Investment Bank Outlook 04-08-2021

Credit AgricoleAsia overnight: In Asian hours risk sentiment was broadly stable with mot regional stock market indices trading higher at the time of writing. This is partly due to better than expected business activity data out of China. In G10 FX, the risk sensitive NZD was among the outperformers. However, this is mostly on the back of better-than-expected Q2 employment data. At 4.0% (prev.4.7, cons. 4.4%) the unemployment rate came in well below consensus. So much should lay the ground for the RBNZ considering higher rates later this month with all its implications to the currency. Elsewhere, the AUD has been sticking to most of its recent gains as driven by more hawkish than expected RBA monetary policy announcement.Looking ahead, trade data on Thursday will likely demonstrate medium-term underlying support for the currency. Indeed, strong iron ore prices as well as large export volumes will potentially see Australia will potentially log a record trade surplus. Importantly, Australia’s strong trade balance and current account surplus leaves the AUD less vulnerable to downside pressures from its lost interest rate advantage. European morning: All eyes on PMIs Data wise today’s focus will be on July Services PMIs out of Eurozone, UK and Sweden. Since Eurozone and UK data are final revisions, surprise potential seem slow.This in turn implies low market impact with external factors such as global risk sentiment likely to remain in the driver’s seat. This is especially true as when it comes to the Euro with its strongly capped rate profile keeping funding attractiveness rather well supported. When it comes to GBP, investors’ main focus should have shifted to the upcoming BoE monetary policy announcement already. Turning to Sweden, incoming data is likely to confirm services-sector related business activity to continue expanding at a very healthy level. This is in line with forward looking indicators such as Economic Tendency Survey paining a more constructive picture on growth. At the same time, however, Riksbank members are unlikely to consider a change to their cautious monetary policy stance anytime soon with interest rates expected to remain capped for the entire forecasting horizon. So much is likely to keep the SEK’s sensitivity to better data low. All in all we stick to a neutral stance on the currency from here. USD: Looking beyond the Fed The US debt ceiling and fiscal stimulus While the patient Fed approach towards policy normalization is among the key drivers of the USD underperformance ,we think that additional factors may be playing a lore as well through their negative impact on UST yields and US rates. The first is the US debt ceiling suspension that has expired recently and which means that the US Treasury would have to restrict the issuance of new debt while drawing down its cash reserves (e.g. there could be some focus on the US Treasury quarterly financing announcement today). This has already created an environment of very subdued nominal and record low real UST yields. According to some estimates, the US treasury would not run out of spending power before October, suggesting that the politically-charged process of raising the debt ceiling could drag on in a foreseeable future. In turn, this can keep the current low UST yields and rates in place for longer and undermine the USD. The second USD driver seems to be the lingering uncertainty about the second fiscal stimulus package proposed by the Biden administration (and that consists of an infrastructure bill as well as a much larger (USD3.5tn) reconciliation package).While a successful vote on the infrastructure bill in the US Senate this week can move the process forward, we may have to wait for the more important vote in the House until September when a compromise between the centrist and progressive Democrats on the size of the reconciliation package may be needed to get the fiscal stimulus package through the US congress. Importantly, a debt ceiling extension in conjunction with another aggressive fiscal stimulus deal could magnify the positive impact from Fed QE taper on the UST yields and US rates. Indeed, the confluence of the three factors could shake up the US FI markets in late Q3 and Q421. In turn, higher UST yields and US rates could prop up the USD towards the end of the year, especially vs the JPY and CHF that remain among the most sensitive G10 currencies to moves in the US FI markets. Data wise, today’s focus will be on the July ISM non-manufacturing PMI.Our US economist expects it to post a modest increased to around 60.5 (prev. 60.1). He notes that the outlook for the sector has improved on the back of the reopening of the economy. From that angle upside risks cannot be excluded with such prospects potentially helping the greenback to regain ground. A main focus will be on the PMI’s employment component as lead over Friday’s labour data. Having said that, as outlined previously, any potential positive news about the outlook of the US labour market could bring the FOMC closer to policy normalization in our view and help the USD to regain ground.

