GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Andbank’s Monthly Corporate Review November 2016
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-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 NOVEMBER-16
Executive Summary USA – Some respected analysts have put the US economy on watch (negative) after last week’s release of the NFIB small business survey and the significant drop in the job openings component. A continued decline in job openings is certainly cause for concern. This will undoubtedly limit the Fed’s ability to raise rates and Fed rates and yields should stay low. Europe – ECB policy on hold for now but we expect an adjustment in the QE program after the ECB instructed its committees to evaluate options for a smooth implementation. No tapering any time soon. Spain – The economy has enough traction to finish the year above 3% GDP growth. Nevertheless, many doubts arise about the future, with household confidence declining from 41 to 39, and industrial production decelerating to below 1% y/y. China – China is trying to overcome the old regime and is shifting toward monetary orthodoxy. Instead of controlling the pace of money supply growth by focusing on the quantity of money, the PBoC has now adopted a more widespread practice of targeting an interbank rate (focusing on the price of money), resulting in control of the money base while stabilizing the depo rate. India – India’s GST (Goods and Services Tax) reform could prove nearly as significant as the agreement that created the European common market. The GST is a “big-bang” reform passed by Modi’s administration and shows that its pro-business agenda is gaining traction. Japan – Trading in 10-year JGBs has declined by 50% after the BoJ introduced its new yield curve control policy. This has removed the incentive for participants to trade JGBs in the secondary market. Consequently, Japan’s mega banks are paring back their presence in the JGB primary market, with unknown future consequences. Brazil – The Central Bank cut rates for the first time since 2012. It cut the Selic rate by 25bp, opening the door to further cuts in the coming quarters. In our view, these cuts will be gradual. We remain comfortable with a forecast for COPOM to continue moving in steps of 25bp over the next few meetings, and to cut rates by a total of 250bp to 275bp (to 11.25%-11.50%) by end-17. This will be very supportive for the economy. Mexico – Mexico’s momentum seems to be fading. GDP contracted by 0.2% q/q in Q2. Most of the drop was accounted for by a steep fall in oil output, but manufacturing also contracted in q/q terms. Argentina – New debt issues face big demand from overseas investors. We like shorter maturity bonds.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
The month in charts
Who’s who in the lending activity
Our structurally weak view for the oil price suggests that EUR weakness will continue.
Tapering? Not any time soon
Brazil: After a severe recession, Brazil’s economy is stabilizing.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
USA:
We are not facing a cycle of rate hikes
Do you feel dizzy? Monetary conditions are clearly accommodative while fiscal policy is neutral
Growth in the US could keep pace but the structural shape is now vulnerable
Our outlook for the Economy & Risks Some respected analysts have put the US economy on watch after last week’s release of September’s NFIB small business survey and the significant drop in the job openings component (from 30 to 24), hitting the lowest level in 15 months. This is of utmost importance since it suggests that demand for US labor may be rolling over (an aspect which is certainly concerning). Payroll growth can slow down due to two reasons: (1) Because of a tight labor market with low unemployment and labor supply constraints; or (2) Because demand for labor from employers is waning. Of the two reasons, the second is far more worrying, and the latest data suggests that end demand for labor may now be waning. Why is a decline in job openings a cause for concern? The NFIB Job Openings is one of the most reliable US recession indicators as it focuses on the demand side for labor, but also because it works (when the 3 month moving average falls below the 3 year moving average this is associated with economic problems or even recessions. See chart 1). Meanwhile, US consumption has been the only real growth driver in the US economy. Now imagine that the labor market is indeed starting to weaken - it is certainly difficult for us to see another engine of growth riding to the rescue. It is therefore worth noting that the most recent high-frequency data, such as the ISM PMIs for services, offer mixed data with falls and bounces. However, the point is that this last NFIB figure calls into question the sustainability of these rebounds. At the same time, we are closely monitoring the spread between the return on capital (ROIC) and the cost of capital (COC) and the recent deterioration of this spread (mainly due to the continued fall in ROICs) makes a higher use of capital from entrepreneurs and businesses unlikely. On the other hand, the rise in yields at both the short and the long end of the curve represents a higher cost of capital, which poses a risk since it raises the odds of a further slowdown in the US economy. In short, a figure does not make a trend, and a recession for the US economy in 2017 is not yet clear but the recent deterioration in job openings, the fall in the return on capital and a continued rise in yields and thus the cost of capital, are all gradually raising the odds of a recession in the US. The outlook for the US economy is not looking brighter. Although US GDP is likely to continue rising (positive growth), deceleration is becoming apparent, with GDP growth averaging just 1% annualized in the first half of 2016, with some projections of zero growth in 4Q16. The FED Considering all the above, we strongly believe that the US economy is in the second half of its economic cycle, at a point when a central bank should not raise rates. The FED can certainly hike rates once or twice, but we believe that we are not facing a cycle of rate hikes from this position that could pose a serious risk to the bond market. Financial Markets: (Very capable of shrugging off bad news) Equities (S&P): EXPENSIVE. Target = 2000. Stock analysts are predicting the fastest earnings expansion since the bull market began. They had better be right since the US equity market has had poor results in the absence of earnings growth. Annual income for S&P 500 companies fell to $106 a share last quarter from a high of $113 in September 2014. Nevertheless analysts still predict that annual income will increase 10% to $117 per share by the end of 2016. In our view, this will not happen. As such, US equities remain in highly overvalued territory keeping US equities more vulnerable to bad news than good news. We maintain our fundamental approach and are therefore reiterating our year-end price target for the S&P of 2000. ¡Government Bonds: FAIRLY VALUED. We slightly rise our target for the 10Y UST yield from 1.7% to 1.8% at year end. ¡Corporate Inv. Grade: ATTRACTIVE Target revised from 63 to 69 High Yield: ATTRACTIVE. Target revised from 325 to 340.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Europe:
ECB confronts the European commercial banks.
Our structurally weak view for the oil price suggests that a weak EUR will remain a supportive factor for exporters.
ECB Policy on hold, for now: The ECB was widely expected to leave key policy settings on hold. Draghi emphasized that its monthly QE target will remain at €80bn until March 2017, or beyond, until it sees a sustained adjustment in the path of inflation. The focus is likely to revolve around discussions related to an adjustment in the QE program after the ECB instructed its committees to evaluate options for a smooth implementation of the scheme, likely to be revealed in December. The ECB is not at all alarmed by complaints from banks. In fact, its chief economist (Praet) is very belligerent about the idea that the ECB is to blame for the fall in profitability. Moreover, Danielle Nouy, ECB’s chair of the supervisory board, said banks that do not adapt to the new reality of low interest rates, competition from fintech companies and tighter regulation will fail. She said banks should rethink and adapt their business models given the low rates environment and warned of tectonic shifts in the sector. She added that Basel III will not significantly increase overall capital requirements. Bundesbank's Dombret tells banks to stop blaming the ECB and regulators for their predicament and accept that they are not automatically entitled to a comfortable business environment. He added that banks have often blamed the ECB's negative rates for lenders' stress, but warned critics not to interfere with central bank independence. Macro front – mixed picture Germany: DIHK Chamber of Industry lifts growth forecast to 1.9% for 2016 vs previous estimate of 1.5%, but cut its longer-term outlook adding that “it was clouded”. It cited rising oil prices and sluggish global growth as factors for the fall in expectations, which was leading to “a drop of confidence in all branches of the economy“. Merkel’s popularity rises in latest poll. Die Welt confirmed that the governing grand coalition of German parties is the only combination capable of forming an administration. Polls place the CDU/CSU on 34%, the SPD on 22%, the AfD on 12%, the Greens on 11%, the Left party on 9% and the FDP on 6%. Italy: The EU is considering sending a warning message to Italy about its draft budget for next year, because Rome's planned budget gap is much higher than previously promised. Instead of the 1.8% deficit that Italy itself pledged in a letter to the Commission in May, Renzi now expects a shortfall of 2.3% (just slightly below the 2.4% expected in 2016). “That is a big difference. Everybody was really surprised that Renzi decided to be so bold”. Spain: The economy has enough traction to end the year above 3% GDP growth. Nevertheless, many doubts arise about the future, with household confidence declining from 41 to 39 (Ipsos sentiment index), and industrial production decelerating to below 1% y/y. Spanish Equities: Looking at the performance of the EUR vs other currencies where Spanish companies have a presence, (GBP, MXN, BRL, etc.) we are sticking to our FY16 sales prediction for IBEX companies. Furthermore, although there has been a recent improvement in consensus about EPS growth, in our view it is too early to revise our margins estimates upwards (set at 8.1%). Accordingly, with sales and margins unchanged, we also keep our target for FY16 EPS unchanged at 642 EUR. However, at the last investment committee we decided to tick up the PE LTM multiple to 14.5 (from 14), fixing the new year-end fundamental price at 9,365 in the belief that the Spanish equities market is in a comfortable value zone. Fixed Income: We are also keeping our target for the 10Y bono unchanged at 1.30% Markets Equities (STXE 600): FAIRLY VALUED. We keep our year end target price at 334. ¡Spanish IBEX: ATTRACTIVE We raise our target price to 9365 (offering some 3%-5% potential appreciation) Bonds: MIXED. 10yr Bund target at 0.20%, Italy 1.4%, SP 1.3%, POR 2.8%, IE cut to 0.50% (from 0.90%). We like POR & IT. ¡Credit: FAIRLY VALUED. IG Itraxx target at 75. HY at 325 6
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
China:
Overcoming the old regime. A shift toward monetary Reforms orthodoxy Until recently, the People’s Bank (PBoC) was one of the few central banks globally that still sought to directly control the pace of money supply growth by focusing on the quantity of money, rather than its price. The effect was that interbank rates were very volatile. Recently, the PBoC has adopted a more widespread practice of targeting an interbank rate, resulting in a control of the money base while stabilizing the depo rate (what the PBoC called the 7-d repo corridor). This also reduces the sensitivity of interbank rates to seasonal factors and swings in liquidity demand. Whereas growth in the money base was previously determined by the PBoC, under the new regime it is driven by credit demand. The ceiling on deposit rates –the last remaining restriction– was removed in October. China’s financial system (and the economy itself) is now less dominated by traditional banking. This is part of the financial liberalization agenda undertaken in the last few years. The result is a greater reliance on capital markets to provide financing needs. In other words, the more developed the capital markets, the less relevant (and less risky) the banking system, and therefore the lower the systemic risks. This is clearly shown in Chart 2. While Chinese banks still predominately rely on customer deposits for funding, a growing number now turn to the interbank market to meet funding shortfalls. China to cut red tape to boost foreign investment: A State Council meeting held over the weekend discussed further streamlining of the approval process for investment projects, including those by foreign investment. The new proposals would lead to a reduction of up to 95% of the required registration procedures for FDI. Real Estate At the G20 meeting in Washington, PBoC Governor Zhou Xiaochuan said that the Chinese government is paying close attention to rising property prices in some cities. Zhou said China will control credit growth and appropriate measures will be taken to promote the healthy development of the real estate market. President Xi Jingping and Premier Li Keqiang recently took a tough stance on the real estate market surge (South China Morning Post). This has motivated a flurry of new investment restrictions implemented by up to 21 cities. Shanghai Banking Regulatory Bureau urged banks to increase vigilance on real state loans to prevent unauthorized speculative flows (Caixin). More cities are tightening home buying rules. Nanjing and Suzhou will raise down-payment requirements for some buyers of second homes to 50%, up from 45% in Nanjing and 40% in Suzhou. Banking Sector S&P says China’s banks may need $1.7T injection as credit quality worsens (S&P Global report). Rising debt levels will impact the credit profiles of China's top 200 companies this year, requiring the country's banks to raise as much as $1.7T in capital to cover a likely surge in bad loans. The story said S&P estimates problematic loans among Chinese banks were at 5.6% at the end of 2015. Local Government Debt Issuance by LGFVs fell 18% last quarter. This results from tightening the rules in the use of these instruments. Meanwhile the discount on LGFV debt issuance costs compared to regular companies has fallen by about half over the past six months to only 23 bp (a clear sign that the central government is no longer backing LGFV issuance). Corporate Debt The National Development and Reform Commission (NDRC) calls for action to reduce corporate debt levels. According to an official report, China will allow firms to conduct an orderly market-orientated debtto-equity swap process with the aim of developing equity financing. SOEs and Excess Capacity problems The number of central government owned enterprises has fallen to 103 from 196 in 2003 and this figure is expected to fall below 100 by year-end. We see this move as a sign that the authorities want to overhaul the sector while trying to fix overcapacity problems.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
India:
India - On course to become a genuine economic power
Central Bank has serious options to ease conditions
Credit has normalized at a much more sustainable pace. Good in terms of future path in NPLs.
The SSE has already reflected the fall in intermediation
Growth structure seems stable and sustainable
Reform agenda leaps forward India’s GST (Goods and Services Tax) reform could prove nearly as significant as the agreement that created the European common market. For a better understanding of the magnitude of the changes that are occurring in this gigantic country, we must first take a quick look through India’s recent history. India has been a strong political state for nearly 70 years, but its fragmented economy prevented (and still prevents) goods and many services from moving freely within its borders. The existing tax system is a complex tangle of codes that distorts market prices and is a bureaucratic nightmare for businesses. (1) The central government taxes services and the production of goods. (2) State governments tax goods at the point of sale. (3) Localities levy a bewildering array of taxes, with local collection making logistics slow, expensive and unreliable. To take a truck transporting goods from Mumbai to Delhi, a journey that crosses four state borders, could require more than a dozen checks by various officials asking for papers, charges or interstate taxes. At some state crossings, trucks routinely get stuck for four or five days. The World Bank estimates that road delays mean manufacturing costs in India are two to three times higher than international benchmarks, and that cutting waiting times by half would reduce logistics costs by up to 40%. This structure pushes up costs for manufacturers and prices for consumers. Where the economy is headed after the GST reform… The GST is a “big-bang” reform passed by Modi’s administration and shows that its pro-business agenda is gaining traction. The GST reform promises to (1) Create a genuinely common market for 1.3bn people, (2) Replace a tangle of central, state and local taxes with a unified tax levied on the final user that should greatly simplify the system, (3) Boost aggregate domestic demand, (4) Cut the cost of business, and (5) Potentially transforming India into a viable manufacturing base. (6) Favored industries will no longer be granted tax exemptions, creating a level playing field for manufacturers to set up where it is economically efficient to do so. By creating a unified economy, the GST will give India a chance of creating the sustainable growth it needs to fulfill its vast, yet still unrealized, potential. If implemented properly, it will be a key step towards turning Modi’s “Make in India” vision into a reality. Private forecasts suggest that GDP growth may be upped by 0.91.7pp, potentially pushing India’s economy well beyond the 8% threshold. Politically speaking, this reform is a triumph for the country. The GST is a major political victory for Modi’s government. The GST had been held up by opposition in parliament and by states’ reluctance to cede their tax powers to the center. How did Modi achieve this? The government made concessions for the bill to pass through the upper house and brought the states on board by (1) Granting them greater discretionary spending power under its policy of devolving power and encouraging greater competition across the country, and (2) It also promised to make the measure revenue-neutral for five years by offering direct transfers to those states that experience a reduced tax take. Royal Bank of India Lawmakers signed-off in August on an inflation targeting mechanism that will for the first time bind policymakers to a rules-based system of monetary control. Confirmation of the 4% inflation target over the next five years represents a clear signal that the government will accept constraints on economic policymaking and will be subject to a higher level of discipline. The chosen target index –the headline CPI– represents a signal sent by the government that (1) It will forgo political expediency and will focus on the long haul, and (2) That the government aims to manage the inflation expectations that impact its decision on whether to hoard gold as an inflation hedge or invest in financial products that help fund investment and growth. The new monetary policy committee will have six members that will have to explain to parliament any failures to achieve its inflation targets. Markets !Equity (Sensex): ATTRACTIVE. We slightly adjust our year-end target for PE LTM to 18 (from 17). New 2016 target price at 29,610 Bonds: CHEAP. 10YR BOND TARGET 7%
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Japan:
The JGB market is fast disappearing. Despite this, continued QQE is more than likely Banks & JGB market (The free float is falling rapidly. This could “positively” impact the EM bond market) Trading in 10-year JGBs has declined by 50% after the BoJ introduced its new yield curve control policy. The 10y yields have been stable in the -0.10% to 0% range to the satisfaction of the BoJ, although this has removed the incentive for participants to trade JGBs in the secondary market. Last night Kuroda reiterated the possibility of a slowdown in bond purchases if 10-year JGB yields fall well below the target of around 0%, though he does not see an immediate possibility of bond buying falling sharply from the current pace. Japan’s mega banks are paring back their presence in the JGB primary market. Mitsubishi UFJ withdrew as a primary dealer in July. Including Sumitomo Mitsui and Mizuho Bank, JGB holdings at the three megabanks have fallen ¥8T since the end of March (from ¥ 51T to ¥43.1T). A senior official at the Financial Bureau feared the bond market will become fully government controlled. Hard Data (Still no signs of recovery) Composite PMI September 48.9 (down from 49.8 in August) Services PMI September 48.2 (down from 49.6 in August) Economic Watchers current conditions index: 44.8 in Sept. (vs 45.6 in August). Corp. Goods Price Index CGPI -3.2% y/y in September (despite the M2 supply growing at +3.6% y/y in September) Real wages +0.5% y/y in August. Average wages -0.1% y/y. BoJ & Stimulus (every aspect points towards a continued easing) BoJ should hold easing at current pace and wait until next year before easing policy further (unless there is a sharp spike in the yen). 70% of respondents in a Reuters poll said that the central bank would ease in January or later. In a report, the Nikkei discussed the suitability of the BoJ’s 0% target for long-term JGB yields and questioned the decision to control longterm yields in the same way as overnight rates. The report highlighted that the BoJ my be violating market mechanisms in JGBs. The BoJ responded by warning against testing its “infinite” capacity to fulfill its policy mandate. BoJ Governor Haruhiko Kuroda told Bloomberg that reaching the BoJ's 2% inflation target may take longer than the forecast for FY17. Kuroda confirmed the BoJ will continue or add to monetary easing over the long term to achieve the inflation target. Kuroda said at the Brookings Institution that other central banks may need to follow the BoJ in recalibrating monetary policy to target the yield curve. Kuroda: “I do not think there is a strong feeling among the G20 that monetary policy is reaching its limits or that an over-reliance on monetary policy is causing problems”. Policy (If early elections are called, this will enable greater continuity of monetary policy) PM Abe may call early elections in the next few months (comments from close advisors such as Shimomura flagged January as a possible election date). Analysts pointed out that the decision makes sense given a weak opposition and no rivals within the LDP. Adviser to Prime Minister Abe, Etsuro Honda, urged the BoJ to step up easing in November by expanding its purchases of JGBs and deepen negative rates further, and advocated a more aggressive use of fiscal spending to complement the BoJ’s easing program. Honda said this could include expanded issuance of JGBs. International transactions in Japanese securities (last month ended 8-Oct ). Domestic investors: Net buyers of ¥781B in foreign equities. Net buyers of ¥1,181B in foreign long-term debt. However, global money flees Japan stocks at fastest pace since 1987. Stock buybacks climb to record. Why? Put simply: Businessmen are not willing to undertake any real investment while perceiving that the information coming from the domestic monetary system is being artificially manipulated. This deprives them of their capacity to determine the true cost of capital. The Nikkei reported Japan's listed companies bought back a record ¥4.35T ($41.8B) of their own shares from January to September. According to the report, this represents an increase of about 40% from a year earlier and will likely surpass last year's record ~¥4.8T.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Brazil:
We remain comfortable with a forecast for COPOM to continue cutting rates in steps of 25bp
A dramatic improvement in the external accounts, our outlook for commodity prices and the BRL could turn the net borrowing requirement into a net lending capacity
BRL seems to be trading at fair value
Central Bank: First rate cut since 2014 The Central Bank cut rates by 25bp in its last COPOM meeting, and opens the door for further cuts in the next quarters. In our view, these cuts will be gradual. As things stand, we remain comfortable with a forecast for COPOM to continue moving in steps of 25bp over the next few meetings, and to cut rates by a total of 250bp to 275bp (to 11.25%-11.50%) by end-17. Broadly speaking, a more cautious pace in cutting rates will likely strengthen COPOM’s efforts to restore credibility in the Brazilian markets and increase its effectiveness in trying to bring down bond yields. Risks & Politics Does the imprisoned Cunha have the ability to bring down the government? The arrest of former Deputy Eduardo Cunha takes the investigations into the center of power of the ruling PMDB party. Never before, the Judge Sergio Moro was so close to the source of the corruption scheme, and thus, so close to its solution.. The former deputy probably has enough firepower to wreak havoc within the group, but this does not necessarily mean he has the ammunition to overthrow the government. Economy After a severe recession, Brazil’s economy is stabilizing: (1) Confidence levels have picked up, and (2) Industrial output and investment rose in 2Q16. Reforms The decision by the lower house of Congress earlier this month to approve the government’s bill to cap public spending is the kind of tangible progress investors (and COPOM) have been looking for. But it is only the first step in a long march back to fiscal sustainability. The government has promised to expand privately-funded infrastructure initiatives and to privatize state-owned assets. Authorities are allowing companies other than Petrobras to lead exploration in the pre-salt offshore oil fields. A labor regulation reform has been announced to give firms greater flexibility when hiring workers. The pension reform plan will adopt a minimum 65-year retirement age and unify schemes so that the same rules apply to men, women, urban and rural workers, civil servants and private sector employees. If implemented as written, the fiscal deficit should stabilize early next decade with government debt at about 90% of GDP. Outlook The hope is that these fiscal initiatives will deliver a dual benefit. Firstly, as the current recession ends and the economy returns to growth, tax revenues should pick up which, assuming flat expenditure in real terms, should improve the primary balance. Secondly, with a less expansionary fiscal policy the central bank should be able to lower interest rates, in turn reducing interest payments on government debt. In the political arena, the new government under President Michel Temer has stemmed the slide towards a full crisis by appointing a better economic team, wrangling wider congressional support for its policies and promising bold reforms to deal with Brazil’s daunting fiscal problems. As a result of these initiatives, consensus forecasts point to a sharpish return to growth next year, lower inflation and a glide path to lower interest rates. The consensus sees GDP expanding at 1.3% in 2017 after a contraction of -3.2% in 2016. Risks & Politics The hope is that these fiscal initiatives will deliver a dual benefit. Financial Markets Equities: CAUTIOUS. Our year-end target stays at 58,000 Govt. Bonds: In local currency: ATTRACTIVE. In USD: ATTRACTIVE FX: We are revising our year-end target to 3.1 from 3.3 10
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Mexico:
Is Mexico’s momentum starting to fade? Economy GDP contracted by 0.2% q/q in Q2. Most of the drop was accounted for by a steep fall in oil output, but manufacturing also contracted in q/q terms and service sector output softened as consumer spending slowed. The latest data suggests that Q3 was a bit better. On the production side of the national accounts, mining exerts a strong drag but it seems that manufacturing returned to positive rates of q/q growth. On the expenditure side, consumer spending still seems to be expanding – albeit at a slower pace than over the past couple of years. By contrast, investment appears to have fallen again in Q3. The net result is that according to some of the latest high-frequency data, the economy could have expanded by something like 0.5% q/q in Q3. Outlook Growth should pick up next year (to around 2%-2.25% growth) as the drag from mining eases. Even so, the recovery will be weaker than most expect. Assuming Secretary Clinton prevails next month and trade relations with the US continue as normal, Mexican exporters should receive a boost from the drop in the peso over the past year. Good for manufacturing activity. Nevertheless, domestic demand will remain under pressure. The flip side of a weaker currency will be a rise in inflation that will eat into real incomes and force a further tightening of monetary policy. On this basis, some prestigious research firms expect inflation to rise to around 4.0% in 2017 and interest rates to increase by 100bps to 5.75%. Fiscal & Credit Metrics Fiscal policy is likely to be tight, dragging on the economy even more as the government attempts to plug a widening budget deficit caused by falling oil revenues. The draft 2017 budget envisages a fiscal squeeze equivalent to 1.2% of GDP. Around 40% of these cuts will fall on Pemex’s capital budget, which means investment is likely to contract for much of the year. Debt/GDP ratio is expected to reach 50.5% in 2016 (well above the 37.7% seen in 2012, and 29.8% in 2006). In response, the new ministry of finance presented the 2017 budget with no tax rises and expenditure cuts of 1.2% of GDP in order to achieve a primary surplus after 6 years of deficit. But with the state-owned oil company Pemex shouldering around 40% of the cuts, the long-term decline in oil production looks set to persist. S&P cuts the outlook for Mexico sovereign debt to negative from stable. Markets Equities. ATTRACTIVE, IPC year-end target (according to our central scenario of a Clinton victory) remains unchanged at 49,000. If Trump wins, the Mexbol could fall to levels around 42,000. While the media still projects Clinton as the clear favorite, the race has narrowed dramatically, with FiveThirtyEight flipping its Ohio and North Carolina projections to Trump showing the overall race getting close fast. We reduced our exposure to stocks with high US debt and a negative impact in higher interest rates, while on the other side we increased our exposure in defensive stocks. In the worst case, Mexico will have to make small concessions on things such as labor standards, taxation of remittances, and other such marginal issues in order to avoid any of Trump's more threatening punishments (tariffs for example). These concessions would have a small but negative effect on the Mexican economy. FX: NEUTRAL-POSITIVE. Our year-end target for the peso is now somewhere near 18. The Trump effect is diminishing, although lower oil prices, the expected Fed decisions and the lower liquidity in the FX market are among the reasons that could keep MXN subdued. If Trump wins and the Fed raises rates in Dec, the MXN peso could jump to 21. If Clinton wins, we could see a return to 17.50 !Fixed Income. FAIRLY VALUED. We are raising our target yield for the M10 bond to 6.50% (from 6.0%), and the USDdenominated Mexican bond (UMS10) to 3.75% (from 3.0%)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Argentina:
New debt issues face big demand from overseas investors. We like shorter maturity bonds.
It seems as if the initial euphoria over the change of government had dissipated
Latest Developments After Fed’s last decision to hold rates on 09/21/2016, Argentina announced a new EUR2.5bn debt sale in international markets in EUROS. This move was intended to take advantage of low rates in the Euro market and to close the Q4 2016 financing gap. Argentina also continued to issue fixed ARS notes in local markets which generated major demand mainly from overseas investors. Most of these funds will be used to finance 2017 needs. Tax amnesty: to date the amount of money that has been declared in the new tax amnesty plan is very low, however this is expected to pick up in November and December due to the incentives that were established by law. Fiscal Fiscal Deficit was lower than expected in 1H. The pace for 1H16 is a full-year primary fiscal deficit of 2.8% (much better than the official target of 4.8%). Nevertheless, this improvement is the result of a reduction in subsidies and a decrease in capital expenditure, which is not sustainable as the cut in subsidies is a one-off event and capital expenditure is expected to increase considerably in 2H16. In short, for 2016 we expect the government will meet its primary fiscal target of a 4.8% primary deficit. Looking beyond, for 2017 the government initially had a 3.3% target for primary fiscal deficit but our fears that it would fail to achieve this target were confirmed when the cabinet sent the budget bill the congress, with a deficit target revised up to 4.2%. Despite the evident procrastination of the much-needed fiscal adjustment, if we consider the current context it is still a big effort (1.7% real cut in deficit). More importantly, this will take place in an important year when the government will be facing legislative elections that are seen as confirmation –or not– of Macri’s mandate and his possible re-election in 2019. Central Bank & Reserves YTD Argentina has issued US$42.5bn in debt instruments (22 bn internationally and 20.5bn locally). These issues were used for payments to holdouts and to close the government’s 2016 financing gap. This and other aspects such as the current account deficit and tourism (abroad) contributed to minor growth in international reserves despite big issuances made during the year. Inflation The knock-on effects of the devaluation and some tariff adjustments have led to a large acceleration in prices. Inflation is expected to end the year above 40% (29% accrued in the first half of the year). This number is well above the government’s target for this year of 25%. However, July and August readings (2% and 0.2% m/m) confirmed a diminishing path for inflation in line with government expectations. Core inflation decreased between July and August from 1.9 to 1.7%. Financial Markets FX. ARS spot depreciated after BCRA started to cut rates (8th cut in a row and after that 3 weeks on hold) moving the 35-day rate from a high of 38% to 26.75%. However depreciation stalled as expectations about tax amnesty are high and inflation pressures are diminishing. Year-end target for ARS/USD at 16. Fixed Income. Current 10yr Govt Bond in USD (Global 2026) is trading at 6.10% YTM. External factors still favoring emerging markets. This, combined with higher spread versus LatAm peers, make Argentina bonds attractive. Our target for 10yr Global 2026 yield remains unchanged at 6.00%. Strategy: Short term bonds continue to offer interesting spread despite the fact that their yield has come down considerably. These bonds will add very low volatility and very low repayment risk (Global 22/4/19, Buenos 14/9/18 and Bonar 7/5/24, YPF 4/4/24). Equities: There has been a strong recovery in the last few months. Some equities still look cheap but will mostly depend on the success Macri achieves with his measures to reestablish macro-equilibrium in Argentina. Examples of companies that could benefit from Macri’s policies are YPF, Financials (BMA, BFR, GGAL) and Utilities (PAM, EDN, TGS) 12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-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
Index USA S&P 500 Europe STXE 600 Spain IBEX 35
China SSE COMP.
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%
15,69 15,00
7.927
8,1%
646
0,7%
14,26 14,50
7,7%
30.739
7,3%
2.254
19,4%
25,32 21,74
5,5%
58.635
6,5%
3.811
12,9%
18,90 15,22
5,0%
2,0%
20.816
5,0%
1.041
2,2%
17,02 16,00
18,20 17,44
2.652
233,9
8,8%
7,0%
2.838
8,8%
250
6,8%
13,30 13,00
HK HANG SENG
13.064
2.015,3
15,4%
2,0%
13.325
15,4%
2.052
1,8%
11,45 10,00
India SENSEX
12.559
1.432,9
11,4%
11,0%
13.941
11,8%
1.645
14,8%
19,40 18,00
411
34,1
8,3%
7,0%
37
7,0%
21,07 20,00
MSCI EM ASIA
440
8,3%
INDEX CURRENT PRICE 2.139 340 9.149 47.805 63.826 17.336 3.112 23.084 27.790 719
2016 TARGET PRICE 2.000 334 9.365 49.000 58.000 16.653 3.247 20.521 29.610 730
2016 E[Perform.] % Ch Y/Y -6,5% -1,9% 2,4% 2,5% -9,1% -3,9% 4,3% -11,1% 6,5% 1,6%
ANDBANK ESTIMATES
RISK-OFF PROBABILITY Andbank's Global Equity Market Composite Indicator (Breakdown)
Buy signals Positive Bias Neutral Negative Bias Sell signals FINAL VALUATION
Previous
Current
Month
Month
5 2 6 7 2 0,2
2 2 13 3 2 -0,2
Andbank’s Global Equity Market Composite Indicator Preliminary assessment of the level of stress in markets
previous
current
0
-5
-10 Market is Overbought
+5
Area of Neutrality Sell bias
Buy bias
+10 Market is Oversold
o Score: NEUTRAL. Our Andbank GEM Composite Indicator has moved from 0.2 to -0.2 (in a -10/+10 range), suggesting that the market is not overbought and is still trading in a zone of no-stress (or neutrality). Therefore, and strictly under a flow, positioning & sentiment analysis, we cannot say that the equity market in general is expensive. At current levels, a risk-off probability in the equity markets seems unlikely (in the absence of highly disruptive events). If a risk-off shift takes place, the market would become oversold again. o Positioning indicators: POSITIVE reading. Tapering fears combined with the US election, have been inducing investors to cut risk in recent weeks (de-risking mode). Speculators’ position indicator on US equities flags a big short position. The current level is the lowest since 2006. DMHF’s betas are currently neutral on equities. o Flow indicators: NEGATIVE reading. BofA Fund flows do not yet indicate selling of fixed income or rotation to stocks, and Merrill Lynch’s flow show outflows in US and European equity ($7.2bn and $1.6bn record 35 straight weeks of outflows respectively). Bonds received relevant inflows ($11.4 bn) and much more modest in precious metals ($0.6 bn). This suggests a negative momentum for equities. Additionally, the PE blended forward 12M keeps widening, and is therefore getting expensive. We bet contrarian and our position is bearish. o Sentiment: NEUTRAL reading. Most of the indicators in this category are neutral this month.
TECHNICAL ANALISYS: Short-term (ST) and medium-term (MT) o o o o o o
S&P: SIDEWAYS-BEARISH. Supports 1&3 month at 2072/1991. Resistance 1&3 month at 2193. STOXX600: SIDEWAYS. Supports 1&3 month 331/327. Resistance 1&3 month at 348/351 IBEX: MOD. SIDEWAYS Supports 1&3 month at 8393/8229. Resistance 1&3 month at 9155/9360 €/$: SIDEWAYS-BEARISH. Supports 1&3 month at 1.09/1.07. Resistance 1&3 month at 1.132/1.143 Gold: SIDEWAYS. Supports 1&3 month at 1190. Resistance 1&3 months at 1343/1391 Oil: SIDEWAYS. Supports 1&3 month at 42.75/39.24. Resistance 1&3 month at 57.77/62.58
13
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Fixed Income – Core Country Bonds: UST 10Yr BOND: 2016 target 1.8%, Ceiling 2.7%-3%. Floor (fundamental) 1.75% 1. Swap spread: Swap rates continued to recover and rose to 1.58% (from 1.55%). The 10Y Treasury yield rose even more, to 1.78% (from 1.70%). Hence the swap spread ticked down to -20bps (from -15bps). For this spread to normalize towards the 20-30bp area, with 10Y CPI expectations (swap rate) anchored in the 2% range, the 10Y UST yield would have to move towards 1.75% (this could be considered a floor). 2. Slope: The slope in the UST yield curve rose to 94bp (from 90bp). With the short end normalizing towards 1.25% (today at 0.85%), to reach the 10yr average slope (of 179bp), the 10Y UST yield could go to 3.04%. 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 revised 2016 CPI forecast of 1.7%, the UST yield would have to rise to 2.7% to become a “BUY”.
BUND 10Yr BOND: 2016 target 0.2%, Ceiling 0.90%. Floor 0.65% 1. Swap Spread: Swap rates rose to 0.38% in the month (from 0.31%), and the Bund yield also rose to -0.07% (from -0.16%). Hence the swap spread ticked down to 45.5bps (from 47bp). 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 0.65% (entry point). 2. Slope: The slope of the EUR curve raised to 60bp (from 51bp). When the short end “normalizes” in the -0.25% area (today at -0.67%), to reach the 10yr average slope (114bp), the Bund yield would have to go to 0.89%.
Fixed Income – Peripheral Bonds: Spain: Target for the 10yr bond yield stable at 1.30%. Less political risk compared to Italy plus better economic conditions deserve a lower yield target. Italy: Target stable for the 10 yr bond at 1.4%. Growing political concerns have led to a spread widening vs. Spain. As we approach the referendum on Senate reform (although there is no official date), the “no camp” could be slightly ahead according to latest polls but the number of undecided remains high. Start looking at Italy carefully. Spreads over 30bp vs. 10Y Spanish bond seem a good entry point Portugal: DBRS confirms Portuguese rating at BBB (Low), Stable Trend. Fiscal measures already presented to comply with 2017 deficit target: As long as the budget is roughly consistent with maintaining the fiscal adjustment efforts, a “green light” is expected for the budget from the European Commission. Ireland: target set at 0.5% post APPLE affair. It should now trade at levels closer to the semi-core space (Belgium and France 10Y trading at 0.3-0.35%).
14
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Fixed Income – Corporate Bonds & EM Govies FIXED INCOME – CORPORATE CREDIT US$ IG & HY Investment grade bonds: IG bonds continued to receive flows, gaining US$1.09bn MTD. Spreads contracted during the month on the back of lighter bond supply. Favorable drivers expected to remain in place: (1) An expected 3Q earnings season that could be credit supportive –especially for banks. (2) A light bond supply continuing into year end. (3) Global investors struggling with low and negative govt bond yields, and (4) Strong total return performance for bonds YTD that historically has led to more funds inflows. We uptick our year-end target spread level for the CDX IG to 69bp to accommodate a more realistic level. Overweight: Financials – Materials – Technology. Underweight: Utilities – Healthcare – Industrial. US High Yield: US high-yield bonds are among the world’s top performers in 2016 YTD. High-yield issuance totals $126bn YTD compared with $135bn during the same period last year. September was the second highest monthly issuance. High-yield ETFs reported inflows for the month. We uptick our year-end target spread level for the CDX HY to 340bp to accommodate a more realistic level (current market level is at 377bp). Positive drivers will remain in place: (1) We continue to expect flows into the asset class as the risk-on scenario is expected to continue. (2) WTI price stable around the $50pbl. (3) Refinancing activity and strong demand conditions make us think that we will continue to have an active primary market for the year-end. OW: Financials – Media – Retail – Technology Telecommunications. UW: Metals and Mining – Energy
EUR IG & HY Spreads have remained broadly unchanged as government yields have gone up. Minor movements since our last committee. ECB corporate purchases have intensified to make up for the minor purchases during the summer, being very supportive for European credit. ECB corporate purchases remain on track. Some fine-tuning of the QE program still expected. The options are: (1) Extension of the program beyond March 2017, (2) accompanied by an amendment to the criteria/limits currently applied (Purchases allocated as a percentage of the market value -debt weighted- rather than the current ECB capital key criteria. Limits per ISIN being lifted up. Removal of the depo rate as the threshold for purchases). European credit fundamentals are solid (leaving aside UK bonds due to the currency risk), US credit seems to be trading at more attractive levels Despite fundamentals being supportive, targets have already been reached and we are even approaching those more optimistic levels set in our optimistic scenario from the beginning of the year. We stick to a tactical underweight and a strategical neutral. Recent outperformance from financials. We prefer bond picking rather than a sector approach and a “quality” oriented portfolio. We prefer bond picking rather than a sector approach and a “quality” oriented portfolio. Credit Targets: IG Itraxx unchanged at 75 (currently at 71). HY Itraxx to 325 (currently at 320)
FIXED INCOME - EMERGING MARKETS (GOVIES): “The two conditions are not met” 10 Year
EM ASIA
10 Year Yield
Yield
Last reading
Real
3,07% 4,25% 2,30% 1,90% 1,46% 0,37% -0,28% 1,20% 0,33%
3,95%
Taiwan
7,02% 6,88% 3,79% 2,70% 3,56% 2,08% 1,80% 1,60% 0,98%
Turkey
9,75%
7,28% 6,40%
2,47%
Russian Federation 8,40%
11,25% 6,14% 7,27% 6,01%
9,15% 2,96% 7,38% 3,13%
2,10%
India Philippines China Malaysia Thailand Singapore South Korea
EME
CPI (y/y)
Govies Indonesia
LATAM
To date, our rule of thumb for EM bonds has been “buy” when the following 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 !New 2016 target for US CPI of 1.7%, the UST bonds should be at 2.7% 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 0.03% (1.73%-1.70%), the real yield of the EM bonds should be at least 1.03% (look in the table for the bonds that met this real yield).
Brazil Mexico Colombia Peru
2,63% 1,49% 0,80% 2,09% 1,71% 2,09% 0,40% 0,65%
2,00%
3,18% -0,11% 2,88%
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Commodities ENERGY (OIL): Fundamental target at $40. Range (Buy at $30. Sell at $50). Geopolitics The Opec cartel struck an agreement to make modest production cuts, in principle (the details have to be hammered out but talks are of a cut by between -250k and -740k barrels per day as of November, and for a 6 month period only). In light of this, the sources consulted believe that even if the proposed output cuts are confirmed, this deal will not be a game-changer for the international oil market. What follows is a list of curiosities about the oil industry that could help to understand where the oil price might go. i. Saudi production typically falls by around 2% in the last quarter, but Saudi was pumping at record levels of 10.7mn bpd over the summer. So in principle, the proposed cuts will essentially mean business as usual (unless cuts enforced during a prolonged period). ii. The global oil market’s imbalance of supply over demand continues to run at 1mn bbl/day according to OPEC itself. Opec’s proposed production cut will therefore be insufficient to reverse the oil glut. iii. Admittedly, if Russia (not an OPEC member) were to cut output, the impact would be greater. However, although Russia has indicated it can freeze production at current levels, few people know that Russia is producing at +3.7% MoM in September at an all-time high of 11.1 mn bbl/day. In other words, Moscow has shown little willingness to cut its output. iv. Even if both OPEC and Russia were to agree to reduce production, there would still be good reasons to believe that any such deal would prove ineffective. Back in the 1970s or the early 2000s, the exporter’s cartel agreed to cut output and the approach worked well since it was easy to defend market share as the principal competition was among oil producers (in particular between Opec and non-Opec producers). That is not the case today. Today’s biggest threat to any conventional oil producer comes from non-conventional producers and other alternative sources of energy. v. Therefore, the dynamics of the energy market mean that there are solid reasons to believe that the cartel no longer has the power to maintain the oil price significantly above a threshold (50$-55$ pb) for any appreciable length of time. vi. Producers must also bear in mind that the value of their reserves is no longer dictated by the price of oil and the quantity of their reserves, but rather by the amount of time for which they can pump before alternative energies render oil obsolete. In order to delay this deadline as long as possible, it is in producers’ interests to keep the oil price low as long as possible (this keeps the opportunity cost of alternative energy sources as high as possible). vii. Also, producers are keenly aware that the value of their reserves depends on the time they can pump at current levels before new and tougher environment-inspired regulation comes in. For example, Saudi Arabia has between 60 to 70 years of proven oil reserves at current output pace, but with mounting concern about climate change and growing environmental problems that will likely continue to put big pressure on the market for fossil fuels over the coming decades, Riyadh’s most serious risk is of sitting on a big chunk of “stranded reserves” that it could no longer extract and sell. Therefore, Saudi Arabia (and the other producers) has a powerful incentive to monetize as much of its reserves as soon as possible by pumping as much oil as it can (if only to fund the construction of a less oildependent economy). viii. And last, but not least, Iran is still insisting that it must be allowed to step up its output from 3.6mn to 4mn bbl/day. This would imply that Saudi Arabia (the world’s largest producer) would have to take the most, if not all, of the proposed cuts on its own output. This is something incompatible with the condition imposed by the Saudis of not losing market share under the agreement. Looking around, and considering all this relevant information, it seems to me that any coordinated work among Opec’s members to limit production is highly vulnerable and probably ineffective too. This is why I prefer to stand by our original fundamental target for the oil price. As such, we continue to put a ceiling on the price of crude somewhere in the vicinity of US$50 bbl.
16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Commodities GOLD: Buy at US$ 900/oz. Sell above US$1,100. Target price 1,000 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) fell this month to $1141 (from $1202 last month). Nevertheless, in real terms gold continues to trade well above its 20-year average of $769. Given the global deflator (now at 1.1137), for the gold price to stay near its historical average in real terms, the nominal price (or equilibrium price) must remain near US$856. 2. Gold in terms of Silver (Preference for Store of Value over Productive Assets): This ratio has ticked up to 72.6 (from 67.1x last month) and remains well above both its 10-year average of 61.21 and its historical average of 61.6, suggesting that Gold is expensive (at least in terms of silver) 3. Gold in terms of Oil (Gold / Oil): This ratio has fell sharply in the month to 25.01x (from 30.2x last month) but still remains above its 20-year average of 14.48. Considering our fundamental long-term target for oil at US$40pbl (our central target), the nominal price of gold must approach US$579 for this ratio to remain near its LT average level. 4. Gold in terms of the DJI (Dow Jones / Gold): This ratio has moved to 14.33x (from 13.63x last month), still below its LT average of 20.4x. Given our target price for the DJI of $17032, the price of gold must approach US$834 for this ratio to remain near its LT average. 5. Gold in terms of the S&P (Gold / S&P500 index): This ratio has ticked down to 0.591x (from 0.62x last month), still above its LT average of 0.5813x. Given our target price for the S&P of $2000, the price of gold must approach US$1,162 for this ratio to remain near its LT average. 6. Speculative Positioning: CFTC - CEI 100oz Active Future non-commercial contracts: longs fell sharply to 274.3k (from 326k last month). Shorts raised to 94.7k (from 70k) => Net positions decreased to +179k (from +256k). Therefore, although less pronounced, speculators still remain very long in gold => Negative reading. 7. Financial liberalization in China. Higher “quotas” each month in the QFII are widening the investment alternatives for Chinese investors (historically focused on gold). 8. Central bank gold buying. Gold stocks at central banks are still considerably higher than 2008 levels. 9. Monetary stimulus by ECB and BoJ continues, but not by the Fed (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. Negative yields make Gold attractive. The disadvantage of gold relative to fixed income instruments (gold does not offer a coupon) is now neutralized, with negative yields in a large part of global bonds. 2. Relative size of gold: 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 (just 0.08% of the total in the financial markets).
GOLD SPECULATIVE POSITIONS
Long Futures
Net Futures Short Futures 17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Currencies – Fundamental Targets The global USD position has increased sharply during the last month and is now net long against the rest of currencies to the tune of US$17.47bn (from US$8.9bn last month). This is the longest position in USD since February, but despite this buying of US dollars, the global position in the greenback is still far below the US$+44.3bn net long position seen in April 2015, which means that long positions could still be much larger.
• EUR/USD: Fundamental Target (1.05) The flip side of this was a cut in the position of non-dollar reserve currencies. Most notable was a near-doubling of CHF shorts to -2.1bn notional from -1.2bn the previous week. EUR, JPY and Gold positioning was also trimmed, although more modestly. This means that if a USD cycle has started, there is now more room to build long positions by selling EUR, JPY or even Gold. GBP positioning was little changed again this past week, though still hovering at historically short levels.
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); MXN/EUR: Target (18.9) BRL/USD: Target (3.1); BRL/EUR: Target (3.26) RUB/USD: UW RUB !! AUD/USD: NEUTRAL-UW CAD/USD: NEUTRAL !CNY/USD: Target (6.75)
• • • • • • • • •
Mkt Value 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
17,47 18,45 0,99 -14,99 4,45 -7,04 -2,07 0,54 -0,83 1,28 2,30 -1,09
2,01 3,20 1,19 -2,08 -1,09 0,19 -0,88 0,07 0,54 0,57 0,33 -0,21
44,3 43,6 1,0 0,0 8,6 0,7 1,4 0,5 0,0 1,3 4,6 2,0
1-yr Min (Bn $)
1-yr Avg (Bn $)
-6,9 -7,1 -2,2 -24,3 -8,0 -7,8 -3,2 -0,1 -2,3 0,0 -4,7 -4,7
12,7 11,8 -0,9 -11,7 4,0 -4,1 0,0 0,2 -1,3 0,2 0,6 -0,6
Current Z-score 3-yr -0,24 -0,18 0,92 -0,20 1,18 -1,77 -1,39 1,05 -0,16 5,87 1,16 0,29
ANDBANK Max Min 7,0
Current
SPECULATIVE POSITION IN THE FX MARKETS (3Yr - Z SCORES. Max, Min & Current in 1Yr)
5,0
3,0
3-year Z-Score: 1,0
Current Position - 3 year average position 3-year Standard Deviation
-1,0
Values above +1 suggest positioning may be overbought
-3,0
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
Values below -1 suggest positioning may be oversold
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Market Outlook – Fundamental Expected Performance Performance
Performance
Current Price
Target
Expected
Last month
YTD
27/10/2016
Year End
Performance*
-0,9%
4,7%
2.139
2000
-6,5%
EUROPE - STOXX 600
0,2%
-6,8%
341
334
-2,0%
SPAIN - IBEX 35
5,3%
-4,1%
9.149
9365
2,4%
MEXICO - MXSE IPC
0,2%
11,2%
47.805
49000
2,5%
BRAZIL - BOVESPA
9,3%
47,2%
63.826
58000
-9,1%
JAPAN - NIKKEI 225
3,9%
-8,9%
17.336
16653
-3,9%
CHINA - SHANGHAI COMPOSITE
3,8%
-12,1%
3.112
3247
4,3%
HONG KONG - HANG SENG
-2,1%
5,3%
23.084
20521
-11,1%
INDIA - SENSEX
-1,5%
6,4%
27.790
29610
6,5%
MSCI EM ASIA
-0,7%
8,5%
719
730
1,6%
Fixed Income
US Treasury 10 year govie
-1,7%
5,7%
1,79
1,80
1,7%
Core countries
UK 10 year Guilt
-3,8%
8,0%
1,15
1,00
2,4%
German 10 year BUND
-1,8%
4,9%
0,08
0,20
-0,9%
Fixed Income
Spain - 10yr Gov bond
-1,8%
6,7%
1,11
1,30
-0,4%
Peripheral
Italy - 10yr Gov bond
-2,4%
1,9%
1,52
1,40
2,5%
1,9%
-3,5%
3,18
2,80
6,2%
Ireland - 10yr Gov bond
-1,6%
5,7%
0,54
0,50
0,9%
Greec e - 10yr Gov bond
1,1%
3,7%
8,09
6,50
20,8%
Asset Class
Indices
Equity
USA - S&P 500
26/10/2016
Portugal - 10yr Gov bond
Fixed Income
Credit EUR IG-Itraxx Europe
-0,1%
0,7%
74,17
75
0,0%
Credit
Credit EUR HY-Itraxx Xover
0,6%
2,6%
322,02
325
0,4%
IG & HY
Credit USD IG - CDX IG
0,1%
2,6%
75,36
69
0,5%
Credit USD HY - CDX HY
0,7%
7,7%
377,16
340
2,0%
Turkey - 10yr Gov bond
-1,4%
14,6%
9,70
9,25
13,3%
Fixed Income
EM Europe (Loc) Russia - 10yr Gov bond
-0,7%
18,4%
8,41
8,75
5,7%
Fixed Income
Indonesia - 10yr Gov bond
-0,8%
21,6%
7,01
7,00
7,1%
Asia
India - 10yr Gov bond
1,1%
13,5%
6,87
7,00
5,8%
(Local curncy)
Philippines - 10yr Gov bond
-1,6%
5,3%
3,79
3,00
10,1%
China - 10yr Gov bond
0,4%
3,2%
2,69
2,80
1,8%
Malaysia - 10yr Gov bond
0,3%
8,4%
3,55
3,25
6,0%
Thailand - 10yr Gov bond
0,2%
4,9%
2,09
1,50
6,8%
Singapore - 10yr Gov bond
0,0%
8,4%
1,78
1,25
6,0%
South Korea - 10yr Gov bond
-1,0%
6,0%
1,56
1,40
2,9%
Taiwan - 10yr Gov bond
-1,8%
1,3%
0,95
1,00
0,6%
Fixed Income
Mexic o - 10yr Govie (Loc )
-0,4%
6,0%
6,14
6,50
3,3%
Latam
Mexic o - 10yr Govie (usd)
0,4%
10,2%
3,22
3,50
1,0%
Brazil - 10yr Govie (Loc )
4,8%
55,3%
11,25
12,00
5,3%
Brazil - 10yr Govie (usd)
0,2%
29,4%
4,78
5,00
3,0%
6,09
6,00
6,8%
Argentina - 10yr Govie (usd) Commodities
CRY
3,1%
7,1%
188,7
190,0
0,7%
10,1%
32,8%
49,2
40,00
-18,7%
GOLD
-4,6%
19,4%
1.266,6
1.000
-21,0%
EUR/USD (pric e of 1 EUR)
-2,7%
0,4%
1,091
1,05
-3,7%
GBP/USD (pric e of 1 USD)
6,3%
20,3%
0,82
0,86
5,3%
GBP/EUR (pric e of 1 EUR)
3,4%
20,9%
0,89
0,90
1,4%
CHF/USD (pric e of 1 USD)
2,3%
-0,9%
0,99
1,00
0,7%
CHF/EUR (pric e of 1 EUR)
-0,5%
-0,5%
1,08
1,05
-3,1%
Oil (WTI) Fx
JPY /USD (pric e of 1 USD)
4,0%
-13,2%
104,46
110
5,3%
JPY /EUR (pric e of 1 EUR)
1,2%
-12,7%
113,94
115,50
1,4%
MXN/USD (pric e of 1 USD)
-3,6%
8,8%
18,68
18,00
-3,6%
MXN/EUR (pric e of 1 EUR)
-6,2%
9,3%
20,38
18,90
-7,3%
BRL/USD (pric e of 1 USD)
-2,9%
-20,7%
3,14
3,10
-1,3%
BRL/EUR (pric e of 1 EUR)
-5,6%
-20,4%
3,42
3,26
-4,9%
ARS/USD (pric e of 1 USD) CNY (pric e of 1 USD)
-0,5% 1,5%
17,4% 1,5%
15,19 6,77
16,00 6,75
5,4% -0,3%
* For Fixed Inc ome instruments, the expec ted performanc e refers to a 12 month period XX (Target cut)
XX (Target raised)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW NOVEMBER-16
Principal Contributors
Alex Fusté. – Chief Global Economist – Global & Asia & Oil: 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 NOVEMBER-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 NOVEMBER-16
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