Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “July 14, 2017” Day

Cable breaks out to the highest since September 2016

GBP/USD takes out a key level

The pound has broken above the May highs.

Cable has busted resistance and risen to the best levels in 10 months. The May high of 1.3048 has given way and a wave of buy stops has sent the pair quickly to 1.3073.

Weak US data has been the catalyst with soft CPI and retail sales earlier doing most of the damage but the latest U Mich survey pushed the dollar over the edge.

June US Industrial production +0.4% vs +0.3% expected

June production and capacity utilization

  • Prior was 0.0% (revised to +0.1%)
  • Capacity utilization 76.6% vs 76.4% prior
  • Manufacturing production +0.2% vs +0.2% exp
  • Prior manufacturing production -0.4%

It’s a bit of good news for the US dollar but it’s a second-tier indicator so it’s not going to turn the dollar today. U Mich sentiment is out at the top of the hour.

Arvind Subramanian sees bumpy economic path

 Political stability in India paved the way for root-and-branch reforms such as demonetization and the new Goods and Services Tax. But as one of the country’s key economic advisers acknowledged, they came at a cost: subdued growth this year that could extend into 2018.

Arvind Subramanian

“I think in the last year or so there has been a slowdown in the momentum,” said Arvind Subramanian, chief economic adviser to Finance Minister Arun Jaitley. “All the numbers point in that direction: GDP, industrial production, capacity utilization, and credit. For the first time you see consistency of deceleration in the last three or four quarters, and that is a bit worrying.”

 Expansion of gross domestic product slowed to an annual 6.1% in the first quarter of 2017. The economy is hitting speed-breakers including an agricultural malaise featuring low crop prices and farmer distress, moribund manufacturing, and sluggish investment. The challenge of rapid urbanization has seen job creation slow to a snail’s pace.

Yet, Prime Minister Narendra Modi has never been more secure in power. Opposition parties are in disarray — underlined by their inability to reach consensus on a candidate for the presidential election. The vote for the largely ceremonial post will be held among an electoral college of legislators on July 17, and the Modi-backed candidate, Bihar state governor Ram Nath Kovind, a loyalist of the ruling Bharatiya Janata Party, is widely expected to win.

China Revises GDP calculation method

Chinese statistics bureau out with a statement 14 July

Making it an honest one now I hear you all say?

  • new method includes contribution by healthcare, tourism, new economy

Reuters reporting but no further detail as yet. The last time it was revised was 2002 and it’s not clear whether the latest GDP data ( due Monday) will be based on the new method.

Expectations are:

  • QQ 1.7% vs 1.3% prev
  • YY 6.8% vs 6.9% prev

Meanwhile EURUSD still toying with traders at 1.1415, EURGBP trying to make its mind up at 0.8811 and GBPUSD dipping to 1.2954.

USDJPY back up to 113.28 after 113.15 lows and USDCHF 0.9680 near session highs in a moment of general USD demand.

China to pander to those demanding more accurate data?

Sterling, McCafferty, and BOE Policy

Sterling’s advance today is being attributed to comments by a member of the Bank of England’s Monetary Policy Committee McCafferty.  However, we suspect it was a news item that was used to justify the price gains that was already underway.  
Sterling had been sold to a two-week low early yesterday as BOE Deputy Governor Broadbent confirmed our suspicions that he would side more with Governor Carney than the hawkish wing. Sterling rebounded after the employment report.  After reaching almost $1.2810, sterling recovered almost a full cent.  Today it set the week’s high of $1.2955.  
McCafferty is a hawk.  He was part of the dissents in last month’s 5-3 vote to keep rates steady.  He had dissented last year, but failed to convince anyone and moved back with the majority.  In today’s remarks, he did not say what the BOE would do.  He opined on what it should do, which is “think” about reducing its balance sheet.  
First, recall that McCafferty opposed the restarting of asset purchases after last year’s referendum.  That he wants an early unwind is consistent, but hardly new.  Second, McCafferty said other central banks were considering this.  Really?  Besides the Federal Reserve, which central banks are considering unwinding QE?  Try rounding up the suspects, but there aren’t any.  No BOJ, No ECB.  No SNB.  No Riksbank.  At most the ECB is talking about changing its forward guidance risk assessment and, we think tapering its purchases but extending them beyond the current time frame (end of the year).  

