tpl jun 15 15
TRANSCRIPT
ABRAHAM [email protected]
2015 issue 11June 15, 2015
Growth Dynamic – New and Different…Market participants face several complex transitions. First, the U.S. must at some point move to gradually tightening financial conditions,after an extraordinary surge of easing over recent years. This transition is likely to be associated with moderating international capital flows,gradually rising financing costs, and heightened risks of further currency depreciation among most developing economies. It has alreadybeen associated with episodes of market volatility whenever markets perceived the moves to be sooner rather than later. Even with the USFederal Reserve expected to leave interest rates on hold this week, the market will still be focused on policymakers for clear signals onwhen the central bank will make its first interest rate hike in nearly a decade. Once again, the main point of interest will be any change in thenuances of bank Chair Janet Yellen’s language after the central bank’s announcement. Aggravating the concerns is a perception thatliquidity in bond markets is not as robust as years ago. (cont.
Tepid factory data add to Asian gloomManufacturing weakness across the region raises questions over global demand
Benchmark yields spike as Draghi warns of era of higher volatilityECB chief ’s comments spark fresh instability Mood crosses Atlantic to hit Treasuries
OECD slashes global growth forecast Weak investment and poor output spur revision down from 3.7% to 3.1% this year
The U.S. jobs report showed robust growth in May, with total nonfarmpayroll employment rising by 280,000, leaving the unemployment ratebroadly unchanged at 5.5 percent. The gains centered on professional andbusiness services, leisure and hospitality, and health care. The miningsector, which includes the oil and gas industry, lost 17,000 jobs in May,for a total of 68,000 jobs shed so far this year.
JUNE GLOOM: DOW IN RED FOR YEAR
Bond Market VolatilityConcerns over Greece’s future in the eurozone and the impact of a U.S. interest rate rise all contribute to anxieties… But the setback comes as some investors are increasingly questioningwhether the phenomenal post-financial crisis run for US corporate debt isabout to end. Moreover…
US bank and fund chiefs summoned to talks over bondmarket liquidity fears
German 10-year Bund yields back above 1% Milestone passed for first time since September 2014
OIL GLUT TO PERSIST The OPECdecision on June 5 was to maintain theofficial output ceiling at 30 million barrels perday (b/d). With non-OPEC production alsogrowing, market over-supply will persist
The battle developing in oil markets… Can OPEC Survive?
Euro zone formally discusses Greek default for first time
U.S. industrial production unexpectedly fell in May, likelyas a strong dollar and energy spending cuts continued toweigh on manufacturing and mining output, bucking signsof an acceleration in the broader economy.
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June 15, 2015
In This Issue
• Engines of GrowthConflicting economic signals emanating around the globe have confoundedinvestors and contributed to intermittent bouts of volatility, even in governmentbond markets. espite massive easing, most of the global economy faceswoefully inadequate growth prospects and difficult policy options. Very obviousfinancial vulnerabilities, and serious geopolitical concerns are aggravating theuncertainty. And let’s not forget that many of the challenges are not fleetingand cannot be resolved easily … (pg 10)
• Think it Through… (pg 11)
• Credit… (pg 12)
• A New Geography of Business… (pg 13)
• Pumping Iron … (pg 14)
• The DNA of Business… (pg 15)
• Real Estate and Construction… (pg 16)
• Construction… (pg 17)
• Will Life Ever be the Same? (pg 18)
• About Face…Some of this stress is due to awkward changes in regulation and new capital constraintson major financial institutions. Some is due to the large influence of government playersin international bond markets. Changes will have to be made and are being discussed.The other major consideration is the transition to persistently low oil prices over the nextfew years. The latest announcement on U.S. industrial production provides evidence ofthis difficult transition. Industrial output fell 0.2 percent after a revised 0.5 percent drop inApril, the Federal Reserve reported on this past Monday. Clearly, the production side ofthe economy continues to struggle against the lingering effects of dollar strength anddeep spending cuts in the energy sector in response to a sharp decline in crude oil prices.Moreover, the World Bank just cut its forecast for global growth this year to 2.8% from its3.0% estimate in January, as commodity-importing nations fail to capitalize on low oilprices and developing countries await tightening U.S. monetary policy. In short, the globaleconomy is in for one more year of disappointing growth - - with much of it due to thesedifficult transitions. A third concern is the lower growth trajectory in China, that we havecovered numerous times in the past, and the difficult challenges in the EU where not onlygeopolitical concerns abound, but economic pressures will remain intense. Markets havebeen hit again over concerns over the Greek crisis after 11th hour talks between the nearbankrupt country and its creditors collapsed. The losses were broad across risk assets.Major stock indexes fell, as did crude oil prices, while the euro weakened against thedollar. Greece has already been bailed out twice and many banks have cut their exposureto the country while euro zone authorities have put in place mechanisms to limitcontagion. However, the prospect of default and the possibility of Athens leaving the euroweighed heavily on investor sentiment in the disappointment with this failed experiment tobroaden the euro zone. (pg 1)
• In This Issue (pg 2)
• The Return to Normal… (pg 3)
• You Can’t Handle the Truth ! (pg 4)
• Market Roar… (pg 5)
• Households… (pg 6)
• Reference Points… (pg 7)
• Dislocation, Dislocation… (pg 8)
• The Likelihood of Unlikely Events... (pg 9)
Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites.
