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Sat, 25th February 2017

Anirudh Sethi Report

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Posts Authored by: “Nayal Khan”

UK’s four biggest banks £155bn short of safety

londonThe UK’s four biggest banks would need to raise another £155bn in fresh capital to withstand a new financial crisis, despite the view of the Bank of England Governor that lenders have an adequate cushion to cope with further turmoil, reports The Independent.

Those are the results of research from three respected financial academics – and add to a growing feeling that the Bank of England is dangerously undercooking its capital requirements on UK lenders in the face of swelling instability in financial markets.

UK banks had to be rescued in 2008 and 2009 at massive cost to British taxpayers.

Capital represents the shareholder funds in banks available to absorb losses. When losses are greater than the capital cushion the bank is bust and may need to tap state support if deemed to be systemically important by politicians and regulators.

In a new paper Viral Acharya of New York University, Diane Pierret of the University of Lausanne and Sascha Steffen of the University of Mannheim calculate that HSBC, Barclays, Lloyds and the Royal Bank of Scotland would need to raise $185bn (£155bn) of new equity between them to retain a 5.5 per cent capital cushion in a crisis, which is the benchmark of safety used in the past by the European Banking Authority.

Class 8 Truck Orders Plunge To Lowest Level Since February 2010

For those investors that have relentlessly defended equity valuations, shunning hard data in favor of the Fed narrative that lower borrowing costs should move discount rates ever closer to 0% and equity valuations therefore ever closer to infinity, might we suggest you turn your heads now because Class 8 truck orders just dropped a huge dose of economic reality that you might want to promptly ignore

For everyone else, July Class 8 trucks orders were, in a word, abysmal.  According to ACT research, Class 8 truck orders for July came in at 10,500 which is down 57% YoY and 19% sequentially compared to June.  July marked the 17th consecutive month of YoY declines and the lowest reading since February 2010. Perhaps even more shocking is the fact that July orders were 77% lower than the peak shipping month recorded in October 2014.

According to comments made by Dan Ake, VP of Commercial Sales at research firm FTR, to the Wall Street Journal the industry was hit with “several significant order cancellations” which was described as “uncharacteristic” for this time of year.  Dan added that the “high cancellations are likely the result of fleets placing large orders at the end of 2015, for delivery a year out.” 

Steve Tam, VP at ACT Research, added that: 

Too many trucks [are] chasing too little freight.  I think the trucking community had an expectation that [growth] was going to continue.  But with 20/20 hindsight, that did not happen.  Freight has been very flat for basically the last year.  There is anecdotal signs that freight is improving very modestly, but I would liken it to treading water but still below surface at this point.”

July Class 8 Truck Orders

Fifth of ECB corporate QE bonds bought at negative yields

The European Central Bank’s corporate bond programme is nearly two months in and details of the landmark scheme to snap up high-grade company debt are beginning to trickle in.

In its latest monthly update, the ECB notes corporate QE has “started smoothly” and is diversified across a range of sectors.

Here are some of the best takeaways:

  • 20 per cent of bonds purchased have a negative yield (above the -0.4 per cent floor)
  • Purchases have been spread over 458 bonds issued by 175 different corporates
  • Consumer goods companies make up the largest single sector, followed by utilities, and communications (see chart below).
  • 7 per cent of bond purchases made in the primary market; 93 per cent in the secondary market

S.Korea Bans Sales of Volkswagen Cars Amid Test Frauds

The South Korean Environment Ministry separately imposed a fine worth 17.8 billion won ($16 million) on the automaker as a probe into the company proved the company cheating, Yonhap agency said.

According to the news outlet, a total of 209,000 Audi and Volkswagen cars have been affected by certification recall.

In September 2015, the German automaker admitted that it had installed software in their vehicles to falsify emission tests. The company later clarified that an estimated 11 million diesel-engine cars worldwide were emitting up to 20 times more greenhouse gas than showed in the tests.

