29 November 2013
• According to a survey of over 900 global investors conducted by Barclays, the prospect of the Fed tapering asset purchases is by far the main preoccupation. The consensus view among investors is for the Fed to start tapering in March 2014, with the Fed’s 1st interest rate hike expected in the 2nd quarter 2015. Meanwhile the majority of respondents expect the ECB to embark on further monetary policy easing, either through a Very Long-Term Refinancing Operation (VLTRO) providing discounted funding to the banking system, or other non-conventional easing. The overwhelming majority of respondents feel equities will offer the best returns in the next 3 months, in contrast with reduced enthusiasm for commodities and low risk bonds. The outlook suggests a continued asset allocation shift from safe haven bonds into equities. Confidence in equities is attributed to growing confidence in the global business cycle, which could drive “riskier” asset prices in the next few months.
• The subdued global inflation outlook stems from a combination of significant spare capacity in manufacturing and service sectors, as well as weak commodity prices. The recent agreement by Iran to halt its uranium enrichment program in return for relief on economic sanctions, should add further downward momentum to commodity prices in particular the oil price. With the threat of inflation diminishing central banks can afford to focus instead on delivering stronger growth and improved employment prospects. This is especially true in the US where the Fed is unlikely to taper its asset purchase programme before March 2014 or raise its benchmark interest rate before mid-2015. Meanwhile, inflation is certainly not visible in Japan which is striving to end its decade-long spiral of deflation, and the Eurozone where sub-1% consumer price inflation (CPI) is also raising the threat of deflation.
• Building permits for future US home construction increased in October by 6.2% month-on-month to an annual rate of 1.03 million, the highest since June 2008 and well above the 930,000 consensus forecast. The data suggests the recent increase in mortgage interest rates has not derailed the housing recovery. According to Harm Bandholz, chief US economist at UniCredit Research in New York: “These reports are unequivocally in line with our view that the housing recovery remains well on track, as the lack of supply will continue to support both construction activity and house prices.” The S&P/ Case Shiller composite index of 20 metropolitan areas shows home prices increased in September by 13.3% year-on-year the strongest gain since February 2006. The Federal Housing Finance Agency US house price index has posted monthly gains for 20 consecutive months. Improved household balance sheets, fueled by a combination of deleveraging, improving equity markets and rising real estate wealth should provide a solid boost to household expenditure over coming months.
• The Conference Board US consumer confidence index unexpectedly declined from 72.4 in October to 70.4 in November, a 7-month low and well below the 72.6 consensus forecast. While the current conditions index declined only slightly from 72.6 to 72.0 the forward-looking expectations index suffered a more ominous decline from 72.2 to 69.3. According to Lynn Franco, director of economic indicators at the Conference Board: “When looking ahead six months, consumers expressed greater concern about future job and earning prospects, but remain neutral about economic conditions.” Employment expectations measured by the percentage of respondents who think jobs are plentiful minus the percentage that think the opposite, improved slightly from -23.3 to -22.2 but remained in negative territory indicating the majority still view jobs as hard to find. Respondents that were optimistic on the jobs front fell from 16% to 12.7% the lowest since November 2011.
• The Conference Board US leading indicator, a gauge of the economic outlook for the next 3 to 6 months, increased for a 4th straight month in October. Following an upwardly revised 0.9% month-on-month increase in September the index increased a further 0.2% beating the 0.0% consensus forecast. The year-on-year gain now stands at 4.4% the highest since late 2010. The gains are attributed to rising equity markets, higher home values and easier access to credit. According to Conference Board economist Kathy Bostjancic the index is consistent with an acceleration of GDP growth from an estimated 1.6% in 2013 to around 2.3% in 2014. Growth would be even stronger except for the “ongoing caution of businesses that continue to keep tight reins on capital expenditures.”
• Core capital goods orders, excluding volatile transportation and defense orders, unexpectedly fell in October by -1.2% on the month marking the 2nd straight monthly decline, well below the 0.6% consensus forecast increase. The rolling 3-month-on-3-month annualised rate deteriorated further from -7.45 to -8.8%. The report conflicts with recent surveys which suggested investment spending has been picking-up. Total durable goods orders fell by -2.0% attributed to a -15.9% decline in commercial aircraft orders. However, this component should rebound strongly following the Dubai air show at which Boeing secured orders worth around $100 billion. Most orders are for the new 777X model due to begin production in 2017.
• Jobless benefit claims unexpectedly fell in the past week by a further 10,000 to a seasonally adjusted 316,000 well below the 330,000 consensus forecast. The decline caused the less volatile 4-week moving average to decline from 339,000 to 332,000, consistent with solid job gains ahead. The data suggests October’s payroll gain, when a significantly higher than expected 204,000 jobs were added, may not have been an aberration. However, the timing of the Thanksgiving holiday may have been a contributing factor behind the jobless claims decline with the Labor Department noting difficulty in seasonally adjusting the data.
