“I hope that in a fortnight I will become your president. I want to become the president of all the people of France – the president of the patriots in the face of the threat from the nationalists.”
Emmanuel Macron, leader of French En Marche party, 4/23/17
FAST FACTS ABOUT TODAY’S ECONOMIC DATA:
- Gold appears exposed to downside risk. We initiate short view.
- Discretionary joins Tech and Financials in beating EPS expectations.
- Dallas Fed (16.8) indicated sloid growth in April.
- Chicago Fed National Activity Index indicated slower growth in March.
- German confidence at highest level since 2011.
WITH MACRON THE ASSUMED WINNER, NOW WE MOVE ON TO OTHER THINGS:
Who would have guessed that every single global asset and market would be tied to an election in France? Who would have guessed that global markets (ex-China) would respond positively by 1%-3% when the outcome turned out exactly as prediction markets thought it would?
But this is the world we live in now, where investing boils down to how well you can handicap tweets, one-time events, policy confusion, robot traders, and geopolitical risk. Kudos to those who bet the farm into the weekend and got it right. Let’s see how well you do on the unknown “massive” tax cut this Wednesday, the Healthcare vote that may or may not happen this week, Infrastructure spending and border walls, North Korean crisis, China going after leveraged trading, and oh, that pesky government shutdown risk. Yeah, we’ll see alright.
Here’s how we see the world, barring some tweet barrage that makes us rethink everything …
- S. Equities are fully valued. But depending on how much of a blend we get between tax cuts / fiscal spending out of D.C. in the coming weeks, there could be a further reallocation out of bonds and into stocks. Our best idea on how to play the U.S. is to stay short Bonds, and to be selective on equities. We like housing. We like energy. We still like financials. If rates will rise, banks will do well and Utilities and Staples should underperform. As for the overall S&P, until we know about tax cuts, there’s more downside risk than upside potential…but downside is limited.
- All the problems are out of the way for Europe until September, when German elections will be held. Macron likely wins big in France. The ECB is tapering, which should be beneficial to Equities versus Fixed Income. We continue to like the STOXX index.
- If European stocks are going to move higher, while U.S. stocks have limited downside, and rates are likely going to rise, then this puts more pressure on central banks to hike rates. With that in mind, Gold is exposed significantly to downside risk. Today we initiated a Short Gold view.
For a listing of all our active macro trading ideas, see table at the end of today’s report.
TECH, DISCRETIONARY, AND FINS LEAD Q1 S&P EARNINGS:
As of April 20th, 95 of the S&P 500 Index companies have reported Q1 earnings, of which 71 have beaten earnings (74.74%) and 16 have missed (16.84%), albeit on lowered estimates. Thus far, the beats have been led by the Tech, Consumer Discretionary, and Financial sectors, as 12 out of the 13 Tech that reported earnings, 12 out of the 14 Consumer Discretionary, and 20 out of the 26 Financials companies that reported earnings have beaten estimates.
Furthermore, over the past few weeks, Wall Street analysts lowered their Q1 EPS estimates by -$0.03/share to $29.11. Thus, they also lowered their 2017 EPS estimates by -$0.12/share to $129.66 and their 2018 EPS estimates by -$0.11/share to $146.36. This implies EPS growth of +22% Y/Y and +13% Y/Y in 2017 and 2018, respectively. We are still below those lofty forecasts, but we still see decent EPS growth for 2017 and 2018.
CHICAGO FED NATIONAL ACTIVITY SLOWED IN MARCH:
According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) fell -0.19 points to +0.08 in March; therefore, indicating slower growth. Moreover, the three-month average fell -0.13 points to 0.03. In the month, PCE & Housing improved +0.01 points to -0.05, Production & Income was unchanged at +0.04, Sales & Inventories fell -0.02 points to +0.07, and Employment & Hours fell -0.18 points to +0.02.
