Month: June 2017

One of the recurring laments about the Fed’s hiking cycle, most recently from Goldman, is that despite 2 rate hikes so far this year, financial conditions remain the loosest they have been in over two years.Whether that is due to the market being so drunk on the Fed’s “punch bowl” it is unable to grasp the liquidity is being dragged away, or for some other unknown reason despite repeated warnings by FOMC members that stocks here are overvalued, markets simply refuse to concede that financial conditions should be tighter, in fact, as Goldman observed yesterday “so far, the Fed’s efforts to tighten financial conditions have achieved too little, not too much.”

That, in the view of Bank of America’s rates strategist Shyam Rajan is a big mistake because as he explains in his latest note titled “When paint dries, does the wall crumble?” despite the market’s repeated unwillingness to acknowledge, “recent market moves mark the beginning of a prolonged tightening of financial conditions.”

And, more notably, he underscore that despite the benign financial condition regime, the market is missing one key thing: in light of what the market perceives as a “benign flow effect” the risk currently is in the the Fed’s balance sheet “stock” and adds that “we think the market is complacent on the stock effect of the Fed’s balance sheet decline. Specifically, higher deposit betas, UST supply and/or real rates could all trigger significantly tighter financial conditions.”

To underscore his point, Rajan shows the following chart which shows just how vast the upcoming normalization will be, in light of the moves for both inflation expectations and real rates that took place during QE2 and QE3, and how small the unwind has been so far under the Fed’s tightening regime. As Rajan explains further (more below), “ever since the conversation for the Fed shifted from hikes to balance sheet after the March meeting, we have seen a significant increase in real rates and a decline in inflation expectations: the anti-QE trade. Recall that the primary objective of an expanded balance sheet was to push real yields lower (when the nominal funds rate was constrained at 0) and inflation expectations higher. As shown in our Chart of the day, when looked at through that lens, the reversal over the last few months is just the beginning of a long process.”

Rajan’s main point, as noted above, is that while the market has remained focused on the central bank flow which it – erroneously – assumes will not be a major risk factor, what the market should be looking at instead is the stocks. He explains:

With rate hikes in the background, market and policymakers’ attention has squarely moved to the Fed’s balance sheet. In this regard, over-communication from Fed officials to prevent a repeat of the taper tantrum has  no doubt helped. Repeated emphasis on the balance sheet being a “passive tool” and the tapering reinvestments being equivalent to “watching paint dry” seem to have convinced markets that the initial steps ($6bn UST, $4bn MBS runoffs) are unlikely to cause disruptions. Yet, while the market appears very comfortable with the flow effect, we think the longer-term stock effect is underappreciated.

Specifically, we identify three areas where the market seems most complacent going into the unwind experiment.

1. Does the balance sheet unwind lead to an increase in deposit betas sooner than expected?
2. Can the resulting increase in Treasury supply have a significant impact on yields?
3. Will the increase in real yields have knock-on implications for other asset classes? All three signal a significant, albeit slow moving, tightening of financial conditions up ahead.

Going back to a point we have pounded the table on since 2011, Rajan notes that the excess reserves created by the Fed have created a liquidity illusion on bank balance sheets, in the form of excess deposits (the same excess deposits which not only are not inert as many erroneously assume, but are in fact what JPM’s London Whale used – as collateral – to corner the IG market with notable consequences).

It is these deposits that wil now contract as the Fed proceeds to normalize.  Here is Rajan:

Ultimately, as the Fed’s balance sheet shrinks, so does the banking systems’. On the asset side, banks lose cash (excess reserves) while on the liability side deposits leave (to absorb the new Treasury supply) triggering a mirror image decrease of the Fed’s sheet. However, critical to this process is the kind of deposits that leave the banking system. Although consensus remains that given the $2.1tn in excess reserves, competition for deposits will be non-existent, this assumption is heavily reliant on the less stable deposits leaving the system first (corporate, non-operational, etc.) before the more stable ones (FDIC insured retail deposits). Were the first run-offs in October to trigger the more LCR friendly retail deposit outflow, significant knock-on implications could result:

• Deposit betas will be projected to rise faster than expected resulting in a repricing of the asset side of bank’s balance sheets (loans, mortgages etc.;
• If deposit rates were to increase (and deposit-IOER spreads decline), demand for short-dated fixed income, especially at current levels (close to IOER) is likely to dramatically reduce.
• Third, cash will increasingly become an attractive asset to rich valuations across asset classes. This would reduce the safe haven premium of USTs to hedge against a risk-off.

