Thought For A Day
Archives of “April 2019” month
rssThree reasons why this yield curve inversion is different
JPMorgan on why equities aren’t at risk
The inversion of the yield curve has been the preoccupation of markets in the past few weeks but the equity market has gone on to hit five-month highs after an initial hiccup.
JPMorgan equity analysts are that there are some clear reasons why the inverted yield curve signal might not be saying all that much about economic prospects.
1) Typically, an inverted yield curve would indicate that monetary conditions have tightened significantly. Real rates would be elevated and the availability of credit would start worsening, with widening credit spreads and deteriorating bank lending surveys. This time around the key indicators of monetary conditions do not appear tight, despite the inversion. Current real rates are near zero, when they averaged 3% at the point of the past 6 inversions. HY credit spreads are only 80bp off the cycle lows, when they are usually 300-400bp wider ahead of the economic downturns. Banks are very well capitalized currently, having deleveraged over the past 10 years, and stand ready to keep extending credit.2) The curve inversion might be saying more about the global growth decoupling and the desynchronized nature of monetary policy, rather than be an ominous sign for future US growth. The current spread between the US and German 10 year bond yield at 250bp isat the 30 year highs, which could be anchoring long US yields to some extent.3) Finally, as the term premia is outright negative the current inverted curve might be saying more about subdued inflation expectations than about growth prospects. This is where some repricing could materialize, especially if our repeat-of-2016 call gains further traction. We stay constructive on equities given the China turn, dovish Fed, potential USD peak, pivot away from trade uncertainty and likely bottoming out in inflation expectations.
European major indices mostly lower to start the week
UK FTSE near unchanged. German Dax -0.49%
The major European indices are mostly lower to start the week.
The provisional numbers are showing:
- Gernan Dax, -0.49%
- France’s CAC, -0.18%
- UK FTSE, -0.07%
- Spain’s Ibex -0.43%
- Italy’s FTSE MIB, +0.06%
The 10 year benchmark yields are mostly lower with the Italian yields bucking the trend (+0.7 bps). Below is a review of the highs and lows and change for the day.
The snapshot of the strongest and weakest as London/European traders look to exit is showing the CAD is the strongest, while the USD and the GBP are tied for the weakest.
US factory orders for February -0.5% versus -0.5% expectations
Prior month +0.1%
- prior report
- durable goods orders -1.6% versus -1.6% preliminary
- factory orders ex transportation 0.3% versus -0.1% last month (revised from -0.2%)
- durable goods ex transportation -0.1% versus +0.1% preliminary
- capital goods orders nondefense ex-air -0.1% versus -0.1% preliminary
- capital goods shipments nondefense ex-air -0.1% versus 0.0% preliminary
- inventories rise 0.3%
- shipments up 0.4%
- inventory shipments 1.36 versus 1.36 last month
Looking at the trends in Factory Orders, in December there was a small 0.1% increase, but has been 0.0 or negative (-2.1% was the low point) since October.
USDCAD moves to new session low
Falls below the 200 hour MA
The USDCAD has moved to a new session low after cracking below its 200 hour MA. That MA stalled at the 200 hour MA on Friday and again today.
The 100 hour MA (blue line) is at 1.33507 and is the next target. The 50% is at 1.33488 and is another target to get through.
Tesla CDS Upfront & Default Probability
Russia’s Dmitriev: OPEC+ could decide to raise oil output at June meeting
Russia and Saudi Arabia are shooting from two different angles
- Market situation is improving, stocks are falling though
- Output increase would not mean end of OPEC+ oil market coordination
Kirill Dmitriev is one of the main architects of Russia’s agreement with OPEC, so for him to come out and say this it could have some weight on the discussion in May/June. Do take note that his previous stance was that it was too early to comment on exiting production cuts, whereas now he’s talking about increasing production instead.
As mentioned earlier, Russia basically only has one foot in the circle when it comes to working with OPEC at the moment so it’s not too surprising to see them to make such remarks. But it isn’t going to be something that oil prices will like if such sentiment starts to gain more traction in the coming weeks.
Saudi oil minister says OPEC+ commitment to reducing inventories remain unchanged
Comments by Saudi oil minister, Khalid Al-Falih
- Venezuela, Iran sanctions waivers have an impact on markets
- OPEC+ to hold ‘key meeting’ in May
- Premature to say that OPEC+ has consensus to extend output cuts
As the April meeting has been cancelled, OPEC+ will be hosting its next JMMC meeting in May and will be discussing on whether or not to extend output cuts beyond the summer. With Russia only having one foot in the circle, I wouldn’t be surprised if they do reach a deal to extend said cuts until the end of the year.
Oil remains buoyed on the day, with Brent rising comfortably above the $70 handle at the moment following tensions seen in Libya.
Eurostoxx futures -0.4% in early European trading
Softer tones observed in early trades
- German DAX futures -0.6%
- French CAC 40 futures -0.2%
- UK FTSE futures -0.4%
This very much keeps in tune with the way risk sentiment has been having in the latter hours of Asian trading. The softer tone here is continuing to keep the likes of the yen slightly underpinned to start the European morning.
US equity futures are also still trading lower, down by 0.2% at the moment:
Nikkei 225 closes lower by 0.21% at 21,761.65
Tokyo’s main index closes slightly lower in sluggish session for Asian equities
The index gets rejected by the 200-day moving average (blue line) as stocks retreated following gains seen earlier in the Asian morning. Risk sentiment is looking a bit jittery as markets hit the reset button after a more solid performance in Wall Street last Friday.
The softer risk tones is helping to keep the yen on the front foot as we begin the European morning. USD/JPY holds near the lows for the day still at 111.42 currently.