The good news is that global manufacturing output has rebound since this summer: If it lasts through the end of the quarter, it will be the first extended period since 3 years.
Will this finally get the capex cycle moving again is a good question. If not, sub-par growth will continue.
The EU area (Spain might even show some positive growth next year) has met the positive expectations that we hoped for since May.
Japan, after a brief respite, continues to show good performance in the real estate sector (our favorite holding since the beginning of the year) and the latest export numbers are encouraging. China gave us a nice positive surprise with growth of 9.1% q/q. The general view is that this was the consequence of new credit and infrastructure spending that took place at the beginning of the year. Beijing is acutely aware of the leverage in the economy and our guess is, that now that some stability has been found, it will refrain from further stimulus measure.
Unfortunately, none if this is strong enough to get us out the lack of wage and employment growth in the G7. Worse, productivity gains remain dismal. We are still far from a virtuous cycle.
Credit growth continues to be directed at the banks and large corporation.
SME’s, who in Europe have created 85% of jobs since 2000, are conspicuously absent from these hand-outs. Between a stifling regulatory environment and the lack of credit, new business creation remains lackluster. Despite all the talk in the EU of structural reforms of the labor market and help to smaller enterprises, we have seen practically no change in the last five years.
In terms of the stock market, we are now in the S&P 500 at 16X earnings, with little room left for positive surprises in Q4. That is slightly higher than the long term average.
The only thing that is keeping the party going, and a very important one, is the de facto put option that Fed has put on the bond markets (3% on the UST 10 year).
Risk is on, probably until December.
Emerging markets are the first beneficiaries.
Our guess is that EM corporate credit will do well. Bank loan growth continues at the same pace as of the beginning of the year and FX reserve in several EM countries have risen to a new highs after this summer’s dip.
There has been a lot of noise about the USD as a reserve currency and the desire to diversify from it by the large national players (central banks fx reserves and sovereign funds, growing roughly at $1.2 trillion p.a.). It’s a great line, but we doubt there is any real intention behind it. It would be simply too disruptive. In practice J.P. Morgan Research made the point that currently “ US marketable securities held in Fed custody Foreign Official &Intl. Accounts are up by $44bn since the end of July, reversing most of the $50bn decline seen during June and July” . We might add that this weekly data takes into account some fear factor that must have emerged in late September, so that the gap should now be rapidly closed.
Longer term, the data confirms that FX reserve managers will cautiously continue to add gold to their reserves.
Moves are made on the margin. EM equity and bond buying implies selling of USD. We have believed since July that EUR resilience has been due to buying of EU peripheral bonds. If our view is correct the risk-on mode is supportive for the EUR.
The US has no problem with a lower USD, Europe has. A EURUSD at 1.45 would be the worst nightmare of President Draghi as he repeats continually “ risk in the EU remains on the downside”.
A USDJPY at 110 would stretch significantly the energy import bill of Japan (currently consumers energy bill has increased by more than 15% since the beginning of the year) and kill Abenomics, if next year’s hike in the sales tax does not do it.
We believe that there is an understanding among Central bankers, now that the JPY has returned to a more normal valuation, that currency stability inside of a 5% band of the average yearly rate of the major pairs (USD-EUR-JPY) ,is beneficial to all ( EURUSD has fluctuated this year in a band of roughly 6.5%).
Short term we have broken out of the one month (18.09 .13 to 17.10.13) sideway trading range of 1.3475 to 1.3650, but with far less conviction than on September 18th when we broke out of the 1.32-1.34 range. We have been neutral since 3 weeks, waiting for a break out of the channel.
We touched 1.3704 last week, the years high having been on February 1 at 1.3714.
In traditional technical terms, the trends since September is healthy, where new highs were followed by balance areas and previous balance areas were not tested. Given the lack of follow-thought since last week’s move, we would need to see if 1.3620 holds, if not, 1.35, before talking any strong view.
On the other hand, if there is demand above 1.37, we shall have to come to the conclusion that 1.4150 is the next target.
Weekly Pivot on December Futures
PP 1.3625, R1 1.3770, R2 1.3850, R3 1.4080
S1 1.3545, S2 1.3398, S3 1.3170