(C) 2012 – Ricochet Alternative Asset Management
Market activity over the recent weeks focused on whether the Fed will pump more liquidity into the market via quantitative easing (QE3). The expectation of growth as reflected in macroeconomic indicators have been mediocre to poor. Manufacturing in the U.S. as measured by the Chicago PMI & the ISM index indicate decreasing marginal growth (microeconomics effect: diminishing marginal returns on ROA) with any further contractions reflecting negative macroeconomic manufacturing growth.
However, it’s worth noting that the global economy as reflected in the global markets, are under tremendous systemic and non-systemic stresses. As such, any positive growth in the U.S. achieved during the period of rising energy/food inflation & a falling USD (falling exports..), albeit diminishing & marginal, is still a reason for optimism. U.S. exports* (Apr, 2012) were at a 2 year high given a relatively strong USD* over the period.
Given a strong dollar, further demand for U.S. exports at the current (or slightly higher) USD dollar index (DXY), and the sentiment around entrepreneurial growth going forward in the U.S., should give rise to consumer purchases of U.S. manufactured non-durable goods increasing through the summer months. The consumer non-durables generally are the items that benefit from the renewed sense of pride in nationalism for American manufactured items & known brands.
The non-durables market that reflects such sentiment include the Industrials sector, Machinery & Farm-Diversified & Hand-tools-Battery Systems, etc. Companies similar to Deere & Co. (John Deere) (Ticker: DE), Stanley Black & Decker (SWK), Energizer Holdings (ENR), Mosaic Co. (MOS), Cummins Inc. (CMI), 3M (MMM). Other sectors may benefit as well, including: Retail-Bedding (Bed Bath & Beyond, BBBY); Retail-Restaurants (BJ’s Restaurants (BJRI); Integrated/Gas-Oil (Conoco Phillips, COP); Retail-Drug Store (CVS, WAG), & Consumer-Foods (General Mills GIS, Kellogs Co., K)
The Dow lost -2.70% last week as the index traded down marginally for the week until the major sell-off on Friday (-2.22%). The non-farm payrolls came in much weaker as the market expected 150k & I (optimistic) pegged the number at 120k (actual: 69k non-adjusted), which provoked the selling en masse fashion. The NASDAQ, losing -3.17% for the week, following the Dow, traded down marginally until Friday’s major sell-off (2.82%). The S&P 500 lost -3.02% for the week, trading down marginally with a sell-off on Friday (-2.46%).
Given the weakness in China & Japan along w/the banking crisis in Spain, the sovereign & banking crisis in Greece, and the Italian Central Bank holding in excess of €200 billion in peripheral European debt, the market required a poor non-farm payrolls number to sell-off. The market ostensibly over reacted and buying on the open on Monday is very probable given the strength of the dollar and expectations of sectoral strength in U.S. markets, including technology. Capital is expected to transition from gold back into U.S. equities over the coming weeks.
Factory orders, trade balance, and unemployment numbers are important to U.S. markets in the coming week.
Central & South America
The IPC (Mexico) closed down -0.81% for the week as the index closed up Monday and rose sharply on Tuesday. After trading marginally lower on Wednesday, the index closed down Thursday (-0.52%) and sold-off significantly on Friday (-1.82%). The IPC is subject to global macro risks as the index is comprised primarily of communications stocks (27% of weighting).
The IBOVESPA (Sao Paulo) closed down -1.95% for the week as the trading movement for the week is a short-tail upward buying trend followed by an extended sell-off (2 days). The buying on Thursday, which erased Wednesday’s losses, were given back on Friday (-1.99%). The extended sell-off on Friday reflects global macro concerns regarding the climate for economic growth in the U.S. & Europe & concerns regarding export demand for Brazilian goods going into the summer as U.S. exports are higher and demand for U.S. goods in U.S. markets are expected to increase on the rising USDBRL for substitutable goods.
The MERVAL (Buenos Aires) closed down -5.34% for the week after experiencing downside tail-risk. The index closed up on Monday (+0.60%), followed by a sell-off lasting the rest of the week. The sell off reflects the interconnectivity of the Argentinian market w/global trade as well as the relative isolation of Argentinian earnings. As such, the stocks selling off included financials, metals, and mining. Uncertainty in the global equity markets will likely keep the index volatile and at risk-on of a major sell-off.
The FTSE closed down -1.71% for the week as the index sold off on Wednesday (-1.74%) after closing higher on Tuesday. Buying on Thursday proceeded the sell-off (-1.14%) on Friday.
