HYG price action points to short term capitulation - look for bounce from these level and re-test close to recent lows to offer asymmetrical entry point - risk/reward
Macro backdrop could support risk assets in the short term following FED meeting: following significant credit spread widening in the US, if Yellen increases the target ranger from 0-0.25 to 0.25-0.5 she will most probably be quite dovish - should be supportive of a Christmas rally especially in the current price action environment.
Once the market rebounds, it will be interesting and key to assess how the "target range" system which differs from the post-crisis "target rate" works - indeed, with USD 2.5tr in reserve, the FED might be forced to set up RRA with commercial banks in order to sock up liquidity and manage accordingly the range - hopefully it will not be a problem...
Monday, December 14, 2015
Monday, August 24, 2015
Markets Turbulences are creating huge buying opportunities in US (and EU)
One charts explain it all again : Spread of US BBB spreads vs Phily Fed is at highest since 2009 on the back of recent de-risking + supply is hitting historical high before expected rate hikes. Seems quite bullish to me !
EU charts in next post.
Friday, August 21, 2015
Time to reconsider Brasil and BRL
The asymmetry in being short BRL against EUR (4.2) or USD (3.7) is not there anymore (see my thesis there with details there : http://factualmacro.blogspot.ch/2014/08/short-brl-charts-only.html ) - As a starter, one simple chart support my view - see below : the current account deficit is closing at a rapid pace. There is still significant room to improve - as most of the move is due to reduced imports and current account /GDP is still at a wide -4% - to help the external sector to actually contribute to GDP growth but nonetheless this is a much welcome development that will resonate with the investor community, especially non BRL denominated investors.
Moreover, inflation is topping out and as a result, long BRL Fixed Income is should be a good play @ approx. 12% carry and potential price appreciation and BRL appreciation.
Clearly, industrial production and output gap are at 2009 lows, credit is being tightened big time and fiscal tightening is at his highest since 2002 - there is basically no oil in the economic motor and the gov.is trying to squeeze it even more...So macro data are definitely not rosy! But I believe, after the recent China related fears, most of these info are in the prices of BRL and brazilian equities.
Interesting opportunities in Brazil equities should arise in the months to come with another potential catalyst being China stimulus. As investors are digesting China devaluation, we should expect some volatility down the road, but I believe this is a good time to slowly start building select exposure in Brazil. Factually, we need prices and macro to back our thesis before going in in size.
Now, on a FACTUAL basis, prices are not telling us to change positioning for the time being - but
I would recommend to cut short BRL exposure and start building small exposure in BRL denominated equities with beaten down non-cyclical sectors such as a Telco basket (TIM + Vivo for ex). While it might be too early to look at cyclical stocks, it make sense to start screening for the middle part of the smile in term of gdp beta such as supermarket (Lojas Americanas), few banks such as Bradesco, few local cyclical plays such as GOL Linha Aerias.
As China economy is decelerating fast (last PMI @ 47, 6 months in a row below 50) with inflation well below the 4% upper limit, the probability of monetary and more likely fiscal stimulus is increasing fast. We should also expect much more FX devaluation (20% should be a good start).
Any hint of stimulus in China should also help lift Brazil cyclical sectors. If such a scenario occurs, extremely beaten down global cyclical plays such as FCX (which recently announced that it will raise equity..) could be very interesting, especially after the current market correction.
Let s now wait context for market prices to change so that it help the trade logic resonate with investors.
Stay tuned
Tuesday, June 23, 2015
Today s EU Macro data continue to support bullish positioning - all stars are aligned..
Higher than expected and continued rebound in growth + historical ease in financial conditions + recent sell-off on Grexit noise = all stars are aligned
Friday, June 19, 2015
Grexit is for sheep and sheep get .....
Why Grexit will not happen :
1. Political dimension: A Greece exit, i.e a return to the drachma, a default on its EUR denominated debt and more importantly a return back to monetary and fiscal sovereignty will - after probably a difficult period of 12-18 months - trigger a huge economic rebound (as it was the case for example in EU in Island). As a result, anti-EU parties across Europe will gain significant credibility and the "farce" of Troika' forced auterity will be totaly discredited. So politically this is simply not possible for the Troika - the current game-theory driven negotiation are only a staged act for the media/population. If markets could correct a bit more before the final outcome, the Troika/Grece Gov. could be even more happy has their "TV-novela" will be more credible and they will on top of that be considered as "hero" once they find a deal and market rebound as a results.
2. Financial dimension: just look at this charts, which is Greece loans to deposit ratio - this leveraging is made mostly with ELA (Emergency Liquidity Assistance)....- so if they default or exit...this is the double whammy for EU central banks that need to honor payment via Target. That s also explain why the ECB is keen to save Greece from default and exit illustrated by EUR 90bn in loan from ECB vs EUR 44bn in assets.
