Five markets charts that matter for investors
The euro, S&P 500, mutual fund managers, central banks and frontier markets in focus
by: FT Reporters
Here is a selection of five charts that FT Markets believes are worth watching.
1. A bullish propellant for the euro
Hedge funds have cut their bearish bets on the euro to the lowest level in three years, with the common currency on track for its second straight month of 2 per cent plus returns against the dollar. Investors are now questioning if that will provide additional ballast to the euro.
The shift in sentiment by leveraged funds, a proxy for hedge funds, follows Emmanuel Macron’s sweeping victory in the French presidential election as well as quickening economic activity across the continent. Large net short bets have been reduced, and shorts now outnumber long positions by 5,342 contracts, according to the latest data from the Commodity Futures Trading Commission. That figure eclipsed 155,000 in November.
Despite the swing in futures positioning, investors and strategists are already drumming up a list of potential weights on the euro. That includes the next populist test in the continent, after former Italian prime minister Matteo Renzi signalled he favoured an early election this year.
2. S&P 500 v Citi economic surprise index
Confounded by the string of record highs by the S&P 500 despite lacklustre economic data over the past several months in the US? You’re not alone.
Peter Tchir, an analyst at Brean Capital, argues it is a phenomenon that “deserves some attention”. Economic data have broadly fallen short of forecasts over the past month, according to a closely followed barometer produced by Citi. What’s more, investors have dialled back their optimism that economic policies championed by the Trump administration will become law this year.
Nonetheless, the S&P 500 has set 20 closing highs this year. Investors point to faster than expected earnings growth in the first quarter. The advance has been fuelled by the ascent of some of the index’s largest members, many of which are in the technology sector. Portfolio managers have looked to the industry with the expectation that it will be able to deliver growth even if broader economic output decelerates.
More defensive parts of the market have also outperformed the S&P 500 since March 15, with utilities, consumer staples and real estate companies all advancing.
3. Mutual fund managers finally have something to brag about
Mutual fund managers facing mounting competition from passive investment products amid years of underperformance finally have something to brag about.
Goldman Sachs research shows that 52 per cent of funds that focus on large-cap stocks have beaten their benchmarks since the start of 2017. If the trend held steady, it would mark the first time the hit rate has exceeded 50 per cent since 2009.
The brightening performance, which would represent a sharp uptick from the grim 19 per cent hit rate notched up last year, has come as managers have placed bets on the technology, consumer discretionary and healthcare sectors. The trio represent the top-performing S&P 500 sectors this year, with price returns of 20.1 per cent, 11.5 per cent, and 9.7 per cent, respectively.
Growth funds have posted particularly strong gains, with the average fund up 12.5 per cent year-to-date, compared with a 2.4 per cent advance for value funds.
4. Central banks keep expanding their balance sheets
Investors are becoming a lot more focused on the prospects for tighter policy by global central banks.
The Federal Reserve is expected to nudge borrowing costs higher next month and is looking at winding down its $4tn balance sheet this year. The European Central Bank has begun a taper of its purchases with monthly bond buying dropping by one-quarter to €60bn.
Still, as this chart shows, the overall size of central bank support for asset prices remains hefty and helps explain the resilience of equities. Jack Ablin, at BMO Capital Markets notes: ‘’Valuations are stretched but equity markets continue to enjoy a continuous flood of liquidity from the world’s central banks and sidelined investors. Central banks purchased $1.8tn over the past 12 months. The Fed is reinvesting more than $30bn each month even though they stopped growing their balance sheet in 2014.’’
5. Frontier markets are still unloved
Plenty of money has pursued emerging markets this year, not so the outer realm of the investing universe. Flows into frontier markets — countries whose markets are considered too small or illiquid to be included in MSCI’s flagship EM Index, such as Argentina, Kuwait, Pakistan, Vietnam, Morocco and Nigeria — remain negative. Much may depend on perceptions of Africa, a large slice of the frontier world, particularly with Pakistan being promoted to emerging market status by MSCI in June and expectations that Argentina could follow suit in 2018.
FIVE MARKETS CHARTS THAT MATTER FOR INVESTORS / THE FINANCIAL TIMES
ASSUME THE BRACE POSITION / JOHN MAULDIN´S OUTSIDE THE BOX NEWSLETTER
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Position
EXECUTIVES TAKE A QUIET TURN AWAY FROM GLOBALIZATION / THE FINANCIAL TIMES COMMENT & ANALYSIS
Executives take a quiet turn away from globalisation
Trump’s ‘America First’ rhetoric plays into a trend that was already under way
by: Gillian Tett
A company such as 3M, the American manufacturing powerhouse, seemed until recently a beacon of globalisation. It sells the Post-it note and other famous products all over the world. Indeed 60 per cent of its $30bn revenues, and 40 per cent of its workforce, sit outside American shores.
But here is a curious thing: if you ask Inge Thulin, the Swedish-born chief executive of 3M, to describe corporate strategy these days, he does not speak of globalisation. Instead, he prefers to talk about “localisation” — and the benefits of operating in the mighty US of A.}
“We employ 20,000 people in manufacturing in America and we have expanded this by 10 per cent in the last five years,” he told me last month at the Council on Foreign Relations in New York. “Our strategy has changed. If you go back [several] years, there was a strategy of producing at huge facilities at certain places around the world, and shipping it to other countries. But now we have a strategy of localisation and regionalisation. We think you should invest in your domestic market as much as you can.”
