FIG Topics of Interest

 

11/20/18

The Trump administration is considering tighter curbs on technology exports, a step that Deutsche Bank AG says would have a “profound and long lasting adverse impact” on relations between the U.S. and China.
https://www.bloomberg.com/news/articles/2018-11-20/trump-threatens-high-tech-export-curbs-in-latest-swipe-at-china

A request for public comment, published Monday on the U.S. government’s Federal Register, asks if a list of new technologies that have national security applications -- from artificial intelligence to microprocessors and robotics -- should be subject to more stringent export-control rules. That would affect U.S. manufacturers as well as purchasers in China.

The news added to bearish sentiment in China’s stock market on Tuesday, with two manufacturers of surveillance equipment -- Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co. -- leading large-cap losses.

Click here to download a pdf of this article, Missile.pdf
 
 

11/19/18

“You would think that companies want to add to productivity capacity but we really haven’t seen it,’’ said Priya Misra, head of global rates strategy at TD Securities USA. “If they view the economy as in the late stages of the expansion, then there isn’t a lot of confidence about the outlook and it is easier to buy back stock.’’
https://www.bloomberg.com/news/articles/2018-11-19/corporate-america-s-debt-boom-looks-like-a-bust-for-the-economy?srnd=premium

Despite strong incentives in the Republican tax plan for American executives to expand, invest and ultimately boost the U.S. economy’s growth potential, a lot of the debt companies are issuing appears to be motivated by something else.
Non-financial corporate debt stands at 45.6 percent of gross domestic product, near the highest in post-war record keeping. Despite that, non-residential investment -- a broad category in the national accounts that includes everything from office buildings to software -- has only been bouncing around the 13 percent of GDP range since 2012.

“When we think about business cycles and what ends them, you can always follow the leverage,’’ said Ellen Zentner, chief U.S. economist at Morgan Stanley & Co. “It is not a household issue this time, it is going to be corporate.’’

One corner of the corporate debt markets that’s ringing alarms is leveraged lending, or credits to highly indebted companies.

Globally, new issuance hit a record $788 billion last year, the International Monetary Fund said in a recent blog post, with the US market accounting for more than 70 percent of the total. Credit quality and investor protections have deteriorated, and some of the transactions are arranged specifically to extract cash for shareholders while loading a company’s balance sheet with debt. That can reduce management’s flexibility in an economic downturn, and forecasters expect U.S. growth to slow over the next two years.

Click here to download a pdf of this article, Missile.pdf
 
 

11/16/18

“The big event is going to be the one-on-one meeting with President Trump and President Xi at the G-20 down in Argentina. All this other stuff is just preparatory until that. That’ll set if there is going to be a real framework," he said at the ribbon cutting for Cheniere Energy Inc.’s new liquefied natural gas export terminal in Corpus Christi, Texas.
https://www.bloomberg.com/news/articles/2018-11-15/trump-and-xi-likely-to-get-only-framework-trade-deal-ross-says
The U.S. and China are now discussing the agenda for the two leaders’ meeting on the sidelines of the Nov. 30-Dec. 1 Group of 20 summit in Buenos Aires and what a realistic outcome could be. When asked about a report that China this week had presented a list of possible concessions ahead of the talks, Ross said in an interview Thursday that everything leading up to the meeting is just “preparatory.”
The U.S. still plans to raise tariffs on Chinese imports in January with President Donald Trump and China’s Xi Jinping likely at best to agree to a “framework” for further talks to resolve trade tensions at an upcoming meeting, Commerce Secretary Wilbur Ross said.

