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Tickmill UK Daily Market Notes

Discussion in 'Market Predictions and Reports' started by tickmill-news, Jan 25, 2018.

  1. tickmill-news

    tickmill-news Tickmill Representative

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    US Retail sales join Chinese data to hint about early stage of global recovery
    US retail sales unexpectedly recovered in March at the fastest rate in a year and a half, offsetting a gloomy February with the fall by 1.7%. As the March data shows, the structure of aggregate consumption saw exceedingly favourable shift, namely, consumers spent more on car purchases. This rebound could point to the improvement in household expectations regarding the size and stability of future income, but still with only one observation such a conjecture remains a shallow speculation. Although car sales tend to be volatile by nature and thus considered unreliable, the positive monthly change in March comes right in time to support the assumption about rebound of economic activity in the second quarter.

    [​IMG]

    However, in January, car sales pulled consumption down, apparently due to seasonal exhaustion after New Year’s spending.

    Broad retail sales indicator rose by 1.6% in March compared with February. Core sales also rose adding 1%.

    From the interesting details of retail sales report, it can be noted that all four of the largest items of consumer spending posted an increase compared with the same month last year and February:

    • Cars and spare parts – + 3.8%
    • Food and drinks – + 1.0%
    • Restaurants – + 0.8%
    • Online purchases – +1.2% and +11.6% compared with March 2018.
    [​IMG]

    Positive data further attracted buyers to the dollar, after the US currency went into the lead against the main opponents during the London session on Thursday:

    [​IMG]

    Unemployment in the US is likely to continue to test historical lows in April, as shown by unemployment benefits data. The number of initial claims for benefits has dropped to its lowest level in 50 years (192K) and it is completely unclear how this fails to translate into the consumer inflation.

    Large downward risks to the American economy, hovered in the air, are fading from view. Given that the data from China indicated fast recovery, the trading theme of the next week should be “the search for yield”.
     
  2. tickmill-news

    tickmill-news Tickmill Representative

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    Why is backwardation possible in the futures market?
    In one of my recent articles about the oil market, I stated that the withdrawal of waivers for consumers of Iranian oil could lead to a compensating effect on the part of the US supply, which the latest API report on commercial reserves in the US seemed to reflect. In the weekly report dated April 23, the API estimated the growth of reserves at 6.9M barrels with a forecast of -3.9M barrels, which naturally forced buyers to moderate their appetite. It also called for review of the medium-term consequences of White House “harsh” decision against Iran, which may have muted impact on the world supply considering rivalry between US producers OPEC and Russia.

    [​IMG]

    The growth of US stockpiles occurs against the background of “ugly” futures price curve for US manufacturers where contracts for more distanced delivery are cheaper than contracts for the near term (state of backwardation). In this state of the market, it seems that it would be more profitable for American producers not to accumulate reserves, but to sell oil on the spot market, which should lead to a decrease in reserves and, accordingly, their ability to influence futures prices.

    Within the framework of non-arbitrage theory of pricing, with deterministic rate and not counting storage costs, futures price is simply an expression of the opportunity cost of holding money (that is, a reflection of lost profit between investing now and in the future):

    [​IMG]

    Where F and S are futures and spot prices for a good at time t, r is a continuously compounded interest rate. The question naturally arises about the possibility of F < S, i.e. backwardation, because then the interest rate r must be negative, which looks impossible.

    This, at first glance, contradiction is resolved through an analysis of the state of current vs. future reserves of the good. In the context of contango, when stocks are now higher than in the future, the owner of the goods has a low incentive to sell the goods now, i.e. expects price to rise in the future. In this case, F> S. However, in the case of low stocks now, and expectations of their increase in the future (lower price in the future), i.e. in the state of backwardation, the so-called convenience yieldarises – an implicit yield, which I would call the “opportunity cost of selling a scarce commodity”. It should also be noted that if during contango the deficit in the future can be filled through the increased sale of futures contracts, in case of backwardation, you can’t borrow supplies from the future using derivatives. Accordingly, the futures price formula is correct with additional term:

    [​IMG]

    Where c is convenience yield, which can be expressed as an advantage in the form of maintaining current customer satisfaction (since the amount of the is scarce on the market!), ensuring uninterrupted supply, or expecting for an increase in demand for the good on the spot market, etc.