The DAX closed down -4.57% for the week as the index traded down marginally on the close Wednesday after closing at its highest point of the week on Tuesday. Thursday closed down marginally from Wednesday’s close and Friday’s sell-off was a downside tail-risk (-3.42%). The German sell-off reflected the relative sentiment of growth going forward given the perceived slowdown for German exports and the instability of the peripheral euro region as Germany is facing pressure to undersign for the peripheral debt load.
The CAC 40 (Paris) closed down -3.20% as the index followed roughly the same trading pattern as the DAX, with a major sell-off on Friday (-2.21%). The growth forecast for France is essentially nil however five years out one wonders if they’ve missed a tremendous buying opportunity as France may shift gears and move more toward growth measures generating inflation and precipitate rising interest rates.
The BEL-20 (Brussels) closed down -3.09% as the index traded up on Tuesday (+0.59%) followed by a sell-off Wednesday through Friday (-3.58%). The smaller European markets will feel the crunch as the larger euro economies continue to contract. The Belgian market will be one to watch going forward into the approaching weeks.
The ATX (Vienna) closed down -3.06%. Similar to the IBOVESPA, the ATX has a symmetrical trading pattern to which Monday and Wednesday’s movement are very similar as well as Tuesday (steeper slope) and Thursday’s movement. The relative downward volatility of the index relative to the BEL-20 signifies a problem with the fundamentals underlying the economy, notably, the exposure to contagion. Belgian CDS are rising again indicating an increase in default expectations although intervention is expected. That said, the markets are aware of the growth aspect underlying the fundamental analysis of the BEL-20 & ATX. Italian CDS are also rising, reaching 52wk highs as uncertainty looms. The Italian Central Bank holds >€200 billion in peripheral debt.
The SSMI (Switzerland) closed down -1.50% for the week. Sideways trading on Monday spurred buying on Tuesday followed by gradual selling on Wednesday w/a sell-off Thursday & Friday (-2.12%). The Swiss market index (SMI) is still valued relative high in relation to competitive market indices. Given the level of uncertainty in Europe, the SSMI did not do too badly.
The ASE (Athens) closed up +3.45% as the index closed up significantly on a percentage basis for the week inclusive of Friday’s sell-off (-4.48%). The major buying occurred on Monday & Tuesday (+8.85%) followed with break-even trading activity over Wednesday & Thursday. The index also responded to positive sentiment surrounding German intervention as well as the simple fact that the index is down right cheap. As the euro drops, the prospect for the ASE rise regardless of whether Greece keeps the euro or reissues the drachma. The growth prospects going forward cannot get much worse relative to valuation of forward earnings.
Middle East, Asia & Far East
The TA 100 (Tel Aviv) closed up +0.06% for the week. The closing percentage is misleading given the volatility relative to movement of the index over the week. Monday’s close was in the green (+0.93%), Tuesday (-0.40%), Wednesday (-0.47%), Thursday (+1.08%), Friday (-1.07%). The market moved plenty but in the end, didn’t really move much. The volatility experienced in previous weeks not reflected as a function of tail-risk volatility (upside/downside) perhaps indicating less pressure around uncertainty of earnings going forward.
The BSE 30 closed down -1.56%. The index rose Monday & Tuesday (+1.36) followed by a sell-off commencing Wednesday and going until Friday’s close (-2.88%). India’s GDP declined to just over 5% from just over 9% previously to which the market decline is now a function of the lowered growth. India’s inflation above GDP growth (%), and falling interest rates (need to rise), counter intuitively may be actually bullish for Indian stocks however India is also reliant on commodity prices such as gold to which the BSE 30 index is highly and positively correlated to.
The Nikkei 225 closed down -1.63%. The index closed up Monday & Tuesday followed by slight selling on Wednesday then a major sell off on Thursday & Friday (-2.23%). The market is expecting BoJ intervention.
Hang Seng -0.83% The index remained essentially unchanged for the week on Wednesday’s close. Trading on Thursday & Friday reflect the percentage decline of market value. The index did not sell-off on Friday as volatility has been reduced over recent weeks. The PBoC is expected to ease further to devalue the yuan against the $ & €, which should promote buying in Asian markets.
The Straits Times closed down -0.98% as the index experienced a linear rise in selling on Monday & Tuesday (+1.05) followed by a sell-off commencing Wednesday through Friday’s close (-2.00%).
The TSEC (Taiwan) closed down +0.49%. The index movement throughout the week involved upside and downside tail-events. The open of the week experienced major buying on Monday & Tuesday, closing up 3.83%, followed by major selling on Wednesday & Friday, with index value dropping (-3.22%) and losing 84.1% of its weekly gain. There was buying on Thursday (+0.55%) before Friday’s sell off (-2.68%).