This is a thought-provoking statement, not least because I have heard several other executives echo it in private. For the past three decades western multinationals have been outsourcing production to low-cost places such as China, creating global supply chains. But today, instead of celebrating “free” trade, American executives are calling for “fair” trade, along with “reciprocity” and “equalisation” of trade deals. This is a euphemism for better terms for US companies.
“What is new today, is the conversation [about trade],” Andrew Liveris, chief executive of Dow Chemical recently observed. “[American companies] have not had fair access to many markets for a while. We got used to that . . . but not any more.” Or as Mr Thulin says: “Things like Nafta are working well, but it can be improved . . . what we want is fair trade.”
Does this simply reflect the new mood music in the White House? Yes, in some respects. Business leaders are trying to ingratiate themselves with the White House (and avoid any tweet attacks) by aligning themselves with President Donald Trump’s “Make America great again” rhetoric.
Many also genuinely welcome Mr Trump’s economic reform pledges. Indeed, five months after the inauguration, executives’ support for the president still seems strikingly high, regardless of the endless scandals around the White House or this week’s furore about the Paris climate change accord. “President Trump is pro-growth and very engaged — this is good from the perspective of doing business in the United States,” argues Mr Thulin, once again evoking sentiments I have heard other chief executives toss around.
But there is a further crucial factor behind this linguistic shift: when Mr Trump started talking about restoring US manufacturing last year, he was not swimming against the tide. On the contrary, he tapped into a subtle trend that was already emerging.
To understand this, take a look at a survey of US companies conducted by Boston Consulting Group. This survey showed until recently that American companies were busy building cross-border supply chains: in 2012, 30 per cent said China was the most likely destination for US company investment. But in 2015, BCG found a shift had occurred: 31 per cent of companies planned to boost production in America, but only 20 per cent said the same about China.
One reason for this shift is a rise in relative wage costs in China. Another is that production costs in the US have fallen because of automation and cheap energy. However, a third point is that chief executives have realised that long supply chains create political and logistical risks. “The days of outsourcing are declining,” Jeff Immelt, General Electric chief executive, observed late last year. “Chasing the lowest labour costs is yesterday’s model.”
Now, this does not mean people such as Mr Thulin, Mr Liveris or Mr Immelt are turning their back on the globe; in a world of “localisation”, there is still incentive to keep overseas production serving overseas markets. Nor should anybody overstate the speed of this shift: it is subtle and slow.
But the main point is this: even before Mr Trump arrived in office, the C-suite was losing its blind faith in globalisation. For better or worse, we face a more localised world. And that trend owes as much to robots and digital technologies as any political firebrand — and will probably outlast any president, too.
CHINA´S DEBT PROBLEM MOVES BACK TO THE FUTURE / THE WALL STREET JOURNAL
China’s Debt Problem Moves Back to the Future
The lack of a 2013-style credit crunch following the crackdown on bonds doesn’t mean all is well for China’s corporate debtors
The Chinese bond market is dead. Long live China’s shadow banks.
Beijing’s full-frontal assault on financial market leverage this spring has driven bond yields skyward, but hasn’t sparked the systemic credit crunch that many feared. That doesn’t mean the risks have disappeared: cash-strapped firms have avoided more defaults by skulking back to high-interest shadow lenders instead.
With industrial profits up 14% on the year in the first quarter, firms can probably afford to pay up for expensive loans from sources other than banks and the bond market for now. But forcing firms to refinance at exorbitant rates—and without the real, albeit limited, market discipline of China’s bond market—is storing up trouble for the future. And foreign investors eyeing Chinese bonds through the brand new Hong Kong bond connect should be wary of taking the plunge: Corporate debt might look like a bargain now, but firms are mostly shifting risks around rather than eliminating them.
Back in the days before China’s bond market took off, hard-up corporate borrowers used to rely heavily on nonbank lenders like trusts, which sell retail investment products and channel the proceeds into high-interest loans. High-profile repayment problems triggered a crackdown on these trusts in 2013 and 2014, which helped push marginal borrowers into China’s nascent corporate-bond market instead.
Now, as regulators have become increasingly concerned about leveraged bets on bonds, that process has moved into reverse. Corporate-bond debt rose 30% from early 2015 to mid-2016, but issuance is now in free fall: Debt outstanding fell 58 billion yuan ($8.5 billion) in the first quarter of 2017. Meanwhile, trust lending, which had almost ground to a halt by mid-2015, has roared back: It rose nearly 700 billion yuan ($103 billion) in the first quarter alone. Other forms of shadow bank lending, including direct company-to-company loans, have also staged sharp recoveries as the bond market has withered.
The good news is that all this shadowy lending has helped avoid a full-scale credit crunch. The bad news is that shadow finance is expensive, and often lacks proper risk-control mechanisms.
AA-rated corporates, which in February could issue two-year bonds with a yield to maturity as low as 4.6%, now must choose between bonds paying 6%—if they can find buyers at all given the current scrutiny—or trust loans at 7% or higher.
China’s economy remains in decent shape for now—and policy makers are unlikely to tolerate a sharp slowdown ahead of a critical Communist Party meeting this fall where the next generation of leadership will be chosen. But the attack on rising near-term risks in the bond market—while permitting a big rotation back into the shadowy world of trust lending—looks a lot like sacrificing much needed long-term moves toward better pricing of risk in exchange for short-term stability.
And it also begs the question: Once the party conclave is finished this fall, what happens next?
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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