GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Andbank’s Monthly Corporate Review July 2016
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Contents Executive Summary
3
The month in charts
4
Country Pages USA
5
Europe
6
China
7
India
8
Japan Brazil Mexico Argentina
9 10 11 12
Equity Markets Fundamental Assessment Short-term Assessment. Risk-off shift probability Technical Analysis. Main indices
13 13 13
Fixed Income Markets Fixed Income, Core Countries Fixed Income, European Peripherals Fixed Income, Corporate Bonds Fixed Income, Emerging Markets
14 14 15 15
Commodities Energy (Oil) Precious (Gold)
16 17
Forex
18
Summary Table of Expected Financial Markets Performance
19
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Executive Summary USA - The fallout from Brexit could delay the Fed’s plan to increase interest rates. The significant downturn in financial markets in January did not lead to either a U.S. or global recession, so we do have a recent precedent for optimism about the ability of the global economy to withstand shocks. Europe - Surprise from the 23rd June referendum, with the Brexit victory shaking the markets. What’s next? Volatility may well remain high in the next days (weeks?) since it remains a political issue that seems will not be fixed early. Investment Approach: Flexibility required! Potential outcome not clear. Two year negotiation period with different options, not discarding the possibility of a bespoke relationship. Spain - New elections were held on 26th June, following Brexit referendum. Friendly outcome for the markets. Sorpasso was avoided, PODEMOS as a third political force and PP as the clear winner with a stronger position for an agreement. Coalition needed, but a new Government could now be closer. China – Fears are growing that this summer could see another storm of uncertainty, with the epicenter possibly being China’s FX policy. However, an extreme disruption in the RMB looks unlikely. India – Reserve Bank of India governor Raghuram Rajan announced he will not seek an extension to his three-year term, which ends in September. Fears that the hard-won credibility of the RBI under Rajan will be undermined by the appointment of a more malleable governor look misplaced. Japan – Japan share buybacks are up 67% y/y in 2016 to May as negative rates cause a misperception regarding the accuracy of the information coming from the monetary system. Brazil - The past month has brought further evidence that Brazil’s economy is starting to turn the corner. While the recent economic news has been better, the political fallout from the Lava Jato probe has continued. Mexico - Despite the fact that UK banks have a footprint in some countries (notably Mexico), these units are locally capitalized. This could help to explain the relative resilience of financial assets in the region (also in Mexico). Argentina - Economic activity is still showing signs of contraction mainly due to measures taken by the government to reduce the imbalances inherited from previous administrations. There are signs that the policy tightening implemented over the past six months is weighing on the real economy. However, analysts expect a better 2nd half due to planned infrastructure projects and FDI.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
The month in charts
Libor-OIS spread (Overnight Index Swap)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
USA:
We do have a recent precedent for optimism about the ability of the global economy to withstand shocks.
Do you feel dizzy?
Brexit & the Fed The fallout from Brexit could delay the Fed’s plan to increase interest rates, particularly if the dollar strengthens and uncertainty intensifies. To a certain extent, all this “imbroglio” means a potential and unwanted tightening of financial conditions at a time when the U.S. economy is still quite mixed, suggesting that a rate hike this year could look extremely difficult. Futures pricing of the possibility of a rate increase show the probability of a cut running as high as 19% in both September and November. Risks to the U.S. are likely to be indirect As of yet, risks to the U.S. are likely to be indirect. The most direct channels of impact are expected to be through tighter financial conditions in international markets, which could prompt greater uncertainty about the prospects for global growth and increased financial market volatility, which in turn could make U.S. businesses more cautious about hiring and investing. Uncertainty and volatility could also push international investors towards the safety of the U.S. dollar, strengthening the currency while creating a new hurdle for U.S. exports abroad and making imports cheaper, which could result in deflationary forces becoming more entrenched. If we had to gauge how the risks will materialize, we would state that the US$ effect and its drag on US exports accounts for roughly 1/3 of the total impact, while tighter financial conditions (higher credit spreads or declining equities) explain the remaining 2/3 of the impact. About the future It is worth noting that the significant downturn in financial markets in January did not lead to either a U.S. or global recession, so we do have a recent precedent for optimism about the ability of the global economy to withstand shocks. GDP grew at an annualized rate of less than 1.1% in Q1. We still expect a bounce in the second quarter, but it is likely to be more modest than anticipated in light of recent events. With the Brexit impact estimated to begin in the 3rd to 4th quarter, average annual GDP growth may change little this year. We have consequently revised our 2016 GDP forecast slightly down, from 2% to 1.8%. Markets Equities (no change): Investors can no longer view bad news as good news. Consistent bad news would now mean a recession. We believe we are stuck in a slow-growth economy where good news is not extreme enough to incite a rally in stocks. However, this could trigger further coordinated policy initiatives from central banks in the near term, aimed at stabilizing and reassuring financial markets. Lower interest rates for longer will also favor U.S. businesses and consumers. In fact, rates have already come down dramatically in the wake of the Brexit vote, with the yield on the 10-year Treasury falling to around 1.40 recently, and near its all-time low of 1.38 reached in 2012. S&P 500 earnings per share are expected to decline in the second quarter according to FactSet, in what would be the fifth consecutive quarterly drop (the first time this has happened since 2008). Investors are hoping that this will be the last negative quarter and that earnings growth in the second half of the year will rebound. Nevertheless, until we see that happen, it’s difficult to get excited. In past reports we forecasted and outlined that US equities had limited upside potential. Our view has not changed and the addition of Brexit into the equation definitively does not fill us with excitement and expectations of changing that forecast. However, once the dust has settled, our base case looks for a stabilization in equity markets and a gradual shift towards more fundamental issues. As such our year-end target for the S&P 500 remains unchanged at 1949. !! 10Y Treasury: We are cutting our Dec 16 target to 1.7%.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Europe:
Have we just witnessed a type of “Lehman moment”? Brexit referendum: A big elephant in the room Surprise of the 23rd June referendum, with the Brexit victory shaking the markets. What’s next? Volatility may well remain high in the next days (weeks?) since it remains a political issue that seems will not be fixed early. The UK appears to be “in no hurry” while the EU insists there is “no time to lose”. Economic impact: It looks like it will be harder for the UK than for the Eurozone. Time to adjust European GDP downwards. It could slash 0.5% off growth, but in 2017. Impact on rates: Lower for longer in Europe, although not discounting a possible rate cut from the BOE or the ECB. It will likely refrain the FED from a rate hike. “Unknowns”: (1) From Great Britain to Little England? (Scottish independence fears are soaring and this risk is becoming evident). Investment Approach: Flexibility required! Potential outcome not clear. Two year negotiation period with different options, not discarding the possibility of a bespoke relationship. Brexit does not necessarily have to be a “Lehman moment” A shift of the type and magnitude of Lehman occurs when core beliefs in financial markets are shattered. For example (as one source wisely pointed out), before Lehman everyone bought into the belief that cutting up risk into small pieces and selling it through structured products (risk syndication) was a wise idea, which reduced the overall risk for the financial system while allowing for more leverage. Well, this belief turned out to be wrong (it was shattered) and the mass of excess leverage unwound precipitously in a market with no market-makers. We can therefore respond to our question by simply answering this one first: Has any core belief in the markets been broken? 1. If the purported omnipotence of central banks and their ability to fix and maintain prices was taken as a core belief, then, what we are witnessing is a sort of Lehman moment. However, in our view, nobody with a modicum of intelligence has massively leveraged up and invested on the premise that policies from Brussels, the ECB and the BoJ were a great and sustainable idea. Thus, if we are right, the presumption of omnipotence (and the subsequent massive leverage) was not a “core belief” that had been broken. 2. Then, maybe the “core belief” was that Brexit would not happen. Well, probably, a fraction of market participants conceived this idea as something possible (if only because of the abuse of this buzzword by the media). However, financial markets dramatically overreacted, maybe because what actually represents a “core belief” is the fact that buzzwords like Spainoyara, Departugal, Italeave or Frexit will never happen. Of course, with the advent of Brexit, such a core belief has been shattered. So what? For us, Brexit does not necessarily have to be a Lehman moment in itself due to the simple fact that, unlike the Lehman episode, when the fall of one big bank inevitably led to the fall of others, it remains to be seen whether the Brexit event will drag down other countries. We have to define a central scenario and work on this hypothesis. Well, in our central scenario we foresee an EU that responds as it has always done. Moving forward. Perhaps at a slower pace, but moving forward nonetheless. Markets ! Equities (STXE 600): We cut 2016 PE ltm to 14 (from 15.5). New target price 312 (from 345). We cut PE in Spain to 13. New target for the Ibex Index is 8347. ! Core bonds: We cut Bund target to 0.20% (from 0.40%) ! Peripherals 10Y yields: Italy 1.4%, SP 1.3%, POR 2.8% !Credit: IG Itraxx 85 (from 65). HY Itraxx to 360 (from 290) 6
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
China:
The probability of storms this summer is greatly reduced Fears about China arising from the Fed’s decision seems overblown Fears are growing that this summer could see another storm of uncertainty, with the epicenter possibly being China’s FX policy. However, extreme disruption to the RMB looks unlikely. If a Fed rate hike does trigger a sharp across-the-board rally in the US dollar, this time around the reaction of the renminbi’s exchange rate is likely to be moderate, since the PBoC is now better equipped to deal with unruly moves in currency markets. (1) Few people know that the PBoC has conscientiously tried to reconcile the dual objective of its exchange rate policy: Renminbi stability against a basket of currencies, while also holding the renminbi stable against the US dollar. From February to April the US dollar fell by -7% against a basket of major developed market currencies. Simultaneously, the PBoC allowed a moderate depreciation of the renminbi against the CFETS basket, and managed to keep pace with the USD (RMB/USD changed just 1.87%). As a result, the RMB was fairly stable against both the USD and a basket of currencies. Then, from April the USD reversed course and began to appreciate, with the DXY index rising by 3.5% through May. In response, the PBoC also allowed the RMB to appreciate moderately against the CFETS basket (by around 1.5%), avoiding any significant depreciation against the USD (-1.5%). Again, the PBoC managed to keep RMB performance relatively stable against the USD but also with other currencies. (2) The direction of capital flows has not yet reversed, but the outflows have at least stabilized. FX Outlook The PBoC will continue with this strategy over the summer (if the US dollar does strengthen, Beijing will allow the renminbi to rise against the CFETS basket, tempering the renminbi’s weakness against the US currency). This new approach means that: (1) Currency shifts -when it comes to China- will be now more gradual. (2) A rerun of a global selloff due to the renminbi’s devaluation therefore seems unlikely. We understand that China’s exchange rate policy is driven by a desire to maintain stability (versus the US dollar but also other currencies) rather than trying to generate benefits through a war of competitive devaluations. The state of the nation May Industrial Production: +6.0% y/y (unchanged) Fixed Asset investment: +9.6% YTD (vs +10.5% in April) Retail sales: +10.0% (vs 10.1% in April) Fiscal expenditure in May: +17.6% y/y vs +4.5% in April Equity market, the MSCI and the Reforms: The MSCI announced that it will not include China’s onshore A-share market in its Emerging Markets or World indexes. MSCI said that “despite real progress, there were still some technical obstacles” although also pointed that “most of these are eminently surmountable at any time the Chinese authorities wish”. In recognition of this, MSCI noted the possibility of “a potential off-cycle announcement should significant positive developments occur ahead of June 2017”. Of the four difficulties MSCI highlighted: 1) One is fully resolved (rules on beneficial ownership). 2) A second is in flux (improvements have been made on paper to Qualified Foreign Institutional Investor quota allocation and daily repatriation should be now possible. The inability to repatriate more than 20% of net asset value in a single month remains a problem for managers facing redemptions. 3) A third difficulty is still unaddressed (the requirement that any product anywhere in the world linked to an index containing A-shares must be pre-approved by domestic Chinese stock exchanges). 4) The fourth difficulty seems harder to address (the so-called circuit breakers by which A-shares trading can be suspended, locking international investors into positions they are desperate to sell). In response, the SSE has announced stricter rules on trading suspension: Companies will only be allowed to suspend trading for limited times. Three months for a major restructuring. One month for a non-public offering. Ten days for certain minor actions. The MSCI has responded to this gesture from the SSE, stating that this new regulation needs a period of observation. A matter of time: CSRC’s head says that the inclusion of yuandenominated A-shares in a MSCI index is a "historical certainty" that will happen eventually. When it does, the MSCI proposes an initial inclusion factor of 5% of the foreign investable float (foreign investment is now limited to 30% of free float). This means that some US$20bn of inflows into A-shares could take place after the inclusion. This is 20% of the US$100bn of offshore funds invested in Chinese stocks via the QFII, RQFII, Shanghai-HK Stock connect. What will happen when the MSCI allows the inclusion of 100% of this foreign investible float - 400bn?
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
India:
New RBI governor will walk the line between Rajan’s fully provisioned NPLs and certain relaxation in provisioning The SSE has already reflected the fall in intermediation
The SSE has already reflected the fall in intermediation
A New Reform The BJP-led government of Narendra Modi has managed to pass the new bankruptcy code in congress, and the fog of the legislative inertia has finally lifted (recall that Modi’s efforts to push through tax, land and labor reforms have been hobbled by opposition in parliament so far). The new Consolidated Insolvency & Bankruptcy Code will replace the outdated laws that keep many of these distressed loans locked in zombie firms, protected by archaic bankruptcy laws that date back to British rule and ranks India a lowly 136th in the World Bank’s “resolving insolvency” ranking. This situation prevents banks from financing new projects and businesses, as well as delaying a turnaround in the investment cycle. (Typically it takes more than four years to wind down bankrupt companies, with creditors recovering just 26 cents in the dollar). The new code will (1) Rank lenders by seniority, with an understanding that junior creditors may never be repaid. (2) Employ specialized bankruptcy courts (rather than regular courts) to make decisions about collateral write-offs. (3) Bankruptcy resolution processes for companies should be reduced to nine months. Reform Agenda after Rajan to continue Reserve Bank of India governor Raghuram Rajan announced he will not seek an extension to his three-year term, which ends in September. Fears that the hard-won credibility of the RBI under Rajan will be undermined by the appointment of a more malleable governor look misplaced. The structural and institutional reforms begun by Rajan are unlikely to be abandoned by his successor, and any differences in approach are likely to be more in terms of style than substance. The functional independence of the RBI is not under existential threat, but given that the RBI is not formally independent, the government (market-oriented reformist) could have moved to exert control over who is going to lead the RBI. Outlook Under the old insolvency laws, non-bank credit providers were deterred, but the new Consolidated Insolvency & Bankruptcy Code is a crucial step towards creating a functioning corporate bond market in India that could complement the bank lending sector and prevent the economy from becoming overly dependent on bank credit. In short, the Bankruptcy Code will not offer a quick solution to the legacy of bad debt, but strengthening the institutional framework will create the structure for a revival in the investment cycle. Admittedly, the new code should go a long way towards reassuring investors that infrastructure bonds are a safe investment, but if properly implemented, the new code will prompt confidence in insurance companies and pension funds, which in turn will play a role in financing. According to our local sources, there are good reasons to hope that the investment cycle (which has slumped since 2010) could turn around soon. Another positive aspect is that by passing the new code, the government seems to have a clear road map for cleaning up bank balance sheets. (Another important factor is the creation of the Banks Board Bureau, with the aim of formulating a plan to consolidate and recapitalize public sector banks –which account for the bulk of total loans). Modi’s administration has therefore just announced that India’s largest state-owned bank will merge with five subsidiary banks under its direct control. At the end of the day, steps that show the government’s new resolve to tackle this issue. The risks (1) There is still a lack of skilled professionals who understand the bad debt resolution business. (2) The authority entrusted with overseeing the appointment of liquidators is yet to be set up. (3) If this governmental body is filled with dithering bureaucrats, the code itself will not be enough to ensure a speedy debt resolution. There is still a “To Do list” There are more controversial reforms such as the long-delayed Goods and Services Tax (GST) reform that Modi has failed to deliver. As the government will continue to have a minority in the Upper House, this issue will probably be held up in parliament (the GST requires a twothirds majority).
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Japan: PM Abe calls for G7 cooperation to minimize the impact of the Brexit vote
Who will be the new buyers of Japanese equities? Domestic investors? Foreigners only account for about 30% of the market so will domestic investors bear the brunt of the role? The problem lies in that it takes time for Mrs Watanabe (a big player in currency trading) to get excited about Japanese equities. That was the story in 2012-15, as a 50% ¥ devaluation supercharged corporate profits and lead to higher demand for equities. Today it seems unlikely that domestic investors (even foreign ones) will quickly buy in to another renewal story. Admittedly, domestic retail investors can step up but given their ageing profile this seems to result in very mild support. The BoJ? The problem is that a fresh money printing program will likely weaken the currency sufficiently that in USD terms global investors will tend to ignore the Nikkei. Domestic corporations? It seems probable, after having acquired huge piles of cash and stored it without investing it. About 45% of Japanese corporates have net-cash compared to 20% in the US, so they seem best positioned to become the marginal buyer of Japanese equities. But this will ultimately result in weaker future profits. Remember that ROE in Japanese companies is low compared to the US, suggesting that this cash should be employed to fund capex to boost efficiency. Share buybacks surge at record pace Corporate cash holdings are expanding to record levels. The Nikkei reported that cash holdings by listed companies rose to a record JPY109T ($1.01T). Cash accounted for 13% of the roughly JPY840T in total assets. Japan share buybacks are up 67% y/y for the year to May as negative rates cause a misperception regarding the accuracy of the information coming from the monetary system, which in turn hinders the decision-making process for corporate investments. Simply put, CEOs do not know how to assess new investment projects using this manipulated -and therefore unreliableinformation. This situation of financial surrealism results in investment decisions being postponed, and money therefore being returned to shareholders (as happened in the US before the tapering). As long as the QQE strategy and NIRP continues, share buybacks will also continue. While this could provide some support to equity prices in the short-term, it represents a threat to the future evolution of the prices of these companies. Fiscal Procrastination In the meantime, and in a clear sign that the authorities are unable to fix the “problem”, the government has postponed the fiscal adjustment. Abe will delay next year’s consumption tax increase by two-and-a-half years to October 2019. In the meantime, Japan continues with its efforts to convince other G7 nations of the need for more government spending (Abe sees Chancellor Merkel as more willing to make concessions). BoJ & Kuroda Governor Kuroda acknowledged that consumption is not strong enough and said that growth in wages and household income were crucial. Kuroda also dismissed the idea of changing or watering down the BoJ's 2% inflation target. Hard Data - Bad figures: Q2 MoF large firm business survey index (7.9) vs (3.2) in Q1. May Reuters Tankan manufacturing sentiment at three-year low, falling to 2 from 10 in April, driven by exporting industries. The service sector index fell to 19 from 23 in April, weighed by retailers. The story attributes the deterioration to the rising yen's impact on exporters as well as domestic demand via tourism spending. Politics Japan's main opposition party is finalizing a plan to submit a vote of no-confidence in Prime Minister Shinzo Abe as the party argues a sales tax delay signifies the failure of Abenomics. The move will likely not succeed. Abe's approval rating improves following G7 summit (Tokyo poll) from 53% to 56%, according to the survey. FX !JPY: We revise our target to 110. Finance Minister Aso suggested 9 that he would be satisfied with USD/JPY around 109 level.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Brazil:
Brazil’s economy is starting to turn the corner. The UK’s Brexit vote triggered a pullback but Brazilian assets are still up. Real economy (first signs of stabilization) The past month has brought further evidence that Brazil’s economy is starting to turn the corner. Industrial production expanded by 0.2% m/m in April, while retail sales increased by 0.5% m/m in the same month. And consumer confidence –FGV index– improved to 71.3 (from 67.9). Some GDP Trackers point to a clear bottoming out of the recession. Economic vulnerabilities are starting to ease. The current account deficit has narrowed sharply and stood at just 1.7% of GDP in May (with BCB’s projection even falling below 1% in 2016). Despite rising in the latest figures, inflation has resumed its downward trend this month, paving the way for a future easing in monetary policy (perhaps in 4Q16), which could result in an acceleration of the economic recovery. IPCA mid-month in June was +0.4% m/m (from 0.86%), and 8.98% y/y (from 9.62%). The main concern still surrounds the fiscal position. The budget deficit widened to 10.2% of GDP in April but the new government under interim President Michel Temer has unveiled bold plans to cap public spending, which this month passed the first round of voting in the lower house. But concerns about the fiscal position will remain and mean that the central bank will be slow to cut interest rates, even as inflation falls. Reforms & Fiscal package The early focus will be on stabilizing public finances (the government will eschew the piecemeal measures employed in recent years in favor of more fundamental structural reforms). Plans to tighten fiscal policy have been unveiled: Sovereign Wealth Fund (SWF) will be disbanded. This Fund was not built through accumulated budget surpluses but from issuing too much debt. Total assets are US$5.5bn (some BRL 20bn). The BNDES will pay back one fifth of the debt owed to the government (some R$100bn over two years). This will help the government’s cash flow in the short term, and although it will not alter the net debt position, it will reduce the gross debt position by approximately 2% of GDP. Most importantly, it will help to save some R$7bn (US$2bn) per year in interest (due to the difference in funding costs for the government and what it receives from the BNDES). This is equivalent to a 10 bps deficit. A reform to break the automatic indexation of pension spending to increases in the national minimum wage. This could lower spending as a % of GDP by 2% by 2019. Cap in spending: A law aimed at limiting growth in spending (below inflation) means that there will be no real growth in spending. All this, coupled with a modest cyclical recovery, should offer a considerable break in the rise in public debt to GDP (although it still seems to fall short of what is needed to reverse the upward trend in the debt ratio). What is actually good news (in our view) is that Meirelles seems to be focusing on the spending side of the public accounts. Risks & politics While recent economic news has improved, the political fallout from the Lava Jato probe has continued and we have seen the first accusations that President Temer was involved in the alleged corruption at Petrobras. Despite this, financial markets have continued to rally this month. The UK’s Brexit vote triggered a pullback at the end of June, but both the BRL, bonds and equities are still up on the month. The spending reforms will require changes to the constitution in a Congress that could be fragmented following Mr. Juca’s departure. Financial Markets !Bonds: We cut our target for the 10yr Gov bond yield in local currency (to 13% from 13.5%) and the 10yr Gov bond yield in USD (to 5.5% from 6%). Equities: Target for the Bovespa unchanged at 50,000 FX: Target for the BRL/USD unchanged at 3.30
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Mexico:
UK banks have a footprint in Mexico, but units are locally capitalized. We see a limited impact after Brexit. The Brexit impact The UK’s vote to leave the European Union has triggered falls in financial markets in Latin America, but the economic fallout for the region should be limited (the UK is a relatively small export market for Latin America) and despite the fact that UK banks have a footprint in some countries (notably Mexico), units are locally capitalized. This could help to explain the relative resilience of financial assets in Latam and Mexico (equities and bonds). The bigger risk for the region is that the Brexit vote triggers a prolonged dislocation in global financial markets, which could eventually weigh on capital flows to EMs. Economy Mexico’s economy has lost some steam in recent months, with some GDP trackers suggesting that economic growth eased to around 2.2% y/y at the start of Q2, from 2.6% y/y in Q1. Industrial production growth rebounded in April but this was largely payback for a weak March. In three-month average terms, production continued to grow by less than 1% y/y. The strong correlation of US industrial activity (which keeps decelerating) with the Mexican manufacturing industry has hurt Mexican exports (the most important part of Mexican offshore sales), which is in addition to the recent drop in oil exports as a result of the current situation in the global energy sector. On the positive side, indicators show that private consumption continues to underpin the Mexican economy, while the labor market is gradually recovering. Median forecast for 2016 GDP is 2.35%. Government approach The government announced another round of budget cuts this month, which is admittedly small at just 0.2% of GDP. But combined with a larger fiscal squeeze announced earlier in the year, the budget deficit –which stood at just over 3% of GDP in the 12 months to April– should narrow this year, which should be good news for fixed income assets. Financial Markets !FX. The peso was one of the hardest hit EM currencies following the UK’s vote to leave the EU, falling by 5% against the dollar. The currency has since recovered some of its losses, but it is still down 3% month-to-date. We expect the recent peso weakness to prompt the central bank to raise interest rates by 25bp (to 4.00%). Our mid-term target level for MXN has been raised to 18.25 (from 17.5). Fixed Income. For the M10 we expect a central point target of 6.00, while the USD denominated Mexican bond (UMS10) should be around 3.5. Equities. After the initial reaction following the BREXIT vote (when the IPC index lost 4.1% and European risky assets suffered double-digit losses), the Mexican IPC index is recovering some of its ground. Due to the widespread uncertainty generated in the aftermath of the Brexit vote, investors may reduce their weightings in European equities and move them to US equities (where we think the return to positive profit growth should enable US equities to set a new trading range: 1900/-2200), as well as towards EM Equities (Latam and Asia), especially if the political uncertainty in Europe is contained at a regional level. We will wait for further clarity on the upcoming political events in Spain and Italy. We would reduce exposure to stocks with high US debt and those more affected by higher interest rates, while increasing exposure to defensive stocks. We are keeping our year-end 2016 IPC target of 48,000. We expect consumption to remain strong throughout the year, based on strong job creation, wage increases, low inflation and remittances. 11
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Argentina
The much needed policy tightening implemented over the past six months is weighing on the real economy.
It seems as if the initial euphoria over the change of government had dissipated
The government approach Economic activity is still showing signs of contraction mainly due to measures taken by the government to reduce imbalances inherited from previous administrations (removing exchange controls, reducing tax exports, sharp increase in interest rates, adjustments in public tariffs, and decrease in printing money). All this caused a significant deceleration in economic activity. The INDEC statistics agency reported a 6.7% year-on-year reduction in industrial output in April. The January-April YoY comparison showed a 2.4% reduction. Consequently there are signs that policy tightening implemented over the past six months is weighing on the real economy. However, analysts expect a better 2nd half due to planned infrastructure projects and FDI. Fiscal & inflation problems Revamped data released this month show that the fiscal deficit narrowed in Q1, largely due to a sharp drop in capex. Having raised interest rates aggressively since December, the central bank has in recent weeks begun trimming them. With only two figures released, the new data are of limited use until a longer time series is available. Accordingly, the provincial consumer price data will still have to be used as a benchmark for the national figure, which put inflation at around 40% y/y in May. Core inflation (the most relevant number for the central bank) stood at 2.7% m/m. Politics Argentina is witnessing a kind of “witch hunt� of former government officials. Several politicians and journalists have spoken about a deep-rooted system in the last 3 administrations designed to steal money by overpricing infrastructure projects carried out by the federal and several provincial governments. However, the justice department remained muted until the new government got into office. Now, the media constantly speaks about judicial processes and who will be the next former official to get investigated by the justice department. Macri administration is confident that it will attract large amounts of funds through a tax amnesty plan. According to government figures, Argentineans hold more than 200bn in assets outside Argentina, of which less than 10% is declared. Unofficial figures estimate it at 400bn USD. Fiscal amnesty terms are 10% penalty if declared in 2H2016; 15% penalty if declared in 1Q2017; 0% penalty when the investor buys one of the following two bonds: a) a non-negotiable 3yr maturity with 0% coupon, or b) a 7yr bond with 1% coupon negotiable after the 4th year. Financial Markets !FX. The ARS started to decline after BCRA started to cut rates on the front end of the curve during June, moving the 35-day rate from a high of 38% to 31.50%. This change is due to an improvement in the core inflation trend. Considering that chances of a successful tax amnesty are high and FX needs will decrease, we are changing our target for this to 17. !Fixed Income. Market belief is that tax amnesty could be successful, so we decrease our target for 10yr Global 2026 yield to 6.5%. This target could come down further if tax amnesty is effectively accomplished as Argentina is still trading at high spreads from LATAM peers. Still continue to like short term government/quasi bonds: 1) BONAR 29-nov-18 at 4.69% yield. 2) GLOBAL 22-Apr-19 at 4.56 yield. 3) BUENOS 14-Sep-18 at 5.24% yield. 4) YPF GLOBAL 28-Jul-25 at 7.57% yield. Equities: Equities have also staged a major recovery in the last few months. Some still look cheap but will depend mostly on the success Macri gets with his measures to reestablish macro equilibrium in Argentina. Companies that could benefit from Macri policies include YPF. Financials (BMA, BFR, GGAL), Utilities (PAM, EDN, TGS). 12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Equity Markets GLOBAL EQUITY INDICES - FUNDAMENTAL ASSESSMENT Sales per Share 2015
EPS 2015
1.130
117,6
10,4%
4,6%
1.182
301
21,7
7,2%
0,0%
301
7.875
641,4
8,1%
0,7%
Mexico IPC GRAL
28.542
1.888,1
6,6%
Brazil BOVESPA
55.578
3.377,2
6,1%
Japan NIKKEI 225
20.408
1.018,6
China SSE COMP.
2.652
HK HANG SENG India SENSEX
Index USA S&P 500 Europe STXE 600 Spain IBEX 35
MSCI EM ASIA
Andbank's Sales Andbank's Net Margin Sales Growth per Share Net Margin 2015 2016 2016 2016
EPS 2016
EPS Growth PE ltm PE ltm 2016 2015 2016
9,7%
115
-2,5%
7,4%
22
2,6%
15,21 14,00
7.927
8,1%
642
0,1%
12,74 13,00
7,7%
30.739
7,3%
2.254
19,4%
24,35 21,30
5,5%
58.635
6,5%
3.811
12,9%
15,26 13,12
5,0%
2,0%
20.816
5,0%
1.041
2,2%
15,40 15,80
233,9
8,8%
7,0%
2.838
8,8%
250
6,8%
12,54 13,00
13.064
2.015,3
15,4%
2,0%
13.325
15,4%
2.052
1,8%
10,32 10,00
12.559
1.432,9
11,4%
11,0%
13.941
11,8%
1.645
14,8%
18,94 17,00
411
34,1
8,3%
7,0%
37
7,0%
19,42 18,21
440
8,3%
17,85 17,00
INDEX CURRENT PRICE 2.099 330 8.171 45.966 51.527 15.682 2.933 20.794 27.145 663
2016 TARGET PRICE 1.949 312 8.347 48.000 50.000 16.445 3.247 20.521 27.965 665
2016 E[Perform.] % Ch Y/Y -7,1% -5,5% 2,2% 4,4% -3,0% 4,9% 10,7% -1,3% 3,0% 0,3%
ANDBANK ESTIMATES
RISK-OFF SHIFT PROBABILITY Andbank's Global Equity Market Composite Indicator (Breakdown)
Buy signals Positive Bias Neutral Negative Bias Sell signals FINAL VALUATION
Previous
Current
Month
Month
4 3 9 5 1 0,9
5 3 8 5 1 1,4
Andbank’s Global Equity Market Composite Indicator Preliminary assessment of the level of stress in markets
0
-5
-10 Market is Overbought
+5
Area of Neutrality Sell bias
Buy bias
+10 Market is Oversold
o Score. Our Andbank GEM Composite Indicator has raised from 0.9 to 1.4 in a -10/+10 range), suggesting that the market is not oversold yet and is trading in a zone of neutrality. The market is now a little bit cheaper. We cannot say it is expensive. At current levels, a risk-off probability in the equity markets is slightly lower than a month ago. If a risk-off shift takes place, the market would quickly become oversold again. o Positioning (moderately positive reading): A wide variety of positioning strategies depending on the type of investor. Speculators are now long equities vs rates, Hedge Funds are slightly underweight, Strategists are neutral, and Asset Allocators are long cash, meaning that managers remain unconvinced. o Flows - Funds & ETFs (moderately negative reading): The allocations in the last month to US equities fell back to their 8-year low in May. Europe remains underweight (14 straight weeks; longest streak since Feb’08) and in emerging market allocations too, with $2.3bn outflows (largest in 16 weeks). o Market vs Data – Surprise indexes (moderately negative reading). o Sentiment (moderately positive reading): The BNP Love/Panic US Index is still in Buy territory with a very low mark of -65% (lower than 2008/2012 levels). The strongest driver of sentiment indexes once again comes from a Commodity composite bullish index (which aggregates commodity sentiments for Crude Oil, Gold, Copper, Corn, Soybeans and Raw Sugar).
TECHNICAL ANALISYS: Short term (ST) and medium-term (MT) o o o o o o
S&P: SIDEWAYS. Supports 1 & 3 month at 1972. Resistance: 1 month at 2116 / 3 month at 2134. STOXX50: MOD. BULLISH. Support 1m at 2672 / 3m at 2608. Resistance 1m & 3m at 3156 IBEX: MOD. BULLISH. Support 1m and 3m at 7500. Resistance 1m at 8912 / 3 month 9360 €/$: Support 1m at 1.08 / 3m at 1.07. Resistance 1m at 1.14 / 3 month 1.17 Gold: Support 1m at 1260 / 3m at 1190. Resistance 1m & 3m at 1361 Oil: Support 1m at 43 / 3m at 42.5. Resistance 1m at 51.6 / 3 month 54.8
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Fixed Income – Core Country Bonds: UST 10Yr BOND: 2016 target 1.7%, Buy above 2.3% yield, Sell below 1.70% / Ceiling 3.00% 1. Swap spread: Swap rates fell sharply in the month to 1.34% (from 1.61%), and the 10Y Treasury yield also fell, to 1.47% (from 1.80%). The swap spread therefore rose to -13bps (from -19bps). For this spread to normalize towards the +20 to 30 bp area, with 10Y CPI expectations (swap rate) anchored in the 2% range, the 10Y UST yield would have to move towards 1.70% (this could be considered a floor). 2. Slope: The UST yield curve has flattened to 95bp (from 101bp). With the short end normalizing towards 1.25%, to reach the 10yr average slope (175bp), the 10Y UST yield could go to 3.00%. (Ceiling) 3. Given the new normal of ZIRPs, a good entry point in the 10Y UST could be when the real yield hits 1%. Given our new (!!) 2016 CPI forecast of 1.3%, the UST yield would have to rise to 2.3% to become a “BUY”.
BUND 10Yr BOND: 2016 target 0.2%, Buy above 0.80% , Sell below 0.60% 1. Swap Spread: Swap rates fell to 0.40% (from 0.55%) and the Bund yield also fell to -0.11% (from 0.16%). The swap spread therefore rose to 51bp (from 38bp). For the swap spread to normalize towards the 30-40bp area, with 10Y inflation expectations (swap rate) anchored and also normalized in the 1% area, the Bund yield would have to move towards 0.60% (entry point). 2. Slope: The slope of the EUR curve fell to 54bp (from 67bp). When the short end “normalizes” in the -0.25% area, to reach the 10yr average slope (113bp), the Bund yield would have to go to 0.88%.
Fixed Income – Peripheral Bonds: !Spain: New target for the 10yr bond yield at 1.30%. New elections were held in June 26th, following Brexit referendum. Friendly outcome for the markets. Sorpasso was avoided, with PODEMOS as a third political force and PP as the clear winner and in a stronger position for an agreement. Coalition needed, but a new Government could now be closer. !Italy: New target for the 10yr bond yield at 1.4%. Local elections surprised with the Five Star party as a clear winner in Rome and Turin, well ahead of Renzi’s PD party. Though the PD revalidated its majority in the North of Italy (Milan), snap elections could take place before 2018. Greece: Greece’s programme review was finally closed. The ECB has recently reinstated the regular access to liquidity for Greek banks, abandoning the ELA extraordinary mechanism. Next step should be the eligibility of Greek government bonds for European QE, which could drive yields lower. After the summer? !Portugal: New target for the 10yr bond yield at 2.8%. Ireland: Stable target for the 10yr bond yield at 0.9%.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Fixed Income – Corporate Bonds & EM Govies FIXED INCOME – CORPORATE CREDIT US$ IG & HY HY Primary market: Significant recovery in the last two months. High-yield bonds issued YTD total 149 and are worth some $80bn compared with 165 and $81bn face value last year, for the same period. June has been the best month and some research firms have increased their estimates for new issuance. High-yield bond funds reported an outflow of -$0.5bn for the month as at June 26th and investment grade continues to receive flows, gaining $0.3bn MTD. US Investment Grade: Neutral. Current spread level 85 bp, 2016 target 63bp. US issuance has been light YTD as banks await clarity from the Fed on the rules defining TLAC eligible issuance. We remain comfortable with our target as 1) The large increase in QE in Europe and Japan makes US bonds more attractive, 2) A much slower than expected tightening of US monetary policy, and 3) A higher and more stable energy price dynamic. Overweight: Financials – Materials – Technology. Underweight: Utilities – Healthcare – Industrial. US High Yield: Neutral. Current spread level 484 bp. We remain comfortable with our forecast for 2016 of 400 bp as 1) Oil market keeps rebalancing with prices now trading in line with our forecast and energy bonds ~50% above the mid-February lows, 2) The global central bank landscape has the potential to drive credit yields even lower than otherwise believed possible. 3) Earnings estimates do seem to have found a floor. 4) A recovery in the primary market.
EUR IG & HY The risk off mode following the Brexit referendum made peripherals spreads widen last month, while save haven yields have dived into negative territory. As for the corporate universe, we are back at March levels. The ECB corporate purchases program kicked off with robust numbers. The first week’s figure reached 1.9 billion euros, which on a monthly basis would mean over 7.6 billion, well above initial estimates (around 4-6 billion) and in the range pointed out by Reuters (5-10 billion euros). In relative terms, the ECB would be buying around 0.9% of the eligible universe, sending a strong signal to the bond markets. As for the sector’s performance, financials have been among the worst performers following the Brexit event. Investment approach: Bond picking!! Targets: Itraxx IG: 85 (from 65bp). Itraxx HY: 360 (from 290)
FIXED INCOME - EMERGING MARKETS (GOVIES): “The two conditions are not met” 10 Year
CPI (y/y)
10 Year
Yield
Last
Yield
Govies
reading
Real
3,60% 5,34% 1,10% 2,30% 2,15% 0,03% -1,10% 1,02% 1,88%
3,73%
Taiwan
7,33% 7,42% 3,16% 2,81% 3,69% 1,93% 1,81% 1,33% 0,73%
Turkey
8,90%
6,57% 7,30%
2,34%
Russian Federation 8,16%
12,04% 5,87% 7,62% 6,25%
9,83% 2,54% 8,06% 3,95%
2,21%
Indonesia India EM ASIA
Philippines China Malaysia Thailand Singapore
EME
South Korea
LATAM
To date, our rule of thumb for EM bonds has been “buy” when two conditions are met: (1) US Treasuries are cheap or at fair value; and (2) Real yields in EM bonds are 175bp above the real yield in UST. Is the UST cheap or at fair value? Historically, a good entry point in the 10Y UST has been when real yields are at or above 1.75%. However, given the “new normal” (ZIRPs & NIRPs), a good entry point in the 10Y UST bond could be when the real yield is 1%. Given our 2016 target for US CPI of 1.3%, UST bonds should be at 2.3% to be considered cheap. So the first condition is not met. Do real yields in EM bonds provide sufficient spread? If the first condition is met, under the “new normal” (ZIRPs), a good entry point in EM bonds could be when EM real yields are 100bp above the real yield of the UST. Since the projected annualized real yield of the USTs from now on is 0.16% (1.46%-1.30%), the real yield of the EM bonds should be at least 1.16% (see table).