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Daily Market Outlook, August 4th, 2021

Daily Market Outlook, August 4th, 2021 Overnight Headlines New Zealand Jobless Rate Drops To 4%, Fueling Rate-Hike Bets Growth In China's July Services Activity Speeds Up, But Risks Loom Japan's Service Sector Activity Shrinks At Faster Pace In July FDA Aims For Final Approval Of Pfizer Shot By Early Sept - NYT U.S. CDC Announces New 60-Day Covid-19 Eviction Moratorium Dollar Pressured Ahead Of Jobs Data; Kiwi Leaps As Rate Hikes Loom Japan 10-Year Yield Falls To Zero For First Time Since December Oil Drops For Third Day On Concerns Covid-19 Spread To Cut Demand Asian Shares Near 1Week Highs But Delta Woes Continue To Mount Singapore Banks Report Strong Profit Growth, Loan Losses Decline Softbank Is Said To Build $5b Stake In Swiss Pharma Giant Roche Apple, Affirm To Launch BNP Program For Canadian PurchasesThe Day Ahead Today’s July PMI Services updates for the Eurozone and the UK are both final estimates. Typically these are largely unchanged from the initial reading. However, in the case of the UK, the latest responses will have been collected after the lifting of restrictions in England on 19th July. So given the likelihood that this provided a boost to some services firms we look for a small upward revision this morning. The services headline index for the Eurozone moved up sharply from June on the first reading, while in contrast the UK measure slipped to its lowest since March. However, both are consistent with strong growth in the sector. In both cases, but more markedly in the UK, inflationary pressures and supply side constraints were noted. UK businesses also continued to point to recruitment difficulties. In the US, the July ISM Services survey will be published. In June the headline index fell to its lowest since February, although its level would normally be seen as indicating strong growth. A further fall in the ISM Manufacturing Index on Monday prompted some speculation that US economic activity may be starting to roll over. Nevertheless, after a big decline in June, it still seems likely that the Services index posted a modest improvement in July. As in the UK, US services companies are complaining about continuing supply issues and recruitment difficulties. It suggests that it might be those factors rather than a lack of demand behind much of the slowdown in activity. Today’s ADP measure of US employment will, as always, be watched for clues on Friday’s jobs report. Expect 800k jobs growth for July which would be a signal that the labour market is robust. However also note that the ADP is often an unreliable guide to the payrolls outturn. Fed Vice-Chair Clarida is set to speak this afternoon. He is seen as one of the Fed’s key policymakers, So his insights into what needs to happen before the Fed starts tapering its asset purchases may be particularly revealing of the policy outlook. Previous comments suggest that he favours taking a cautious approach to cutting back stimulusG10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby) USDJPY - 111.70 981m. 111.40/50 926m. 111.20/30 594m. 111.00/10 603m. 110.50/60 1.46bn (1.38bn C). 109.50/60 500m. 106.40/50 420m. EURUSD - 1.2000 562m. 1.1920 632m. 1.1890/1.1900 416m. 1.1870/80 507m. 1.1850/60 1.96bn (1.21bn P). 1.1830/40 1.30bn (878m P). 1.1800/10 836m. 1.1650 424m. GBPUSD - 1.3750 598m. EURGBP - 0.8600 420m. 0.8550 872m. EURJPY - 129.20 960m. USDMXN - 19.90 445m. Technical & Trade ViewsEURUSD Bias: Bearish below 1.1950 Bullish above EUR/USD opened 1.1863 - the third straight day opening close to 1.1865 The USD broadly eased in Asia - led by a surge higher in NZD/USD EUR/USD is at the session high at 1.1875 heading into the afternoon Buyers are tipped ahead of 1.1850 where it has bottomed last 3 days Support is at the 10-day MA at 1.1836 and break would ease upward pressure Sellers are camped around 1.1900 with resistance at 38.2 fibo at 1.1948 EUR/USD consolidation may continue ahead of US payrolls FridayGBPUSD Bias: Bearish below 1.40 Bullish above. +0.1% at the top of a 1.3899-1.3930 range with morning flow and a softer USD UK's civil servants may return to office for only 2 days a week Range trading likely key in August, providing opportunities Charts; 5, 10 & 21 daily moving averages climb - momentum studies conflict Net bullish setup, but topside progress needed soon to sustain signals 1.3870 10 DMA is initial support - 1.3827 21 DMA is the pivotal level 1.3991 61.8% June-July fall and 1.3998 upper 21 day Bollinger cap at present Break would bring 1.4090 76.4% retracement of June-July fall into playUSDJPY Bias: Bullish above 109 Bearish below USD/JPY does little in Asia, holds in 108.93-109.11 EBS range Bids, support sub-108.90, 108.88 low overnight Safe-haven JPY buys as well as some JPY buy-backs on 109.00 break Japanese importers, investors, others showing interest sub-109.00 Upside now likely capped ahead of daily Ichi cloud base at 109.30 Japanese exporter offers look to have moved down, bounce to 109.50 a sell? Some option expiries today but mostly to upside, from @109.50 Soggy US yields to help cap USD/JPY, Treasury 10s @1.183% in Tokyo AXJ mostly up with Wall Street but Nikkei -0.1% @27,603, E-Minis -0.1% JPY crosses do little, NZD/JPY, ZAR/JPY best bid Japan services still in doldrums, July PMI-services 47.4AUDUSD Bias: Bearish below .75 Bullish above AUD/USD opened +0.41% at 0.7393 after a whippy US session Strong NZD jobs data sent the NZD/USD soaring and dragged the AUD/USD higher... The AUD/USD traded to 0.7411 and was around 0.7405 into the afternoon A close above the 21-day MA (0.7401) and last week's 0.7413 high would be bullish The objective of a break higher would be the 38.2 of 0.7891/0.7289 at 0.7519 Buyers are tipped ahead of yesterday's 0.7357 low