Contact information:
Abraham Gulkowitz
phone: 917-402-9039 email: [email protected]
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June 15, 2015
New World Competitiveness Rankings
The World Competitiveness Scoreboard presents the 2015overall rankings for the 61 economies covered. Theeconomies are ranked from the most to the least competitive The competitiveness ranking is an annual surveycompiled by the IMD institute's World CompetitivenessCenter. For its 2015 ranking, it looked into the economies ofthe world's most industrialized countries. IMD has based itsranking on over 300 criteria, of which about two-thirds arestatistics and the remaining third gathered from opinion polls.http://www.imd.org/wcc/news-wcy-ranking
New World Competitiveness Rankings – Select Country RecordsSource: Institute of Management Development, Switzerland; Competitiveness of 59 economies, based on over 330 criteria Country 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1990 1980‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐USA 1 1 1 2 1 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 2SWITZERLAND 3 2 2 3 5 4 4 4 6 8 8 14 9 Sweden 9 5 4 5 4 6 6 9 9 14 14 11 12 12 11 14 14 16 19 14 12 9 ‐‐ ‐‐Canada 5 7 7 6 7 7 8 8 10 7 5 3 6 7 9 8 10 8 6 12 13 20 ‐‐ ‐‐Australia 18 17 16 15 9 5 7 7 12 6 9 4 7 10 12 11 11 12 15 21 16 16 ‐‐ ‐‐Germany 10 6 9 9 10 16 13 16 16 26 23 21 20 17 13 13 12 15 16 10 6 6 4 4Taiwan 11 13 11 7 6 8 23 13 18 18 11 12 17 20 16 17 15 14 18 18 14 22 ‐‐ ‐‐U.K. 19 16 18 18 20 22 21 21 20 21 22 22 19 16 17 15 19 13 9 19 15 14 ‐‐ ‐‐France 32 27 28 29 29 24 28 25 28 35 30 30 23 25 25 22 23 22 22 20 19 13 ‐‐ ‐‐Japan 27 21 24 27 26 27 17 22 24 17 21 23 25 27 23 21 26 20 17 4 4 3 1 1Korea 25 26 22 22 22 23 27 31 29 38 29 35 37 29 29 29 41 36 30 27 26 ‐‐ ‐‐ ‐‐China 22 23 21 23 19 18 20 17 15 19 31 24 29 28 26 24 29 21 27 26 31 34 ‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Note that in the early years of the rankings, China and Russia were not even considered.The US leads again, Europe recovery is weak and uneven, Asia
is mixed, and big emerging markets struggle…
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June 15, 2015
Go Figure…Where Now?
China Deflation Risks Linger, Underscoring Weak Local Demand China’s consumer prices rose at a slowerpace in May and factory‐gate deflationextended a record stretch of declines,underscoring tepid demand at home andabroad.
Hong Kong economy deteriorates asexports to China fall at fastest ratesince 2008
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June 15, 2015
Engines of Growth…
The manufacturing sector in South Koreacontracted at an accelerated pace in May, thelatest survey from Markit Economics showed amanufacturing PMI score of 47.8. That'sdown from 48.8 in April, and it moves furtherbeneath the boom-or-bust line of 50 thatseparates expansion from contraction in a sector.It also represents a 21-month low reading.
One sign that rates are about to rise - and onemajor bullish factor for the stock market - is thedeal craze. Corporations are rushing to get cheaploans for these deals. Late last week, The WallStreet Journal reported that Humana, a healthinsurer that administers insurance forgovernment programmes like Medicare andMedicaid as well as the private markets, hadbeen approached by suitors and had hiredinvestment bank Goldman Sachs as it considersa sale. Any deal for Humana would likely beworth more than its market capitalisation beforeFriday's rally, or about US$27 billion. Thiswould be the first health insurance deal of itssize since President Barack Obama's healthcarereform bill. The deal could spark a similarindustry consolidation as that which hasoccurred among drug makers, including thepending US$40 billion merger between Israeligeneric drug maker Teva Pharmaceutical and itsEuropean rival Mylan, and Actavis's US$66billion purchase of Allergan.
Global trade and GDP growth remain subdued,both running in the 3.0-3.5% range, well belowthe previous rates of more than 6.0% and4.0%, respectively. Transitory factors such aserratic weather have depressed both. While themiddle of 2015 should see these losses recouped,unfavorable weather could continue to weigh throughout2015 as the return of the 'El Nino' phenomenon maydisrupt some economies. Both energy and commodityproducers are suffering from falling investment and lowexport revenues: some prices have rebounded (eg, oil),but weak markets will not support a sustained rise.
Lack of confidence in Ukraine's economy hinders banksDespite positive comments yesterday from the IMF that Ukraine is committed to reforms andsome stability is emerging, the Fund projects end-December inflation at 46% and GDPcontracting by 9% in 2015. Ukraine's financial system and banks in particular have been one ofthe most obvious casualties of the crisis. The troubles that have befallen the banking sectorfollowing Ukraine's early-2014 slide into turmoil may not have been particularly new, as many ofthem also appeared during earlier crises, most recently in 2008-09. However, the extent of thepresent-day problems has proved unparalleled, with far-reaching implications for the system.Ukraine's reserves stood at 9.6 billion dollars at end-April.
Union unrest rises amid Brazil austerity, recession
An expansionist monetary policy in most largecountries will also help the world economyexpand. The question facing policy makers iswhat will happen to investment, both privateand public, which has failed to rebound after thecrisis in the way it did after previous recessions,damaging productivity. The world economyremains stuck in a low-level supply-demandequilibrium.