The JKSE (Jakarta) closed down -2.63%. The index movement remained relatively flat from Monday through Wednesday prior to Thursday & Friday’s sell-off (-3.02%).
The NZX 50 (New Zealand) closed down -0.98%. The index experienced a very interesting week. Friday’s U.S. jobs report and the renewed uncertainty surrounding slower global growth forced a market sell-off. The index closed down (-0.69%) on Monday, closed in the green (+0.75%) Tuesday through Thursday, followed by a sell-off on Friday (-1.04%). The market should rebound given global macro events in the coming week.
Commodities & Futures
Over the past week, NYMEX WTI & Brent crude oil price range(s) reflected the USDRUB trade, the higher USDRUB increases the dollar’s purchasing power in Russian oil markets as weaker global demand for Brent & WTI also force market dynamics to favor the U.S. as markets want to trade for the USD given the falling value of oil. Price movement of he USDRUB has correlated highly yet inversely to WTI & Brent, further weakness in Russia & the ruble, falling global demand for oil given the drop in global demand for energy/electricity has fallen as well.
Deflation, in the case of the U.S. markets is ostensibly good as the non-core inflation (energy) has fallen (which we know had been choking growth), as well core inflation which includes milk prices. Milk prices were higher in 2011 which ultimately slowed demand for milk and raising demand for milk substitutes. The USDA cut the demand forecast for milk as prices are expected to fall on lower demand. However, as prices fall, the quantity demand for milk will increase. Downward pressure on prices are good for consumers as real wage growth has remained stagnant over the recent economic crisis. Deflation acts as a sort of ‘raise’ for wage earners as purchasing power increases per dollar earned. Falling prices does however decrease tax revenues and creates a budget gap for government operating on sales and other tax revenues broadly received by prices in the economy. The deflation in core CPI can be ostensibly seen in the falling of the CMCI Food ETN Fund (FUD).
Pork and beef futures contracts trading higher with expiry’s at the end 2012. Open interest for orange juice futures are at 52 week highs on global supply concerns and of the Hurricane season in the U.S. Cotton demand at 2yr lows on supply hoarding and slow global demand for growth, which weighs down demand for commodities tied to consumer retail demand. Countries with large supplies of cotton can continue to produce without resorting to the global markets to procure additional cotton.
The U.S. treasuries continue to trade at historic lows (mind the bond ancients) as the U.S. 30yr yield will likely see 2.45% an the U.S. 10yr treasury 1.35%. The 2yr yield is essentially reflective of the U.S. government’s quick ratio – or ability to meet short-term debt obligations. The bond is trading near parity. The fed is likely to extend Operation Twist as interest rates are at modern historic lows and funding growth by buying back debt and issuing new debt at lower rates will finance growth with low maintenance costs and with a strong dollar. The U.S. debt markets will remain a safe haven trade given the strong dollar.
The Japanese 10yr bond yield continues to fall against a strong ¥ as the principal value approaches par. The Australian & New Zealand 10yr bond continue to see new lows on inflows as the principal values continue to climb. The bonds will continue to see inflows the coming week. The French 10yr bond remains the known unknown in peripheral Europe as the yield falls to 2.23% and the principal rises to over $106. The yield is higher than the German 10yr with similar principals. The Spanish 10yr is likely to hit 6.80% toward weeks end as the banking crisis continues with regard to recapitalization from the ECB.
The strong USD index (DXY) should remain above $82.80 for the week and continue the precipitous rise against the €. The ¥ continues to rise against the $ & € and further easing will likely not cease the rising valuation. The GBP will continue to fall against the $ ($1.50) and rise marginally against the €. The BoE is likely to commence with easing going forward to devalue the GBP and jump start U.K. exports. Easing from the BoE will boost European markets to which the ECB can focus on stabilizing peripheral Europe and directly stabilize the banking system and sovereign debt obligations rather than injecting liquidity into the markets. Given the focus on growth, the Fed would like to extend Operation Twist and get through the summer without initiating further QE measures. The Aussie will continue to weaken against export markets AUDUSD should hit $97.00 by mid-week, AUDEUR should retract toward €0.77, AUDJPY will fall against the ¥ to ¥73.20 by the weekend.
Thank you for reading and have a wonderful close to your weekend and a great week ahead.
Vidia – Founder/President, CEO/CIO – Ricochet Alternative Asset Management