1. Political dimension: A Greece exit, i.e a return to the drachma, a default on its EUR denominated debt and more importantly a return back to monetary and fiscal sovereignty will - after probably a difficult period of 12-18 months - trigger a huge economic rebound (as it was the case for example in EU in Island). As a result, anti-EU parties across Europe will gain significant credibility and the "farce" of Troika' forced auterity will be totaly discredited. So politically this is simply not possible for the Troika - the current game-theory driven negotiation are only a staged act for the media/population. If markets could correct a bit more before the final outcome, the Troika/Grece Gov. could be even more happy has their "TV-novela" will be more credible and they will on top of that be considered as "hero" once they find a deal and market rebound as a results.
2. Financial dimension: just look at this charts, which is Greece loans to deposit ratio - this leveraging is made mostly with ELA (Emergency Liquidity Assistance)....- so if they default or exit...this is the double whammy for EU central banks that need to honor payment via Target. That s also explain why the ECB is keen to save Greece from default and exit illustrated by EUR 90bn in loan from ECB vs EUR 44bn in assets.
Monday, February 23, 2015
USDBRL Update
USDBRL went from 2.25 to 2.87 (approx +27% in 6 months) as of today since my last post - I continue to believe that this is only the beginning of this uptrend as macro data continue to deteriorate at a rapid pace - and in all fronts! So far no counter cyclical measure from the Gov - and we should not except any I guess...
The theme is starting to get audience as the uptrend in the USDBRL price is clearer, macro data are getting quite ugly and election are done - this should help the trend to accelerate in the near future.
GS started to become bearish on the USDBRL in Q4 2015 - Below a macro update from GS:
Business Confidence Business confidence in the industrial sector declined a sizeable 3.1% mom sa in February, more than fully erasing the 1.9% mom sa increase recorded in January. Business confidence in the industrial sector is currently 22% below the January 2013 peak.
The index measuring current conditions declined 1.7% mom sa in February and the index measuring expectations fell a large 4.8% mom sa. The rate of capacity utilization remained unchanged at 82.0, i.e., below the 84.6% print from a year ago.
Weak confidence in the industrial sector attests to the very challenging near term operating environment. Industrial production has now declined for six consecutive quarters and it is should retrench further in 2015 as it continues to face strong headwinds from a still overvalued BRL, high levels of inventories, depressed confidence, high unit labor costs, poor infrastructure, rising energy costs, a high (and rising) tax burden and weak external demand (particularly from Argentina for durable goods).
Furthermore, financing conditions are expected to tighten in 2015 as lending rates go up and access to credit becomes more selective (from both private and public banks). Finally, investment spending is likely to contract again in 2015 given the poor outlook for final demand growth, higher financing costs, growing risk of energy/water supply limitations, and likely significant cuts in capex by Petrobras owing to the legal and corporate governance issues.
According to the Central Bank’s weekly survey of market analysts, inflation expectations for year-end 2015 worsened, reaching a high 7.33% (+6bp from a week ago and +34bp from a month ago), and for year-end 2016 remained unchanged at an above-target 5.60%. That is, expectations for 2015 IPCA headline inflation continue to deteriorate, moving further away from the generous 6.50% upper limit of the inflation target band.
Inflation in February is expected to have been under upward pressure from higher fuel prices and school tuition fees and the residual impact from higher electricity tariffs and urban bus fares. This should be partially offset by the slight moderation of food inflation and the seasonal decline in airfares and clothing prices.
Overall, the current account posted a very large US$90.9bn deficit in 2014 (4.17% GDP; the largest current account deficit in 13 years), well above the US$81.1bn deficit (3.62% of GDP) recorded in 2013 despite a stagnant economy. FDI inflows moderated slightly: to US$62.5bn in 2014 from US$64.0bn in 2013; i.e., FDI financed only 69% of the current account deficit over the last 12 months, down from 120% in 2012 and 127% in 2011
FDI inflows reached US$62.5bn in 2014 but financed only 69% of the current account deficit over the last 12 months.
According to the monthly FGV Index, consumer confidence (CC) posted a large 6.7% mom sa decline in January. The overall consumer confidence index is now at its lowest level since the index started to be reported in September 2005. Furthermore, consumer confidence is currently 30.2% below the April 2012 peak and 22.2% below the average of the last five years.
Business and consumer confidence remains very depressed given the anticipation of policy tightening, rising inflation, higher taxes, significant increases in utility and transportation tariffs, deteriorating labor market conditions, and more exigent credit conditions. This poses major headwinds for private consumption in the coming months.
