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Daily Fundamental Analysis: 3 Sep 2015

Discussion in 'Fundamental Analysis' started by Sandra S., Sep 3, 2015.

  1. Sandra S.

    Sandra S. Forum Member

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    We begin with Brazil where economic and fiscal uncertainty is making international investors increasingly uneasy.

    1. The latest industrial production report showed an 8.9% contraction.
    [​IMG]
    Source: Investing.com
    2. The Brazilian real breached 3.75 to the dollar. Below is the percent move vs. the dollar over the past year. This is likely to worsen inflationary pressures as well as make US dollar denominated liabilities increasingly more expensive.
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    3. Here is how Brazil's dollar-denominated debt compares to other emerging economies.
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    Source: @MxBtdr, Wolf Street
    4. The 10-year domestic government bond yield broke above 14.75% as foreigners exit the market.
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    Source: Investing.com
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    Source: @BloombergEM
    5. Sovereign CDS spread (5yr CDS shown) spikes on rising fiscal concerns. I would be surprised if we don't see more negative action from the rating agencies in the near future.
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    Source: @markets; thanks Mike!
    Turning to China, I continue to be puzzled by the nation's policymakers with respect to the yuan exchange rate setting. Is China now strengthening the yuan? While some are reading this as a manifestation of a mysterious master plan, to me the decision makers simply seem to be lost. In fact this currency management looks more botched than the effort to manage the stock market.
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    Source: barchart
    Similarly there is a problem in China's money markets. The overnight rates rose as a result of more capital outflows in spite of PBoC's recent liquidity injections. The overnight repo rate and SHIBOR are now above 2%. As the PBoC lowers its target lending and deposit rates, the actual overnight rates rise. The central bank is allowing monetary conditions to tighten while trying to ease across the board. Madness.
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    Unease around China's economic trajectory is now visible in a number of global indicators. Here are a couple of examples.
     
  2. Sandra S.

    Sandra S. Forum Member

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    1. China's Economic Policy Uncertainty Index has risen sharply.

    [​IMG]

    2. More importantly, we see a spike in the correlation between China's and US equity markets.

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    Source: @markets

    Speaking of China, Western banks' exposure to the nation's credit remains fairly benign. There is little evidence of any direct threat to the financial system.

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    Source: @business

    Nevertheless, China's private credit has risen massively over the past couple of decades. Currently as a percentage of the GDP, only Hong Kong has greater credit/GDP measure.

    [​IMG]
    Source: ‏@raluca3000

    Now lets go through a number of key trends in the US economy. Once again, the nation's economy has shown resilience in the face of the global slowdown

    1. The labor markets situation in the US remains strong.

    The ADP report came in a bit below expectations but not terrible.

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    Source: ADP
     
  3. Sandra S.

    Sandra S. Forum Member

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    Small/medium-size business still driving job creation in the US. This is what's needed in Europe now.

    [​IMG]
    Source: ADP

    Gallup's job creation index continues to point to a potentially strong payrolls report this Friday. By the way, the equity makers may react quite negatively to a better-than-expected jobs report, as the probability of a September rate hike will rise.

    [​IMG]

    2. US productivity jumps as unit labor costs move lower. Where are those "wage pressures" we've been promised?

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    Source: BLS

    3. Construction spending in the US has strengthened.

    Office construction spending for example is rising quickly, though remains below previous two peaks. Will we go above the "resistance level" this time before hitting another recession?

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    Also, manufacturing construction spending spikes, driven by the chemicals sector taking advantage of cheap oil & gas feed.

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    On the other hand private residential construction, while improving, remains significantly below historical averages. Here it is as a percentage of the US GDP.

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    4. US auto sales surprised to the upside, reaching the highest level in a decade.

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    Auto sales are helped by cheap and easily available financing, including long-dated and subprime loans (discussed a couple of days back).

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    Source: bankrate.com

    The demand for autos is definitely on the rise as "vehicle miles traveled" is near record levels (note that the chart below is not seasonally adjusted).

    [​IMG]
     
  4. Sandra S.

    Sandra S. Forum Member

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    The demand for heavy duty trucks in the US has also been strong (in the chart below some are being exported).

    [​IMG]

    One helpful factor on heavy truck sales has been the ongoing decline in diesel prices, now at levels not seen seen since 2009.

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    Staying with the theme of fuel prices, here is an update on US energy markets.

    1. US gasoline supply issues related to the recent refinery closures seem to be abating as gas prices fall across the country,

    [​IMG]

    2. Gasoline production remains elevated on strong demand.

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    3. Turning to crude oil, the markets reacted negatively to a larger than expected inventories increase. In a steep crude oil curve (contango), "cash and carry" positioning is lucrative, encouraging more storage.

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    4. On the other hand, more evidence is emerging that US production is now declining (although still significantly elevated relative to last year). This could prove to be bullish going forward. Of course there is a natural cap on prices as rigs will probably be brought back online in the $55-$60/bbl range.

    [​IMG]

    5. Apparently (according to BAML) the weakness in crude oil in August has been driven by falling global demand instead of excess supply (not the case in the US).

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    Source: ‏@ReutersJamie, BAML

    As discussed before, the current market volatility its making its way into the various "stress indices". Here is the Economic Policy Uncertainty Index for United States.

    [​IMG]

    Another "stress indicator" is he euro becoming a major "risk-off" asset (similar to treasuries, Bunds). The currency is now inversely correlated with the S&P500 and other "risk-on" assets - similar to the way it behaved around the time of the financial crisis.

    [​IMG]
    Source: @Eurofaultlines

    US equity investor sentiment finally returns to reality - a healthy adjustment.

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    Source: Yardeni Research

    Finally, here are a couple of updates on commodity markets outside of the energy sector.

    1. Weak Brazilian real (and the Colombian peso) is pressuring coffee prices lower.

    [​IMG]
    Source: barchart

    2. Here is a 5-year chart of US wheat prices. The 2012 spike was due to the historic drought in the Midwest.

    [​IMG]
    Source: barchart

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

    1. How do major Asian nations view each other?

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    Source: @pewglobal

    2. Creative destruction? Uber forces falling demand for New York City taxi madallion (permit).

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    Source: @AEI

    3. How Trump and Bush are viewed - broken out by race of potential voters.

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    Source: ‏ ‏@PostPolls, @aaronblakewp

    4. Here is the "favorability" situation for the Democrats.

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    Source: ‏ ‏@PostPolls

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    Source: ‏ ‏@conradhackett, Politico

    5. US college students now prefer marijuana to cigarettes.

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    Source: @stefaniei, @WSJvideo
     

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