Friday, 27th of July 2018
It is almost the end of July already. The heat of summer has intensified around the northern hemisphere and it may be what has calmed-down the flow of political tweets. Indeed, all of us have tired of them… Junker visited DC and we were told that Europe and the USA are best friends again, no tariffs nor duties across the puddle. President Trump met with Jean-Claude Juncker, the president of the European Commission, at the White House, the two said they were entering a new phase in their relationship. Crucial to that will be natural gas. Mr. Trump said on Wednesday that the 28-nation European Union would be “a massive buyer of L.N.G.,” before adding, “We have plenty of it.” having the possibility of importing large amounts of L.N.G. from the United States, or indeed elsewhere, eases the risk that Russia could apply a gas chokehold on Europe. (Germany, for example, imports around half of its natural gas from Russia.) Poland and Lithuania, which are especially wary of Moscow, have recently built L.N.G. receiving terminals for this reason. Still, Europe’s dependence on Russia is driven largely by one factor — Russian gas is cheap. Giles Farrer, an analyst at the energy consultancy Wood Mackenzie, points out that the President has tried to use gas to improve the United States’ trade balance in talks with Europe and China. There is a caveat to the euphoria- The United States became a natural gas exporter only recently, as a result of large quantities of the fuel becoming available from shale drilling. As a result, the country has yet to construct the export terminals necessary to sell its gas to customers further afield. The United States is expected to add substantially to this export capacity in the next few years, though.
Equities liked all that. Then, North Korea let us see via satellite images that they are doing something towards dismantling something or other. More “likes” from the markets. These “likes” bring us to Facebook- Facebook missed projections on revenue and global daily active users this quarter after struggling with data leaks and fake news scandals. The company posted its second-quarter earnings after the bell on Wednesday. Shares were down as much as 24% after the report followed by confirmation of the after-hours carnage in the actual trading day on Thursday- The biggest single-day capital erosion ever- The company’s market capitalization fell by $120 billion!!! Wow, scary and makes some analysts wonder about the sanity in all of the ‘FANG stocks’… Well, do look at FB. It did take a huge single day hit, but stabilized back at the levels it was in February… Still up handsomely for the year… And so many others are doing well- Amazon, the second of the FANG, showed us amazing earnings yesterday- $5.07 vs. $2.50 expected. More than double the expected EPS- Again, those analysts… talk of a miss!!!
Goldman Sachs Group Inc. senior investment strategist Abby Joseph Cohen sees pain ahead for bond investors. While the valuation of the S&P 500 index is “okay, not great,” Treasuries have room to fall as the U.S. economy continues to expand through next year, she said in a Bloomberg Television interview Tuesday. Ten-year Treasury yields will climb to 3.6% by the end of 2019, from about 2.96% now, according to Cohen who rose to prominence after predicting the equities bull market of the 1990s. Yields on the global borrowing benchmark were last at the level she’s currently “I’m more concerned about fixed income than equities,” the strategist said. “There’s already been a notable rise in interest rates at the intermediate and long end. I think it will be increasingly difficult for fixed-income investors to do well.” Treasuries have rebounded since 10-year yields hit an almost seven-year high of about 3.13% in May. Meanwhile, the S&P 500 index has risen around 5.7 percent this year, after climbing 19.4% in 2017. Our basic view is still what we thought at the beginning of the year. We see a robust global economy that is delivering growth, employment and rising incomes in most major economies, whether it is the US, Europe, China or other emerging markets. This growth is moderate but sustained and does not look like it is excessive or giving rise to higher inflation.
We are awaiting the US GDP figures for Q2 to be published today. We expect the consensus to be about correct expecting a figure of say 4.5% growth.
Markets could be in panic mode by late next year if the flattening yield curve turns into a full-on inversion, but it won’t turn into a massive sell-off, the head of asset allocation at UBS Asset Management told CNBC. The yield curve, which shows the gap between the interest rate on the two-year Treasury note and the rate on the 10-year U.S. bond, is interpreted by several investors as an indicator of an upcoming recession. As the gap between both yields narrows and the curve flattens, the more the market believes there will be economic turmoil. This becomes a more worrying phenomenon when the yield on the 2-year note becomes higher than the one on the 10-year paper — a phenomenon described as an inversion of the yield curve. This is because it indicates that markets see a higher risk of borrowing money for the short term than at the long term. In a growing and healthy economy, lending at the longer term should be seen as a riskier because it is harder to predict what’s going to happen. The yield curve indicator has caught the attention of investors over the last few weeks given that the line has become flatter. Erin Browne, head of asset allocation at UBS Asset Management, told CNBC last week that the indicator will continue to flatten and invert in late 2019 — causing major stress among market players, who will be wondering whether or not a recession is about to kick in. Morgan Stanley also argued in a note earlier this month that it forecasts the yield curve will invert by the middle of 2019.
Good ‘oh Maggie Thatcher was right when she coined the term “TINA” way back when and for other issues- There Is No Alternative she said… We take her acronym and apply it to our thinking on equities- scary, but possibly less risky than bonds, at this ongoing moment in time. Yes, Facebook scared us all with the huge market-cap loss, but then, look elsewhere, away for the high valuations of the FANGs- Oil-giant Royal Dutch Shell posted a 30% increase in net profit in the second quarter of 2018 and announced a $25 billion share buyback program. We are pleased to say that we had expected the ‘Oil Patch’ to do well and added exposures to it several months ago. With oil at about $70/Bbl of WTI, we are comfortable in holding the sector for some time to come. It also serves as a hedge against a further flare-up in the war of words between the Donald and the Iranian leadership… It is rare to find a hedge that pays you to hold it…
Oh, let’s not forget our friend Draghi at the ECB-The European Central Bank’s interest rate on its main refinancing operations, its marginal lending facility and the deposit facility will remain unchanged at zero, 0.25% and -0.40%, respectively. Draghi told reporters that the euro zone still needs “significant monetary policy stimulus,” despite announcing last month the winding down of its quantitative easing (QE) program. In June, the central bank outlined plans to end its massive bond-buying program in December and hinted that interest rates are likely to remain at current ultra-low levels until, at least, the summer of 2019. Perhaps you should not have heeded the analysts recommending during last year an overweight of Europe in your portfolios…
An interesting ecological observation here- Bees are wasps that went vegetarian. This was a brilliant evolutionary move: they now outnumber wasps by around three to one. Instead of hunting creatures that would rather not be eaten, they turned to living things that offered themselves on a plate. Bees and flowers evolved together in a gorgeous spiral of mutual dependence. Nectar and pollen feed the bees; in return, the plants get to procreate. Some of our politicians ought to read more about nature and interdependence… If you had started to believe that after all, maybe Trump is right in his China bashing, think again- The Chinese yuan is still “fairly valued” despite recent declines against the dollar, said an International Monetary Fund (IMF) official on Friday. Overall, the DXY has been holding steady at 94.66 and our usual risk-measure the VIX has fallen under 12!
For those of you who appreciate solar energy, think of this- When there is a HUGE solar spill, it’s just called a nice day… Looking into a pleasant August.
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