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Dollar Edges Lower; Employment Data Seen Key This Week

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Market Update – August 4 – USD consolidates, Equities Higher, Kiwi Jumps

Market News Today – USD holds at pivot point and struggles for direction. (USDIndex  92.00). Equities close at ATH again (USA500 +0.82% 4423) – strong factory orders and signs of increase in vaccination rates in some key states. Asian markets at 1-week highs Yields lead – down again; 10yr 1.175% close. Overnight – NZD rallies on expectations of rate hikes from August and good jobs data (Unemployment down to 4.0%),  Strong  Chinese Services PMI (54.9 vs 50.3 last month). Gold moves up to $1813 USOil dumps again (missile incident off UAE coast, Iran, UK & US involved) back to $70.00 .

European Open –  DAX and FTSE 100 futures are slightly higher, US futures little changed, after a mixed session in Asia overnight, where Japanese bourses underperformed. The September 10-year Bund yield is up 4 ticks, U.S. futures also fractionally higher, with cash yields still at very low levels. Japan’s 10-year hit zero overnight and the German rate closed at -0.48% yesterday, despite more signs that the current wave of virus infections won’t derail the recovery in Europe, thanks to a successful vaccination campaign. The ECB may have strengthened the dovish language on rates, but it likely to revisit the tapering debate after the summer and Fedspeak from Clarida today will also be scrutinised for hawkish comments.

Today – Final UK & EZ Services PMIs, US ISM non-manu. PMI, ADP employment & remarks from Fed Vice Chair Clarida. Earnings: Commerzbank, Intesa Sanpaolo; Legal & General; General Motors, Kraft Heinz, Uber

Biggest FX Mover @ (06:30 GMT) NZDJPY (+0.71%) Big move ahead of expectations of 0.25% rate hikes August, Sept & October by RBNZ.  Has moved up from 76.00 low yesterday, to breach 77.00 and the 20-day MA today. Faster MA’s aligned higher, MACD signal line & histogram over 0 significantly and moving higher, RS 68 and still rising. H1 ATR 0.125, Daily ATR 0.760.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Deutsche Post Q2 Earnings Report

The Deutsche Post second-quarter earnings report is today. Considering the previous quarterly report, this guide will forecast the company’s second-quarter earnings report. On July 7, 2021, preliminary results for the second quarter of 2021 were announced. Revenue surged by 26% year on year to €22.7 billion in the first  quarter, while free cash flow increased by one-third to €1.9 billion ^[1].

EBIT (earnings before interest, taxes) tripled to about €2.3 billion. In addition, the company’s net income increased to more than €1.4 billion. According to CEO Frank Appel, the profit figures were first-quarter records ^[1].

The business earned €1.13 in earnings per share on a diluted basis, more than quadrupling its first-quarter 2020 results. According to the organization, quarterly operating cash flow more than tripled to €3 billion, while free cash flow increased to more than €1.4 billion. Free cash flow is frequently negative in Deutsche Post DHL’s first quarter, which is typically its weakest of the year.

Its Global Forwarding, Freight division saw forwarding revenue increase 32.7%  year on year to €4.8 billion. This business also comprises its European road transport activities, which increased by 43.6% to €3.59 billion^[1]. This was due to an 18.2% increase in airfreight volumes to 494,000 tons, as well as an 8.8% increase in the Freight division – primarily due to demand from Asia to North America.

