Eurozone PMI hits 34-month high; French election weighs on euro
- French election casts shadow on Europe numbers
- Russia becomes king of crude with help from China
- Small tail wags big dog: Euro breakup chances remote, worry looms large
Chinese appetite for all things German helps boost Europe manufacturing
IHS Markit’s flash composite Purchasing Manager’s Index (PMI) rose to an almost three-year high of 56.1 in January. The reading well exceeded the consensus forecast, reported Reuters.
The strong numbers have been helped by continued growth of Germany’s exports to China.
Small tail wags big dog: Euro breakup chances remote, worry looms large
The risk of European breakup, while still very remote, is a big worry for credit investors. European investment grade credit (as gauged by the spread to LIBOR of credit default swaps on a basket of credits) has cheapened relative to US investment grade credit since the US elections. Notably, that difference isn’t reflected in markets that typically trade in tandem with credit spreads, for example, equity volatility. There are two reasons for the difference. One is wider European financial spreads: the European economy may be doing better but some European financials look dicey compared to their American peers. Another is so-called redenomination risk: In the very unlikely event that France might leave the Eurozone, some French corporates might repay their debt in devalued national currencies rather than in euros.
That might be a small risk for the time being, but investment grade bond buyers look for a very high degree of safety. Most of the worst-performing names in the ITRAXX European investment grade credit default swap index are French, led by Electricite de France.
Oil prices driving European stock rally
Oil prices at a two-year high are driving today’s rally in European stocks. The oil and gas sector of the broad European index was up 1.65% at 9 am EST. Tech was up 0.88% and Industrials up 0.6%.
Russia becomes king of crude with help from China
Russia has overtaken Saudi Arabia as the world’s largest crude oil producer, reports Bloomberg. The US now follows Saudi Arabia as the third largest.
The country jumped into first place in December helped by a sharp increase in China’s appetite for Russian oil, with China now importing more Russian oil than Saudi.
Turkish banks lead index gains today
Strong gains among Turkey’s largest banks led BIST 30 Index today, as a more stable Turkey lira reduced fears of credit stress among Turkish borrowers. Turkey remains one of our favorite emerging markets. Reviving world trade benefits Turkish exporters, and the expanding China-led One Belt, One Road development project will help Turkish transportation and communication infrastructure.
Auto companies lead HSCEI
Great Wall Motors was the top performer overnight in the Hang Seng China Enterprises, or H-shares, index, up 3.85%, followed by Dongfeng Motors at +2.85%.
Raw materials boom lifts Brazil
Petrobras was up 2% at 9 am EST. Petrobras, Cia Energetica de Minas and Petroleo Brasileiro together accounted for 100 points of the 500 point gain in the IBOV Index. The overall index was up 0.72%.
China to phase in new asset-management rules
Chinese financial regulators are coordinating to draft new rules that would make it clear the government does not guarantee asset-management products. Bloomberg reported Tuesday that the new rules would be phased in when existing products mature, as regulators attempt to manage the public perception that the government would intervene in the event investments went bad.
The move comes as the Chinese government has identified controlling financial risk as a priority for 2017. Specifically, the proposed rules would ban financial institutions from investing the proceeds of asset-management products in assets deemed too risky and would require 10% of client fees to be set aside as reserves.
US theme still optimism
Unlike Europe, the US stock market rally this morning is NOT driven by oil and commodities. Apart from Mondelez (an M&A target), the S&P 100’s best performer is Wal-Mart, up by 3%, followed by Metronic, Colgate-Palmolive, and Halliburton. Laggards in the broader S&P 500 index are concentrated in interest-sensitive stocks like REITs. The US theme remains economic optimism.
Alibaba extends big data reach with retail move
Alibaba has entered into a partnership with one of China’s oldest and largest retail players, Shanghai Bailian Group Co. The supermarket and department store chain will receive upgrades to customer relations and logistics, while Alibaba extends its big data reach, allowing the company to monitor brick-and-mortar transactions in real time.
Shares of Bailian rose to the 10% maximum in trading on Monday in Shanghai. The move from the tech-giant, which all but vanquished Amazon from China, comes after Amazon unveiled Amazon Go in December, in another effort to integrate the traditional retail experience with e-commerce.
5-Year TIPS yields fall as yen declines
As Japanese investors buy Treasuries in response to a rising dollar, TIPS (inflation-indexed) yields fall alongside the depreciating yen.
CapitaLand, Unilever Indonesia up
CapitaLand (Singapore) was the top performer in the FTSE ASEAN 40 today, up 2.4%, followed by Unilever Indonesia (+1.4%), despite a downgrade from some regional brokers. Unilever’s local revenues are rising as the market for halal food products surges in Indonesia and Pakistan.
French election casts shadow on Europe numbers
As Marine Le Pen gains in polls ahead of France’s first-round vote in April, her threats to pull France out of the euro are casting a shadow over positive economic data coming out of Europe. The Financial Times notes that, despite the low likelihood Le Pen would win in the second round, surprises in both the US election and the Brexit vote have given investors reason to watch closely.
Against this backdrop, the euro and French bonds are selling off, with the spread between 10-year French debt and equivalent German bond yields reaching its highest point in more than five years.
Emerging markets outperform (well, sort of)
On a 12-month basis, the MSCI Emerging Markets Index has outperformed the S&P 500. Of course, February 2016 was a tough month for emerging markets, after the Chicken Little China scare. Year-on-year comparisons favor emerging markets because of the low starting point. Nonetheless, emerging markets as an asset class are drawing flows from investors looking for better value than in pricey industrial country stock markets.
The top performer among major emerging markets was Brazil, due to a combination of currency and stock price appreciation. Rising raw materials price buoyed Brazil, and that trade probably has reached its used-by date. The underperformers such as Southeast Asia and Turkey have done better since the beginning of 2017 and stand to benefit from reviving world trade, strong Chinese growth and China’s One Belt, One Road infrastructure invesmtent plan.
Norway fund should invest in unlisted infrastructure: report
A new report to be presented at a closed door session of Norwegian lawmakers on Wednesday argues that the country’s $900 billion sovereign wealth fund should be allowed to invest in unlisted infrastructure projects, reports Mikael Holter for Bloomberg.
In the report, the Institute for Energy Economics and Financial Analysis argues that returns from investing 5 percent of the fund’s capital in these assets could see returns of 12% to 15%, annually. It comes after requests from the central bank to add the asset class were rejected last year.
Japan PMI up three straight months; weaker yen not answer for US: Nomura
Manufacturing activity in Japan continues to accelerate as the country’s PMI in February was up for a third straight month to 53.5 points. The output index, new orders index, supplier delivery times index, and the employment index all continued positive trends, while the stock of items index fell.
Despite concerns that the Trump administration might raise the issue of currency devaluation during the US-Japan summit this month, the subject was reportedly avoided for the time being. Nomura pointed to estimates which indicate that, contrary to common assumptions, a stronger yen may actually worsen the US trade deficit with Japan.
China recovery, DM stimulus tailwinds may increase into 2018: Citi
A recent Citi report has optimistic things to say about the outlook for 2017, noting that “a better-synchronized global recovery seems to be underway at present, making the current bout of global economic reflation more resilient, with China’s surprising pickup now feeding through.”
The report went on to say that China’s large trade surplus, along with potential for fiscal stimulus in the US and Europe, could see the tailwind increasing through the end of the year.