Click here to download a pdf of this article, Missile.pdf
 
 

11/15/18

“We have to be thinking about how much further to raise rates, and the pace at which we will raise rates,” Powell said during a question and answers session Wednesday in Dallas moderated by Dallas Fed chief Robert Kaplan. The goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.”
https://www.bloomberg.com/news/articles/2018-11-15/powell-says-fed-paying-close-attention-to-rate-cycle-impact?srnd=premium
While generally upbeat about the U.S. economic outlook, Powell listed potential challenges including slowing demand abroad, fading fiscal stimulus and the lagged effect on the economy of the Fed’s eight rate increases since late 2015.
“Powell tried to come across as neutral, in our view, which may be perceived as dovish by the markets,” said Sonia Meskin, an economist at Standard Chartered Bank. “He opted to try to calm the markets, at least from the Fed’s side.”
“I do believe our economy can grow and grow faster,” Powell said.

The Fed chairman said officials are “looking really carefully” at how financial markets, the economy and business contacts are responding to rising rates.

The chairman also stressed that his move to press conferences following all eight of the Fed’s meetings in 2019 will help policy agility, and get markets away from the idea that the Fed only has the potential to change policy four times a year, lining up with the current press conference cycle.

"The markets definitely got in the habit of having us only move on press conference meetings,” Powell said. “Over time the market’s going to have to get used to that.”

Click here to download a pdf of this article, Missile.pdf
 
 

11/14/18

The U.K. and European Union are reported to have reached a provisional agreement over Brexit but before anyone gets too excited – or indeed, disappointed – there are big hurdles to overcome to get the draft deal approved on all sides.
https://www.cnbc.com/2018/11/14/brexit-deal-what-are-the-terms-of-provisional-agreement.html
Now, U.K. Prime Minister Theresa May has to get her Cabinet of ministers and then a majority of parliament to approve the draft deal – or what has, in typically bureaucratic fashion, been called a "technical agreement" between the U.K. and EU.
That's not likely to happen smoothly with both ends of the political spectrum — both pro-EU members of her cabinet and parliament as well as hard Brexiteers – expected to be unhappy with the terms of the draft deal.

Click here to download a pdf of this article, Missile.pdf
 
 

11/13/18

U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He have resumed talks on trade, and a potential Washington visit by Liu is being considered before the nations’ top leaders meet later this month.
https://www.bloomberg.com/news/articles/2018-11-13/china-s-liu-mnuchin-are-said-to-have-resumed-dialog-on-trade?srnd=premium
The two officials spoke by phone on Friday, according to people briefed on the matter, who asked not to be named due to the sensitivity of the topic. The conversation didn’t yield any concrete results, the people said. The Hong Kong-based South China Morning Post reported Tuesday that Liu was “expected” to visit Washington shortly. The Wall Street Journal first reported the phone call Monday. 
The phone discussion followed a call between President Donald Trump and China’s Xi Jinping two weeks ago -- the first publicly disclosed call in six months. The two leaders are slated to meet at the Group of 20 nation’s summit in Argentina, which is scheduled to take place from Nov. 30 to Dec. 1.

The White House is circulating a draft report by the U.S. Commerce Department over whether to impose tariffs on automobile imports to protect national security, three people familiar with the matter said.
https://www.bloomberg.com/news/articles/2018-11-12/u-s-car-import-probe-advances-as-trump-plans-trade-team-meeting
President Donald Trump is scheduled to meet with senior members of his trade team on Tuesday to discuss how to proceed on the potential tariffs, two of the people said. Speaking on condition of anonymity to discuss internal deliberations, they didn’t give any insight into Commerce’s conclusions.

Click here to download a pdf of this article, Missile.pdf
 
 

11/09/18

Bob Shanks, Ford’s chief financial officer, said on an earnings call last month that the company is committed to maintaining its investment-grade ratings, and doesn’t intend to lose that status again. The company is “moving with a sense of urgency and taking proactive steps to redesign and restructure the business,” and over time "the market will recognize our progress,” spokesman Brad Carroll said.
https://www.bloomberg.com/news/articles/2018-11-09/it-s-2005-all-over-again-as-ford-teeters-on-the-edge-of-junk?srnd=premium
“There’s a better chance than not it ends up in high yield,” said Henry Peabody, a portfolio manager at Eaton Vance Corp. in Boston. “It’s a combination of a fairly weak strategic position, less than ideal strategic decisions over last handful of years, a smattering of overconfidence and where we’re at in the credit cycle.”

