %ile since ‘03
  • Long-Short “Beta to Beta Factor” just 3rd %ile since ‘03
  • Mutual Fund “Beta to Beta Factor” just 23rd %ile since ‘03
• Macro Fund “Beta to SPX” similarly “meh” at just 56th %ile since ’03, which is actually down vs 1m ago
• EPFR Global Fund Flow data now showing a -$138.4B redemption YTD from Global Equities funds, incl a “net outflow” of -$41.2B in US funds (-$83.0B from Active-, partially offset by +$41.8B inflow to Passive-)
• Conversely, there is significant “High Cash” component which then could act as “fodder” for a grab-in across both Risk-Assets (and further into Bonds), with Money Market funds experiencing a massive +$195.8B inflow YTD, which is 93rd %ile since 2000 (although last week saw a -$14.0B outflow as seemingly money was “put to work”)
• Still seeing some legacy “Net Short” positions in our Nomura QIS CTA Trend model which are incrementally nearing “buy to cover” levels in Russell 2000, Nikkei and KOSPI, while Hang Seng CH is within reach of triggering more re-leveraging / buying to get back to “+100% Long” signal as well
• Nomura QIS Risk-Parity model estimates the “gross exposure” across the aggregate position in Global Equities near 1.5 year lows, with the aggregate US Equities futures component near 28 month lows—the continued grind lower in trailing 2 year realized vol will gradually reverse last year’s “higher realized” environment and gradually see Equities exposure added back

Meanwhile, looking back at June, which saw the S&P surge 7%, yet saw most hedge funds suffer losses, the Nomura derivatives expert attributed this to the positive impact of a steepening US yield curve on chronically under-owned “Value” (Predicted E/P factor +6.6% MTD; Sales / Price +5.8% MTD; EBITDA / EV+5.2% MTD; Cash Flow / EV +4.6% MTD; PEG +4.1% MTD) vs the NEGATIVE impacts of a steeper curve on “Momentum” (Sector Neutral 1Y Momentum -3.6% MTD; “Pure” 1Y Price Momentum -3.6% MTD; Vol Adjusted Momentum -3.3% MTD).

As shown below, the US “factor reversal” remains the story of June due to the positive “value”, negative “momentum” shift due to yield curve steepending (which itself should be negative for the market):

In conclusion, why has 2019 been so challenging within US Equities from a thematic / risk-premia perspective?  As McElligott concludes, the above US Equities factor “unwind” phenomenon has been an almost monthly occurrence for the past year via said constant “end of cycle” macro regime-change across Volatility-, Financial Conditions- and US Rates- / Yield Curves- therein; the result: spectacular performance of Nomura-Instinet’s two “monthly reversal” factor market-neutral strategies of the past 1 year window: “1m Price Reversal” factor at +24.3% YTD / +28.3% past 1 year period; and “Conditioned Reversal” factor at +13.4% YTD and +28.6% past 1 year period.

via ZeroHedge News https://ift.tt/2Nn4iU4 Tyler Durden

A reported trade “truce” between China and US has prompted excited talk of fresh record highs in US stocks, a surge in Chinese stocks, a jump in offshore yuan relative to the dollar, but barely anything in bonds (with 10Y Yields hovering just above 2.00%, unable to hold the overnight spike).

But, as Bloomberg’s Garfield Reynolds warns, the key danger across markets is the potential for a corrective yield spike that would pummel risk assets and worry investors that they have fallen for a low-yield trap.

Via Bloomberg,

Falling bond yields have been the big surprise of 2019 so far and there’s an excellent chance they will grind lower in the second half — and take stocks with them — as weak growth spurs global monetary easing.

Given how tough it has been to forecast bond yields, getting that call right for the rest of the year is key.

A reminder of how difficult that can be comes from San Francisco Fed President Mary Daly. Twice last week she said it’s very hard to say what the central bank should do, including comments that she’s unsure “whether interest rates will be lower a year from now.”

Surveying the outlooks our team came up with at the start of 2019, it’s clear our biggest misses were all in bonds
The same goes for those readers who took part in our surveys. Treasury yields finished June more than 100 bps below the consensus for end-2019, while bunds were ~75 bps lower and Italian yields a whopping 105. Bond analysts were also far too bearish.

What some forecasters may find especially galling is the way the yield projections actually look sensible if you consider where equity gauges are now. The same goes for FX projections that mostly favored a soft-dollar outlook.

Our readers were bearish bonds and bullish equities, and while equities are mostly well north of the WHIS numbers, bond yields are way, way south.

Oddly enough, the growing concern right now seems to be the rush into bonds has created massive duration risk that could set off a global version of the so-called VaR shock that hit Japanese government debt back in 2003.

Very few seem to be raising concerns that U.S. equities at a record high would be at least as exposed to the turmoil that would come. Consider how the spike in Treasury yields in February 2018 set off global carnage for stocks.

Still, with central banks marching down the easing path, justified by a record stretch of data disappointment, a meaningful backup in yields looks unlikely.

The G-20 trade truce did very little to indicate a resolution to the U.S.-China conflict is imminent, so that will continue to weigh on the global growth outlook.

The key question is whether yields that stay at current lows or drop further can go on being fuel for equity rallies?

Your answer to that may come down to whether you buy into the “insurance cut” thesis that the Fed will be able to preserve the U.S. economic expansion with a rate move or two.

What looks more likely is that equities ultimately succumb to the macro logic that has fueled this year’s bond rally.

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