Consolidated Public Sector Primary Fiscal Balance (January); the consolidated public sector posted a very disappointing 0.63% of GDP primary deficit in 2014, down from surpluses of 1.9% of GDP in 2013, and 2.4% of GDP in 2012. This was the worst fiscal outturn in 16 years (since November 1998). The erosion of the primary surplus in recent years was driven chiefly by the weak fiscal numbers of the Central Government, whose primary balance declined from 1.55% of GDP in 2013, to a deficit of 0.40% of GDP in 2014.
The overall public sector fiscal deficit widened to a very high 6.7% of GDP (from 3.25% of GDP in 2013 and the highest fiscal deficit since August 1999) given the very high 6.1% of GDP net interest bill and steady erosion of the primary fiscal surplus.
Gross general government debt rose to 63.4% of GDP in 2014, up from 56.7% of GDP in 2013 and 53.4% of GDP in 2010 (the highest level since at least 2006).
The theme is starting to get audience as the uptrend in the USDBRL price is clearer, macro data are getting quite ugly and election are done - this should help the trend to accelerate in the near future.
GS started to become bearish on the USDBRL in Q4 2015 - Below a macro update from GS:
Business Confidence Business confidence in the industrial sector declined a sizeable 3.1% mom sa in February, more than fully erasing the 1.9% mom sa increase recorded in January. Business confidence in the industrial sector is currently 22% below the January 2013 peak.
The index measuring current conditions declined 1.7% mom sa in February and the index measuring expectations fell a large 4.8% mom sa. The rate of capacity utilization remained unchanged at 82.0, i.e., below the 84.6% print from a year ago.
Weak confidence in the industrial sector attests to the very challenging near term operating environment. Industrial production has now declined for six consecutive quarters and it is should retrench further in 2015 as it continues to face strong headwinds from a still overvalued BRL, high levels of inventories, depressed confidence, high unit labor costs, poor infrastructure, rising energy costs, a high (and rising) tax burden and weak external demand (particularly from Argentina for durable goods).
Furthermore, financing conditions are expected to tighten in 2015 as lending rates go up and access to credit becomes more selective (from both private and public banks). Finally, investment spending is likely to contract again in 2015 given the poor outlook for final demand growth, higher financing costs, growing risk of energy/water supply limitations, and likely significant cuts in capex by Petrobras owing to the legal and corporate governance issues.
According to the Central Bank’s weekly survey of market analysts, inflation expectations for year-end 2015 worsened, reaching a high 7.33% (+6bp from a week ago and +34bp from a month ago), and for year-end 2016 remained unchanged at an above-target 5.60%. That is, expectations for 2015 IPCA headline inflation continue to deteriorate, moving further away from the generous 6.50% upper limit of the inflation target band.
Inflation in February is expected to have been under upward pressure from higher fuel prices and school tuition fees and the residual impact from higher electricity tariffs and urban bus fares. This should be partially offset by the slight moderation of food inflation and the seasonal decline in airfares and clothing prices.
Overall, the current account posted a very large US$90.9bn deficit in 2014 (4.17% GDP; the largest current account deficit in 13 years), well above the US$81.1bn deficit (3.62% of GDP) recorded in 2013 despite a stagnant economy. FDI inflows moderated slightly: to US$62.5bn in 2014 from US$64.0bn in 2013; i.e., FDI financed only 69% of the current account deficit over the last 12 months, down from 120% in 2012 and 127% in 2011
FDI inflows reached US$62.5bn in 2014 but financed only 69% of the current account deficit over the last 12 months.
According to the monthly FGV Index, consumer confidence (CC) posted a large 6.7% mom sa decline in January. The overall consumer confidence index is now at its lowest level since the index started to be reported in September 2005. Furthermore, consumer confidence is currently 30.2% below the April 2012 peak and 22.2% below the average of the last five years.
Business and consumer confidence remains very depressed given the anticipation of policy tightening, rising inflation, higher taxes, significant increases in utility and transportation tariffs, deteriorating labor market conditions, and more exigent credit conditions. This poses major headwinds for private consumption in the coming months.
Consolidated Public Sector Primary Fiscal Balance (January); the consolidated public sector posted a very disappointing 0.63% of GDP primary deficit in 2014, down from surpluses of 1.9% of GDP in 2013, and 2.4% of GDP in 2012. This was the worst fiscal outturn in 16 years (since November 1998). The erosion of the primary surplus in recent years was driven chiefly by the weak fiscal numbers of the Central Government, whose primary balance declined from 1.55% of GDP in 2013, to a deficit of 0.40% of GDP in 2014.
The overall public sector fiscal deficit widened to a very high 6.7% of GDP (from 3.25% of GDP in 2013 and the highest fiscal deficit since August 1999) given the very high 6.1% of GDP net interest bill and steady erosion of the primary fiscal surplus.
Gross general government debt rose to 63.4% of GDP in 2014, up from 56.7% of GDP in 2013 and 53.4% of GDP in 2010 (the highest level since at least 2006).
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