U.S. Economy Just Had its Worst Month Since the RecessionUS economy set for Q2 rebound, but questions hang over strength of upturn
China's economy is still slowing, and President Xi Jinpingis further tightening his hold over an increasingly illiberalpolitical system, but few grave consequences are visibleyet. In Japan, Prime Minister Shinzo Abe's leadershipremains unchallenged. Tokyo's relations with Beijing andSeoul have warmed slightly, but tensions in the SouthChina Sea have risen.
Prospects for Europe For the rest of June and the third quarter, the EU will grapple withthe future positions within the bloc of two member states, theUnited Kingdom and Greece. The period will see the resolution,one way or another, of the immediate crisis in Greece's relationswith its international creditors. The way in which this takes placewill have profound implications for the future of the singlecurrency.
Eurozone Industrial Production Growth At 3-month Low
Apple Unveils Apple Music, New SoftwareApple unveiled Apple Music—a new subscription-based streaming service and an ad-supported online-radio offering—in an attempt to change how people buy and listen to music.
French industrial production has hovered around azero annual growth rate for several years. May's 2.1%month-to-month drop leaves IP shrinking by 3.7% year-over-year. Sequential growth rates show that recent IPtrends have become even weaker than their decliningyear-over-year pace.
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June 15, 2015
YouCan’t Handle the Truth…Let's Take the “Con” out of Economics
IMF URGES CAUTION FOR FEDIMF warns Fed to hold fire on rate riseConditions not right for ‘lift-off’ until 2016, cautions fundThe IMF’s annual review of the US economy projects growth at 2.5 percent in 2015. Conditions for growth and employment creation are favorable during the remainder of 2015, coming off the weak performance during Q1, when the strengthened dollar, adverse weather, West Coast port strike, and falling investment in the oil sector reduced economic activity. Still, the IMF urged the Federal Reserve to wait for stronger indications of wage or price inflation before raising rates for the first time in almost 10 years. The assessment comes as the Labor Department released new data showing a sharp 3.1 percent fall in productivity in Q1 (y/y), and a moderate level of initial claims for state unemployment benefits that is typically associated with a firming of labor markets.
U.S. Is Awash in Glut of Scrap MaterialsA strong dollar, slowing Chinese economy cut into demand abroad for salvaged metal and paper
Rise in dealmaking is a classic harbinger of poorer times for credit
China's fixed-asset investment grew at its slowestrate in nearly 15 years in May, missing expectationseven as growth in retail sales and factory outputsteadied, arguing for Beijing to increase policysupport to avert a deeper downturn.
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Dislocation, Dislocation, DislocationEquity ValuationsSmall-cap stocks now seem absurdlyoverpriced. According to investment researchfirm MSCI, the average small-cap stock’sprice-earnings ratio is 29. The historicalaverage P/E for stocks is about 15. That’s whyGMO, a well-respected mutual fund shop,recently put out one of its grimmest forecastsfor small stocks — returns of -1% annualizedfor the next seven years or -3.2% afterdeducting inflation. High quality blue chips, bycontrast, are expected to deliver 2.7% a year.Yet investors keep pouring money into small-caps. According to Morningstar, small-capexchange traded funds have experienced $3.3billion in inflows in 2015 while large-cap oneshave seen $35.9 billion in outflows in 2015
The OIL OUTLOOK – Special ConsiderationsOn the demand side, high prices and new efficiency standards had ledto a decline in OECD consumption since 2005. Also, Saudi Arabiacontinues to pump at record levels. Again on the supply side, U.S.shale oil production may be sustained at higher-than-expected levelsas production costs are falling due to greater operational knowledge,improved technology and lower input prices.
Bonds put asset managers under spotlightDebate fuelled by fears a rise in US rates could spark a rush for the exit in fixed income markets
The ongoing Greek debt crisis has been taking a toll on the eurozone's economicgrowth, Markit said on Wednesday. The composite purchasing managers' index forthe region fell to 53.6 in May, from 53.9 in April, with growth in both output andnew businesses slowing to three-month lows. The uncertainty over Greece's future isacting as a brake on growth, though continued high unemployment is also playing apart. "Any escalation of the Greek crisis could rapidly derail the recovery," he said.Greek Prime Minister Alexis Tsipras travels to Brussels to present his country's latestreform proposal. Meanwhile, the group of international lenders will put their ownplan to the Greek leader. It is seen as a take-it-or-leave-it plan in order for Greece toreceive the next portion of bailout cash.A volatile start to the month saw
sovereign bonds in the eurozone selloff.Across the three major currencies, onlyUK gilts provided positive performance,returning 0.4%. German bunds and UStreasuries returned -1.1% and -0.3%respectively.
Emerging-market stocks headed for the longest run of losses in almost three months as Greece’s talks with its creditors stalled, while Russia to Indonesia joined a global bond rout. The ruble led currencies lower.
Global bond volatility has seen investors flee the most volatile part of the bond market, despite the fact that high yield bonds have outperformed in the past couple of months.
Accommodative interest rate policy had boosted high yield bond issuance…But bond ETF investors have sold over $2bn of high yield exposure since April…
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The Return to Normal ?
U.S. business leaders have scaled back hiring andinvestment plans for the next six months, a reflection ofheightened uncertainty after a patch of slower economicgrowth. The Business Roundtable‘s measure of theeconomic outlook among chief executive officers slippedto 81.3 in the current quarter from 90.8 in the first quarter,the lobbying group said. The survey of 128 CEOs reflectsexpectations for sales, capital spending and hiring in thenext six months.