Meanwhile, its Supply Chain division, which was exposed to a large-scale overhaul following the disposal of its Chinese assets, saw revenue remain unchanged at €3.24 billion, while EBIT increased by 59% to €167 million. The relatively young e-commerce segment increased revenue by 46% to €1.8 billion, as strong demand in 2020 spilt over into 2021. The supply chain segment, which had lagged behind the other divisions due to the impact of the COVID-19 pandemic on customer activity, recorded 4.7% organic sales growth to €3.8 billion ^[1].

Given the current profits growth, the Group EBIT for 2021 is forecast to exceed €7.0 billion. This includes around €200 million in additional expenses for the one-time corona bonus.The Group now anticipates a free cash flow of more than €3.2 billion for the fiscal year 2021. In 2021, gross CAPEX is estimated to be around €3.9 billion.

Stock Analysis

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Deutsche Post has continued to move upwards for the past five months. The recent low came on March 5 with a low of $48.49. The company’s most recent high came on July 7, when it breached above the $70 mark, trading at 71.28.  The 9-day moving average indicates the positive trend will continue for the German company.

Deutsche Post’s next resistance level, based on its upward trend, is $71, which was its latest high. If the price breaks through $71, it may see some demand on to the next resistance of $80. However, the price may see some downturns. Furthermore, the stock is trading well above its 48 support level [2]

1. https://www.dpdhl.com/content/dam/dpdhl/en/media-center/investors/documents/presentations/2021/DPDHL-Preliminary-Results-Q2-2021-Presentation-2021-07-07.pdf
2. https://finance.yahoo.com/quote/DPSGY/analysis?p=DPSGY

 

Click here to access our Economic Calendar

Adnan Abdul Rehman 

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Dollar Down, Near Recent Lows Ahead of U.S. Economic Data

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Dollar pressured ahead of jobs data; kiwi leaps as rate hikes loom

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McConnell warns Democrats not to end infrastructure debate

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Too embarrassed to ask: what is a share buyback?

There are two main ways for companies to return cash to shareholders. 

Dividends tend to be preferred by income investors; a dividend is a cash payout to shareholders, typically issued on a half-yearly basis. 

The other method is to use a share buyback. This means just what it says – the company buys back its own shares. 

It’s easy to see why shareholders like dividend payouts. But how do buybacks benefit shareholders? Well, when a company buys and cancels some of its own shares, the remaining shareholders are left holding a greater proportion of the company. 

Let’s say a firm has one million shares in issue, and the share price is £10 per share.  It made one million pounds profit last year. So it has earnings per share of £1. 

Let’s say it wants to return the whole one million pounds profit to its shareholders via a share buyback. It buys back 100,000 shares at £10 a share and cancels them. This leaves 900,000 shares in issue. 

That means earnings per share has increased from £1 to just over £1.11, because there are now fewer shares. In turn, assuming that investors keep valuing its earnings on a constant basis, the share price would rise to just over £11.

Fans of buybacks argue that they are more tax-efficient than dividends. For managers, buybacks are also more flexible than dividend payments. Shareholders tend to react more negatively to a dividend cut than to a reduction in buyback levels.

Critics argue that executives have an incentive to use buybacks to meet performance targets linked to share-price growth. So they may curb investment or borrow too much to fund buybacks. 

Timing can also be a problem. Some studies suggest that larger companies in particular have a bad habit of buying back shares near the top of the market, when they’re expensive, rather than nearer the bottom, when they’re cheap.

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General Motors Q2 Earnings Report

The General Motors second-quarter earnings report is due on August 4, 2021. Considering the previous quarterly report, this guide will forecast the company’s second-quarter earnings report.

On May 5, 2021, General Motors (NYSE: GM) posted earnings for its first fiscal quarter. The automaker announced first-quarter results that were fueled by exceptional price and neutral performance in the US, strong credit and residual value performance at GM Financial, and China’s industry rebound ^[1].

The company reiterated its earnings estimates for the fiscal year 2021 in the first quarter. Unadjusted net income for the first quarter was $3 billion, up from $294 million a year earlier, when automakers began closing operations to help manage early breakouts of the pandemic ^[2].

