Sun, 22nd January 2017

Anirudh Sethi Report


Posts Authored by: “Jim John”

South African fin min to Fed: beware the consequences of rate rises

South African finance minister Pravin Gordhan has called on the US Federal Reserve to remain mindful of the impact of its decisions on emerging markets as it continues with a programme of raising interest rates.

Speakng at the World Economic Forum in Davos, Mr Gordhan said the so-called ‘taper tantrum’ of 2013 reminded investors and policymakers of the strong links between global financial markets

“The Fed has shown a new kind of sensitivity to their decisions and the impact on emerging markets and we hope that will continue,” he said.

He also noted that the Fed will be operating in an unusual environment under President Trump.

“The new administration has a particular political outlook, to put it politely, and the Fed has another. That will have implications.”

Jeff Gundlach’s Forecast For 2017

Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.

Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.

But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.

Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%. He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%. Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150. 

Real Rates in US are Elevated

The US 10-year yield fell briefly below 1.32% last July.  The yield slowly rose to reach 1.80% in mid-October.  The day after the election, the yield initially slipped to almost 1.71%.  This was a bit of a miscue, and the yield rose sharply to hit almost 2.64% the day after the FOMC hiked rates for the second time in the cycle on December 14.   The yield backed off to hit 2.33% at the end of last week. 
The difference between the conventional yield and the inflation-linked yield (TIPS), the 10-year breakeven, climbed with conventional yield until the middle of November.  Since the election, the increase in the conventional bond yield has not been matched by the increase the breakeven. 
This is depicted in the Great Graphic here, created by Bloomberg. The yellow line is conventional 10-year bond yield.  The white line is the 10-year breakeven.  The gap between the two shows the real rate (nominal minus inflation expectation).   What is remarkable is the sharp rise in the real 10-year yields since the election.  

Vanguard is best-selling fund manager of 2016

Vanguard has topped a table of the bestselling fund managers globally for 2016 after drawing nearly $200bn from investors, eclipsing the total amount of new money raised by its 10 nearest competitors.

 The Pennsylvania-based asset manager has benefited from the runaway success of its low-cost sales strategy, which has dealt a serious blow to pricier rivals in the active investment industry.

Amundi, the French fund house, was the second-bestselling asset manager, pulling in $35bn over the same period — roughly a sixth of Vanguard’s haul, according to figures compiled for FTfm by Morningstar, the data provider.

Timothy Strauts, markets research manager at Morningstar, said: “Vanguard is eating the rest of the US fund industry. It is dominating completely. Both its active and passive businesses are doing very well, mainly because [it charges] very low fees.

Vanguard is eating the rest of the US fund industry. The US market is all about fees and if you don’t have low fees, you don’t get flows

Timothy Strauts, Morningstar

“I can guarantee you Vanguard will be the biggest selling [company] of 2017. The US market is all about fees and if you don’t have low fees, you don’t get flows.”

Dimensional, the Texas-based asset manager, was the third-bestselling fund house, with $23bn of inflows, according to the data, which excluded flows to exchange traded funds. Including ETFs, Vanguard’s total was even bigger at $288bn.

Here are the top-20 selling cars in the United States

From the December sales data

1 Ford F-Series P/U +2.7% y/y in December

2 Chevy Silverado-C/K P/U 13.8% y/y in December

3 Ram P/U +14.9% y/y in December

4 Nissan Rogue +52.9% y/y in December

5 Honda CR-V +21.1% y/y in December

6 Toyota RAV4 +16.8% y/y in December

7 Honda Accord 3.4 y/y in December

8 Toyota Camry -10.4 y/y in December

9 Honda Civic -4.0 y/y in December

10 Toyota Corolla -7.4 y/y in December

11 Chevrolet Equinox +24.6 y/y in December

12 Ford Escape -7.7 y/y in December

13 Toyota Highlander+57.9 y/y in December

Iron Ore Stocks At Chinese Ports Hit New Record Highs: Why This Is An “Ominous Sign” For Prices

As Axiom Capital’s Gordon Johnson points out, Iron Ore stocks at Chinese ports just hit a new record high in the last week of 2016, even as the spot price of iron ore staged a dramatic comeback over 2016, closing near the highs of the year. However, as Johnson notes, if history is any precedent, such record stocks “carry an ominous sign for iron ore prices.” Here’s why.

After jumping by the biggest 1-wk increase since Oct. ’15, +2.7% w/w, iron ore inventories at Chinese ports reached a new record high of 114.0Mmt on 12/30.

What will drive political uncertainty in 2017?

As 2016 draws to a close, a sense of unease is gripping many commentators as they look ahead. This year brought victories for Brexit and Donald Trump. The outcome of both votes were largely unexpected. What will 2017 bring? The EU is facing three, or even four, elections in major member states. The Netherlands, France, Germany and possibly also Italy will go to the polls. The outcome in all four elections is far from certain at this stage. Indeed, voting behavior seems to have become difficult to predict.

Economic and sociological research points to a number of different factors provoking these recent results. The debate is broadly about whether it is economic issues such as income inequality, cultural issues such as a rejection of equal rights for women, minorities and gay people, or factors relating to citizens’ perceived loss of control over their destiny that has driven people to support populist candidates and causes.

 At first sight, the economic factors seem to have played a strong role. The vote for Brexit predominantly came from the countryside, where GDP per capita levels are significantly lower than in the cities. Moreover, income inequality levels are much higher in the United States and the U.K. than in continental Europe. And indeed, one can show that the Brexit vote is significantly affected by regional income inequality though the effect may not be very large.

The second explanation is a rejection of progressive cultural norms. An interesting study by Ingelhart and Norris emphasizes very much this aspect. They offer evidence that the recent protest votes are a cultural backlash against progressive values. And indeed, discourse especially on social media has totally changed. Unfortunately, it seems to have become widely acceptable to talk of white supremacy and engage in racist discourse.

Italy Urges Europe To Begin Censoring Free Speech On The Internet

First it was the US, then Germany blamed much of what is wrong in society on “fake news”, and not, say, a series of terrible decisions made by politicians. Now it is Italy’s turn to call for an end to “fake news”, which in itself would not be troubling, however, the way Giovanni Pitruzzella, head of the Italian competition body, demands the European Union “cracks down” on what it would dub “fake news” is nothing short of a total crackdown on all free speech, and would give local governments free reign to silence any outlet that did not comply with the establishment propaganda.

In an interview with the FT, Pitruzzella said the regulation of false information on the internet was best done by the state rather than by social media companies such as Facebook, an approach taken previously by Germany, which has demanded that Facebook end “hate speech” and has threatened to find the social network as much as €500K per “fake” post.

Pitruzzella, head of the Italian competition body since 2011, said “EU countries should set up independent bodies — co-ordinated by Brussels and modeled on the system of antitrust agencies — which could quickly label fake news, remove it from circulation and impose fines if necessary.” 

In other words, a series of unelected bureaucrats, unaccountable to anyone, would sit down and between themselves decide what is and what isn’t “fake news”, and then, drumroll, “remove it from circulation.” On the other hand, coming one week after Obama give Europe the green light to engage in any form of censorship and halt of free speech that it desires, when the outgoing US president voted into law the  “Countering Disinformation And Propaganda Act”, it should come as no surprise that a suddenly emboldened Europe is resorting to such chilling measures.

So with Europe on the verge of rolling out unbridled censorship, here is the strawman used to justify it.

Saudis Forecast $51 Oil In 2017 Rising To $65 By 2019; Will Spend 20% Of Total Budget On Military

After suffering two record budgets shortfalls in 2015 and 2016 as a result of plunging oil prices, and which nearly brought both Saudi Arabia’s economy and banking sector to a standstill, not to mention billions in unpaid state worker wages at least until generous foreign investors funded the Kingdom’s imminent cash needs with its first, and massive, bond sale ever, today Saudi Arabia released it budget outlook for the next year.

And while the Saudis believe the country’s budget deficit will fall modestly next year even with an increase in spending, it is still set to be a painful 8% of GDP suggesting the Saudi cash burn will continue even with some generous oil price assumptions.

The budget deficit for 2017 is expected decline 33% to 198 billion riyals ($237 billion), or 7.7% of GDP, from 297 billion riyals or 11.5% of GDP in 2016 year and 362 billion riyals in 2015, the Finance Ministry said in a statement on its website on Thursday. In 2016, the finance ministry said its spending of 825 billion riyals ($220 billion) was under the budgeted 840 billion, and the 2016 budget deficit came to 297 billion, below the 362 billion in 2015.


US EIA weekly oil inventories 2256k vs -2500k exp

US EIA weekly oil inventory data week ending 16 December 2016

  • Prior -2563k
  • Cushing -245k vs 700k exp. Prior 1223k
  • Gasoline -1309k vs 1375k exp. Prior 497k
  • Distillate -2420k vs -1625k exp. Prior -762k

  • Production 8.786m vs 8.797m prior
  • Refinery utilisation 1.0% vs 0.33% exp. Prior 0.1%

That’s caught the market on the hop as last night’s private data showed a bigger draw than expected. WTI took a swan dive down to 52.93 from around 52.40 but has recovered to 53.21.

Production fell a touch too and that’s now 3 on the trot.

US oil production