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The Market Roar…
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Households – Brave New World
US consumer spending remains broadly flat, and the boostexpected from lower gasoline prices, among other sources ofadditional money in consumer’s pockets, is translating into highersavings rates rather than more consumption.
The Census Bureau released updated figures recentlyshowing that the share of households that are owner-occupied in the first quarter of this year slipped to63.7 percent, its lowest level in about 25 years.
Preliminary May Vehicle Sales at close to 18.0 million units SAAR: On pace for Best Year since 2001
Some forecast demographic changes will help lead to a decline in homeownership rate
A decade after homeowners used rising property values to go ona borrowing binge, some of the nation’s largest banks arefacing yet another hangover. Borrowers who took out home‐equity lines of credit, or Helocs, when real‐estate prices werenear their peak a decade ago are now falling behind asprincipal finally comes due after years of interest‐onlypayments. Data provided to The Wall Street Journal byEquifax, a credit‐reporting firm based in Atlanta, shows thatborrowers who signed up for Helocs in 2004 were 30 or more dayslate on $1.8 billion worth of outstanding balances just fourmonths after principal payments started kicking in. Thatrepresents 4.3% of the balance on outstanding 2004 Helocs,according to Equifax—a sharp rise from the 2.7% delinquencyrate on those same Helocs one month before borrowers reachedthe end of the interest‐only period, which typically lasts for10 years after homeowners open a Heloc.
Overall retail sales including food services & drinking placesduring May strengthened 1.2% (1.0% y/y) following gains of0.2% and 1.5%. This bounceback come after a terribly weekstring of weak data.
Mortgage Rates Top 4% in Test for Housing
Permits for future home construction increased 11.8 percent to a1.28 million-unit rate, the highest since August 2007. Permits havebeen above a 1 million-unit pace since July. U.S. home building isbeginning to regain ground lost during a harsh winter and there aresigns activity may accelerate this year as tightening labor marketconditions spur strong wage gains and encourage young adults tomove from their parents' basements.
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June 15, 2015
Reference Points…
Consumer credit in the U.S. showed another significant increase inthe month of April, according to a report released by the FederalReserve on Friday. The report said consumer credit surged up by$20.5 billion in April after jumping by an upwardly revised $21.3billion in March. Economists had expected credit to climb by about$16.5 billion compared to the $20.5 billion increase originallyreported for the previous month. Revolving credit, which largelyreflects credit card debt, increased by $8.6 billion in April afterrising by $4.9 billion in March.
Goldman Plans to Offer Consumer Loans Online, Adopting Start-Ups' TacticsThe unit will eliminate the costs of bank branches andtellers to allow Goldman to charge lower interest rates andstill make a profit. But the venture holds risks.
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The Likelihood of Unlikely Events
Russia's Ministry of Finance has rejected a request from state oil company Rosneft to dipinto one of the country's sovereign wealth funds (SWFs), business daily Vedomostireported on June 3, citing a ministry letter. Concern about the need to preserve one of theSWFs to support the pension system is probably a major reason behind the rejection. TheMinistry of Economic Development had already approved part of the 1.3 trillion ruble (25billion dollar) transfer to Rosneft from the National Welfare Fund. The intra-ministrydispute highlights how state firms are looking to SWFs for unconventional governmentfinancial support in the face of sanctions-driven stress on Moscow's budget and restrictedaccess to international capital markets.
The third quarter could see a significant worsening of Russia's ties with the West.With the Donbas crisis threatening to erupt into open war as in 2014 and early 2015,the Minsk 2.0 process is strained to breaking-point. Recent months have seen thegradual deterioration of the February peace plan, with heavier skirmishing culminatingin the recent battle for Maryinka. In Ukraine, the economic situation remains a majorproblem. In Central Asia, regional economies are suffering from Russia's slowdown,as some strengthen their integration with Russia as part of the Eurasian EconomicUnion (EEU).
Rouble slides as fighting resumes in Ukraine
Europe’s ageing population poses a long-term threat to monetary unionTHE euro area has been doing better of late: growth of 0.4% in thefirst quarter (1.6% on an annualised basis) was the strongest in thetwo-year recovery; unemployment has fallen to 11.1%, its lowest inthree years; and inflation is positive again. There has even been asurge of hope that Greece’s membership of the currency may yet bepreserved. But even if a deal is stitched together to keep Greece in,the euro will soon face a broader crisis. The slow growth andstrained government finances of recent years will soon bedramatically amplified by demography. And the member facing themost severe onslaught is not a small Mediterranean country butGermany, the euro area’s muscleman.
Asians are marrying later, and less, than in the past. This has profound implications for women, traditional family life and Asian politics
Volcker Sees Hidden Peril in State BudgetsPaul A. Volcker, the former FederalReserve chairman widely creditedwith taming inflation in the 1980s, hasfound what he considers a neweconomic scourge to battle: shoddystate budgets that he contends pushcosts into the future for othergenerations of taxpayers to pay.When the states live beyond theirmeans in this way, Mr. Volcker saidon Monday, their budgets may seembalanced every year, but they are infact piling up hidden mountains ofunpaid bills. The invisible mountainsgrow bigger every year and eventuallybecome crushing — something thatseems to be happening in severalstates this summer as lawmakers findthemselves at a loss to close theirdeficits. “The never-ending sense ofcrisis leads to stop-and-go funding ofvital programs,” Mr. Volcker said inhis first report on state finances sinceestablishing the Volcker Alliance, afoundation devoted to rebuildingpublic trust in government at thefederal, state and local levels.
