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Emerging market debt: an end to the agony?
Capital Markets
<p> Capitulation by many EMD investors has created opportunities in many of the more resilient countries.<br /> We favor countries moving down the reform path and where there is significant impetus to reign in excessive government spending.<br /> Valuations have reached the extremes that allow a selective approach to EM to now represent a key part of an income-oriented portfolio.</p> <p>Emerging markets (EMs) have endured a miserable year. Slowing Chinese growth, collapsing commodity prices, rising indebtedness and geopolitical turmoil have all taken their toll on fundamentals. The worsening EM story has, in turn, had a negative impact on capital flows, impacting performance both in absolute terms and relative to developed markets.</p> <p>More recently, China’s devaluation has led to fears that deflation could be exported to the rest of the world. The haphazard nature of China’s policy response to the economic downturn has weakened investor resolve that Chinese authorities can engineer a "good" outcome. The problems do not end there. The Federal Reserve is stating a desire to tighten policy, prompting concerns that a continued rise in the U.S. dollar will undermine EM local returns.</p> <p>Unsurprisingly, sentiment toward emerging markets has soured. The above trends are self-reinforcing, prompting many to call for EM to enter a protracted period of weakness. Given all the uncertainties, should investors simply ignore EMD altogether, or might a more selective approach to EMs produce better results?</p> <p>It is far too late in the cycle to “give up” on emerging markets</p> <p>Abandoning EMD altogether is akin to throwing the baby out with the bath water. The adjustment in EM assets is hardly new, and underperformance has been marked since at least 2012. Consider Brazil — a constant source of discouraging news. Brazilian equities, as measured by the Ibovespa, are down by 36% over the five years ending September 30 in local terms. For a U.S. dollar investor, however, depreciation of the Brazilian real has pushed the return to -71.7% over the period. Local rates in Brazil have risen to over 15%. Other markets — in USD terms — have also posted deeply negative returns. Russia, Ukraine, Turkey and Argentina have all endured periods of notable stress in the last 24 months.</p> <p>Prices could, of course, move lower, but valuations suggest that EM challenges are well-recognized in the market. We fully expect a protracted period of emerging market economic weakness, but we are at a stage in the current cycle that demands a focus on dislocations and valuation. Many opportunities appear compelling. EM growth will be positive and will continue to exceed developed market growth (Exhibit 1), notwithstanding the risk of further downward growth revisions that have dominated this cycle (Exhibit 2). This is a recipe for further volatility, despite much-improved valuations.</p> <p>Exhibit 1: IMF GDP growth forecast — advanced economies</p> <p>Sources: Columbia Threadneedle Investments, IMF, 07/15</p> <p>Exhibit 2: IMF GDP growth forecast — emerging economies</p>
Daily Scan: Equities rip higher; Bank of England 'ringfences' banks
Capital Markets
<p>Updated throughout the day</p> <p>October 15</p> <p>Good evening everyone. SOE consolidation hopes, stimulus wishes, and a spooked-out Fed led Asian shares soaring today with the Hang Seng Index up 2%, the Shanghai Composite up 2.32%, and the Nikkei 225 up 1.15%.</p> <p>European indices meanwhile appear to be on the up and up as well. The U.K.’s FTSE 100 has so far climbed 0.8%, Germany’s DAX has jumped 0.9%, and France’s CAC has surged 0.9%. As for Wall Street, it looks like they’ll be joining the party too. S&amp;P 500 futures are pointing to a 0.5% pop at the open while Dow and Nasdaq futures signal a 0.5% and 0.6% climb respectively.