Ford is fighting a “multiple-front war,” Peabody said, citing the company’s slowing sales growth in China and higher costs in the U.S. from global trade disputes.

Debt investors are skeptical. The extra yield that money managers get for holding Ford’s 4.346 percent bonds due 2026 rather than similar Treasuries jumped to levels typical of high-yield companies. The cost of protecting Ford’s debt against default using credit derivatives rose in October to the highest levels since 2012 before settling down again. Moody’s downgraded the company in August to one level above junk, and said further cuts are possible in the medium term.

Ford told investors in July it is launching an up to five year overhaul that could cost it $11 billion, as it focuses on higher margin products like trucks and sport-utility vehicles and exitsbusinesses including its U.S. sedans. However, it has provided scant details on the restructuring plan, and has yet to reschedule an investor meeting that was originally set for September.

Click here to download a pdf of this article, Missile.pdf
 
 

11/08/18

"US crude oil production was recorded at a new record high, and the largest in the world by far, moving ahead of Russia and closer to the level Saudi Arabia might be able to reach in another six months," wrote Citigroup energy analyst Eric Lee.
U.S. oil production jumped to a record 11.6 million barrels a day last week, and rising U.S. output is a factor that could prompt OPEC members and allies to react when they meet over the weekend.

https://www.cnbc.com/2018/11/07/us-pumps-more-oil-than-russia-and-saudi-arabia-opec-could-strike-back.html

Oil prices have cratered amid concerns of a global supply glut, and the jump in U.S. output to a point where it is now surpassing Russia, in addition to Saudi Arabia, only adds to these concerns. West Texas Intermediate futures are now down 20 percent from the near four-year high reached on Oct. 3.

U.S. production is up a stunning 2 million barrels a day from the same period last year, and 400,000 barrels from the week earlier, based on weekly U.S. government data. Weekly numbers are often revised, but the higher production figure is in line with growing U.S. output expectations. The U.S. government expects October production was 11.4 million barrels a day and expects production can grow to 12.1 million barrels a day on average next year.

Click here to download a pdf of this article, Missile.pdf
 
 

11/08/18

"US crude oil production was recorded at a new record high, and the largest in the world by far, moving ahead of Russia and closer to the level Saudi Arabia might be able to reach in another six months," wrote Citigroup energy analyst Eric Lee.
U.S. oil production jumped to a record 11.6 million barrels a day last week, and rising U.S. output is a factor that could prompt OPEC members and allies to react when they meet over the weekend.

https://www.cnbc.com/2018/11/07/us-pumps-more-oil-than-russia-and-saudi-arabia-opec-could-strike-back.html

Oil prices have cratered amid concerns of a global supply glut, and the jump in U.S. output to a point where it is now surpassing Russia, in addition to Saudi Arabia, only adds to these concerns. West Texas Intermediate futures are now down 20 percent from the near four-year high reached on Oct. 3.

U.S. production is up a stunning 2 million barrels a day from the same period last year, and 400,000 barrels from the week earlier, based on weekly U.S. government data. Weekly numbers are often revised, but the higher production figure is in line with growing U.S. output expectations. The U.S. government expects October production was 11.4 million barrels a day and expects production can grow to 12.1 million barrels a day on average next year.