Turkey election outcome pummels liraRuling party’s loss leads to record lows while country’s equities lead EM declines
U.S. and German government bonds extended a sell-off thathas pushed yields to the highest levels this year on demandconcern.
Treasury market liquidity raises trading concerns…World’s most actively traded market ‘not functioningas normal’
The ECB Governing Council has raised theceiling on emergency liquidity assistance (ELA)from the Bank of Greece to the country'sfinancial institutions from 80.7 billion euros (91billion dollars) to 83.0 billion, it was reported,amid signs that the outflow of deposits from theGreek banking system has accelerated. Pressureis intensifying on the negotiators representing theGreek government and its creditors -- mostimportantly Germany -- to reach some form ofagreement allowing the release of sufficientfinancial assistance for Greece to meet its paymentobligations due by the end of June. However, thegoverning Greek coalition does not appear stableenough to adopt the reform programme demandedby its creditors. Meanwhile, German economicopinion on Greece is hardening, in the gatheringbelief that the risks to the rest of the euro-areafrom any concessions to Athens are now greaterthan those of a possible rupture
Can China Be Contained?As tensions with China rise, U.S. foreign policy thinkers aredusting off ideas from the Cold War—and questioning thelong‐standing consensus for engagement with Beijing
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Credit Matters-Know RiskMany Excel in Strategy, Few in the Management of Risk
Traders have attributed the heightened volatility ingovernment bonds in part to structural factors, including therise of electronic trading and prevalence of high‐speedcomputer algorithms that were long prevalent in the equity,futures and foreign‐exchange markets. The Treasury MarketPractices Group, an expert panel convened by the Federal ReserveBank of New York, in April wrote that automated trading strategiesnow account for more than half of Treasury trading on someplatforms, and that its increasing adoption would lead to “the risk ofsharp, short‐term disruptions to the Treasury securities market of thekind experienced in the equities and futures markets.” Others finger adecline in liquidity, or the ease of trading at given prices, as a result ofnew rules in the wake of the financial crisis targeting bank risk‐taking.
Margin lending in China is approaching 3.5 per centof GDP — a level exceeding the US, which is also at arecord high. The fear of curbs to margin lending wasresponsible for a 5 per cent intraday sell-off recentlybefore the index recouped all its losses; similar worriessent the index down 6.5 per cent a week earlier.
Sovereign wealth funds face new global environmentThe world's largest sovereign wealth funds (SWFs) manage more than 3 trillion dollars in assets, butbudgetary pressure from lower oil prices is causing Saudi Arabia and others to dip into the funds.Even with some outflows, SWFs remain large strategic investors, and their investment decisionshave important effects. China is investing in infrastructure in its neighbouring countries and expectsthe SWFs to cooperate with the Silk Road Fund (SRF), a new state-backed private equity fund.
Calpers to Cut External Money Managers by HalfThe largest U.S. public pensionfund intends to sever ties withroughly half of the firms handlingits money.
E&P credits net lifelines by blocking and tackling capital marketsWhen oil prices were at six-year lows late last year, the damaged energy sector was clearly a wildcard for2015. Against all prognostications, however, it’s become this year's hotspot, with sector returns boosted byissuers taking a variety of distinct paths through the capital markets and the rebound in oil prices. Marketparticipants have been diving back into the sector as it outperforms the broad index amid the oil-marketrebound, marking a complete turnaround for the E&P sector in high-yield as compared to late last year.The energy sector has returned 6.23% for 2015 through the end of May, versus 4.08% for the broad market,according to S&P U.S. Issued High Yield Corporate Bond Index. And it’s not just because oil hasrebounded. This year has seen multiple paths taken through the capital markets to address balance sheetsand liquidity, including primary market executions, debt swaps, loan amendments, and private placements.
Nonbank auto‐finance companies willface direct U.S. oversight for the firsttime under regulations publishedWednesday by the Consumer FinancialProtection Bureau.
Alaska’s Legislative Impasse over Spending Cuts On Tuesday, a special session of the Alaska (Aaa negative) legislature failed toreach a budget agreement, further delaying adjustments to the state’s spendingplan for fiscal 2016, which starts 1 July. The credit negative budget impasseraises credit risks in light of the state’s spring 2015 revenue forecast, whichprojected a 59% decrease from the prior year and has opened a gaping $3.5billion budget deficit.
•There were nine issuer defaults in May, the most since October 2009, whichpushed the overall trailing 12‐month (TTM) high yield rate to 2.3%... Therehas been seven distressed debt exchanges (DDEs) over the past two monthsin the energy and metals/mining sectors, with many representing a smallportion of the issuer’s total bonds. Energy makes up $62 billion of the $259billion ‘CCC’ or lower rating category, more than double the total seen one‐year ago and nearly equaling the next three largest industries combined
PE-backed loan volume falls to 6-year low amid regulatory pressureAs tough a year as it has been for leveraged loan activity overall – with new-issue volume down 32% year-over-year, to $205 billion through June 12 – private equity has suffered a disproportionate drop fostered by acombination of regulatory pressure and sky-high equity prices. All told, PE-backed issuers’ share ofleveraged loan volume has receded to a six-year low of 43%, or $87.7 billion of $204.6 billion, from 54% lastyear. And this doesn’t include the looming set of large corporate deals that includes Charter Communicationsand Avago Technologies. Pro forma for those deals on the calendar, PE’s share drops to 39%.