For the first quarter, the automaker earned $4.4 billion in adjusted pretax earnings, up from $1.3 billion the prior year. The automotive industry is now impacted by a global scarcity of semiconductor chips, which is affecting global output.  The chip scarcity has forced automakers to close manufacturing plants for varied lengths of time around the world, resulting in low vehicle inventories on dealer lots. Reduced supplies, on the other hand, have resulted in higher earnings per vehicle, allowing automakers to thrive despite the shortfall. These estimates take into account the likely impact of the chip shortage, which included a $1.5 billion to $2 billion drop in earnings and a $1.5 billion to $2.5 billion drop in free cash flow.

In 2021, the company expects pretax revenues of $10 billion to $11 billion, or $4.50 to $5.25 per share, with adjusted free cash flow of $1 billion to $2 billion.

The car behemoth is expected to beat revenue estimates in the second quarter, but earnings may fall short.

The company has reported higher-than-expected earnings in each of the last four quarters, as well as higher-than-expected revenue in two of the last four quarters.

The first quarter brought in $32.5 billion in revenue for General Motors. As the business continues its comeback, revenues are unchanged from the same period the prior year. In the second quarter of FY2021, the momentum established in previous quarters is projected to continue. In the fiscal year 2021, GM expects total revenue of $136.5 billion.

GM Stock Analysis

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Following its last strong breakout in January, GM stock has been trading sideways for the past six months.

The stock of General Motors fell as much as 18% to a low of 52.63 on July 19. However, that low point was within 1% of the 9-day moving average for GM stock, indicating a lack of momentum.

A seven-week consolidation has resulted in a 64.40 resistance for GM shares. However, if the GM stock breaks above its down-sloping trend line from the early June high, we may see some demand.

While the early-June breakout effort failed, GM stock has remained comfortably above the 46.81 support level, which it cleared on January 12 ^[3].

 

Click here to access our Economic Calendar

Adnan Abdul Rehman 

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Disasters, bunkers and financial collapse: a little not-so-light holiday reading

Usually when I think of you reading the books I suggest for the summer I picture you on a plane and a beach, so I try to make them not too heavy and not too traumatic.

This year I feel less constrained. 

A history of disaster

• SEE MORE Niall Ferguson: why we'll never be prepared for disaster

First up is Niall Ferguson’s general history of disaster: Doom, The Politics of Catastrophe. Think of something terrifying – pandemics, volcanic eruptions, nuclear accidents, tsunamis – and you’ll find it here. The key thing to pull out of Doom is that while we might be great believers in human ingenuity, incompetence is equally impressive.

That makes the distinction between man-made and natural disasters something of a “false dichotomy”. Famines are the obvious example. Think of the Irish famine of the late 1840s, Mao’s Great Hunger, two Soviet famines (1921-1923 and 1932-1933) and Bengal in 1943.

Failed harvests played their part, but mass starvation was a result of government or market failure. The same is true of everything from floods – floodplains and bad drainage – to the Hindenburg airship – you could blame the lightning for it burning from “nose to tail in 34 seconds” but the pilot’s risky “high landing” did not help.

Covid, too, is perhaps in the same category. Natural or not, says Ferguson, the response to it has been a classic example of “bureaucratic sclerosis”. Despite being technically prepared for a pandemic, civil servants everywhere served up a catalogue of mistakes, including testing, tracing, pointless panics over the wrong bits of equipment and ill thought out lockdowns. These errors mostly made things worse. History is mostly about progress but it is punctuated by “unexpected disruptive events” we just aren’t good at preparing for.

What next? Ferguson’s final chapter dwells on the miseries that might be yet to come: a more lethal pandemic, alien invasion, environmental collapse or “tiny black holes that would swallow up the planet”. Then there’s unfriendly AI: what if we tell machines to stop climate change and they decide the best way is to eliminate people?

A bit of bunker tourism

Enjoying your holiday? How about a nice underground bunker next year? Just in the nick of time comes “urban explorer” Bradley Garrett’s Bunker: Building for the End Times, a glorious yomp through the “disaster architecture” fantasies of the parts of the global population living with constant existential anxiety.

This includes governments (Switzerland has bunker capacity for 8.6 million people), the US’s “preppers” and the super-wealthy, some of whom see “survival of the richest” as a perfectly reasonable part of the endgame. Garrett takes us to panic rooms in gated communities, refurbished wartime ammunition stores, New Zealand estates (before the pandemic, the country was considered the best place to sit out even the worst Ferguson can think of) and plans for whole communities to live for years underground.