In January, the South Korean Environment Ministry filed complaint against Volkswagen’s branch office on the accusations that it violated the national Clean Air Conservation Act by fabricating emission and noise level reports and launched investigation.

Spain Markit mftg PMI July 51.0 vs 51.5 expected

Spain Markit July mftg PMI report 1 Aug 2016

  • 52.2 prev
  • new orders fall to 48.7 vs 50.6 prev. First contraction since Nov 2013

Data out a few moments ago but not a price changer. The downward trend continues though with lowest headline reading since Dec 2013.

Final July readings for France, Germany and EZ all coming up before the top of the hour.

Putting The BOJ’s Purchases In Context: Equivalent To The Fed Buying $580 Billion In ETFs In 2 Years

When it comes to the Bank of Japan’s actions (or inactivity as case may be), traditionally the market’s focus has been on whether or not Kuroda would expand QE and/or cut rates. However, while far less noticed, the central bank’s aggressive purchases of ETFs are becoming a troubling reality. Recall that in April the BOJ was revealed to already be a top 10 holder in about 90% of all Japanese stocks. 

As Bloomberg reported, as of April the BOJ ranked as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies. “The central bank effectively controls about 9 percent of Fast Retailing Co., the operator of Uniqlo stores, and nearly 5 percent of soy sauce maker Kikkoman Corp. It has an estimated shareholder rank of No. 3 in both Yamaha Corp., one of the world’s largest makers of musical instruments, and Daiwa House Industry Co., Japan’s biggest homebuilder.”

The news followed the just as striking disclosure that the BOJ is already an owner of more than half of all Japanese ETFs.

In 50 Years This Has Never Failed To Trigger A Bear Market

It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either.

So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market.

In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

Emerging Markets -An Update

  • Indonesian President Widodo shuffled his cabinet
  • Egypt has requested a three-year $12 bln loan from the IMF
  • Johannesburg Stock Exchange data on investment flows into South Africa was wrong
  • Fitch downgraded South Africa’s local currency rating by one notch to BBB- with a stable outlook
  • Fitch cut its outlook on Colombia’s BBB rating from stable to negative

In the EM equity space as measured by MSCI, Turkey (+4.8%), India (+1.4%), and Qatar (+1.3%) have outperformed this week, while Colombia (-6.4%), Mexico (-3.2%), and Singapore (-2.9%) have underperformed.  To put this in better context, MSCI EM rose 0.6% this week while MSCI DM rose 0.6%.

In the EM local currency bond space, Turkey (10-year yield -35 bp), South Africa (-14 bp), and Hungary (-13 bp) have outperformed this week, while Ukraine (10-year yield +31), Colombia (+16 bp), and the Philippines (+5 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -8 bp this week to 1.49%.

 
In the EM FX space, ZAR (+2.3% vs. USD), TRY (+2.2% vs. USD), and KRW (+1.3% vs. USD) have outperformed this week, while COP (-3.8% vs. USD), RUB (-2.5% vs. USD), and CLP (-1.4% vs. USD) have underperformed.

There will only be three key moves over the BOJ

The BOJ is going to be messy one way or another but there is only three things you need to watch

I’ve been thinking about the possible moves tonight and it I can sum them up in three points

  1. The BOJ don’t do anything –  Yen pairs fall hard.
  2. They act – Yen pairs rally as soon as the headlines hit. The market won’t read the details in the first couple of minutes, it will be buy first, ask questions later.
  3. The market reads the small print – After the initial reaction, the market will look into the details and decipher what they mean. This will either cause yen pairs to rise further or fall if the market is disappointed

Use these three points as a guide to any trades you are in as they could save you from getting whipped about. If you are long yen pairs into the decision and you get that initial jump, I’d suggest thinking about locking in or taking some off quickly so that you don’t give it all back if the market goes against you on part 3.

For no action, the trade is pretty clear.