Brazil Mexico Colombia Peru
2,08% 2,06% 0,51% 1,54% 1,91% 2,91% 0,31% -1,15%
0,86%
3,33% -0,44% 2,31%
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Commodities ENERGY (OIL): Fundamental target at $40. Range (Buy at $30. Sell at $50). Price: Why has the oil price surged? (All the potential explanations) China’s draft for new rules for strategic oil reserves: China is planning changes to the way it handles oil reserves by allowing private companies to build and operate some of its strategic stockpiles while also requiring companies to maintain compulsory inventories, potentially boosting its futures imports. Traders familiar with this issue said that such requirements could boost China's oil imports in the near term. Not surprisingly, the Qingdao port in Shandong (where most teapot refineries are based) suffered congestion from "unprecedented" tanker traffic. Inbound shipments YTD are 6.5% higher y/y. Demand is seen to surge in the short term as refinery capacity hits a record: Refinery capacity hits a record, with global capacity projected to reach 101.8M bpd in August, up from 97.25M bpd in March. Some 80-85M bpd of this capacity is expected to be used over the coming summer months (northern hemisphere). Hedge funds seem to be looking for $100 in oil price: According to some brokers, energy HFs could be buying call options for the 2018-20 period that will only pay out if crude rises well above $100/barrel. Brokers said the deals bear the hallmarks of trades made by hedge funds, and that seem to be based on the belief that current low prices will generate a supply crunch as oil companies cut spending on developing fields. Nevertheless, this driver may be coming to an end, since hedge funds cut their net-long position in WTI crude in the week of 6-12 June for the first time in a month (combined net longs in US crude futures and options in both NY and London fell by 11,478 contracts to 244k net longs during the week). OPEC’s theory: According to OPEC ministers, the price has surged as the strategy of letting low prices eradicate surplus production is working, in the sense that the supply glut is easing. Other theories: Venezuela’s minister says that the surge in price had more to do with unexpected supply disruptions than a successful OPEC strategy. By way of example he mentioned the Niger Delta Avengers group claiming responsibility for blowing up the Obi Obi trunk line (ENI's main crude oil line in Nigeria's Bayelsa state), or this group saying it had also destroyed a CVX well called RMP 20 near the Dibbi flow station in the Niger Delta. The militants are also renewing a warning to big oil companies not to attempt to repair pipelines and facilities damaged by attacks. Additionally, a new militant group (Ultimate Warriors of the Niger Delta) has emerged and is also issuing an ultimatum to the federal government. Meanwhile, Venezuela recorded its biggest monthly oil-production decline in a decade in May (-120K bpd, to 2.37M), underscoring the inability of its state energy company to maintain investment and output. Major oil services companies are also cutting back operations in Venezuela as the country struggles to pay multi-billion dollar debts with partners. What to expect now? The rally should falter. US shale producers are adding new rigs. Raymond James believes the US rig count has probably bottomed out after falling from more than 1,900 rigs in 2014 to only 404. The number of new well-drilling permits has climbed recently (drillers added rigs for a second week in a row for the first time since August). However, it believes producers will spend their money in DUC (drilled but uncompleted) wells before adding new rigs. There are a lot of DUC wells waiting to be utilized. Resilience of US producers means potential output will always be above the table: Global OPEC producers that need higher prices to be financially viable should be worried about the US shale industry, which has proved resilient and is showing signs that it might ramp up activity at current prices. Some of the supply disruption (which the EIA estimates at 3.6M bpd) might return quite quickly and this could make the oil rally falter. How is the new normal of low prices reshaping the market? BP sold its Norwegian oil fields to DETNOR, a company controlled by billionaire Kjell Inge Roekke. The deal follows several other moves in Norway after plunging oil prices raised pressure on companies to find cost savings. US to be a big oil player, but this time as a seller: US Energy Department is to overhaul its Strategic Petroleum Reserve Facilities to help prepare for the planned sale of 18% of the reserve through 2025. In fact, recent legislation has been passed that authorized the department to sell $2B in oil to modernize the reserve. Hundreds of wells are changing hands in the US: In North Dakota's Bakken Shale region, local producers are scaling back assets to pay creditors. The need to drill deep wells and a lack of infrastructure have made the Bakken one of the costliest US shale fields. New investors say they are waiting for prices to stabilize in the $60-70 range before restarting production. How is monetary policy manipulation reshaping the corporate energy sector? Junk-rated energy companies are succeeding in selling more bonds, as investors regain their appetite for risky energy assets. Junk energy companies sold more debt in May and June than in the preceding 11 months combined. Investor demand for two deals last week was so strong that the issues were increased by 50%, although admittedly, bond sales have been clustered in branches of the industry with less direct exposure to underlying crude prices (pipeline and oil services companies). Geopolitics: Iran will continue to play a role: Iran’s oil minister said that the country won't commit to any oil production action with fellow OPEC members despite being close to pre-sanctions output and export levels. Moreover, Iran is seeking to boost output by 600K-700K bpd from fields in the Karoun River area, along the Iraqi border. Iran is seeking international investors to fund a refinery project in the country's south as it looks to boost sales of refined oil products to Asia. The initiative will seek to raise as much as 80% of the capital needed from international partners. To achieve this, Ali Kardor, who played a key role in bringing foreign investment back to the country, will replace Rokneddin Javadi as managing director of the state-oil company. Meanwhile, Shell has resumed purchases of Iranian crude and European purchases of Iranian crude have also gone to refineries in Spain, Greece and Italy since the sanctions were lifted in January. At the same time, South Korea, Asia's largest buyer of condensate, is planning to increase purchases of ultra-light oil from Iran by more than 50% in June, as competitive pricing squeezes out rival oil from Qatar. OPEC's 'fragile five' cannot live with $50 oil: The FT noted that OPEC's economically fragile members can't live with $50 crude oil. An oil price at $50 is not high enough to save the economies of these five countries (Venezuela, Nigeria, Iraq, Libya 16 and Algeria) nor low enough to instigate any collaborative action among the world's biggest oil producers.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Commodities GOLD: Buy at US$ 900/oz. Sell above US$1,100. New target price!! 1,000 (from 900) Negative drivers: 1. Gold in real terms. In real terms the gold price (calculated as the current nominal price divided by the US Implicit Price Deflator-Domestic Final Sales, base year 2009, as a proxy for the global deflator) rose from $1129 last month to $1186) and continues to trade well above its 20-year average real price of $762. Given our proxy for the global deflator, now at 1.1046, for the gold price to stay near its historical average in real terms, the nominal price (or equilibrium price) must remain near US$842. 2. Gold in terms of Oil (Gold / Oil): This ratio has risen to 27.4x (from 25.94x) but still remains above its 20-year average of 14.23. If the average oil price stays at $40 (our central target), the nominal price of gold must approach US$569 for this ratio to remain near its LT average level. 3. Gold in terms of the DJI (Dow Jones / Gold): This ratio has moved to 13.27 (from 13.95 last month), still below its LT average of 20.4x. Given our new target price for the DJI of $16,700, the price of gold must approach US$818 for this ratio to remain near its LT average. 4. Gold in terms of the S&P (Gold / S&P500 index): This ratio has moved to 0.64x (from 0.612x last month), still above its LT average of 0.5807x. Given our target price for the S&P of $1949, the price of gold must approach US$1,131 for this ratio to remain near its LT average. 5. Positioning in gold points to further falls: CFTC - CEI 100oz Active Future non-commercial contracts: longs rose to 358k (from 337k last month). Shorts fell to 66K (from 72k) => Net positions increased to +293k (from +264k). Speculators are once again longer than a month ago). 6. Financial liberalization in China. Higher “quotas” each month in the QFII are widening the investment alternatives for Chinese investors (historically focused on gold). 7. Monetary stimulus by ECB and BOJ continues, but not by the Fed (remember the price of gold is in USD, and therefore much more affected by the Fed’s decisions). This points to the following dynamics: gold stable or downward in terms of USD; gold price following an upward trend versus the EUR and JPY, which means that the USD must rise relative to the EUR and the JPY. Positive drivers: 1. Recent pick up in central bank gold buying. Despite this, gold stocks at central banks are still considerably higher than 2008 levels. 2. Amount of gold in the world: The total value of gold in the world is circa US$6.9tn, a fairly small percentage (3.2%) of the total size of the financial cash markets (212tn). The daily volume traded on the LBMA and other gold marketplaces is around US$173bn (2.5% of the world's gold and just 0.08% of the total in the financial markets).