I’m not mad for the basic options, although I am getting a survival bag so that I live for five days longer than you do. But I am keen on The Survival Condo – once a Cold War missile silo, now an “opulent” bunker complete with apartments, one done as a log cabin complete with fake fire. They will come complete with supermarkets and yoga classes. Oh, and guns. Lots of guns. If I need a bunker to participate in the “survival and rebirth story” (yes, prepping does have religious overtones) I’ll take this over a buried shipping container any day.

You don’t need to ask what’s driving this urge to dig down. Just see Ferguson’s list! But it is interesting that money looms large. “I think the economy goes down first” one US prepper told Garrett. “The country is $23-something in debt. How do you recover from that?” Well quite.

How the Asian financial crisis set up our current crop of bubbles

• SEE MORE Russell Napier: Asia, financial repression and the nature of capitalism

And so we turn to Russell Napier’s The Asian Crisis: Birth of the Age of Debt. Napier was working in Hong Kong in 1997, and the book is partly a compilation of the excellent notes he wrote during this “collapse of the entire financial system” and partly an explanation of how the crisis set us on our current financial path. It gave us the deflationary impulses that gave us the low rates that caused the Great Financial Crisis, that then gave us quantitative easing, asset bubbles and of course the inflation we now see – the inflation that will eventually crash markets.

The past decade has been good to investors – the endless easy monetary policy Napier writes about has given us long and happy bull markets. Preppers worry about YOYO (you are on your own – so be resilient). For this cycle’s equity investors it has been more YOLO (you only live once – so bet big).

• For 30% off a copy of The Asian Crisis, order direct from the Harriman House website and put in the code AFC30.

A history of market speculation

Some would have you believe that this is a new dynamic. It is not. For evidence you will need Playing the Market: Retail Investment and Speculation in Twentieth Century Great Britain by Kieran Heinemann. It turns out that investment and speculation (there is a “hazy line” between them) have long been “mass activities” in the UK.

In 1850 about 250,000 people owned shares. By the 1930s it was 1.3 million and The Economist was happily noting the “great increase in the investment habit among classes in which it was formerly uncommon”. By the 1950s everyone was at it. A study by the Acton Society Trust found factories with “gambling groups” of workers, one of whom reported that “a man in my shop who used to back horses told me that he had found a better method – industrial shares – and now he has got me doing it too”.

Sound familiar? Thousands of new investors have entered the markets in the past two years. When it all comes crashing down (impossible to time, but inevitable) they may find they feel a bit YOYO.

With that in mind, here is one bit of prepper advice. “Three is two, two is one, one is done,” meaning always have a back-up plan. You might not always make it to your bunker when disaster strikes – ask the Russian oligarchs who left leaving for New Zealand too late and spent lockdown in Moscow. Look at alternatives. Translate that to money and the advice is similar – diversify.

A dreich novel to end with

Finally, a bestselling novel – Summer Water by Sarah Moss. Some will want you to read it for its intense depictions of family relationships. But I offer it to you (in particular to readers in the travel industry) for its relentless rain. The characters are on holiday in Scotland.

They are never really dry. “What’s got into you?” says Mum, “Cheer up, it can’t rain much longer.” It does. This year you might be convinced you need to buy a domestic holiday home. But let’s not forget one of Napier’s core rules for analysts – no extrapolation allowed. Next year you probably won’t want one.

• This article was first published in the Financial Times

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Tencent shares dive as China targets video games industry

China’s ongoing crackdown on different segments of the economy took yet another twist on Tuesday. 

Hong Kong-listed shares in internet company Tencent – which makes 30% of its revenue from its online games business – fell as much as 12% on Tuesday after China released an article likening the video games industry to “spiritual opium” and “electronic drugs”. 

The article was written by the Economic Information Daily, a newspaper backed by the state-backed Xinhua Agency, and said that minors were addicted to virtual games and called for sweeping reforms to the industry. 

The article, which has now been deleted, did not explicitly name Tencent but made references to the Chinese video gaming’s flagship game, the “Honour of Kings”. 

"No industry, no sport, can be allowed to develop in a way that will destroy a generation," the newspaper said, likening online video games to "electronic drugs,” according to Reuters. 

Shares in rival video game firms also took a hit, with the likes of NetEase dropping as much as 15%, XD Inc falling more than 20%, and GMGE Technology Group, a mobile-game publisher down 16%. 

How did Tencent react? 

Tencent was quick to respond to the indirect criticism, introducing curbs on Tuesday on how long minors can play its “Honour of Kings”  game. Video game hours for holiday periods were slashed from 1.5 hours to one hour. For holiday periods, hours were reduced from three to two hours. This helped the company’s share price pare some losses, but it was still down by around 6%. 

