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Europe and Tech Lift Risk Appetites

Europe and Tech Lift Risk Appetites

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3 years ago

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Overview: The continued domination of the tech sector and Europe's tentative agreement is lifting equities and risk assets more generally today.  Australia and Hong Kong's 2.3%-2.5% rally led Asia Pacific markets.  The Dow Jones Stoxx 600 is higher for a third session and above its 200-day moving average for the first time since February.  The Dax is turning positive on the year.  The S&P 500 did so yesterday, though nearly 2/3 (320 companies) remain lower on the year. The S&P 500 is set to gap higher and is likely to move into the old gap (February) between roughly 3260 and 3328.5.  The European peripheral yields are falling by a couple of basis points, and Italy's two-year yield is below zero for the first time in five months.  Core yields are little changed, as is the US 10-year benchmark (~61 bp).  The dollar is mostly lower, led by the Australian and Canadian dollar and the Scandis.  The euro, yen, and Swiss franc are hovering around little changed levels.  Most emerging market currencies are stronger, led by the liquid and accessible currencies, like Russia, South Africa, and Mexico.  The Chinese yuan, alongside the Singapore dollar, slipped lower.  Gold has made a new multiyear high near $1825, and crude oil is firm, with the September WTI contract near recent highs around $41.50.  A gap we have targeted extends toward $42.50.  

Asia Pacific

Japan's June CPI readings were largely in line with expectations.  Headline inflation was steady, rising by 0.1% over the past year.  However, the core rate, which excludes fresh food, ticked up to zero from minus 0.2%.  This is a touch stronger than expected. It is the first time in three months, the core rate is not below zero.  When fresh food and energy are excluded, June prices rose by 0.4%, the same as in May.  Phone services and durable goods prices rose.  It is not a gamechanger. Last week, the BOJ forecast inflation would fall by an average of 0.5% this fiscal year.  Energy prices stabilized.  Gasoline, for example, fell 12.2% year-over-year after falling nearly 16.5% in May.  

South Korea's trade figures for the first 20-days June were weaker than expected, and are seen as a cautionary bellwether for the region.  Exports fell by 12.8% year-over-year, after falling 10.9% in May.  It was partly distorted by the number of business days, and when adjusted accordingly, exports fell 7.1%.  Imports fell 13.7% after falling 11.2% in May.  Semiconductor chip exports were off 1.7%.  In June, they were flat.  The exports of computer peripherals rose by almost 57%. On the other hand, the import of semiconductor fabrication equipment rose more than 131% from a year ago after a 140% rise in June and a 168% increase in May as new investment takes place.   Of note, shipments to China fell by 0.8% year-over-year after increasing 9.5% in June.  Exports to the US, Europe, and Japan are still falling on a year-over-year basis, but the pace has slowed. 

The dollar is in a quarter of a yen range in the first half of today's 24-hour session below JPY107.40. It is the fourth session that the greenback is recording higher lower.  There are options for $1.1 bln that expire today between JPY107.30 and JPY107.35.  There is another set at JPY107.55 for nearly $450 mln.  The Australian dollar is moving higher for the third consecutive session and is trying to solidify a foothold above $0.7000.  The next immediate target is the post-crash high set last month, a little below $0.7065.  The intraday technicals are stretched in the European morning.  The PBOC's reference rate for the dollar of CNY6.9862 was a little weaker than the models suggested.  China's money market rates have fallen in recent days, and the 10-year yield fell three basis points to 2.91%, the lowest in a couple of weeks.   

Europe

Initially, Merkel and Macron proposed 500 bln euros in grants as the core of the Recovery Plan, and that apparently has been negotiated down to 390 bln and 360 bln in low-interest loans.  The rhetoric got brutal as Dutch Prime Minister Rutte, whose party has only half the seats in Parliament and hence in a vulnerable political position, was accused of blackmail.  European Council President Michel may have found a compromise with a handful of creditors, in part by granting nearly 53 bln euros in rebates (to Denmark, Germany, Netherlands, Austria, and Sweden).  Hungary appears to have secured a dilution of the "rule of law" conditionality, and the Article 7 procedures against it will be closed by the end of the year, according to reports. This may prove to be controversial for the European Parliament that also must approve the agreement.  Michel's compromise also includes some conditionality and a mechanism for qualified majority voting that dilutes the veto of the unanimity requirement. The newest proposal will be cast as more friendly for the creditor countries, it also injects more Europe into the Recovery Plan as well. Separately, EC is proposing to put a level on imports of goods from countries that have lower carbon emission standards than it does. 

The eurozone reported an 8 bln euro current account surplus for May.  In May 2019, its current account surplus was 23.3 bln euros.  In the first five months of 2020, the eurozone current account surplus has averaged 14.3 bln euros compared with 26.3 bln in the first five months of 2019.  Despite the falling external surplus, the euro is rising for the third consecutive month.  It is within striking distance (though probably not today) of the year's high a touch below $1.15.  The next target is last year's high set near $1.1570.  

The UK reported a June budget shortfall of GBP35.5 bln, which brings the deficit in the first three months of the new fiscal year to almost GBP128 bln.  That is a little more than double the deficit of the previous fiscal year.  The government is spending and cutting taxes by GBP190 bln to help cope with the pandemic.  A deficit of GBP370 is projected this fiscal year or around 19% of GDP.  Meanwhile, the Bank of England has purposefully not rejected a sub-zero base rate, and the yield curve is negative out seven years.  

The euro reached $1.1470 in Asia but has not been able to sustain the momentum.  There is an option for 650 mln euros at $1.15 that will be cut today.  It has found support near $1.1430 in the European morning—yesterday's low a hair above $1.1400.  A close below $1.1420 would be disappointing and would be the first close below the five-day moving average in nearly two weeks.  Note that an option for 1.3 bln euros at $1.1450 expires tomorrow.  Sterling rose above $1.27 for the first time in more than a month and briefly traded above its 200-day moving average (~$1.2705).  Here too, the early momentum could not be sustained, and sterling is consolidating in the European morning.  Initial support is seen near $1.2650.  After reaching almost GBP0.9140, a new high for July, the euro reversed course and settled below the pre-weekend low.  Follow-through selling today has seen the euro test GBP0.9000.  Last week's low was near GBP0.8945.  

America

The Trump Administration has two targets in mind with the sanctions and tariffs on China.  Of course, in the first instance, it wants China to change its behavior.  However, often overlooked is that it wants companies to change their behavior as well.  US Attorney General Barr was as explicit as any official has been:  Apple, Disney, and other companies are pawns of China.  Eleven more Chinese companies were put on the entity list for aiding human rights abuses.  Two of the companies claim to have previously supplied product for Apple and several popular clothing labels. It raises questions about the resilience of supply chains in China.  At the same time, last week,  Luxshare bought a couple of Wistron factories that assemble iPhones in China.  Apple now has a local partner.  Taiwanese companies appear to have a two-prong strategy to compete:  exit low margin-business and develop production facilities in India.

A Republican Senator from Louisana (Kennedy) has said he will support Shelton's controversial nomination to the Federal Reserve at the Senate Banking Committee today.  All 13 Republican Senators on the committee must approve her to take the vote to the entire Senate.  The other nominee Waller is considerably less controversial and will easily be approved. Separately, even though the Republicans have not entirely sorted out its fiscal stance, negotiations between Treasury Secretary Mnuchin and House leader Pelosi are set to get underway today.  There seem to be three key issues for Mnuchin: A payroll saving tax cut (strongly favored by the President), limiting the liability of businesses re-opening, and not a renewal of the $600 a week in federal unemployment assistance.   

Canada reports May retail sales today.  A sharp jump (~20%) is expected after a 26.4% plunge in May.  Canada will report June CPI figures tomorrow.  While the headline has been weak due to energy prices, among others, the underlying measures have held up considerably better.  Mexico reports May retail sales tomorrow.  A modest 3% rise is expected after tumbling 22.4% in April. 

The US dollar has pushed below the CAD1.35 support area, which also houses the 200-day moving average. It is testing the recent low near CAD1.3485 after posting an outside down day yesterday.  The June low would be the next obvious target, set near CAD1.3315.   The intraday technicals are stretched, suggesting that North American operators may have difficulty sustaining a significant range-extension now.  The greenback reversed lower against the Mexican peso yesterday as well.  Some follow-through selling has pushed it to around MXN22.3850 today (~MXN22.7650 was yesterday's high).  Support is seen near MXN22.25 and then MXN22.15.    






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iPhone Maker Foxconn Investigated By Chinese Authorities

Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple…

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October 23, 2023

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Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple media reports. Foxconn’s business has been searched by Chinese authorities and China’s main tax authority has conducted inspections of Foxconn’s manufacturing operations in the Chinese provinces of Guangdong and Jiangsu. At the same time, China’s natural-resources department has begun onsite investigations into Foxconn’s land use in Henan and Hubei provinces within China. Foxconn has manufacturing facilities focused on Apple products in three of the Chinese provinces where authorities are carrying out searches. While headquartered in Taiwan, Foxconn has a huge manufacturing presence in China and is a large employer in the nation of 1.4 billion people. The investigations suggest that China is ramping up pressure on the company as Foxconn considers major investments in India, and as presidential elections approach in Taiwan. Foxconn founder Terry Gou said in August of this year that he intends to run for the Taiwanese presidency. He has resigned from the company’s board of directors but continues to hold a 12.5% stake in the company. Gou is currently in fourth place in the polls ahead of the election that is scheduled to be held in January 2024. The potential impact on Apple and its iPhone manufacturing comes amid rising political tensions between politicians in Washington, D.C. and Beijing. Apple’s stock has risen 16% over the last 12 months and currently trades at $172.88 U.S. per share.  

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Tesla stock hits 4-month low as DoJ range probe adds to list of concerns

Tesla said the DoJ is looking into claims about vehicle driving range, add to a growing list of investor concerns for the clean energy carmaker.

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2 hours ago

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October 23, 2023

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Tesla  (TSLA) - Get Free Report shares moved lower Monday, sending the stock to a fresh four-month low, as a Department of Justice probe into the carmaker's claims over driving range, as well as expanded spending plans, added to a growing list of investor concerns. Tesla said Monday that the DoJ has requested documents related to the group's autopilot system, as well as "certain matters associated with personal benefits, related parties, vehicle range and personnel decisions". The group also said its 2023 capital spending will likely top its previous estimate of between $7 billion and $9 billion, as it ramps-up production of key models, including the Cybertruck, while expanding its new facilities in Germany and Texas. "Our capital expenditures are typically difficult to project beyond the short-term given the number and breadth of our core projects at any given time, and may further be impacted by uncertainties in future global market conditions," Tesla said in a Securities and Exchange Commission filing. "We are simultaneously ramping new products, building or ramping manufacturing facilities on three continents, piloting the development and manufacture of new battery cell technologies, expanding our Supercharger network and investing in autonomy and other artificial intelligence enabled training and product," the filing noted. Tesla shares were last marked 1.4% lower in early Monday trading to change hands at $209.23 each, after hitting a four-month low of $202.51 earlier in the session. Last week, CEO Elon Musk cautioned that its Cybertruck will likely weigh on cash flows over the coming year as it accelerates production of the long-awaited flagship in an unusually cautious update that followed disappointing third quarter earnings. Musk noted that "stormy' economic conditions, rising interest rates and uncertain demand have clouded the group's near-term outlook and appeared to back away from the company's stated goal of growing overall deliveries by 50% each year. Tesla did, however, reiterate its 2023 delivery target of 1.8 million vehicles – which will require a fourth quarter tally of around 477,000 to achieve – following a muted September quarter. Tesla's third quarter profits were down 37% from last year to 66 cents per share, even as revenues jumped 9.1% to $23.4 billion, thanks in part to a series of price cuts in key markets aimed at expanding the group's market share. Adjusted automotive margins were 16.1%, Tesla said, well south of the 18.7% figure recorded over the first quarter and last year's second quarter tally of 23.2% following a series of price cuts in its biggest global markets. Gross margins were 17.9%, down from 25.1% over the same period last year and the 18.2% figure recorded over the second quarter. Wall Street forecasts hovered between 17.8% and 18.2%. Musk also suggested the group could delay plans to launch its latest 'gigafactory' in Mexico, citing both the growing global economic uncertainty and the relentless rise in U.S. interest rates. "I think we want to just get a sense for the global economy is like before we go full tilt on the Mexico factory," Musk told investors last week. "If interest rates remain high or if they go even higher, it's that much harder for people to buy the car. They simply can't afford it."
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A further examination of the state of the economic tailwind

  – by New Deal democratWith no big economic news today, I thought I would pick up where I left off Friday, when I identified three major reasons for…

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October 23, 2023

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- by New Deal democrat   With no big economic news today, I thought I would pick up where I left off Friday, when I identified three major reasons for the economic tailwind that prevented a recession from happening in the past 12 months.
1. Commodity prices generally and gas prices specifically
I am beginning to think that all economic forecasts should come with an open caveat on the order of “subject to the trend in gas prices, which are set by a few geopolitical actors.” Certainly that was the case in 2022, when the War in Ukraine drove prices skyward, and then they fell back to ground as Europe in particular dealt with their reliance on Russian fuel.
This year prices rose as the economy strengthened, but they have fallen again in the past month, and averaged $3.50/gallon when I pulled this graph this morning, which is about -8% lower than 1 year ago:
 
Historically gas prices have a complex relationship with the economy. As shown in the graph below, gas prices averaged quarterly have a broad positive correlation with real GDP for the same quarter:
 
Which is another way of saying that large moves in gas prices affect the economy almost immediately (as in, “the remedy for high prices, is high prices.”)
But note the exceptions of 2006 and 2016. In both cases gas prices retreated sharply, even as an expansion continued (first due to the ebbing effects of Katrina, the second due to the success of fracking production in the US). A similar situation appears to be playing out in the past 12 months, where a big YoY decline in gas prices has been driving a sharp increase in GDP (which is expected to continue in the Q3 report this Thursday).
I also track industrial metals, which exclude the direct inclusion of energy prices. These also declined sharply this year. They appeared to be stabilizing, but in the past month have declined to new 12 month lows:
 
This may be traders’ reaction to the Israel/Gaza situation. But it may also have to do with continued weakness in China. So the commodity tailwind may be starting up again.
2. The slowdown in China
Below is a graph of imports to and exports from China measured YoY:
 
While I take all statistics about China with multiple grains of salt, if I saw this chart coming out of any transparent economy, I would treat it as recessionary. And because China is such a huge consumer of raw materials, I would treat it as placing further deflationary pressure on commodities, which we may be seeing with industrial metals in the past few weeks in the graph above.
3. Pandemic disruptions in the supply chains for houses and motor vehicles
As I have noted many times, mortgage interest rates lead sales. With mortgage rates having hit 8% last week, let’s update the YoY graph of rates (inverted,*10 for scale) vs. housing permits:
One year ago mortgage rates hit 7%. But then they declined to 6% in the spring before rising to new highs more recently. So we cannot project current rates forward. But *IF* this uptrend in rates does not promptly reverse, then it is likely that permits will decline to new cycle lows below 1.350 million annualized, shown in the below graph of absolute mortgage interest rates and permits:
 
In fact, with interest rates about 10% higher (7%*1.10) than they were last year, a decline during winter to 10% below 1.350 million, or about 1.225 million, is possible.
And sooner or later, the big downturn in permits and starts is going to catch up with housing units under construction, which as I noted Friday are only down 2% so far.
The situation is much less clear when it comes to motor vehicles.
This past spring SP Global wrote:
“S&P Global Mobility estimates that in 2021 more than 9.5 million units of global light-vehicle production was lost as a direct result of a lack of necessary semiconductors, with the third quarter of 2021 experiencing the largest impact with an estimated volume loss of 3.5 million units. Another 3 million units were impacted in 2022.
“During the first half of 2023, however, losses identifiable as specifically related to the semiconductor shortage fell to about 524,000 units globally.”
They also supply the following graph comparing backlogs in chip shipments compared with normal (normal=1):
At that time, the backlog was still about 3X the usual pre-pandemic time.
“Car manufacturers are struggling to keep up with the demand for new vehicles, as the shortage of chips has resulted in a shortage of critical components needed for production. It has also led to higher car prices as manufacturers pass on the additional costs to consumers.”
“Overall, the auto industry stocked 60 days’ worth of vehicles at the beginning of October. That’s considered a normal supply of inventory by historical standards, and it’s also the highest since early spring 2021”
But needless to say, it varies considerably with the popularity (or lack thereof) of the vehicles being sold:
“brands like Dodge, Chrysler, Lincoln, Infiniti, Volvo, Ram, Jeep, and Mini offer plenty of new vehicle stock. In contrast, inventory levels still sit well under normal for Honda, Toyota, Kia, Subaru, Lexus, Cadillac, Land Rover, and Hyundai.”
To summarize the situation with motor vehicles, the chip shortage itself may be mainly over, but there is roughly 10,000,000 vehicles worth of pent-up demand that is far from being addressed. The net result for now is that vehicle prices have reached a new, stratospheric equilibrium, that is also constraining sales from satisfying that pent-up demand.

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