Dark clouds gathering on horizon for UK
(by Arnaud Masset)
The UK March employment report, released earlier this morning, was rather mixed as the unemployment rate surprised slightly to the downside, printing at 4.6% versus 2.7% median forecast. However, the interesting part of the report is the effect of the strong inflation pressure that has been at the centre of the attention recently.
The report fuelled the BoE rhetoric that the recent pick-up in inflationary pressure will have negative effects on consumer spending as it will erode the purchasing power of Brits.
Regular pay adjusted for inflation contracted 0.2%. Just like the US, where real wages have been in negative territory since the beginning of the year fuelling worries about the ability of the world’s largest economy to maintain the pace of growth, the United Kingdom is facing another challenge to keep the growth engine from stalling.
Dark clouds are gathering on the horizon for the UK, especially against the backdrop of renewed optimism about a strong Europe following Emmanuel Macron’s election win.
OPEC rally runs out of steam
(by Arnaud Masset)
After hitting $50.39 on Monday amid the positive outcome of discussions between the oil ministers of Saudi Arabia and Russia, the price of a barrel of West Texas Intermediate crude for delivery in September returned to $48.92 on Wednesday.
Indeed the market’s enthusiasm following the decision to extend the supply cut deal until March 2018 was short-lived as investors got a reality check.
According to data compiled by Baker Hughes, US total oil and gas rig counts rose to 885, the highest level since August 2015, while total US oil rigs increased by 9, which brings the total to 712.
As already discussed last week, OPEC and its allies are in a difficult position as any effort to stabilise oil prices will actually benefit the US shale industry. US companies active in the exploration and production sector are ideally positioned to take advantage of the situation. Therefore we maintain our position of continued crude oil price gains, though modest, in the short-term. We believe it is very unlikely to see sustainable improvement in crude prices with US producers pumping like crazy while OPEC and its allies cut production. We need to see some significant improvements of the fundamentals to see a barrel of WTI above $60.
On Wednesday, the WTI extended losses to $48.38 (generic price), down 0.58% on the day, while its counterpart from the North Sea fell 0.35% to $51.47.
Fade risk inducing noise
(by Peter Rosenstreich)
Selling of risky assets shifted into high gear after a weak US session. The lack of real drivers has allowed noise around US politics to derail fundamentals optimism. The initial news of allegations that President Trump leaked classified information then demand ex-FBI Director James Comey pledge loyalty generated scant market impact.
Yet suddenly markets have created a theme to trade-off. Given the fact that there have been no structural shifts we suspect this current bout of risk aversion to be short lived. Our defining theory for 2017 has been to avoid hype and focus on fundamentals, which we will despite lots of red on the board.
US long end yields fell, flattening the curve slightly, as investors liquidated risk assets. The narrowing of US-JP yield differential gave JPY a broad based boost providing further effect of a global concern. Despite the choppy rally in volatility (which was going to happen regardless due to ultra-low levels) the economic data continue to support risk taking.
EU data indicated that growth momentum remains solid. US industrial production surged in April to its fastest pace since March 2014 (house building data disappointed slightly but from an elevated level). Only China's industrial output came in softer than expected, yet since controlled policy tightening was the primary culprit, deeper deterioration is unlikely.
While the Trump reflation story has taken a hit on lower expectation for his pro-growth agenda, we remain a buyer of EM FX in dips as the core themes (higher growth, low interest rates / vol, and fading protectionism) should support risk taking.
USD has been on the front of much selling as weaker CPI and strong EU data has shifted the balance of tightening expectations to Euro. The low USD position suggests that in our view markets are underpricing the Fed policy path. Improvement in economic data from now until 14th June will asymmetrical favour USD.
Japan: Growth is only spurred by QE
(by Yann Quelenn)
The future does not seem so bright for Japan when looking at fundamentals. The level of debt is astonishing (€8.6 billion debt at 0% interest rate) and the population is ageing. The debt now represents 250% of the GDP.
Inflation is still very weak and Japan's policymakers have been unable to spur it. Yet, growth has increased 1.7% in Q1 and retail sales have also increased 0.5%. The data since the start of the year has clearly outperformed expectations. However today’s data such as machine orders (-0.7 y/y) or industrial production (-1.9%) are clearly on the soft side.
What really matters is that the Bank of Japan is continuing its QE. The amount of debt it owns is not reimbursable. Social security spending is growing as the population is getting older. We believe this is actually very costly for Japan. The central bank must also keep its credibly and not default. At the moment, there is no reason for less QE as it would certainly uncover all Japan’s difficulties.
In the short-term, we bet on renewed demand for the yen as it seems likely the US economy, which we also believe is overestimated, will drive investors towards the land of the rising sun. When looking for an example, towards the S&P direction, if we remove big blue chips such as Amazon, Apple or Alphabet, the S&P is actually down.
We are certainly at an inflexion point. We reload our long USD/JPY towards 115.00 with a two-month horizon.