</p> <p>Here’s what else you need to know:</p> <p>Bank of England lays out “ringfencing” laws. In an effort to strengthen the U.K. financial system, the Bank of England laid out two proposals today, one on ringfencing and one on operational continuity. Under the former proposal, “ringfenced” banks will need to seek permission from the BOE to pay out dividends to its affiliates, as well as pay market rates for services rendered by its partners. The new rules will come into force in 2019. Wall Street Journal (paywall) / Bank of England</p> <p>PBOC injects liquidity. With 70 billion yuan worth of liquidity set to drain this week, the People's Bank of China topped up the money markets today through an auction of 50 billion yuan worth of seven-day reverse bond repurchase agreements. Reuters</p> <p>Hong Kong continues reign as most expensive place to rent office space. Annual Hong Kong office rent has apparently reached $255.5 per square foot, $5 more than last year’s showing, and easily eclipsing New York’s $153 and Tokyo’s $125. The pace of growth however has appeared to slow, but yeah, tell that to the tenants. SCMP (paywall)</p> <p>Australian jobs surprise to the downside. After registering gains the previous four months, the Australian labor market lost 5,100 jobs in September, a huge contrast to the additional 9,600 jobs expected by analysts. Financial Times (paywall)</p> <p>Bank of Korea keeps rates steady, slashes outlook. As expected, Korea’s central bank kept interest rates steady for the fourth month in a row. It did however, cut its GDP and inflation forecasts, with 2015 growth now expected to be 2.7% instead of 2.8%, while inflation is currently pegged at 0.7% instead of 0.9%. Bank of Korea</p> <p>Sumitomo Mitsui Banking to issue green bonds. In a first for a Japanese megabank, SMBC is set to issue around $500 million worth of green bonds as early as today, with the proceeds meant to bankroll a variety of renewable energy projects. The five-year bonds are expected to carry a coupon of around 2%. Nikkei Asian Review</p> <p>Volkswagen loses designated North American chief. Winfried Vahland was named to run the North America business three weeks ago  after working for the car manufacturer for 25 years. Vahlan</p>
Daily Scan: Stocks fall after Wal-Mart scare; IPOs beware
Capital Markets
<p>Updated throughout the day</p> <p>October 14</p> <p>Good evening everyone.  Economic data in the U.S. Wednesday did little to dispel the fear of deflation: producer prices in September fell 0.5%, the biggest drop in eight months, and retail sales were weak. The Fed’s survey of its districts, the beige book, revealed modest expansion but no wage pressures anywhere. Meanwhile, Wal-Mart shocked investors with a dismal outlook and nosedived, pulling down the Dow Jones Industrials 0.92% to 16,925, marking the first back-to-back drop this month. The S&amp;P 500 trimmed 0.48% to 1,994.  And the U.S. 10-year note did just what you would expect in the face of this dismal economic news: yields fell below 2%, hitting a 5-month low at 1.97%. What was the Fed was saying about a rate hike?</p> <p>Here's what else you need to know:</p> <p>IPOS beware. Albertson’s scotched its $2 billion IPO scheduled for Wednesday but First Data soldiered on with its offering, lowering the price to $16/share, from the $18-$20 originally anticipated. The weather is getting rougher and rougher for IPOs. KKR must have been very anxious to price First Data, the largest processor of e-commerce transactions. Street Insider</p> <p>Square braves the treacherous IPO market. The payment startup, led by Jack Dorsey – CEO at both Square and Twitter -- doesn’t appear to have a weather vane. The company is going where many tech companies have turned away from. Wall Street Journal (paywall)</p> <p>Wal-Mart slammed after earnings outlook. Wal-Mart shocked investors by predicting a huge drop in earnings next year, with per-share profits to fall between 6% and 12% in 2017. Shares for the company plummeted 10% in response, a 3-year low and the worst drop for the company since 1988. The stock is now down almost 30% this year. Wal-Mart says profits are being sucked by the increase in employee wages. CNN</p> <p>Volkswagen loses designated North American chief. Winfried Vahland was named to run the North America business three weeks ago  after working for the car manufacturer for 25 years. Vahland is leaving the company due to differences about the organization in North America, not the current diesel engine scandal, he says. Wall Street Journal</p> <p>First Jamaican writer wins Man Booker prize. Marlon James was awarded the prestigious writing award for his fictional account of the attempted murder of Bob Marley in 1976. The judges were unanimous in their decision to award "A Brief History of Seven Killings" because it "kept surprising the judges." The Guardian</p> <p>Hillary Clinton emerges strong from first Democratic debate. That's the consensus. She even got a boost from rival Bernie Sanders who lambasted the media for spilling so much ink on Clinton's email controversy.</p> <p>Sharp differences on Wall Street. Clinton would tweak while former Maryland Governor Martin O'Malley would re-introduce </p>