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Currencies – Fundamental Targets The global USD position has changed this month and is now net long against other currencies to the tune of US$+8.14bn compared to -3.6bn last month. Despite this shift, the global position in USD is still well below the US$+44.3bn net USD position seen in April 2015, which means that long positions could still be longer.
• EUR/USD: Fundamental Target (1.05) Speculators are now short in EUR (vs USD) to the tune of US$-8.6bn (shorter than the US$-3.2bn last month), and have been steadily cutting their positions since November. Despite their net short positions, there is still plenty of room for speculators to reach the lower end of the range (-30.4bn) seen in March 2015 by building shorter positions in EUR. In Z-score (3-year) terms, EUR positioning is no longer at its highest level in the last 12 months, but it is still among the longest currencies held by investors, together with CHF. All this suggests that the EUR (and these other long currencies) could go lower vs USD.
JPY/USD: Target (110) JPY/EUR: Target (115.5) GBP/USD: Target (0.86) GBP/EUR: Target (0.90) CHF/USD: Target (1.00) CHF/EUR: Target (1.05) MXN/USD: Target (18.25) MXN/EUR: Target (19.16) BRL/USD: Target (3.30) BRL/EUR: Target (3.47) RUB/USD: UW RUB AUD/USD: MW AUD CAD/USD: MW CAD CNY/USD: MT Target (6.45).
• • • • • • • • •
Values of Change vs Net positions last week 1-yr Max (Bn $) (Bn $) (Bn $)
Currency USD vs All USD vs G10 EM EUR JPY GBP CHF BRL MXN RUB AUD CAD
8,14 6,84 -1,30 -8,62 6,24 -4,76 0,83 0,38 -1,85 0,17 -0,52 0,20
3,96 3,85 -0,12 -0,71 -0,32 -1,52 -0,10 0,02 -0,12 -0,02 -0,03 -1,23
44,3 43,6 0,1 -3,1 8,2 0,7 1,4 0,4 0,0 0,2 4,6 2,0
1-yr Min (Bn $)
1-yr Avg (Bn $)
-6,8 -7,1 -2,8 -24,3 -11,7 -6,0 -3,2 -0,3 -2,7 -0,1 -4,7 -5,1
19,3 18,0 -1,3 -12,2 -0,1 -2,4 -0,1 0,0 -1,4 0,0 -1,1 -2,0
Current Z-score 3-yr -0,91 -1,07 -0,54 0,23 1,97 -1,33 0,86 0,81 -1,01 1,47 0,46 1,11
3-year Z-Score: Current Position - 3 year average position 3-year Standard Deviation
Values above +1 suggest positioning may be overbought Values below -1 suggest positioning may be oversold
ANDBANK 4,0
Max Min Current
SPECULATIVE POSITION IN THE FX MARKETS (3Yr - Z SCORES. Max, Min & Current in 1Yr)
3,0 2,0 1,0 0,0 -1,0 -2,0 -3,0 -4,0
ANDBANK -5,0 USD vs All
USD vs G10
EM vs USD
EUR vs USD
JPY vs USD
GBP vs USD
CHF vs USD
BRL vs USD
MXN vs USD
RUB vs USD
AUD vs USD
CAD vs USD
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Market Outlook – Fundamental Expected Performance
19
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Principal Contributors
Alex Fusté. – Chief Global Economist – Global & Asia: Macro, Rates & FX. +376 881 248 Giuseppe Mazzeo. – CIO Andbank US – U.S. Rates & Equity. +1 786 471 2426 Eduardo Anton. – Portf. Manager US – Credit & Quasi governments. +1 305 702 0601 J.A Cerdan. – Equity Strategist Europe – European Equity. +376 874 363 Renzo Nuzzachi, CFA. – Product Manager LatAm – Rates & FX. +5982-626-2333 Jonathan Zuloaga. – Analyst, Mexico – Macro, bonds & FX. +52 55 53772810 Albert Garrido. – Portfolio Manager Andorra – European Equity. +376 874 363 Ricardo Braga. – Product Analyst Brazil – Products. +55 11 3095 7075 Gabriel Lopes. – Product Analyst Brazil – Products. +55 11 3095 7075 Andrés Davila. – Head of Asset Management Panama – Venezuela. +507 2975800 Mª Angeles Fernández. – Product Manager, Europe – Macro & Rates. +34 639 30 43 61 David Tomas. – Wealth Management, Spain – Spanish Equity. +34 647 44 10 07 Andrés Pomar. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25 Carlos Hernández. – Product Manager – Technical Analysis. +376 873 381
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
Legal Disclaimer All notes and sections in this document have been prepared by the team of financial analysts at ANDBANK. The opinions stated herein are based on a combined assessment of studies and reports drawn up by third parties. These reports contain technical and subjective assessments of data and relevant economic and sociopolitical factors, from which ANDBANK analysts extract, evaluate and summarize the most objective information, agree on a consensual basis and produce reasonable opinions on the questions analyzed herein. The opinions and estimates contained herein are based on market events and conditions occurring up until the date of the document's publication and cannot therefore be decisive in evaluating events after the document's publication date. ANDBANK may hold views and opinions on financial assets that may differ partially or totally from the market consensus. The market indices have been selected according to those unique and exclusive criteria that ANDBANK considers to be most suitable. ANDBANK does not guarantee in any way that the forecasts and facts contained herein will be confirmed and expressly warns that past performance is no guide to future performance, that analyzed investments could be unsuitable for all investors, that investments can vary over time regarding their value and price, and that changes in the interest rate or forex rate are factors which could alter the accuracy of the opinions expressed herein. This document cannot be considered in any way as a selling proposition or offer of the products or financial assets mentioned herein, and all the information included is provided for illustrative purposes only and cannot be considered as the only factor in the decision to make a certain investment. Additional major factors influencing this decision are also not analyzed in this document, including the investor's risk profile, financial expertise and experience, financial situation, investment time horizon and the liquidity of the investment. As a consequence, the investor is responsible for seeking and obtaining the appropriate financial advice to help him assess the risks, costs and other characteristics of the investment that he is willing to undertake. ANDBANK expressly disclaims any liability for the accuracy and completeness of the evaluations mentioned herein or for any mistakes or omissions which might occur during the publishing process of this document. Neither ANDBANK nor the author of this document shall be responsible for any losses that investors may incur, either directly or indirectly, arising from any investment made based on information contained herein. The information and opinions contained herein are subject to change without notice.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY-16
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