Click here to download a pdf of this article, Missile.pdf
 
 

11/07/18

While the outcome was largely expected, analysts at Morgan Stanley and Credit Agricole SA say it could lead to a gridlocked government during the rest of President Donald Trump’s term, undermining efforts to extend tax cuts and boost infrastructure spending. This could weigh on the greenback, which has outperformed all Group-of-10 peers so far this year.
https://www.bloomberg.com/news/articles/2018-11-07/dollar-reign-at-risk-as-divided-congress-could-stymie-stimulus?srnd=premium
Morgan Stanley: Bearish Dollar

  • Result “supports our longer-term dollar bearish thesis,” write currency strategists including Hans Redeker
  • See EUR/USD rallying and USD/JPY weaker, as Europe and Japan perform better and FX-unhedged positions shift back to home countries
  • “Democrats taking control of the House effectively halts any further progress of the Republican agenda, but does not invite investors to consider meaningfully higher probability of Democratic priorities being enacted beyond 2020,” strategists including Meredith Pickett wrote in a research note
  • Treasuries are likely to be supported in near term as market “probably got ahead of itself” in pricing in a higher probability of Republicans holding the house and implementing more tax cuts
  • However, see the possibility of an unfunded infrastructure spending plan, with the next couple of weeks “critical to forming a more substantive stance on this issue and whether or not it will impact Treasury markets”

Credit Agricole: Weaker Dollar

  • The Democrats’ win in the House “should lessen the prospect of any meaningful new fiscal stimulus, while the Trump Administration’s protectionist stance should remain largely unchanged,” Credit Agricole analysts including head of G-10 currency strategy Valentin Marinov write in a report
  • “Thus, the past boost to U.S. growth from earlier fiscal measures should fade, reinforcing our outlook for a weaker dollar over time”

Citigroup: Buy the Dip

  • Post-election USD sell-off has “likely been more timid than many investors anticipated,” wrote Todd Elmer, senior G-10 currency strategist
    • Any further dollar weakening on election likely to be short-lived as investor appetite to chase the move may be low, midterms do not historically mark a break in currency trends, policy levers for USD depreciation are weak, and dollar-positive implications from the elections may be underplayed
  • Dollar sell-off ultimately present an opportunity to re-enter longs
  • Sees limited scope for dollar selling to extend and favors buying on the dip

MUFG: EUR/USD Support at 1.13

  • “This is no ‘blue wave’ and no resounding rejection of President Trump that many Democrats were expecting -- that will certainly limit the initial decline of the dollar on this result,” say strategists Derek Halpenny and Fritz Louw
    • “It reduces the prospect of any near-term breach of the 1.1300 support level against the euro”
  • “We can now forget about the prospect of additional fiscal stimulus,” but “Trump’s direction in regard to trade policy and China may not change at all”

BMO Capital Markets: Flatter Curve

  • “In general, the passage of a risk event this time around may not translate into higher yields, as the Treasury market appeared most concerned about a bearish surprise in rates,” wrote strategist Jon Hill
  • Return to political gridlock will likely temper growth expectations or moderate the prospect of additional stimulative fiscal policy
    • Don’t anticipate this to dissuade the Fed from continuing to deliberately tighten monetary policy as other areas of the economy maintain very strong momentum
  • See curve moving flatter from here, with any breach above 26.4 basis points on the 2s/10s clearing the way for a new challenge of the cycle flat of 18.3 basis points in coming weeks

Danske Bank: Still Sees 3.5%

  • “We still expect 10-year Treasuries to move toward 3.5 percent in three to six months,” wrote strategists including Arne Lohmann Rasmussen
    • Knee-jerk reaction to the result might be a modest support to U.S. Treasuries and slightly lower yields, as risk of bigger budget deficit and subsequent tighter monetary policy should somewhat abate; any support is expected to be short-lived
  • Still looks for euro-dollar to move below 1.13 before year-end
    • Dollar set to enjoy continued support from U.S. cyclical and carry outperformance

Toronto-Dominion: EUR/USD Floor at 1.13

  • “The double bottom at 1.13 in EUR/USD now looks like a pretty solid floor for the time being,” says Ned Rumpeltin, head of foreign-exchange strategy
    • “The Democrats underperformed in the Senate but not to a game-changing degree -- it is likely to be a slow-burn story for the dollar”
  • “We are likely to revert back to the 1.16/1.18 trading range that has prevailed for much of the last 6 months or so.”
Click here to download a pdf of this article, Missile.pdf