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U.S. Credit Flows
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A New Geography of BusinessLast month Malaysia released its 11th five year economicdevelopment plan, in which the country plans to attaindeveloped nation status by 2020. The second largestnatural gas exporter in the world also plans to target GDPgrowth of 5%+ over the next five years, outpacing theglobal economy. Malaysia’s latest GDP reading, 5.6%,came in ahead of expectations and above the average forthe Asean group. Even the knock-on effects of fallingcommodity prices over the last year have done little todent Malaysia’s growth momentum as it attempts todiversify away from oil revenue dependency.
Malaysia’s credit shines among Asean peersMalaysia’s sovereign credit has steadily improved as global oil prices have stabilized
Malaysia’s sovereign 5-yr CDS spread has tightened 27bps over the last two monthsMalaysian government bonds have had the best returns among the Asean nations in 2015Risks remain as the country diversifies away from oil revenues
Macau gaming revenues continued to slump in May, falling37.1 per cent year-on-year, continuing a prolonged declinefor the industry in the Chinese territory. Gaming revenuefell to 20.35bn patacas ($2.6bn), according to Macau'sGaming Inspection & Coordination Bureau. The decline is thetwelfth consecutive month of year-on-year falls. Theeconomy in the former Portuguese colony has been weigheddown amid an official Chinese push to reduce corruption,which has made high rolling mainland punters warier aboutpublicly gambling in the enclave — the only place in Chinawhere casinos are allowed. Last year casino revenues inMacau saw their first full-year annual decline since recordsbegan in 2002.
Emerging-market stocks headed for the longest run of losses in almost three months as Greece’s talks with its creditors stalled, while Russia to Indonesia joined a global bond rout. The ruble led currencies lower. Fears of a rout in bond markets also hurt…. Brazil raises rates for sixth straight time
Central bank aims at inflation and tries to regain investors’ trust
Hyundai Motor falls 10% on export woes Stock declines as sliding yen fuels fears over South Korean carmaker’s price competitiveness abroad
Australia's booming property market could be at risk of a 'sharpcorrection' and the country was warned to keep its monetary policy firepower'in reserve' amid uncertainties on the economic outlook, the Organization ofEconomic Co-operation and Development (OECD) said in a reportWednesday. In the latest economic survey report on Australia, the Paris-based think tank said monetary policy firepower should be held in reserve inassumption of uncertainties on the outlook and the downside aspects of ratecuts on the booming housing and credit markets. Further, OECD said fiscalpolicy should continue to provide support if needed from the operation ofautomatic stabilizers and structural reform should facilitate post-resource-boom adjustment, particularly further shift towards indirect taxes.
Swiss watchmakers face a bumpy ride after boom Luxury leaders remain bullish in the face of currency fluctuations and a slowdown in Asian marketsIn the past six months, a cocktail of wavering Asian consumerenthusiasm, currency headwinds and geopolitical instability hastriggered a sales slowdown that is taking a toll on some of thebiggest names in the hard luxury sector.
The European Central Bank's cheap long-term loans and quantitativeeasing program have not been effective in boosting interbanklending in the region, a Reuters poll found on Monday. The ECBissued its first targeted long-term refinancing operation (TLTRO) inSeptember, after a big dip in inflation. In January, the central bankannounced a trillion-euro bond-buying program that began in Marchand will run through to September 2016. While the ECB hoped thedeluge of cheap cash would boost bank lending, a majority of traders- 13 of 23 - said it hasn't. The overnight lending volume has beentrending downward, according to the ECB website.
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Pumping Iron…The Old Economy Revisited
Costly Bet on Big Cargo Ships Comes Up ShortWeak shipping demand and glut of massive vessels add to the overcapacity on the world’s busiest trade lanes
Container‐ship operators say they lose money in thelong run on the Asia‐to‐Europe trade lanes if freightrates stay below $1,300 per container. Analystsestimate capacity in the route at around 30% aboveannual demand, which is expected to grow between3% and 5% this year.
Drought will cause US agricultural shiftCalifornia is in the fourth year of a severe drought. Low levels of snowpackin the Sierra Nevadas, a main source of water for the 50 billion dollaragricultural industry in the state, show that it will last throughout the year.Water in California is a divisive political issue, and a cohesive andcomprehensive plan for water use may be beyond reach even in the faceof unprecedented drought.
Prospects for natural gas The International Energy Agency (IEA) said that China's gas demandslowed to single digits in 2014, a substantial deceleration from the14% averaged during the previous five years. Limited demand growthhas combined with a supply glut, depressing prices and narrowingdifferentials. The strength and extent of US gas output and the rate ofgrowth of Chinese gas demand continue to be the two most significantdrivers of global markets.
Maersk gains more for less with $1.8bn newbuild orderMaersk Line has managed to gain up to 4% extra carrying capacityper ship on a series of second generation Triple-E newbuildingsordered from Daewoo Shipbuilding & Marine Engineering that willcost considerably less than their predecessors. The world’s numberone container line signed a $1.8bn contract for 11 vessels of 19,630teu nominal capacity with the same yard that built the Danishcarrier’s first generation ships of this class. The initial 11-strongorder has an option attached for a further six vessels. Their cargointake capacity will be larger than the first generation Triple-Evessels, even though hull dimensions are the same, with a length ofapproximately 400 m, and width of 58.6 m. But the draft, at 16.5m, is deeper than the 14.5 m of the 20 initial Triple-E ships, the lastof which will be delivered this month.