• The China Banking Regulatory Commission (CBRC) imposed new lending restrictions in a continuation of recent measures to tighten lending oversight. Banks will be banned from evading lending limits by moving assets off balance sheet to financial institutions with lower capital requirements. The proposed regulations will also place a cap on banks’ total lending to other financial institutions. Meanwhile, the CBRC warned last week that one or two small banks may fail next year due to their over-reliance on short-term interbank borrowing. According to Moody’s rating agency mid-sized Chinese banks got 23% of their funding and capital from the interbank market compared with 9% for the largest state-owned banks. Moody’s forecasts a further increase in non-performing loans as weaker borrowers find it steadily harder to refinance. Non-performing loans at Chinese banks increased for an 8th straight quarter in the quarter ended September, extending the longest cycle in over 9 years. While concerning, non-performing loans are still a very manageable 0.97% of the nation’s outstanding loans.
• Japan’s consumer price inflation (CPI), excluding perishables but including energy, increased in October by 0.9% year-on-year marking the 5th straight increase and the strongest gain since November 2008. Core CPI excluding food and energy increased 0.3% the strongest gain since August 1998, indicating that Japan is gradually emerging from 15 years of deflation. The Bank of Japan (BOJ) acknowledges that the weakening yen’s upward pressure on import costs may abate next year but remains confident that the real economy will gain momentum in coming months. It does however remain uncertain whether companies will raise wages next April in response to the government’s planned sales tax increase. The BOJ announced a readiness to expand its monetary easing programme to counter any threat to its inflation pledge.
• Japan’s retail sales increased in October by 2.3% year-on-year above the 1.8% consensus forecast, marking the 3rd straight increase. Durable goods retail sales increased a robust 5.3%, marking the 1st gain in 2 months and the largest since July 2011, although demand may be unnaturally high ahead of next April when the sales tax is scheduled to increase from 5% to 8%. Encouragingly, food and beverage sales marked the 8th straight increase signaling a broad-based recovery in consumer sentiment. However, the government’s consumer confidence index declined from 45.4 to 41.2 attributed to falling disposable income. The average real income of salaried workers’ households fell a real -1.3% on the year. The Abe government has continually stressed the need for wages and salaries to increase in order to beat deflation on a sustainable basis.
• The European Commission’s Eurozone Economic Sentiment Indicator (ESI) increased in November for a 7th consecutive month, from 97.7 to 98.5 above the 98.0 consensus forecast. The data is encouraging, consistent with annual GDP growth of around 1%, a marked improvement on the 0.3% growth recorded in the 3rd quarter. The gains are attributed to strong service sector sentiment and a healthy rise in the export orders index, which is consistent with annual export growth of around 10%. While consumer confidence fell, its 1st decline in a year, it still signals an annual increase in household spending of around 1%. Employment expectations also improved indicating unemployment may soon level out. The ESI data shows sentiment increased in both core and so-called periphery economies. Notably, Italy’s ESI gained strongly from 92.0 to 93.9 a significant improvement on its July level of 89.5.
• Germany’s Ifo business climate indicator recovered strongly in November, more than reversing the falls of the 2 previous months, increasing from 107.4 to 109.3 well above the 107.7 consensus forecast. Both the current conditions and expectations indices rose to new cycle highs. The expectations index increased sharply from 103.6 to 106.3 suggesting an improving outlook for the months ahead. The data is consistent with robust annual GDP growth of around 3%, a significant improvement on the 1.3% growth recorded in the 3rd quarter. Meanwhile the GfK forward-looking consumer confidence index increased from an upwardly revised 7.1 in November to 7.4 in December its highest level since August 2007. The survey found that consumers’ income expectations were at their highest since March 2001 and willingness to spend hit a 7-year high.
• As expected the initial estimate for UK GDP growth for the 3rd quarter (Q1) was left unrevised at 0.8% quarter-on-quarter, the fastest growth in in over 3 years and the fastest growth among the six G7 countries which have so far released data. The rate of growth has been accelerating form -0.3% in Q4 2012, 0.4% in Q1 2013, and 0.7% in Q2. Although household consumption accounted for over 60% of the growth there are signs of a broadening economic recovery. Investment spending increased 1.4% on the quarter, the fastest since Q1 2012. Exports unfortunately fell -2.4% on the quarter, which combined with an increase in imports, shaved 0.9 percentage points from the GDP figure. Recent data indicate GDP will continue expanding at a robust pace in Q4, helped by an expected recovery in exports and signs that companies are beginning to invest their cash-piles. According to consensus forecast GDP should grow by around 2.5% in 2014.
• In a surprise move, Bank of England (BOE) governor Mark Carney announced a decision to curb the BOE’s Funding for Lending (FLS) scheme’s home loan incentives. While stating that the housing market is not an immediate risk to financial stability he admitted some concern amid the near-7% increase in house prices over the past 12 months and forecasts for a 10% rise in prices in 2014. The FLS provided an immediate boost to mortgage lending when it was launched in August 2012. The scheme will no longer be available for home loans, instead focusing exclusively on small business loans. In addition, the BOE announced it was putting “several actions in train that will guard against a build-up in vulnerabilities” including new mortgage affordability stress tests to be introduced from April 2014.
FAR EAST AND EMERGING MARKETS
• South Korea’s monthly current account surplus increased to a new record high of US$ 9.5 billion in October well above the $6 billion consensus forecast. Exports have continued to grow strongly rising by 4.4% on the month, helped by the rising premium of Korean brands internationally. Stronger shipments were recorded in autos, mobile devices and semiconductors, as well as a rising inflow of service receipts from civil engineering and power generation companies abroad. The current account surplus as a percentage of GDP is on track to reach 5.5% in 2013 and 4% in 2014. The continued surplus should boost the Korean Won which has appreciated by over 7% against the US dollar since the end of June. GDP growth is steadily building momentum, from 2.0% in 2012, to a forecast 2.8% in 2013, and 3.8% in 2014.
• Thailand’s manufacturing production fell in October by a greater than expected -4.0% on the year, worse than the -2.9% consensus forecast. Exports also fared badly declining -0.7% on the year in contrast to the consensus forecast 0.7% increase. Meanwhile rising political tension has hurt Thai financial markets, with an escalation of anti-government protests in the past week. However, tension may abate following the survival by government of its no-confidence vote. The foundations for an improvement in economic outlook also remain in place. Although the National Economic and Social Development Board cut its 2013 GDP growth estimate from 3.8-4.3% to 3.0% it forecasts a recovery to 4.8% growth in 2014. Growth prospects should benefit from the central bank’s unexpected 25 basis point interest rate cut this week to 2.25%.
• The Philippines grew GDP in the 3rd quarter (Q3) by 7.0% year-on-year down from 7.6% in Q2. On a quarter-on-quarter annualised basis growth slowed to 4.3%, the slowest pace in over a year, from 6.5% in Q2 and 9.1% in Q1. Disruption from Typhoon Haiyan, the strongest recorded storm ever to make landfall leaving 5,5000 people dead and displacing 3.5 million, will cause GDP growth to slow further during Q4. However, growth in 2014 should receive a boost from reconstruction. Meanwhile, the nation’s fundamentals remain favourable according to Trinh Nguyen, an economist at HSBC in Hong Kong: “Inflation is benign, credit is cheap, and domestic demand is strong.” The central bank is likely to see past the expected supply-side impact on inflation, leaving the benchmark interest rate at its current accommodative level of 3.5%.
• SA’s GDP growth slowed in the 3rd quarter (Q3) to 0.7% quarter-on-quarter annualised, a steep decline from 3.2% in Q2 and well below the 1.3% consensus forecast. This marks the weakest growth in 4 years, caused mainly by the -6.6% fall in manufacturing output owing to industrial action in the automotive sector. Other sectors also suffered a notable slowdown including finance and real estate, wholesale, retail and accommodation, and electricity and gas sectors. Bright spots included the mining sector which rebounded from its -5.4% Q2 contraction with growth of 11.4%. Agriculture also rebounded after 2 consecutive quarters of contraction with growth of 3.6%. GDP is expected to accelerate in Q4 as manufacturing activity normalizes although not enough to boost full year figures. For 2013 GDP is unlikely to exceed 2%, placing pressure on the SA Reserve Bank (SARB) to maintain its accommodative monetary policy. The SARB is likely to keep its benchmark interest rate (repo rate) unchanged at 5.00% for an extended period.
• Growth in private sector credit extension increased slightly from 7.5% year-on-year in September to 7.6% in October although well below the 8.0% consensus forecast. All major categories of credit showed either no change or a slowdown in growth over the month. The general trend in money supply and credit growth is likely to remain lackluster in the months ahead due to subdued economic activity, adding to pressure on the SARB to keep the benchmark interest rate at its current record low level.
• Producer price inflation (PPI) decelerated from 6.7% year-on-year in September to 6.3% in October in line with expectations. The decline is attributed to a fall in food price inflation, accounting for about a quarter of the PPI index, from 6.8% to 5.2%. Lower petroleum product inflation also contributed following the cut in the petrol price in October. It is notable that PPI for many imported items is not being reflected in consumer price inflation (CPI) data suggesting manufacturers and retailers are probably absorbing the cost increases and incurring margin pressure. PPI is likely to stay above 6% for as long as the rand maintains its weakening trajectory, although fortunately there is little sign so far of PPI translating into elevated CPI.
KEY MARKET INDICATORS (YEAR TO DATE %)
|JSE All Share||
|JSE Fini 15||
|JSE Indi 25||
|JSE Resi 20||
• The US dollar has again dropped below the key $/€ 1.30 level versus the euro suggesting a continuation in the dollar’s long-term weakening trend.
• The rand has fallen through successive support levels at R/$9.30 and R/$9.50 and now R/$10.0 suggesting a potential acceleration in the rand’s depreciation.
• The recent sharp increase in the JP Morgan global bond yield suggests the major bull trend which started in the early 1980s may be close to exhaustion. However, there is unlikely to be a major bear trend as the deleveraging phase is still in its infancy.
• The US 10-year Treasury yield is unlikely to accelerate through the major support line from 2007, currently at around 2.7-2.9%. Oversold and diverging momentum indicators suggest the yield is at a peak.
• The longer dated R186 SA Gilt yield has increased in 2 even steps from 7.8% to 8.8% since mid-July. Another step upwards is projected to the lower 9.00s but this is likely to mark the peak in yield.
• Ultra-loose central bank monetary policy has led to increased demand for riskier assets. The Leuthold risk-aversion index is trading close to 30 year lows.
• US and global equity markets have risen in many cases to all-time record highs suggesting a strong bull trend and further gains in the near-term. However, the MSCI World Equity index is in the 5th and final wave of a rising-wedge formation. A rising-wedge formation is a typical trend-ending signal. European equities are breaking out of 5-year resistance levels and are set to outperform US markets.
• The Nikkei exhibits the most bullish pattern in spite of the recent 20% correction from recent highs.
• The Coppock Curve is a long-term momentum indicator with an excellent track record in identifying major market bottoms. It shows that the March 2009 low was a long-term low unlikely to be broken.
• The Brent crude oil price has broken above key resistance at $110 suggesting further near-term gains to $120, although the geo-political risk premium is quite high at an estimated $8 per barrel, suggesting recent gains are not sustainable over the longer-term.
• Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below key support of $7,500 suggesting a downside move to the 2011 low of $6,500.
• The Economist’s world food index has tripled since its base in 1999-2001 and continues to threaten rising global food price inflation. However, agricultural prices have fallen steadily since mid-2012 which suggests a gradual leveling-off in the strong long-term upward trend.
• Gold has reversed recent losses but needs to break back above the key $1550 level to restore the bull trend.
• The All Share index has broken to new highs suggesting the long-term upward trend is intact. However, the index is trying to break up through the top of a channel which has been in place since 1987. Since the Industrial-25 index, which has been the key driver of the All Share index, is beginning to lose momentum, it is doubtful that the All Share will maintain its upward break. A return to the middle of the channel would bring the All Share index back to 33,300, equivalent to a decline of around 27%.
• This year’s Nobel Prize for Economics was shared between Eugene Fama, Robert Shiller, and Lars Hansen. Fama’s thesis is based on the efficient market hypothesis which states that all publicly available information is already reflected in stock prices. Shiller’s thesis is in stark contrast, that prices are driven by human emotion rather than rational pricing. This makes asset price bubbles a regular feature of the markets. The driving force of markets is summarized succinctly in the Investor Psychology Cycle below.
• Although difficult to pinpoint exactly where we find ourselves on the chart, it is worth noting that the All Share index will have gained for 5 straight years by the end of the year, barring any unforeseen correction. The index has increased from a low of 17,000 in 2009 to a recent all-time high of 46,000, with the price-earnings multiple of the index more than doubling from under 9x to 19x. Inevitably we may be approaching the “Greed & Conviction” stage.
Contempt: Usually marks the beginning of a bull market, the best time to buy shares.
Doubt and suspicion: Anxiety ridden, markets are sceptical about the likelihood of recovery.
Caution: Markets show sign of recovery but most investors remain cautious.
Confidence: Caution gives way to new found confidence as share prices move upwards.
Enthusiasm: All stocks go up on a rising tide. Contrarian investors may well take profits.
Greed and conviction: Everyone is talking about the stock market. New listings abound.
Indifference: Warnings that shares have become expensive are ignored.
Dismissal: The change in cycle is dismissed as a mere short-term correction.
Denial: There is prevailing view that the market will turn around.
Fear, panic and contempt: Capitulation sets in leading to panic, desperation and contempt.
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