Switzerland Opens Door To Bitcoin Asset-Management Business

Bitcoin and other cryptos have fallen sharply over the past month in a shakeout that saw some of the early longs decide to take their winnings and walk away. But a 20% drop from the all-time highs hasn’t done much to temper wealthy investors interest in bitcoin and other cryptocurrencies as alternative investments potentially worthy of diversification. And with the Greyscale Bitcoin Investment Trust still trading at a ridiculous premium, and the chances of the SEC approving a bitcoin ETF in the US looking increasingly remote, it’s unsurprising that “private wealth managers” and trying to scoop up wealthy customes who have expressed an interest in bitcoin.

But while regulators in the US and in many other part of the developed world have been hesitant to embrace bitcoin, Switzerland may have just given the world’s private-wealth specialists the opening they needed.

According to Reuters, private bank Falcon announced Wednesday that it would immediately begin storing and trading bitcoins on behalf of its wealthy customers via the bank’s cash holdings, a move that signals the traction the virtual currency is gaining even in slow-changing asset management.


The importance of central banks for equity prices

The S&P 500’s lengthy bull run began in 2009 as the Federal Reserve fired up quantitative easing. Suppressing bond yields and financial market volatility via QE has certainly been a boon for equities. All told, the big central banks have bought some $14tn of assets, providing a very supportive tide of liquidity for global equities led by the S&P 500. Now as the Fed looks to start reducing its $4.5tn balance sheet this year and the European Central Bank discusses tapering bond purchases in 2018, equities will soon need to reflect a reduction in the so-called punchbowl. Having outperformed other leading equity markets during the post-financial crisis era, some believe US stocks are vulnerable, once the liquidity tide slackens in the coming year.

“We think the swing in global liquidity will weigh on the performance of stocks,’’ say analysts at Bank of America Merrill Lynch. “With the Fed about to reduce its balance sheet and the ECB likely to end quantitative easing by the end of 2018, growth in central bank assets is likely to decelerate significantly next year and turn negative in 2019.’’ For now, there appears further room for equities to run higher as central banks are likely to take their time withdrawing stimulus. Soothing words on the interest rate outlook from Janet Yellen in her semi-annual testimony to Congress has bolstered equities ahead of the latest earnings season.

FITCH :affirms China at ‘A+’ and says stable outlook

Says the increase in economy’s overall leverage in context of adherence to ambitious GDP growth raises potential for economic and financial shocks

  • Affirms China at ‘A+’; outlook stable
  • Country ceiling is affirmed at ‘A+’
  • Expects official aggregate financing (excluding equity) will rise to 208% of GDP in 2017, from 201% in 2016 and 114% in 2008
  • Potential remains for capital outflow pressures to resume, especially in context of a strengthening US dollar
  • Broader credit measure, which incorporates activity not directly captured in official series, will rise to around 270% at end-2017
  • Fitch forecasts general government gross debt of 48.3% at end-2017, up marginally from a year prior
  • Public finances remain a neutral rating factor
  • Tighter monetary conditions may lead to slower GDP growth, which in Fitch’s baseline forecast will decelerate to 5.9% in 2018, from 6.5% in 2017
  • Sovereign net foreign assets (SNFA) will decline to 28.9% of GDP at end-2017, down modestly from 29.8% in 2016
  • Says China’s ratings are underpinned by the strength of its external finances and macroeconomic track record
  • Near-term growth prospects remain favourable

Headlines via Reuters

I bolded Fitch’s GDP forecast for emphasis