This is not the first time Chinese regulators have attacked the gaming industry, and appears to be the latest move in a series of recent crackdowns launched by China. 

China’s recent crackdowns 

Investors were already reeling from China’s crackdown on internet companies in recent days. 

But at the end of July, a leaked memo proposed radical changes to the country’s $100bn private-sector education industry, including banning companies from accepting foreign investments, banning them from being acquired, prohibiting them from raising funds via the stockmarket and outlawing them from providing tutoring services on weekends and holidays. That sparked a sell-off in both education companies and tech companies in the last week.

China’s crackdown on private tutoring came days after Didi Chuxing, a minicab app in the vein of Uber, was removed from domestic app stores shortly after its $4.4bn blockbuster listing on the New York Stock Exchange. The Cyberspace Administration of China (CAC) launched a cybersecurity review into the firm last month to conclude whether it illegally collects and uses its customers’ personal data, something Didi denies. 

And last November, China suspended billionaire Jack Ma’s Alibaba-backed Ant Group’s $34.5bn IPO in Shanghai and Hong Kong. Chinese regulators imposed a $2.8bn fine on the Alibaba affiliate earlier this year in April. 

Since then, China has been attacking one sector after another. 

Why is China doing any of this?

There are multiple theories. Some small education firms went bust as a result of the Covid pandemic, while other larger online education platforms thrived and attracted widespread funding. So part of the reason, perhaps, may be the government trying to bridge the gap in a socialist society.

And it could be argued that Chinese firms embracing big tech abroad and people receiving private education could somehow “Westernise” the country. That’s something that would not be well received by the Chinese Communist Party. 

What does this mean in practice?

China’s latest move has sparked fears that its crackdown is affecting all industries, and online entertainment appears to be the next casualty. 

“There is speculation that Chinese healthcare stocks might be next in the firing line,” says Richard Allen, investment manager at investment services group Ravenscroft. 

Chinese tech stocks suffered the biggest monthly contraction in July, since 2008 at the depths of the global financial crisis. 

China’s multiple crackdowns has left many investors in doubt, including clients of Goldman Sachs, who are pondering whether China’s stockmarket has become too risky to invest in, according to Bloomberg. 

Other analysts think China’s stringent regulatory environment is overshadowing Asia’s economic growth prospects. 

“This is turning out to be one of the big stories of 2021 for global markets, overshadowing what many people thought would [be] the key focal point for Asia – namely a year of strong economic growth,” says Russ Mould, investment director at AJ Bell. 

In a double whammy day for Chinese stocks, companies that make semiconductors for the vehicle manufacturing sectgor also fell on Tuesday after the government launched an inquiry into potential market price manipulation, although no firms were named. 

There’s clearly no dull moment when it comes to regulation and China at the moment. Investors may want to wait until China’s crackdowns are fully over before snapping up any stocks. But on the flipside, Chinese regulators could also surprise markets with positive news. Bejing called for calm last week after it held a call with senior international executives to reinstate investors’ faith after the brutal market rout. 

So if you own Chinese stocks via funds, there is less reason to worry, but investing in Chinese stocks directly requires a lot more caution and risk appetite to weather any shock losses.

from Moneyweek RSS Feed https://moneyweek.com/investments/stocks-and-shares/tech-stocks/603654/tencent-dives-as-china-targets-video-games
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What does ISM Manufacturing data tell us about July NFP?

The latest CFTC data showed that investors continued to build up USD longs ahead of the Fed meeting in August. Given the downside in USD last week, this dynamic was quite unexpected. It can be assumed though that by selling dollars after the Fed, market participants were either taking profits or pursuing short-term speculative goals. The data also showed that more long positions of speculators were closed in CAD and NZD futures, i.e., in currencies that have a relatively high correlation with the recession-recovery cycle of the world economy. This fact, of course, does not inspire optimism.Aggregated data on the currencies of the G10 countries showed that net long position on the dollar increased in the week ending July 27 from 1.5% to 3.0% of open interest. The dollar increased its advantage against all G10 currencies except for the CHF.The changes in the CFTC positioning data indicate an increase in bullish sentiment for the dollar, despite the negative reaction of the US currency to the July Fed meeting. This may indicate that underlying drivers of the weakness could be short-lived as Fed tightening is in cards despite relatively dovish message last week, which should offer broad support to USD.The July ISM Manufacturing Activity Report showed improvements in two key components - prices and employment. The purchasing managers said that hiring of workers increased compared to the previous month while the situation with high prices for raw materials also changed for the better. The hiring sub-index rose from 49.9 to 52.9 points:At the same time, the prices sub-index fell from an extremely high reading of 92.1 to 85.7 points:Despite the broad indicator fell short of forecasts, the details of the report pointed to the dynamics favourable for a strong NFP report on Friday, and hence the stronger dollar. Recall that the major constraint in the expansion of US jobs was the labor shortage. It is clear from the ISM report that the manufacturing sector has begun to see positive shifts for job growth.The leading ISM new orders declined for the first time in several months (from 66 to 64.9), which may be an early sign that activity in the sector will soon plateau.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/what-does-ism-manufacturing-data-tell-us-about-july-nfp"
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BoE in the spotlight