Asphalt paving price dropsENR's 20-city average price for asphalt paving dropped0.3% this month, following a 2.3% decrease in May. Thedecline brought the yearly increase to 0.7%, down from 1%last month. The Bureau of Labor Statistics' producer priceindex for asphalt paving decreased for the fourth straightmonth, dropping 2.4% in April after falling 1% in March,when it registered a yearly decrease of 2.1%. The 20-cityaverage price for concrete block dropped 0.2% this monthafter holding steady in May; that ebb brought the yearlyincrease down to 3.7% following last month's yearlyincrease of 4.7%.
US LNG exports will see difficult price environmentLong-term sales agreements already struck mean that US entry into the globalliquefied natural gas (LNG) market is a certainty. However, the uniquearrangements of US LNG projects suggest they will to some extent play the roleof marginal producer. Despite remaining an attractive proposition in Europe andAsia for political and risk-mitigation reasons, when prices are low, so too will beUS LNG utilisation rates, unlike in stickier production regions
Freight rates on the Asia-north Europe tradehave fallen for a fourth straight week after thelatest round of general rate increases proposedby the route's carriers were firmly shunned bythe market. The latest Shanghai ContainerisedFreight Index shows that rates slipped 17%, or$58, to $284 per teu. This represents yetanother all-time low for the key east-westtrade, but also means that rates have fallen bya staggering $577 over the past month. Inresponse to their latest GRI failure, carrierswill once again look to stem the rate erosiontide with yet another round of recommendedincreases in the coming weeks. Indeed, NYKLine has already announced a GRI of $920 perteu effective July 1. However, justifying suchincreases is becoming increasingly hard giventhe current price of fuel and the influx oflarger ships against moderate trade growth.This trend of introducing ultra large efficienttonnage shows no sign of slowing downfollowing news from Maersk Line last weekthat it plans to build a further 11 Triple-E classvessels, with an option for six more.
Prospects for manufacturing The slow pace of industrial growth in mostmajor economies masks significant changesacross the manufacturing product cycle andwithin corporate structures. Small andmedium-sized enterprises (SMEs) are playinga critical role in this transformation, but faceconsiderable constraints on growth.Government involvement will be one of thekey determinants in their impact on industryprospects worldwide.
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The DNA of BusinessReconfiguring Industries to Define Growth
A merger of Dish Network and T-Mobile US would resolve two bigquestions looming over the broader media landscape. It wouldprovide a definitive answer to what billionaire Charles Ergen plans todo with his huge wireless spectrum holdings. And it would give T-Mobile US a clear path to continue its role as a disrupter. But bothcompanies have flirted with others in recent years, and it is not clearthis deal will get done.
Global dairy prices have turned sour. Europe’sproducers are feeling particular pain, withwholesale prices below the cost of production formany farmers. “It’s a big issue at the moment,”says Richard Potts, European policy adviser for theUK’s national farming union. Whole milkpowder, the global benchmark, is at $2,400, thelowest level since 2009, having reached more than$6,000 a tonne in 2013. The high prices ofseveral years ago were spurred by growing demandand low supplies caused by drought conditions,leading to increased production and highinventories that have weighed on demand fromChina
FedEx is further reducing its air capacity in order to reducecosts and improve utilisation, profits and yields, and alsomodernise its aircraft fleet, retiring 15 older planes earlierthan originally planned. Explaining its decision last week,it said it would permanently retire 15 aircraft and 21related engines as it “continues to rationalize capacity andmodernize its aircraft fleet to more effectively serve FedExExpress customers”. Over the last two years, theintegrator has been working to push more of its lower-yielding ‘international economy’ express shipments fromits own air capacity onto less expensive third-party aircargo capacity bought from commercial scheduled airfreight carriers.
US trucker turns to guaranteed payto fight driver shortageAs trucking firms battle for qualified drivers,Covenant Transport is offering more than1,000 team drivers on its payroll $1,000 aweek in guaranteed minimum pay, perhapsthe largest guarantee of its kind yet. Thatkind of guarantee requires strong supportfrom shippers.
A price war is raging among the world’s largestluxury groups. Aggressive currency headwindshave battered parts of the industry, inflatingmanufacturing costs and spreading large pricingvariations among sales regions. The gulfbetween prices for luxury handbags, watchesand jewellery in Europe and in China is thewidest it has been for three years, according toSanford C. Bernstein, a research company, asweakness in the euro upsets the pricingstrategies of high-end brands. The knock-oneffect of the euro’s slide and the stronger USdollar and Swiss franc has led to the likes ofRichemont, Burberry and Chanel raising pricesin Europe, while cutting them in dollar-denominated markets, including parts of Asia.This is an effort to reduce a disparity that hastransformed the global luxury retail landscape.
McDonald’s Sales Fall in MayBurger seller’s U.S. comparable sales drop2.2%, though world-wide sales fall slightlyless than expected
Reynolds American Inc. on Monday announced it willcomplete its $25 billion acquisition of Lorillard Inc. onJune 12, bringing an end to a year-long process that willreshape and further consolidate the U.S. tobacco industry.The announcement came hours after U.S. District JudgeGladys Kessler of Washington, D.C. granted a motionthat will allow Reynolds to divest Maverick, Kool, Salemand Winston cigarette brands to Imperial Tobacco GroupPLC for $7.1 billion.