    The IEA’s announcement on Tuesday effectively downgraded the value of retiring Iran from the competitive market, stating that world reserves are adequate to demand, and spare global oil production capacity is currently sufficient (to counteract the supply shocks).

    Most of the new supply comes from the United States, where crude oil production increased by 2 million barrels from 2018 to 12 million barrels, making the US the largest oil producer, leaving Russia and Saudi Arabia behind. The IEA predicts that in 2019, oil supplies from the United States will increase by 1.6 million barrels.

    One sign that US is gradually taking over OPEC’s share was recent delivery of the first tanker to Indonesia, a major Asian oil consumer which was a traditional OPEC customer.
     
  3. tickmill-news

    tickmill-news Tickmill Representative

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    South Korea: World Growth Must Wait!
    One of the brightest stars in terms of global growth unexpectedly faded, with South Korean GDP falling by 0.3% in Q1. Posting its worst performance in almost a decade:

    [​IMG]

    The economy grew by 1.0% in Q4, 2018 alongside an expected a rebound of 0.3% in the subsequent quarter. Hopes were dashed however due to weak foreign demand for South Korean exports and diminishing domestic consumption. Retail sales declined sharply in February due to the early celebration of the Lunar New Year. Apart from the seasonal factor however, there was also a structural weakening when compared to the average value for January-February with the same period last year.

    When assessing the implications for the global economy, it should be noted that the country exported fewer semiconductor elements, refined petroleum products and passenger cars. Exports declined in February and fell short of forecasts in March, indicating a continuing trend towards weakening external demand during these two months. Sources of weak foreign demand arose from the largest trading partners, such as China, USA, Hong Kong and Japan, which is all well documented in their domestic data. Channels of transmission foreign demand slack into domestic consumption were capacity utilization, which contracted in March, deterring from expansion on business investments, as well as an increase in the ratio of inventories-to-shipments of the exporters.

    [​IMG]

    Source: Korean Development Institute

    Industrial production in February fell by 1.4% MoM, the service sector showed zero growth. In the medium-term trend, assessing the change in indicators in annual terms, the situation also looks alarming. Waning momentum in manufacturing and mining arose became especially distinct in early 2019 while the services sector has been stagnating for a long time.

    [​IMG]

    Shares of companies producing semiconductor elements, amid the decline in exports, raise doubts about the rationality of valuation, as the price is rising while EPS falls:

    [​IMG]

    The South Korean government has pledged to increase fiscal momentum with an additional package of spending of $5.9 billion, in addition to the record budget set for 2019. According to their calculations, this will lead to additional GDP growth of 0.1% and creation of 73,000 jobs. With the failure of the first quarter, the government’s targets for 2.6% to 2.7% GDP growth are beginning to look excessively ambitious, unless, of course, a miracle occurs in export activity.

    The country, with a high share of economic and implicit political power belonging to industrial conglomerates called Chaebol, ranks 11th in terms of the size of the economy and has been growing at one of the highest rates after the Great Depression.
     
  4. tickmill-news

    tickmill-news Tickmill Representative

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    Fight fire with fire: Chinese banks issue more loans to combat effects of bad debts
    After a crushing blow inflicted by Google (shares fell by 6% on the earnings report) Nasdaq futures suffered from additional pressure after Chinese PMI report release, which showed that manufacturing activity in April failed to develop the March impulse.

    [​IMG]

    The rebound in March set the stage for expectations that Chinese economy will enter the second quarter with the claim on recovery after dismal winter, but April data were a big disappointment. Both productive and services sector have torn the groundwork of March, broad activity indices decreased from 50.5 to 50.1 and from 54.8 to 54.3, respectively. The estimate of production activity from Caixin, which adds more weigh to small enterprises in the index formula, also decreased from 50.8 to 50.2 points, contrary to the forecast of 50.9 points.

    The decline embraced all components of the index what brought additional damage to hawkish beliefs on the markets. The leading index of new orders declined slightly, remaining in the expansion zone. However, the index of new export orders fell below 50 points, indicating a cooling in external demand.

    The output component fell along with the urban unemployment component. In March, the unemployment rate navigated to the 74-month low, before the labor market cooled in April. The inventory index returned to negative territory, the goods delivery time index strengthened, indicating an acceleration of capital turnover for producers.

    The pressure in prices of manufactured goods and other costs declined showed corresponding index, which of course means a less favorable outlook for consumer inflation. The balance of incentives for tightening vs. additional credit easing for the Chinese government should remain at the same level, or perhaps slightly shift in favor of counter-cyclicality (more easing).

    A wait-and-see attitude may not be completely comfortable to the government when taking into account curious fact that the weak economy in 1Q, the massive infusion of liquidity (4.6 trillion yuan in January) coincided with increased ratio of bad loans to the highest level almost for three years:

    [​IMG]

    At the same time, despite the slowdown in the economy, which is usually accompanied by the reduction of attractive borrowers and the growth of defaults, Chinese banks, in unison with the Central Bank, almost doubled the issuance of loans in the first quarter compared to Q4 2018:

    [​IMG]

    A brilliant example of what a low level of independence in the decisions have large Chinese banks. Fight fire with fire!

    The lagging of China’s banking sector shares from the ShComp broad index (19% vs. 23% YTD) may just be a concern about the increase of bad loan provisions, which, of course, will have a negative impact on EPS.

    According to a survey by China Orient Asset Management (one of four state-owned companies managing bad debts), 45% of the 202 surveyed managers of Chinese banks believe that bad loans will update the record in 2019.

    The implications for the rest of the world are the implicit boost to risk appetite due to the fact that the Chinese economy should remain afloat, because quickly stopping support for banks, drowning in bad credit, can be hardly included in the government plans.
     
  5. tickmill-news

    tickmill-news Tickmill Representative

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    More than simply a trade truce
    The signs of softening stance of the White House in talks with China before the two leaders met at the G-20 summit (Trump’s phone call to Xi, reports about “extended ” meeting), to the general surprise, were not empty speculations, but a forerunner to extending the truce. The results of the meeting between Trump and Xi set a new vector of cooperation between the two states, as Trump accepted some Chinese demands, such as extending pause in tariff escalation and easing of pressure on Huawei. Markets welcomed this decision by increasing the demand for risky assets, the dollar strengthened, the yield on 10-year notes rose, and SPX futures began trading with a positive gap at around 2975 points.

    And if the tariff truce was within the range of expected scenarios, then the removal of some restrictions on Huawei prompted China to return to the negotiating table, which considered attacks on the Chinese telecom giant as forcing to negotiate with a “gun pointed to its head”. China, in exchange for easing sanctions on Huawei agreed to increase purchases of agricultural products in unspecified amount. Its manufacturers in the United States suffer huge losses, hit by the millstones of the tariff war.

    The chance of a rate cut by 50 bp in July keeps declining, according to futures trading with interest rate as an underlying asset, but the market remains confident that the Fed will lower the rate in July by at least 25 bp.

    [​IMG]

    Asian stock markets got the biggest relief from the Trump-Xi decision. The Japanese Nikkei jumped by 2.1%, the Chinese CSI 300 by 2.6%, as the pause in the exchange of tariffs will allow firms to expand the horizon of production planning, which should add confidence to Chinese firms in decisions to boost hiring and capital investments.