The BoE decision tomorrow is coming into view with the UK expected to join Fed and ECB and signal cautious patience for now.

After the inflation scare over the spring, attention has turned to growth dynamics, and particularly the downside threat from the spreading Delta covid variant along with headwinds from various constraints including labor and materials shortages, supply chain disruptions, and rising prices. Covid cases are continuing to fall sharply in the UK, while the link between new cases and serious illness and death has clearly been smashed. Even normally pessimistic experts in the UK have been admitting that the country is nearing herd immunity, even against the delta variant. Well over 90% of the adult population in the UK have a level of immunity, whether from vaccination, natural infection or both. Those impacts were highlighted in last week’s slower than expected US and German GDP reports. And while many of those drags should be seen in upcoming data, they are expected to dissipate into the end of the year.

In UK, the final June PMI surveys are due, although final readings are not normally of too much interest for markets. The preliminary manufacturing and services PMIs showed an unexpectedly sharply correction from series or near-series record highs that were seen in June, though still showing an overall robust level of continuing expansion. The data didn’t stop the IMF this week from raising its 2021 UK growth forecast to 7.0%, which is their joint fastest growth projection out of the major advanced economies.

The BoE’s Monetary Policy Committee meeting will gain attention after ECB and Fed have already signaled a cautious wait and see stance over the summer and the BoE is likely to follow suit on Thursday. The Old Lady will also release is latest quarterly Monetary Policy Review, which is likely to come with upward revisions to both GDP and inflation projections. But, despite this and that fact that two MPC members (Saunders and Ramsden) have lately turned relatively hawkish, the consensus expectation is for unanimous 9-0 votes at the nine-member committee to leave both the repo rate and QE total unchanged.

The phasing out and upcoming ending of the government’s pandemic wage support scheme is a particular near-term worry for the BoE, given the risk of higher unemployment. The ongoing evolution in the pandemic is also a concern, both globally and domestically. The UK last week saw a pronounced decline week-on-week levels in new Covid cases, although the prognosis remains tentative.

In FX market ahead of the BoE, the Pound has traded modestly firmer so far today, though has remained within Monday’s ranges versus the USD, EUR and JPY, among other currencies.

The GBP despite already being an outperformer on the year so far, may have further to rally, with the currency remaining at relatively weak historical levels by the measure of the inflation-adjusted broad trade-weighted index. This will depend on the Covid situation remaining under control and global sentiment holding up, as the UK currency has an underperforming tendency during sustained periods of risk-off positioning in global markets (being the currency of an open economy with high deficits).

Currently the GBPUSD is resuming northwards move after the corrective dive from 1.4000 to 1.3870. Significant is the fact that is retesting for a second week in a row the midpoint of 2021’s range (1.3560-1.4280). The daily RSI indicator is presenting the latest 10-day rebound but remainsclose to 50, suggesting lack of direction in the medium term. The MACD lines  eventhough they remain below 0, reflect decisive icrease of buying interest since the mid of July as they try to surpass enter the positive terittory.

The asset needs to process into a decisive break id 1.4000 (61.8% Fib. level for 2021 and June-July resistance), in order to prompt further positive bias, with next Resistance at  year’s highs, i.e. 1.4250. A break of the latter could triggered attention to 5-year peak.

In the flipside, a drift down to 1.3815, which confluence the 20-day SMA and 38.2% Fib. retracement level, could attract sellers. That said, such a downleg could bring 23.6% Fib. level at 1.3715 and July’s floor at 1.3570 back into play.

 

Click here to access our Economic Calendar

Andria Pichidi 

Market Analyst

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