DALLAS FED MANUFACTURING INDEX INDICATED STEADY GROWTH IN APRIL:
Today, the Dallas Federal Reserve reported that the Current General Business Activity Index slipped marginally in the month of April, down -0.1 points to +16.8. Note that this month marks the seventh consecutive month of growth in the region. Certainly the decline in oil prices last month led back some growth. In the month, there were declines in Production (-3.2 points to 15.4), Capacity Utilization (-1.7 points to 11.5), Average Workweek (-2.8 points to 5.9), and Capital Expenditures (-6.0 points to 6.7). However, there were improvements in New Orders (+2.0 points to 11.5), Shipments (+3.0 points to 9.5), Prices Received (+4.5 points to 12.0), and Finished Inventories (+2.8 points to 1.0). Lastly, manufacturers had a less positive business outlook, as the Forecast declined -9.2 points to +27.1.
GERMAN IFO BUSINESS CLIMATE INDEX AT HIGHEST LEVEL SINCE 2011:
The German IFO Institute Business Climate Index increased +0.5 points to 112.9 in April, which is the highest level since July 2011. In the month, the Business Situations Index increased +1.6 points to 121.1 (also the highest level since July 2011); however, the Business Expectations Index fell -0.5 points to 105.2.
U.S. GDP: Our GDP model points toward stronger growth in 2H 2017 (+3.1% Real GDP) given improvements in workforce population growth and workforce participation. Our official forecast for 2017 is 3.0%.
U.S. Inflation: U.S. CPI appears to be peaking as the Fed’s preferred inflation metric, the Core PCE Deflator approaches the Fed’s 2% inflation target. As we anniversary the drop in commodities prices, we expect headline inflation to peak within the next few months, taking pressure off of the Fed’s current hawkish rate stance.
U.S. Federal Reserve: Given our belief that U.S. inflation will peak within the next few months, we believe the FOMC will become increasingly more data-dependent. We believe the Fed will hike rates 1-2 more times in 2017 and talk of the Fed reducing its balance sheet will become moot.
U.S. Treasuries: With headline CPI potentially hitting a near-term peak of 2.7% Y/Y, we believe the 10-year U.S. Treasury is now range-bound through the end of the year. We would be inclined to be buyers of Treasuries if the 10-year yield were to approach its recent high of 2.63%.
U.S. Equities and Earnings: S&P 500 operating earnings will rise materially in 2017, but our yearend S&P 500 target of 2400 has already been attained. We favor the Financials and Energy sectors, as well as the Homebuilding sub-sector, and are offsetting that against underweight views in Consumer Staples and Utilities, which are overvalued by historical measures.
Argentina: In short, the economic data out of Argentina remains bad. Industrial Production declined -6.0% Y/Y in February (-1.1% Y/Y prior), Exports declined -6.2% Y/Y in February, Consumer Confidence remains depressed in March, and GDP is still negative.
Brazil: Recent data suggests that Brazil is rolling over again and with Brazilian markets up so much since Rousseff’s removal, we recently initiated a short view on Brazil’s Bovespa. Retail Sales which remain negative on a Y/Y basis worsened in February. Consumer Credit Card transactions have slipped in Q1. Confidence, albeit high, ticked slightly lower in March. The Unemployment Rate has jumped from 11.8% to 13.2% since October. Furthermore, the Banco Central do Brasil’s Economic Activity Index turned negative in February, thus supporting Brazil’s recent rate cut.
Canada: Recent economic data suggest improvement in Consumer Confidence, manufacturing, and Housing. Canada’s monthly GDP has been remarkably steady at roughly 2.0% Y/Y over the past four months and Unemployment improved to 6.6% in February. As the U.S. economy experiences liftoff, we are watching Canada for signs that it too may follow suit and certainly improvement in energy prices are helping in that regard. We will watch for further signs of improvement in Canada in the coming weeks.
Mexico: Inflation continues to rise, yet Consumer Confidence improved in Q1, following a sharp decline. Meanwhile, Manufacturing is slowing. We’re neutral on Mexico given the political uncertainty, but certainly the fundamental backdrop has worsened.
Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again. We are hopeful …
United Kingdom: The U.K. economy seems to be on decent footing post-BREXIT, but Q1 growth appears to have slowed. With some modest economic deterioration and Article 50 triggered on March 29th, we recently closed out our bullish view on GBP.
European Union: With political uncertainty lifted, we can now focus on the improvement seen in economic data in Europe (higher PMIs and lower unemployment). As such, we are bullish on the Euro STOXX 50 Index.
European Central Banks: The ECB is doing exactly what we thought they would do by favoring asset purchases over furthering lowering rates into negative territory and now the ECB is facing rising inflation. The ECB has now begun to taper its asset purchases and certainly a discussion will begin on the process of how/when to raise rates. We will watch to see if ECB tapering has any meaningful impact on zero (or near-zero) interest rates throughout the continent.
Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).
South Africa: Recent data show improvements in PMI, Business Confidence, mining production, and Vehicle Sales following weak Q4 data, which inflation data weakened in January. Given South Africa’s commodity-driven exports, a stronger U.S. dollar could continue to hamper export growth.
Turkey: What’s not to love about Turkey? Not only does Turkey have a worsening political dictatorship, but inflation is rising (+11.3% Y/Y in March), industrial production has turned negative, and unemployment has turned higher. Overall, Turkey’s economic and political situation appears to be too challenging.
ASIA / PACIFIC:
Australia: The RBA has cut rates twice in the past year and we may be seeing some of the after effects as it was reported that Australian home prices have surged. Although, PMI’s have improved in recent months, retail sales have slowed slightly and the unemployment rate recently ticked higher. Recent trade data suggests that Australian trade with China has improved. We are monitoring Australia for further improvement. Note that the ASX 200 index trades at a P/E of 20x and yields 4.2% (when compared to other developed economies, the ASX is cheaper than its peers). We remain neutral on Australia until further economic improvement is evidenced.
China: Recently, we closed out our China equity market short view on the back of stronger trade data, and some subtle improvements in PMI’s. Q1’s stronger than expected GDP release confirms that China is improved somewhat. It appears that China plans to continue to stabilize markets ahead of the National Communist Party Congress later this year, and we no longer believe a short China equities position offers compelling risk/reward at this time.
India: Money supply growth is beginning to recover following last year’s currency demonetization. M1 growth has “improved” to -3.6% Y/Y (versus -18.7% Y/Y in December) and M3 has rebounded to +7.7% Y/Y (was +6.4% in January). Manufacturing and Services PMI’s improved in Q1, and inflation appears stable. As exports and imports in India are surging in Q1, it appears economic activity is rebounding. However, the recovery may be priced in as the Sensex index is up 11.4% this year and trades at an above-average P/E.
Indonesia: Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, but Consumer Confidence and inflation appear to be turning higher. As a result, it is reasonable to assume that the central bank’s dovish policy stance (six rate cuts in 2016) may revert to a more neutral stance this year.
Japan: Data from Japan in Q1 showed modest, positive improvements in Unemployment, CPI, PPI, retail sales, and manufacturing; however, Industrial Production and Exports have recently slipped.
Russia: Despite an unexpected drop in Industrial Production and a worsening in unemployment, Russian economic data continues to improve alongside rising oil prices. Real Disposable Income and Wages have turned up, manufacturing PMI’s are trending higher, and Car Sales were up 9% Y/Y in March. Meanwhile, CPI is moderating, which allowed the Bank of Russia to cut rates. Russian equities remain the cheapest in the industrialized world and we remain bullish.
GLOBAL CENTRAL BANK SCORECARD:
MACRO TRADING IDEAS:
WEEK IN REVIEW – BEST & WORST PERFORMERS:
S&P 500 SECTOR PERFORMANCE:
BEST/WORST PERFORMING GLOBAL STOCK MARKETS:
BEST/WORST PERFORMING WORLD BOND MARKETS:
BEST/WORST PERFORMING CURRENCIES:
COMMODITIES MARKET PERFORMANCE:
MAJOR GLOBAL STOCK MARKETS:
MAJOR GLOBAL BOND MARKETS:
This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author’s opinion at a particular point in time and March change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested.