Analysis of the global economy
Bellwether transport stock Fedex, in a primary down-trend, warns of slowing economic activity in the US. The 6-month Twiggs Momentum peak below zero flags a strong down-trend. Breach of support at 130.00 would warn of another decline — and worsening economic climate.
European equivalent Deutsche Post AG (DPW.DE), owner of DHL, also warns of declining economic activity. Breach of support at 23.00 would warn of another decline.
From Chris Joye at AFR:
On the question of whether the majors are done and dusted on capital raising, investors need go no further than CBA’s chief credit strategist, Scott Rundell, and CBA’s head of fixed-income strategy, Adam Donaldson, who on Thursday published a report arguing the big four are short $32 billion of CET1 capital.
“Capitalisation [is] likely to be a source of credit strength for banks as they build toward meeting APRA’s expected ‘unquestionably strong’ capital requirements,” Rundell and Donaldson said. The authors reiterated previous analysis that suggested the majors’ target CET1 ratios will settle at “around 10 per cent to 10.5 per cent”, which “would put the majors at the bottom of the top quartile” of global competitors.
Read more at CBA: big four to raise another $32 billion of equity | afr.com
Ben Craig and Sara Millington at FRB Cleveland say “liquidity is not diffusing through the banking system, but is instead staying concentrated on the balance sheets of the largest banks.” Banks from the European Union (EU) have also substantially increased their holdings of excess reserves at the Fed.
Hat tip to Barry Ritholz
Gold fell to $1070/ounce, breaching the band of primary support between $1080 and $1100 per ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. The next level of support is $1000/ounce*.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
Core CPI is close to the Fed target of 2.0 percent but inflation expectations continue to fall, with the 5-year breakeven rate (5-year Treasury minus 5-year TIPS yield) as low as 1.2 percent.
Long-term interest rates are rising, anticipating a Fed rate hike. 10-Year Treasury yields retraced to test the new support level after breaking through 2.25 percent. Respect of support is likely and will signal an advance to 2.50 percent. Recovery of 13-week Twiggs Momentum above zero suggests an up-trend. Breakout above 2.50 percent would confirm.
Low inflation and a stronger Dollar are weakening demand for gold. The Dollar Index is testing resistance at 100. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 is likely and would signal an advance to 107*.
* Target calculation: 100 + ( 100 – 93 ) = 107
Solid job numbers have boosted the prospects for an interest rate hike before the end of the year. Employment is growing steadily, having exceeded its 2008 high by more than 4.2 million new jobs.
Unemployment is falling as job growth holds above 2.0 percent a year.
Long-term interest rates are rising, with 10-year Treasury yields headed for a test of resistance at 2.50 percent after breaking through 2.25 percent. Recovery of 13-week Twiggs Momentum above zero indicates an up-trend. Breakout above 2.50 percent would confirm.
The Dollar strengthened in response to rising yields, the Dollar Index breaking resistance at 98. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 would confirm another advance, with a target of 107*.
* Target calculation: 100 + ( 100 – 93 ) = 107
Gold fell as the Dollar strengthened, testing primary support at $1100/ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong (primary) down-trend. Follow-through below $1080 would signal another decline, with a target of $1000/ounce*.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
From Elliot Clarke at Westpac:
Recent softer gains for nonfarm payrolls cast doubt over labour market momentum, giving cause for some to question whether the FOMC would be able to deliver a first hike before the year is out.
The October report changed that view, with the 271k gain for payrolls taking the month-average pace back up to 206k as the unemployment rate declined to 5.0%.
There is certainly more room for improvement in the US labour market. But subsequent gains need to come at a more measured pace.
We continue to anticipate that a first rate hike will be delivered at the December FOMC meeting.
Read more at Northern Exposure: October payrolls justifies December move
Marc Faber: China Has Credit Bubble of Epic Proportions https://t.co/pZtgampX6f
— Colin Twiggs (@Colin_Twiggs) October 30, 2015
GDP rose at an annual rate of 1.5 percent in Q3, according to advance estimate https://t.co/vWMdoOL9TA pic.twitter.com/PFNZ7lXa8D
— St. Louis Fed (@stlouisfed) October 29, 2015
From Elliot Clarke at Westpac:
In assessing the strength and persistence of US growth, it is important to recognise the impact that inventories and net exports continue to have on headline results. Inventories added significantly to growth through the first half of 2015 on rapid inventory accrual; but a more modest pace of stocking in Q3 resulted in a 1.4ppt subtraction from quarterly GDP growth. Similarly, while net exports reduced the annualised Q1 headline outcome by 1.9ppts, it subsequently added modestly to growth in Q2, circa 0.2ppts. If we omit both factors from our assessment (and thereby focus on domestic final demand, DFD), we see a robust, enduring underlying growth trend. Annualised DFD growth in 2015 averages out at 2.7% – or 3.3% if we focus solely on the past six months, when the weather was more favourable.
On the whole, stripping away the impact of inventories and net exports, the past two years have seen a material improvement in the growth trend. This acceleration has primarily been the result of stronger consumption growth, particularly within the services sub-sector and in housing construction. Given the ongoing improvement in the labour market and credit availability as well as robust consumer confidence, this trend should endure into 2016.
Construction spending is the key.
Growth in hourly manufacturing earnings has climbed above the Fed target of 2.0 percent, while core CPI continues to track near the target. But the 5-year breakeven rate (5-year Treasury minus TIPS yield) is close to 1.0 percent. The market expects inflation to fall over the next few years.
The reasoning is straight-forward: the end of the infrastructure boom in China and slowing economic growth means low energy and commodity prices for the foreseeable future. Slow credit growth in the West will also act as a brake on aggregate demand, maintaining downward pressure on CPI.
Long-term interest rates are low, with 10-year Treasury yields testing support at 2.0 percent. Declining 13-week Twiggs Momentum, below zero, suggests further weakness.
The Dollar Index rallied off support at 93. A higher trough indicates buying pressure. Breakout above 98 would suggest another advance.
A strong dollar and low inflation would weaken demand for gold. Spot gold is testing medium-term support at $1150/ounce. Breach would warn of a test of the primary level at $1100. 13-Week Twiggs Momentum is rising, but a peak below zero would signal continuation of the primary down-trend.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Australia’s big four banks have raised significant amounts of new capital as the realization finally dawned on regulators that they were highly leveraged and likely to act as “an accelerant rather than a shock-absorber” in the next downturn.
Chris Joye writes in the AFR that the big four have raised $36 billion of new capital in the 2015 financial year:
Before Westpac’s $3.5 billion equity issue this week, the big banks had, through gritted teeth, accumulated $27 billion of extra equity over the 2015 financial year through “surprise” ASX issues, underwritten dividend reinvestment plans, asset sales and organic capital generation via retained earnings. If you add in “additional tier one” (AT1) capital issues (think CBA’s $3 billion “Perls VII”), total equity capital originated rises to about $32 billion, or almost $36 billion after Westpac’s effort this week.
The effect of deleveraging is clearly visible on the ASX 300 Banks Index [XBAK].
Having broken primary support, the index is retracing to test resistance at 84. Bearish divergence on 13-week Twiggs Money Flow, followed by reversal below zero, both warn of a primary down-trend. Respect of resistance at 84 would strengthen the signal, offering a (medium-term) target of 68* for the next decline.
* Target calculation: 76 – ( 84 – 76 ) = 68
Matt Wilson, head of financial research at the $10 billion Australian equities shop JCP Investment Partners, says the bad news for those “long” the oligarchs is that “we are still only halfway through the majors’ capital raising process at best”.
Chris calculates the remaining shortfall to be at least $35 billion:
Accounting for future asset growth, I calculated the big banks will need another $35 billion of tier one capital if the regulator pushes them towards a leverage ratio of, say, 5.5 per cent by 2019, which is still well below the 75th percentile peer.
One of the big four’s most attractive features is their high dividend-yield and attached franking credits, but Chris compares this to the far lower dividend payout ratios of international competitors and quotes several sources who believe the present ratios are unsustainable.
JCP’s Wilson does not think payout ratios are sustainable and accuses the big banks of “over-earning”. “Bad debts of 0.15 per cent are running at a 63 per cent discount to the through-the-cycle trend of 0.40 per cent,” he says. “Should we see a normal credit cycle unfold, then payouts will be cut significantly due to the pro-cyclicality of risk-weighted assets calculations and bad debts jumping above trend.”
He concludes:
Aboud [Stephen Aboud, head of LHC Capital Fund] reckons artificially high yields also explain why the big banks’ “2.5 times price-to-book valuations are miles above the 1-1.5 times benchmark of global peers”, which he describes as “a joke”.
Plenty of food for thought.
Read more from Chris Joye at Hedge funds that shorted the big banks | AFR