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Daily Fundamental Analysis: 2 Sep 2015

Discussion in 'Fundamental Analysis' started by Sandra S., Sep 2, 2015.

  1. Sandra S.

    Sandra S. Forum Member

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    Greetings,

    We begin with an update on global manufacturing trends. Here is the latest:

    1. In the United States the ISM Manufacturing PMI report showed how the recent US dollar strength is choking off American manufacturing recovery.
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    Source: St. Louis Fed
    New export orders have weakened sharply as a stronger dollar makes US products more expensive for foreigners (note that PMI < 50 means contraction).
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    Moreover, over half the respondents indicated that customers' inventories were too high. This doesn't bode well for new orders going forward.
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    Source: ISM, h/t @NickatFP
    2. In Europe the Markit manufacturing PMI report showed a surprising slowdown in Ireland's manufacturing sector.
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    Source: TradingEconomics.com
    3. Energy markets weakness is taking its toll on Norway's manufacturing.
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    4. The manufacturing sectors in Brazil and Russia continue to contract.
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    5. I discussed the situation in China and in other Asian economies yesterday. Put all this together and it becomes clear that the slowdown in manufacturing activity is a global trend.
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    Source: Markit
    We had another ugly market open in Shanghai. Time to arrest more people for spreading negative rumors?
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    Source: Investing.com
    No worries, the "Beijing put" is still in play as China Securities Finance Corp. will likely step in to buy shares of state companies again. After all the government already owns these firms - why not increase the holdings?

    In spite of the recent selloff, according to some measures, mainland-China's share prices are still quite rich.
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    Source: @business
    Commodity-export-depended economies remain under pressure and this is not limited to emerging markets.
     
  2. Sandra S.

    Sandra S. Forum Member

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    1. Australia's GDP growth disappoints.

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    2. Canada officially enters a recession - a mild one so far.

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    Turning to Europe, here are select economic trends.

    1. Italy had two consecutive quarters of growth for the first time since 2011. How long can it manage to stay out of recession?

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    2. The Eurozone unemployment rate was better than consensus - down to a 3.5-year low. The health of the labor markets however remains highly uneven across the member states.

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    Source: ‏@fastFT

    3. The Swiss National Bank (Swiss central bank) FX holdings (mostly euros) continued to rise in July. The latest increase was driven by Greece, with some private sector flows from Greece (and possibly other periphery nations) going outside the euro area. This tells us that the SNB is not willing to let the Swiss franc strengthen indefinitely.

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  3. Sandra S.

    Sandra S. Forum Member

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    In the currency markets we continue to see the Brazilian real moving lower, hitting 3.69 to the dollar on Tuesday (about a 40% decline in 12 months). This is troublesome, given the size of Brazil's dollar-denominated debt.

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    Source: barchart

    Here is an interesting diagram describing the vicious cycle of currency wars and disinflation. Doesn't look like a "self-stabilizing" system, does it?

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    Source: @vexmark, Morgan Stanley

    The latest market turbulence has had a fairly severe impact on sentiment in the US, which is already visible in high frequency data. Here is the IBD/TIPP US Economic Optimism Index.

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    This is supported by the Gallup Economic Confidence Index. Ultimately this poor sentiment is expected to translate into weaker spending and investment over the next couple of quarters.

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    Source: @GallupNews

    Related to the above, the market volatility is making its way into the various market stress indicators such as the widely followed Cleveland Fed Financial Stress Index. Here is the stock market component of the index.

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    And this is the whole index.

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    A somewhat tighter picture in US funding markets should be getting the Fed's attention as well. Here are some examples:

    1. The effective fed funds rate.

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    2. Commercial paper rates in certain markets have risen.

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  4. Sandra S.

    Sandra S. Forum Member

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    3. General collateral overnight repo rates.

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    Source: DTCC GCF Repo Index®

    This represents tighter financial conditions, which is obviously not a great time to be raising rates.

    Speaking of repo, the 10-year treasury note is trading on special (tight availability of securities) as the repo rate on this specific security declines sharply.

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    Source: ‏@ScottSkyrm

    For those who worry that China's (or other nations') selling of treasuries will become a disaster for the US, don't. There is no shortage of foreign private sector buyers.

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    Source: @ReutersJamie

    Now let's take a look at some observations on US equity markets.

    1. High-net-worth investors are using this volatility as an opportunity to buy.

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    Source: @business

    2. After-tax US corporate profits look strong.

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    Source: @RyanDetrick

    3. Here is how the 5-day correction compares to other 10% and greater selloffs.

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    Source: @vexmark

    Finally a note on the US crude oil markets: The API reported a massive spike in US crude oil inventories (crude in storage). Crude oil futures retreated sharply and crude oil implied volatility spiked in response.

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    Source: Investing.com

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    Source: barchart

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    Source: barchart

    Turning to Food for Thought, we have 5 items this morning:

    1. Donald Trump breaks away from the pack in the 2016 Republican nomination national poll average.

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    Source: RCP (average of recent national polls)

    2. How scientists in different fields are viewed across the political spectrum.

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    Source: @paul1kirby

    3. Statistics on cigarette smuggling across state lines.

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    Source: ‏ ‏@elenaholodny

    4. Homicides are increasing in a number large US cities.

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    Source: ‏ ‏@nytimes

    5. This map shows the shift in the US mean center of population (the equivalent of "center of mass") since 1790.

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    Source: ‏‏@MaxCRoser
     

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