HSBC pledged a new era of higher dividends, laying outplans to slash nearly one in five jobs and shrink itsinvestment bank by a third to combat sluggish growth acrossits sprawling empire. In the bank's second big overhaulsince the financial crisis it will speed up a cull ofunprofitable units and countries by cutting almost 50,000jobs - half of them from selling businesses in Brazil andTurkey.
Sears Holdings Corp's strategy to cutadvertising and discounting is raisingconcerns among analysts who questionwhether the venerable retailer will beable to attract new customers.
Chemicals groups seek to extract full benefit from shale gas bonanzaFlood of cheap energy gives US-based producers huge cost advantages over foreign competitors
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Real Estate and Construction Outlook
US LODGINGApril had the highest occupancy ever (66.8%) and the highest room demand (99.4 million rooms) ever.
Office development in the U.S. is beginning topick up steam after years of dragging. Withoffice vacancy rates inching down and interestrates near historic lows, developers and theirfinanciers increasingly are willing to take risks.In skylines from San Francisco to Chicago toBoston, large office towers are under way. Inrecent weeks, developers announced they weremoving ahead with projects that includeBrookfield Property Partners ’ planned 2million-square-foot tower in Manhattan andHudson Pacific Properties Inc. ’s planned323,000-square-foot office building inHollywood.New York’s Park Avenue is on track to see somethingit hasn’t seen in three decades: a major new officetower. Developer L&L Holding Co. and its partners onTuesday secured $556 million from MassMutualFinancial Group to fund development of the 897-footoffice tower at 425 Park Ave. Taken with otherfunding from Japanese investor Tokyu Land Corp., thedeal gives the developer the cash it needs to pushahead with the 670,000-square foot-tower in a displayof the gradually improving appetite for officeconstruction around the U.S.
FED BEIGE BOOK… Apartment demand was strong inthe Dallas District, and held steady in the Richmond District.Tight inventories and strong sales continued to push up prices,except for at the high end of the Manhattan market, accordingto New York’s report. Condo sales rose in the RichmondDistrict, but declined in the Boston District. Rents and pricesincreased in districts that commented on them, and one SanFrancisco District contact said that high apartment prices haveled young buyers to consider single-family homes. Strength inmultifamily construction was reported in the Cleveland,Atlanta, and San Francisco Districts, and the RichmondDistrict continued to experience steady apartment buildingactivity.
Commercial real estate leasing and constructionactivity improved in most districts, and outlooks wereoptimistic. The New York District reported a strengtheningindustrial market and steady office and retail leasingdemand. In the Boston District, demand for office space heldsteady at a decent to solid pace, except for in Hartford wheredemand was slow. The Dallas District continued to seeactive industrial, retail, and office leasing activity, with theexception of the Houston office market. Both commercialreal estate development and leasing activity increased acrossthe San Francisco District, mostly fueled by growth in thetechnology industry. Contacts in the St. Louis District noted atight office market for Class A space, and continued commercial andindustrial construction. Commercial building increased in theChicago District driven by demand for industrial and office space,and new hotel and office development in downtown Chicago wascompelling retailers to relocate. The Cleveland and Atlanta Districtsnoted increased construction backlogs, and shortages of skilled laborremained a constraint on construction activity in some districts, suchas Boston, Cleveland, and San Francisco.
China's real estate investmentgrowth continued on its downwardtrack in the first five months of2015, to reach its slowest ratesince May 2009, but governmentstimulus policies appeared to allbut end the decline in floor areasold. Property investment growthslowed to 5.1 percent in Januaryto May from a year earlier, theNational Bureau of Statistics(NBS) reported on Thursday, easingfrom 6 percent in the first fourmonths. The floor area of propertysold dropped just 0.2 percentduring the period, narrowing froma 4.8 percent decline in Januaryto April. In May alone, home salesmeasured by floor area rose 16.4percent from a year ago,continuing on an uptrend that wasfirst seen since November 2013.The figure was compared to a 7.7percent rise in April. Analystssaid the robust momentum in thehousing market should last ‐ atleast in the short term. Ratingagency Moody's changed its outlookon the China property sector tostable from negative last week,reflecting the effects ofsupportive monetary and regulatorypolicies, and forecast Chinaproperty sales would grow 0 to 5percent by value in the next 12months. China's central bank cutinterest rates for the third timein six months in May to lowercompanies' borrowing costs and re‐energize a sputtering economy. Animmediate beneficiary might havebeen real estate investment, whichdirectly affects about 40 otherbusiness sectors in China, and isconsidered to be a crucial driverof economic activity.
New York renters were on the move in May, fleeing theirapartments to escape rising costs and seek better dealselsewhere in the city. Rents citywide have been climbing fastand hovering near all-time highs, forcing tenants to pay moreno matter where they turn. Manhattan rents have risen for 15consecutive months and reached a quarterly record at the endof March, according to Miller Samuel. In Brooklyn, formerlya refuge for tenants seeking cheaper deals, rents hit a peak inApril and stayed about the same last month. In May, themedian monthly rent in Manhattan was $3,380, up 2.4percent from a year earlier, according to the report. Rentsrose 4.8 percent in Brooklyn to a median $2,933. In theQueens neighborhoods of Long Island City, Astoria,Sunnyside and Woodside, the median fell 12 percent to$2,597 as small apartments accounted for the largest share ofnew leases, Miller said.
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Will Life Ever Be the Same?
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