Then there is the issue of issue of Treasury supply-demand imbalance, something we first touched upon at the start of the month in “BofA: “If Bonds Are Right, Stocks Will Drop Up To 20%.” This point can be summarized simply as follows: there is $1 trillion in excess TSY supply coming down the line, and either yields will have to jump for the net issuance to be absorbed, or equities will have to plunge 30% for the incremental demand to appear. 

Rajan summarizes these concerns below:

An unwind of the Fed’s balance sheet also increases UST supply to the public. Ultimately, the Treasury needs to borrow from the public to pay back principal to the Fed resulting in an increase in marketable issuance. We estimate the Treasury’s borrowing needs increase roughly by $1tn over the next five years due to the Fed rolloffs. However, not all increases in UST supply are made equal. This will be the first time UST supply is projected to increase when EM reserve growth likely remains benign. Note both the 2003-06 and 2009-13 increase in UST supply were met with the largest increase in Chinese buying of USTs. With this unlikely to repeat, we believe price sensitive buyers need to step up. Our analysis suggests this would necessitate a significant rise in yields or a notable correction in equity markets to trigger the two largest remaining sources (pensions or mutual funds) to step up to meet the demand shortfall. Again, this is a slower moving trigger that tightens financial conditions either by necessitating higher yields or lower equities.

Readers can read the full analysis of the Treasury’s dilemma at the following link.

Treasury market dynamics aside, BofA says that the third, and perhaps most important, aspect of renormalization is that the forward path of the balance sheet decline is already having an impact on one market in the form of rising real yields:

Ever since the conversation for the Fed shifted from hikes to balance sheet after the March meeting, we have seen a significant increase in real rates and a decline in inflation expectations: the anti-QE trade (Chart 3). Recall that the primary objective of an expanded balance sheet was to push real yields lower (when the nominal funds rate was constrained at 0) and inflation expectations higher. As shown in our Chart of the day, when looked at through that lens, the reversal over the last few months is just the beginning of a long process.

 

The message from this combination (higher real rates, lower breakevens) is that even though there is a decline in nominal interest rates, the composition is a “bad” decline.

Besides rates, the “bad” decline shown above is negative for risk assets because ultimately “lower inflation expectations (if right) should lower forward earnings growth estimates (as earnings grow with nominal GDP) while higher real rates should raise discount rates for these earnings: an unfriendly outcome for risky assets.”

Which brings us to Ra’jan’s gloomy conclusion: “Ultimately, all three of the above – a repricing of the asset side on bank balance sheets higher, higher term premium because of UST issuance, and higher real yields – signal tighter financial conditions up ahead.”

 While slow moving, the knock-on impact on asset classes either through a shift in the underlying supply or demand dynamics is significant. We remain a structural bear on real rates to position for this scenario.

And, if right, the conclusion by the BofA strategist is precisely what Yellen, Fischer, Dudley and others have been desperate to communicate to the market over the past 5 months – unsuccessfully – when pointing out as recently as Tuesday, that “Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates.”

Judging by stocks’ reaction to the latest yield spike, the market may be finally getting it.

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Exhausted and demoralized after repeated buyouts and cutbacks in the newsroom, it seems the downtrodden journalists at the New York Times have finally had enough: In a pair of letters delivered to executive editor Dean Baquet and managing editor Joseph Kahn, the News Guild of New York said the New York Times editorial staff will leave the newsroom on Thursday as a demonstration of solidarity as management threatens jobs, according to MarketWatch.

Unlike the employee rebellion at the Wall Street Journal last year, when staffers confronted management about unequal pay practices and a paucity of female reporters and editors in leadership roles, the uproar at the times is centered around the repeated paycuts and cutbacks, which have left the newsroom feeling “demoralized.” One letter was sent by the organization's copy editors, who are facing dramatic staffing cuts, while the second letter was sent by reporters in an expression of solidarity with the editing staff. Both detailed frustrations with the repeated rounds of buyouts, and the lack of transparency surrounding management’s decisionmaking.

“In the copy editors’ letter to Baquet and Kahn, they say they feel betrayed and disrespected in the newsroom, and ask that management reconsider staffing cuts that are expected as the paper plans to restructure.

 

“Cutting us down to 50 to 55 editors from more than 100, and expecting the same level of quality in the report, is dumbfoundingly unrealistic,” the letter reads. “You often speak about the importance of engaging readers, of valuing, investing and giving a voice to readers. Dean and Joe: We are your readers, and you have turned your backs on us.”

 

“Editors — and yes, that especially means copy editors — save reporters and the Times every day from countless errors, large and small,” they say in the letter. “Requiring them to dance for their supper sends a clear message to them, and to us, that the respect we have shown the Times will not be reciprocated.”

The editorial staff is accusing Times management of being too opaque in its efforts to restructure the news operation, which includes consolidating two separate groups of editors into one group and asking copy editors to resubmit applications for roles in the newsroom.

Indeed, morale is so low at the NYT that its reporters and editors said they actually feel more respected by readers than by management. The letters referenced an internal report in which the copy editors were compared to dogs urinating on fire hydrants.

That’s quite the claim  – considering President Donald Trump’s relentless bashing of the “failing” news organization has turned public sentiment squarely against it.

“And that is why it feels like such a profound waste that morale is low throughout the newsroom, and that many of us, from editors to reporters to photo editors to support staff, are angry, embittered and scared of losing our jobs,” the letter reads.

The rebellion comes at a time when advertising revenues for print – formerly a powerhouse of the media industry that has been precipitously eroded by the rise of free news on the internet – continue to shrink, and gains in digital advertising are failing to make up the difference.

In the first quarter, print ads declined by 18% while digital ad revenue increased by nearly 19% and accounted for more than 38% of the company’s total ad revenue. Still, the paper’s stock remains buoyant; shares have risen more than 35% year-to-date, compared with a 9% gain in the S&P 500.

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With his latest two tweets, in which he attacked “Morning” Joe Scarborough and Mika Brzezinski, Trump may have finally crossed the line. At least that’s the view of a group of Republicans who slammed Trump’s over his tweets attacking MSNBC host Mika Brzezinski, saying the personal jabs about a woman’s looks were unworthy of the presidency.

“Please just stop. This isn’t normal and it’s beneath the dignity of your office,” Republican Senator Ben Sasse of Nebraska said on Twitter Thursday.

Please just stop. This isn’t normal and it’s beneath the dignity of your office.

— Ben Sasse (@BenSasse) June 29, 2017

Republican Senator Lindsey Graham also slammed Trump tweeting. “Mr. President, your tweet was beneath the office and represents what is wrong with American politics, not the greatness of America,”

Mr. President, your tweet was beneath the office and represents what is wrong with American politics, not the greatness of America.

— Lindsey Graham (@LindseyGrahamSC) June 29, 2017

As noted earlier, Trump prompted the latest bout of outrage this morning after calling Brzezinski “crazy” and said she had been “bleeding badly from a face-lift” when he refused to see her in December. Brzezinski hosts the MSNBC show “Morning Joe” with Joe Scarborough.

“I heard poorly rated @Morning_Joe speaks badly of me (don’t watch anymore),” Trump said. “Then how come low I.Q. Crazy Mika, along with Psycho Joe, came to Mar-a-Lago 3 nights in a row around New Year’s Eve, and insisted on joining me. She was bleeding badly from a face-lift. I said no!”

“This is not okay,” Republican Representative Lynn Jenkins of Kansas said on Twitter. “As a female in politics I am often criticized for my looks. We should be working to empower women.”

This is not okay. As a female in politics I am often criticized for my looks. We should be working to empower women. https://t.co/sV6WDE0EUD

— Lynn Jenkins (@RepLynnJenkins) June 29, 2017

A senior vice president at NBC News, Mark Kornblau, also responded to the president’s attack: “Never imagined a day when I would think to myself, ‘it is beneath my dignity to respond to the President of the United States.’”

Never imagined a day when I would think to myself, “it is beneath my dignity to respond to the President of the United States.”