    The official index of manufacturing activity in China fell to 49.4 points in June, remaining in the contraction territory for the third month, the data showed on Monday. The activity index of China’s factories, calculated by Caixin, dropped to 49.4 points, the worst since January of this year. Manufacturing PMI includes several sub-indices, such as output, new orders, input and output prices, delivery time of raw materials by suppliers, inventories, employment, etc. Despite the decline in the component of new orders (from 49.8 to 49.6 points), and hiring (from 47.0 to 46.9 points) the positive part of the report was a rebound in activity of small enterprises from 47.8 to 48.3 points:

    [​IMG]

    Recall that small enterprises in China endured greatest pain from the tariff war since the combination of slowdown in growth and credit crunch led to credit tightening especially to this type of firms. Banks are willing to lend to large enterprises, seeking to maintain “healthy” assets on the balance sheet because of increasing probability of default by corporate borrowers. By this, they effectively block the channel of cheap liquidity opened by the Central Bank, intended for small firms.

    It is not known whether the Chinese authorities will keep pause before new stimulus measures (favoured by the outcome of the Osaka meeting), but with the deterioration of the manufacturing sector, the likelihood of expanding support measures is increasing, which should support risk appetite not only in the Chinese stock market, but also abroad in the form of lower demand for “safe havens”.

    European data increased pressure on the euro. Activity indices in production in Italy, France and Germany continued to fall. Unemployment in Germany fell by 1K, the unemployment rate in the Eurozone fell more strongly than expectations to 7.5%. EURUSD is heading to 1.13 level, losing almost half of percent today.
     
  6. tickmill-news

    tickmill-news Tickmill Representative

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    Saudi Arabia Under Pressure as the “Oil Market Goes Green”
    Oil prices renewed their decline, maintaining the bearish tone set on Monday. US producers are gradually resuming oil production in the Gulf of Mexico after Hurricane Barry, in what serves as the basis for downbeat expectations for API and EIA inventory updates this week.

    The rebound of Chinese economy in June, particularly in industrial production and retail sales, left a light imprint of buying activity in oil prices on Monday. However, it failed to gain a foothold, as the forecast for global economic growth (and therefore oil consumption) remains flimsy. This is further evidenced by the dovish stance of the ECB and Fed, ready to combat recession, while American oil producers are ramping up production, maintaining concerns about the glut.

    On January 1, 2020, the International Maritime Organization will enforce new standards for ship fuel, designed to significantly reduce emissions of harmful gases into the atmosphere. This will be one of the biggest shifts in the oil market, as ships burn about 3 million barrels of high sulfur oil every day. These new standards will obviously create an excess of “dirty” fuels on the market and increased demand for standards-compliant fuels.

    The allowable sulphur content is planned to be reduced from the current 3.5% to 0.5%. The average sulfur concentration now stands at 2.7% with a very low percentage of ships currently sticking to the new emission norms. The profits of refineries that focus on refining dirty oil will be under pressure, and this is especially true for companies in Saudi Arabia. Below is the matrix of oil grades in two ways – by density and sulfur content:

    [​IMG]

    Also, for ships that are not going to switch to clean fuel, it is possible to use special installations that reduce the content of harmful substances in emissions.

    The market is also under pressure due to discouraging reports from the EIA, which sees no end in sight to the potential for growth in US oil production. According to the latest forecasts, production in seven major fields will grow by 49K in August to a record 8.55 million barrels per day. The total production in the United States now exceeds 12 million barrels and is expected to rise further.

    [​IMG]

    On Monday, the volume of suspended capacity in the Gulf of Mexico was 1.3 M barrels per day. On a selected day from Sunday to Monday, producers restored production to 80K barrels per day however, the recovery rate is expected to increase. Capacity utilization on some platforms reaches only 31%. Workers of more than 280 drilling platforms were evacuated but they are expected to return to their jobs in a few days after the storm leaves the region.

    Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  7. tickmill-news

    tickmill-news Tickmill Representative

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    US and Vietnam: from “Best Friends” to Trade Rivals?
    Next possible leg of the trade war may affect countries that have emerged victorious at the expense of first victims. This assumption is explained by the fact that losing the accumulated trade and economic advantage is more expensive for any economy than simply missing it out – and Trump understands this perfectly well. Already very attractive for the US president is the ability to knock out concessions from China’s small neighbour, Vietnam, which is seen as one of the main beneficiaries of the transformation of the supply chains in the trade between the US and China:

    [​IMG]

    Trump just needs to make a threat, but can Vietnam avoid this or a new trade front with an East Asian country is only a matter of time?

    First, it is worth remembering that in May, the US Treasury Department included Vietnam in the list of potential currency manipulators, which gives Trump a formal pretext for imposing tariffs on Vietnamese goods if the fact of deliberate devaluation is proved. This threat has already led to the introduction of 400% of the tariffs on steel imports from Vietnam, which was produced in South Korea or Taiwan. Thus, the role of the country as an “unwitting accomplice” is being blocked, also serving as a warning that the connivance of the authorities will be punished specifically with tariffs on Vietnamese goods.

    And there is a reason for this. For example, there are allegations that Chinese goods are “rebranding” in Vietnam and exported to the United States under the guise of Vietnamese goods. The rise of exports from China to Vietnam and from Vietnam to the United States indicates that there may be a phenomenon that US officials call “transshipment”:

    [​IMG]

    As can be seen, China’s exports of key goods to the United States have shrunk along the “short route” and have grown along the “long route” through Vietnam.

    If the United States introduces 25% tariffs on imports from Vietnam, considering that the severity of misconduct is commensurate with Chinese, then according to some estimates, this could lead to a reduction in export volumes by 25% and a loss of 1% of GDP. The United States continues to be Vietnam’s main trading partner, and vice versa, the share of US exports to Vietnam, especially in terms of agricultural products, has risen sharply:

    [​IMG]

    Last month, Trump stunned the Vietnamese authorities with statements that Vietnam was “the worst abuser in the trade of everybody” and “fairness in trade with Vietnam may even be less than with China.” Back in 2016, after entering the presidency, Trump made similar complaints, but the contract for Boeing purchases of several billion dollars and the trend to strengthen alliances with China’s neighbours, in the opinion of the Vietnamese authorities, have become a reliable dam protecting the country from criticism of the POTUS. But it was not there. Trump expressed discontent with the explosive growth of Vietnam’s trade surplus with the United States, which in the first five months of this year reached $21.6 billion, almost doubling compared to the same period last year.

    Several sources claim that Vietnam made several promises to Washington related to trade, and Trump’s recent criticism can only accelerate their implementation. For example, the development of a law on the creation of three free economic zones, which, according to fears of local firms, could go under the control of China, was suspended indefinitely, demonstrating to Washington that the trend of rapprochement with a neighbour was interrupted. Nevertheless, Vietnam is also working on a “spare airfield”, having entered into the Trans-Pacific Agreement (from which the United States left) and signed a free trade agreement with the European Union. Together they can mitigate damage from possible US sanctions.

    Thus, the chances of introducing trade tariffs against Vietnam will directly depend on:

    1. Dynamics of transshipment operations, where Vietnam serves as a gasket between China’s exporters and US importers. The lack of repression and conniving routes – loopholes is likely to provoke a new wave of criticism from Trump.
    2. Vietnam surplus with the United States. The main item of US exports to Vietnam is agricultural products (4 billion dollars in 2018). If purchases will grow at a faster pace, it can be assumed that countries have agreed on something.
    3. Cooperation in the military sphere. In terms of concrete numbers, this should be increased purchases of American weapons and equipment. This should be a more reliable signal of preference for cooperation with the United States to balancing between the interests of superpowers (i.e. US and China and probably Russia).
     

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