FBI to probe Goldman over 1MDB link
Capital Markets
Goldman Sachs just can’t help but court controversy, after Abacus, Greece, and Libya (just to name a few), the venerable Wall Street firm has once again found itself embroiled in yet another scandal, and this time, it’s with Malaysia. According to the Wall Street Journal, the FBI and the U.S. Justice Department are both looking into the Goldman’s role “in
Daily Scan: Stocks tumble as deflationary pressures rock Asia
Capital Markets
<p>Updated throughout the day</p> <p>October 14</p> <p>Good evening everyone. Asian equities extended their declines today as inflation figures from China, Japan, and India all added to worries that deflation is on the horizon. The Hang Seng Index ended the day down 0.71%, while the Shanghai Composite and the Nikkei 225 finished the session down 0.91% and 1.89% respectively. As for the rest, here’s how they fared:</p> <p> Hang Seng China Enterprises Index: -0.99%<br /> Shenzhen Composite: -1.20%<br /> Straits Times Index: -0.37%</p> <p>Over in Europe, things aren’t looking too hot either. The FTSE 100 – at pixel time down 0.65% – seems to be on the way to its third straight decline, while the DAX and CAC – saying goodbye to what was a decent start to the month – are currently down 0.79% and 0.67% respectively.</p> <p>Here’s what else you need to know:</p> <p>U.K. unemployment falls to seven-year low. Guess it wasn’t all bad news in fair Brittania. The U.K.’s Office of National Statistics has just reported that the region’s unemployment rate has fallen to 5.4% – a level unseen since the March quarter of ’08, while the employment rate – the proportion of people aged from 16 to 64 who were in work – climbed to 73.6%, its highest since recording began in 1971. Inflation was pegged at -0.1% yesterday though, take note of that, Janet. Office of National Statistics</p> <p>Japanese producer prices fall to a near six-year low. Japan’s producer price index fell 3.9% from a year ago in September, punching in its sixth-straight month of price deflation and posting its worst decline since November 2009. That 2% inflation rate target set by the BOJ looks even further away now. MarketWatch</p> <p>China CPI misses estimates. The consumer price index in the world’s second largest economy came in at just 1.6% for September, well below August’s 2% reading and less than the 1.8% analysts were expecting. The producer price index meanwhile fell 5.9% from the year before, in-line with estimates. Barron’s</p> <p>Singapore weakens the SGD. Despite seeing its economy – widely expected to contract – narrowly escape recession, the Monetary Authority of Singapore decided to ease its monetary policy today by weakening the dollar “slightly.” While its GDP figures were better than expected – its June quarter data was also revised higher from -4% to -2.5% – on a year-on-year basis, growth has been measly 1.4% – its weakest showing since 2009. Monetary Authority of Singapore / Ministry of Trade and Industry (pdf)</p> <p>PBOC clips yuan’s eight-day winning streak. The yuan lost most of its hard-earned gains today as the People’s Bank of China fixed its mid-point price down 0.3% to 6.3408 to the dollar. Offshore yuan was trading as high as 6.3487 against the greenback. SCMP (paywall)</p> <p>Vehicle sales climb for first time in six</p>
Daily Scan: Stocks slip; Intel and JP Morgan report earnings
Capital Markets
<p>Updated throughout the day</p> <p>October 13</p> <p>Good evening. U.S. stocks dipped lower as Intel and JPMorgan report their earnings. The Dow fell 0.3%, the S&amp;P 500 dipped 0.7%, and the Nasdaq lost 0.9%. Oil fell slightly, finishing below $47/barrel. Johnson &amp; Johnson reported mixed results as sales on its hepatitis C medicine disappointed and the strong dollar hurt profits.</p> <p>&nbsp;</p> <p>Here’s what else you need to know:</p> <p>Mark your calendar: The first democratic debate kicks off Tuesday at 8:30 p.m. ET. It's Hillary vs. Bernie and those other guys. Broadcast live on CNN.</p> <p>JP Morgan shares fall. JP Morgan Chase kicked off Wall Street's earnings reports slightly below expectations. The bank reported earnings of $1.32 per share and $23.54 billion in revenue, a 6% fall from last year's net revenue. Analysts had expected $1.37 per share on $23.69 billion in revenue. CNBC</p> <p>Intel reports earnings. The California-based tech company reported 64 cents per share on revenue of $14.47 billion, beating expectations. Analysts had been predicted at 59 cents per share on $14.22 billion in revenue. Shares for the company jumped up 1.8%. CNBC</p> <p>&nbsp;</p> <p>CIA psychologists sued. A federal lawsuit was filed on behalf of three men imprisoned and allegedly tortured by the CIA. The two psychologists designed and helped oversee the CIA's interrogation programs. CNN</p> <p>J&amp;J better than expected but not good enough. The company posted 3Q net income of $1.20/share; revenue shrank to $17.1 billion, slightly below $17.41 predicted. The company announced a $10 billion stock buyback and lifted the profit outlook. The stock slipped 21 cents to $95.78. ABC News</p> <p>No phone for you! JPMorgan says it will stop paying for employee Blackberrys (and other devices) in a cost-cutting move. The bank expects to save tens of million of dollars. JPMorgan reports earnings after the close Tuesday. Wall Street Journal (paywall)</p> <p>Exports fall 3.7% and imports collapse in China trade data. China’s trade surplus widened to $60.34 billion from $60.24 billion in August, a massive jump from the $46.79 billion narrowing expected by analysts. The surplus was largely fueled by a 17.7% dive in imports, indicating that China’s shift to a consumer economy isn’t going as planned. And exports slowed Business Insider</p> <p>EM currencies slammed. The post China import bloodbath seemed claimed the Malaysian ringgit and the Indonesian rupiah; both tanked at least 1% against the dollar, while the Philippine peso and the Indian rupee lost at least 0.5%. The aussie meanwhile, right after clocking in a 9-day recovery, plunged nearly 0.9% to AU$0.7296 versus the greenback.</p> <p>Goldman calls EM turmoil 'third wave' of financial crisis. Collapsing commodity prices and the threat of higher rates in the U.S. are hitting emerging markets countries hard. The first wave of the crisis was spurred by the disintegration of the housing market in the U.S.</p>
7 takeaways from Brainard’s speech
Capital Markets
<p>Vice-Federale Stanley Fischer may have kicked uncertainty up a notch by calling a 2015 rate hike “an expectation, not a commitment,” but ex-Under Secretary of the Treasury Lael Brainard was a little more forthcoming as far as her stance on rates are concerned.</p> <p>Here are seven key takeaways from her speech at the 57th National Association for Business Economics Annual Meeting.</p> <p>She thinks labor resources are still under-utilized.  “…a variety of evidence suggests there may be some distance to go to achieve full employment. Although the unemployment rate is near longer-run norms, other measures of labor utilization are not. The labor force participation rate remains materially below the pre-recession trend, even after adjusting for demographics.”</p> <p>And the Fed may have an eye on it too. “Perhaps the most striking evidence in support of continued labor market slack is the absence of any acceleration in wages and prices…Indeed, the lack of wage acceleration is likely one of the key reasons that many Federal Open Market Committee (FOMC) participants have revised down their estimates of the longer-run level of the unemployment rate.”</p> <p>Consumer spending looks solid. “…even though equity prices are down this year, continued job growth, lower gas prices, rising house prices and some loosening in consumer credit look likely to support consumer spending over the second half of the year.”</p> <p>But they’re worried about inflation. “Although the balance of evidence thus suggests that long-term inflation expectations are likely to have remained fairly steady, the risks to the near-term outlook for inflation appear to be tilted to the downside, given the persistently low level of core inflation and the recent decline in longer-run inflation compensation, as well as the deflationary cross currents emanating from abroad.”</p> <p>She isn’t a hyper-Keynesian. “To be clear, I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation. A variety of econometric estimates would suggest that the classic Phillips curve influence of resource utilization on inflation is, at best, very weak at the moment.”</p> <p>China matters. “A more negative assessment of underlying Chinese growth fundamentals or its exchange rate regime would likely affect other important economies in the region, as well as commodity-producing economies, pushing global demand down further. In turn, expectations of additional weakness in global demand could have important effects on the exchange rate of the dollar, the valuation of risky assets in the United States, and U.S. inflation, moving the economy further from our goals.”</p> <p>And she thinks the Fed should cool its jets for a while. “There is a risk that the intensification of international cross currents could weigh more heavily on U.S. demand directly, or that the anticipation of a sharper divergence in U.S. policy could impose restraint through additional tightening of financial conditions. For these reasons, I view the risks to the economic outlook as tilted to the downside. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery--and argue against prematurely taking away the support that has been so critical to its vitality.”<br /> Photo: Fortune Live Media</p>
China is not collapsing
Capital Markets
<p>LONDON – One question has dominated the International Monetary Fund’s annual meeting this year in Peru: Will China’s economic downturn trigger a new financial crisis just as the world is putting the last one to bed? But the assumption underlying that question – that China is now the global economy’s weakest link – is highly suspect.</p> <p>China certainly experienced a turbulent summer, owing to three factors: economic weakness, financial panic, and the policy response to these problems. While none on its own would have threatened the world economy, the danger stemmed from a self-reinforcing interaction among them: weak economic data leads to financial turmoil, which induces policy blunders that in turn fuel more financial panic, economic weakness, and policy mistakes.</p> <p>Such self-reinforcing financial feedback is much more powerful in transmitting global economic contagion than ordinary commercial or trade exposures, as the world learned in 2008-2009. The question now is whether the vicious circle that began in China over the summer will continue.</p> <p>Click here to read more</p> <p>© Project Syndicate<br /> Photo: Danijel James</p>
Daily Scan: Weak China trade data hit global markets
Capital Markets
<p>Updated throughout the day</p> <p>October 13</p> <p>Good evening everyone. Weak trade data from China have hit global markets, putting a full stop to the rallies that had lifted bourses for more than a week. In Asia, the Nikkei fell 1.11%; the Hang Seng slipped 0.57%. In Europe, most exchanges were racking up losses in excess of 1% as investors feared the cold China has caught would give everyone else the flu. Commodity and luxury good companies got hit the hardest. The mainland China indexes managed to close higher after spending most of the day in the basement, thanks to the invisible hand of Sino-capitalism.</p> <p>Here’s what else you need to know:</p> <p>Exports fall 3.7% and imports collapse in China trade data. China’s trade surplus widened to $60.34 billion in September from $60.24 billion in August, a massive jump from the $46.79 billion narrowing expected by analysts. The surplus was largely fueled by a 17.7% dive in imports, indicating that China’s shift to a consumer economy isn’t going as planned. And exports slowed Business Insider</p> <p>EM currencies slammed. The post China import bloodbath seemed claimed the Malaysian ringgit and the Indonesian rupiah; both tanked at least 1% against the dollar, while the Philippine peso and the Indian rupee lost at least 0.5%. The aussie meanwhile, right after clocking in a 9-day recovery, plunged nearly 0.9% to AU$0.7296 versus the greenback.</p> <p>Yuan punches in 8-day winning streak. The PBOC fixed the yuan 0.28% higher today, helping the currency snap up another day in the verde (or red, depending where you are). Interestingly, this seems at odds with their recent “quantitative easing” measures, which should’ve sent the renminbi down, down, down. Semantics, I guess, since it was Chinese media who kept calling it that. Financial Times (paywall)</p> <p>Chinese asset manager stabbed by investor. Global Wealth Investment CEO Wang Jie was rushed to a hospital Sunday after a disgruntled investor stabbed him in the shoulder during a meeting. The incident was apparently connected to the collapse of one of China’s largest state-backed guarantors, the Hebei Financing Investment Guarantee Group. Financial Times (paywall)</p> <p>U.K. falls into deflation. While core inflation remained unchanged, headline inflation in the United Kingdom fell to a 55-year low of -0.1% in September, worse than analyst estimates of an unchanged reading. “A smaller than usual rise in clothing prices and falling motor fuel prices” were to blame. Office of National Statistics</p> <p>Apple blocking news app in mainland China. Even users who bought their iPhones in the U.S. can’t access Apple News. Quartz</p> <p>Ford to invest $1.8 billion in China R&amp;D. Despite a slump in car sales in the region, U.S. carmaker Ford plans to invest $1.8 billion to build up its research and development capabilities in China to better tailor its offerings to its customers, as its president, Mark Fields said in a statement: “With this investment in research and development, the next generation of Ford vehicles will be completely designed around our customers.” </p>
Daily Scan: Oil slumps more than 4%; earnings take center stage as stocks rally 7th session
Capital Markets
<p>Updated throughout the day</p> <p>October 12</p> <p>Enough already about this Federal Reserve dithering. Time to worry about earnings. Last week, Alcoa launched the earnings reporting season with dismal news. Expectations are low for the season -- which could prove positive for stocks. Tighten your seatbelt Tuesday for some biggies: Intel, JPMorgan, Johnson &amp; Johnson, and CSX Corp. Later in the week we will get more heavyweights, including Goldman Sachs, Netflix, Bank of America, Wells Fargo, and Delta Air. Did we mention BlackRock, Schwab, or Citigroup? Busy, busy, busy. U.S. stocks closed higher in dull action but still notched a seventh consecutive day of gains. Banks and bond trading were closed for Columbus Day.</p> <p>Here’s what else you need to know:</p> <p>Fortress Investments to shutter lead fund after major losses. Head trader Michael Novogratz is reportedly on his way out. The fund has posted losses of 17.5% through September. The fund now has $1.6 billion in assets, down from $8 billion in 2007. Wall Street Journal (paywall)</p> <p>Oil hit by OPEC production. Sweet crude futures for November fell 4.41% while Brent tumbled nearly 4.5%. It was the biggest one-day drop since Sep 1. OPEC output rose 109,000 barrels/day in September to 31.57 million. That news overshadowed an earlier forecast that U.S. production would drop in 2016. MarketWatch</p> <p>AB Inbev hikes bid for SABMiller to $103 billion. They say the fourth time is the charm. AB Inbev has been wooing the No. 2 brewer for weeks. Apparently, when it announced its bid last week of  $99.2 billion, the jilted suitor thought board members representing SABMiller family stakeholders were in favor of the deal. Wrong! Wall Street Journal (paywall)</p> <p>Dennis Lockhart whistling the same tune. The Atlanta Fed president continues to say that the U.S. is ready for an interest rate hike this year. Lockhart is considered a good gauge on central bank thinking. WBP Online</p> <p>European stocks lower, breaking winning streak. The Stoxx Europe 600 was marginally lower. The FTSE was off 0.77%, breaking a nine-session series of up sessions. Rolls Royce Holdings fell more than 4% after the Financial Times reported that regulators were investigating some of its contracts. MarketWatch</p> <p>Dell to buy EMC in $67 billion deal, a tech record. The PC maker has gone through a total makeover, going private two years ago and now taking on a mountain of debt to acquire the storage giant. An announcement is expected Monday. New York Times (paywall)</p> <p>GE said to be in talks with Wells Fargo to sell $30 billion loan portfolio. GE has been on a tear to return to its industrial roots. Reuters</p> <p>Enough already, move! Central bankers at the annual meeting of the International Monetary Fund in Lima, Peru, told the Federal Reserve to raise rates, already. “'Delaying the increase would not solve the situation,' said Sukhdave Sin</p>