— Mark Kornblau (@MarkKornblau) June 29, 2017

According to Bloomberg, the White House defended Trump’s remarks.

“I don’t think that the president’s ever been someone who gets attacked and doesn’t push back,” Sarah Huckabee Sanders said Thursday on Fox. “This is a president who fights fire with fire and certainly will not be allowed to be bullied by the liberal media and the liberal elites within the media or Hollywood or anywhere else.”

Fox puts out a transcript of Sarah Huckabee Sanders interview from this AM http://pic.twitter.com/aVjZNQ2CIq

— Ben Jacobs (@Bencjacobs) June 29, 2017

As expected, the Democratic National Committee ripped into President Trump saying his “bullying tweets are an attack on women everywhere.”

“Trump’s bullying tweets are an attack on women everywhere,” the DNC said. “From his Twitter slurs to his policies, we have a president who continues to show us he has no regard for women and whose comments demean the office he holds.”

But Mika’s response was perhaps the most appropriate so far:

http://pic.twitter.com/8YhzcCUwM1

— Mika Brzezinski (@morningmika) June 29, 2017

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Ahead of next week’s G-20 summit in Hamburg, Germany, chancellor Merkel had some fiery words about her two least favorite topics: Donald Trump and Brexit. In a speech to lawmakers in Germany’s lower house of parliament on Thursday, Merkel said that “the world has become less united” and acknowledged that discussions at the G-20 meeting in Hamburg on July 7-8 “will be very difficult.” Quoted by Bloomberg, Merkel said that “the discord is obvious and it would be dishonest to paper over the conflict.”

The unexpectedly confrontational posture comes as Germany is set to host world leaders including President Donald Trump and Russia’s Vladimir Putin, who are expected to hold their first head-to-head meeting in Hamburg, although the details have not yet been ironed out. Also present will be China’s Xi Jinping and Merkel’s nemesis, Turkey’s president Erdogan, with the meeting taking place “amid a global shake-up that threatens much of the international order on issues established since World War II. On the agenda for the meeting are free trade, climate change and migration.”

If recent G-20 summits are any indication, next week’s meeting is likely to end in confusion and even more fingerpointing, with little in terms of consensus and even shorter communiques.

Aware of the upcoming dissensus, to use a word coined by Deutsche Bank, Merkel took a swipe at Trump’s “America First” rhetoric, saying that nations turning to isolation and protectionism are making a serious mistake and showcased a renewed “spirit of unity” in the European Union after the U.K. decision to exit.

All the same, the G-20 takes place “amid a particular set of challenges,” she said. “I’m convinced that we need the G-20 more urgently than ever before, because we can only move things together,” Merkel said. “Whoever believes that you can solve problems through isolation and protectionism is making a grave error.”

However, as Bloomberg notes, the German leader reserved her most dramatic language for the Paris climate treaty after Trump pulled out of the global accord aimed at confronting climate change, which Merkel called “irreversible and not negotiable.”

“We want to tackle this existential challenge and we can’t and we won’t wait until the last person on earth is convinced of the scientific basis for climate change,” Merkel said slamming Trump’s recent pullout from the Paris accord.

Merkel also accentuated the recent geopolitical pivot, in which Germany has distanced itself from its formerly staunchest allies the US and UK, and toward France:

In response to Trump’s inward shift, Merkel played up new French President Emmanuel Macron as an ally, saying the German-France axis will drive forward European unity, “regardless of Brexit.” She is hosting Macron in Berlin on Thursday along with European leaders including the U.K.’s Theresa May and Paolo Gentiloni of Italy to align their position ahead of the G-20.

 

“It’s clear to both of us that German and French interests are extremely closely linked when it comes to Europe’s future,” she said.

And while the G-20 meeting will likely end up a flop, one wildcard remains: China. While Merkel has reached out to Beijing as a partner on climate change and free trade, she’s also warning Chinese investors that they may face restrictions in Europe. 

Germany’s government is “thinking about defining industrial sectors of strategic importance for Europe,” Merkel said in an interview with business weekly WirtschaftsWoche published Thursday. “For instance, we decided to resume major investments in microchips. If countries like China want to buy up what was just built up with a lot of subsidies, we have to react.”

Ironically, in the “new new world order”, China has emerged, at least in its own eyes, as the grand champion of free trade hoping to fill the void left by the “protectionist” US, in the process growing it regional and global influence. Which is ironic because China still remains among the world’s most trade protectionist regimes, and if Merkel is hoping to pivot toward China as the next great source of trade, she is set for a major disappointment.

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While the public’s attention is keenly focused on whether Illinois will reach a budget deal in the next 2 days ahead of the next fiscal year end which begins on July 1, avoiding the first ever downgrade to junk for a US state as the state piles up some $15 billion in unpaid bills and now owing more than $800 million in interest on the unpaid balances alone, the financial peril facing Connecticut is just as dire. We laid out the big picture one month ago in “Connecticut State Capital Prepares For Bankruptcy Amid Collapse In Hedge Fund Revenue.” And now, as the state rushes to iron out its own budget deal ahead of the June 30 deadline, another major hit for the fiscally challenged state has emerged because one of the state’s most reliable sources of corporate tax revenue, Aetna, is leaving Hartford and moving to New York.

According to the NYT, Aetna, the insurance giant founded in Hartford, where it has been for the past 164 years, announced Thursday that it would move its headquarters to New York City despite intensive lobbying efforts by Connecticut officials. The move is a blow to the company’s hometown, which is facing severe financial problems, and a potential boon for Aetna, which stands to receive $24 million in tax breaks over the next decade, among other benefits, for its new headquarters in the Chelsea neighborhood of Manhattan.

The relocation, which involves 250 current and new executive and digital jobs, bolsters New York City’s vision of itself as an emerging digital powerhouse, but also continues the erosion in Connecticut of an industry that has long been an economic engine there. The number of workers employed in the insurance industry in Hartford and the surrounding area has plunged to 37,000 this year from over 60,000 in 1990, according to federal statistics.

According to Empire State Development, New York State’s economic development agency, Aetna will invest $89 million to transform 145,000 square feet in a building on Ninth Avenue into its new home.

The decision to move from CT was likely not easy, although in the end NY provided enough incentives to management to make the switch: efforts to lure the company were highly competitive — Aetna considered numerous cities for its new home, but in the end New York offered one of the most attractive deals. Besides the state tax credits, which are based on the number of new jobs Aetna creates, the New York City Economic Development Corporation will provide nearly $10 million worth of incentives through a combination of property and sales tax credits, among other benefits.

The move is a coup for Mayor Bill de Blasio who said that “New York City is where talent and technology come together” adding that “we’ve never been stronger.’’

The decision comes as a double blow to Hartford, which had agreed to match the package after news broke this year about Aetna’s plan to move, according to the administration of Connecticut’s governor, Dannel P. Malloy. But it was not meant to be: “the company places greater emphasis on creating digital tools for people to manage their health care, being in New York City, with its large reservoir of talent, seemed vital to the company’s future” said Mark T. Bertolini, Aetna’s chairman and CEO.

New York provides “the ecosystem of having people in the knowledge economy, working in a town they want to be living in, and we want to attract those folks, and we want to have them on our team,” Mr. Bertolini said in an interview. “It’s very hard to recruit people like that to Hartford.”

 

“It is a difficult decision,” Mr. Bertolini added. “We have continued to work with the governor and mayor of Hartford to try and improve the quality of life in the Hartford area, but that is too slow in coming.”

While Aetna is moving its headquarters out of the state, about 5,000 employees will remain in Connecticut, although it is unlikely they will remain in their seats for long.

Meanwhile, realizing just how precarious the situation is for the troubled state, a spokeswoman for Gov. Malloy quickly came to Hartford’s defense.

“While Hartford may not be New York City, we are proud of the city’s revitalization,’’ the spokeswoman, Meg Green, said. “Hartford provides a strong foundation for any company in the insurance sector, large or small. From a very deep bench of top insurance talent, to incredible school systems and a high quality of life for employees, Connecticut remains the insurance capital of the world for good reason.”

For Hartford, losing Aetna, a company with a history closely linked to the city (a son of the founder served as the city’s mayor), is not just a crushing blow in terms of revenue, but leaves it with just one major insurance company.

That company, the Hartford Financial Services Group, which has been in Hartford for more than 200 years, isn’t going anywhere, according to its chairman and chief executive, Christopher J. Swift, unless of course some Chinese conglomerate comes in and swoops it up once the moratorium on outbound M&A ends.

The good news, at least for now, is that Hartford remains “bullish on the city”, where recent real estate developments could help reverse its economic slide. “We are encouraged by the early signs of revitalization in the city and the more honest assessment and discussion of priorities in light of fiscal realities at the city and state level.” Mr. Swift said. “We are committed to the city, and the state of Connecticut.”

He may change his mind soon, especially if – as some have speculated – a bankruptcy for Connecticut is imminent.

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#mce_temp_url#

Tech has been a market leader for many a year, as it has been much stronger than the broad market and small caps. Could this trend be about to change? Whether it changes or not, Tech does face a key Power of the Pattern test, at this time!

Below looks at the Nasdaq 100 index over the past four years-

 

CLICK ON CHART TO ENLARGE

The trend remains up in tech. The rally off the 2016 lows, now has the NDX testing the top of this rising channel at (1). A 2-year rising support test is in play this week at (2), creating a tight jam between resistance and support. Tech bulls would prefer this rising support line holds!

 

CLICK ON CHART TO ENLARGE

Tech has been stronger than small caps for years. Potential the ratio could be creating a double top at (1). 7-month rising support test in play at (2). If the ratio would break support, it would reflect that small caps are reflecting strength over tech.

 

 

This information is coming to you from Kimble Charting Solutions.  Home of the Power of the Pattern where we provide concise, timely and actionable chart pattern analysis and commentary so in very little time you know the pattern at hand and action to take.   

 

 Send us an email if you would like to see sample reports or a trial period to test drive our Premium or Weekly Research

 

Website: KIMBLECHARTINGSOLUTIONS.COM

 

Questions: Email services@kimblechartingsolutions.com or call us toll free 877-721-7217 international 714-941-9381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Yesterday's 'dead cat bounce' in FANG stocks has been erased as broad-based weakness stemming from increasing recognition of hawkish central bank chatter is hitting stocks and bonds. Bank stocks bounce after stress test 'success' are saving some indices from bigger losses.

FANG stock erased yesterday's gains…

Bank stocks bounced overnight and remain green but are fading as the day progresses…

 

All major indices are in the red with The Dow holding up better as Nasdaq is hit hard…

 

And Europe is in trouble too…

 

And bonds are being hit too…

 

“Markets are quite nervous about central banks,” said Andrea Tueni, a trader at Saxo Bank. “There is a kind of hawkish pivot by global central bankers that seems to have come in concert”

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Authored by Dave Forest via OilPrice.com,

South Africa’s chamber of mines officially filed suit this week to block the country’s challenging new mining charter. But elsewhere in the world, some of the biggest investors in natural resources are ramping up their financial commitments — to a new target region for mining and energy deals.

Latin America.

Specifically, Brazil. Where government officials announced that a major new infrastructure fund backed by China will begin accepting investment proposals this week.

The $20 billion fund was unveiled late last year. With Chinese backers committing $15 billion of the total funds, and the balance provided by Brazilian and international banks.

The focus is infrastructure to speed resource development across Brazil. With officials saying the fund will focus on rail projects, particularly those that link agricultural regions for crops like soy and corn to ports — where these commodities can be shipped abroad.

The move confirms a trend that’s been crystallizing over the last year: a big move by China into the resource sector of South America. Coming on the heels of major mining deals for Chinese firms in places like Argentina.

Those deals have expanded China’s resource influence on the continent — moving outside of initial Chinese investment destinations like Peru and Ecuador. Showing that big investors like what they see in this part of the world, and are pursuing more growth opportunities here.

Brazil however, has been notably absent from Chinese plans up until recently. With even the high-impact oil sector here seeing few Chinese companies involved in projects.

That now appears to be changing — given a slew of projects proposed by Chinese entities in Brazil over the past year. Including a $10 billion “dollars for oil” loan between China Development Bank and Petrobras.

The new $20 billion fund will accelerate China’s influence in Brazil. And could be beneficial to resource projects here — which can piggyback off new rail and other infrastructure to move supplies of minerals, petroleum and agricultural goods to market. Watch for specific projects approved for development by the fund.

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