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New Day, Same as the Old Day

Overview:  It is a new day, but with the continued rise in interest rates and weaker equities, it feels like yesterday.  Only China and Hong Kong among…

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Overview:  It is a new day, but with the continued rise in interest rates and weaker equities, it feels like yesterday.  Only China and Hong Kong among the major markets in Asia Pacific resisted the pull lower.  Europe's Stoxx 600 is off by more than 0.5% led by health care and real estate. It is the fourth loss in five sessions and brings the benchmark to its lowest level since March 18.  US futures are flattish.  Yesterday, the NASDAQ fell by more than 2% for the third session in the past five.  The US 2- and 10-year yields are firm at 2.52% and 2.79%, respectively.  European benchmark 10-year rates are up 1-2p.  The 10-year JGB yield is drawing closer to the 0.25% cap.  The greenback continues to draw support from the higher rates.  Today, the Australian and New Zealand dollars are resisting.  The Swiss franc and Canadian dollar  are the weakest.  Among emerging markets, the Mexican peso is faring best, up around 0.4%.  Gold is firm and straddling yesterday’s $1953.50 close. June WTI is jumping back after falling to $92.60 yesterday, its lowest level since March 17, to recoup most of yesterday's nearly 4% decline.  Europe may be moving toward a ban on Russian oil imports, but a decision is not likely until next month at the earliest and may phase it in over several months.  US natgas is rising another 1.2% after surging 5.8% yesterday.  It was the third session in five that it rose more than 5%.  Europe's natgas benchmark is snapping a three-day drop (~-5.6%) and recouping 1.25%.  Iron ore is up 2.5%, its first gain in six sessions.  May copper is recovering about half of yesterday's 1.9% decline.  July wheat is rising for a third session.  It is up almost 3% after rising more than 6% over the past two sessions.  

Asia Pacific

Despite the economic costs, Beijing is maintaining its zero-Covid policy.  The disruption is weighing on metals and oil prices.  However, the economic squeeze may encourage officials to ease efforts to restructure other parts of the economy.  This may have been behind the decision to approve the first new video games since last July.  China's National Press and Publication Administration published a list of 45 new titles on its website late yesterday.  Recall that last August, Chinese regulators introduced measures to cap the playing time for minors.

China's Huawei has reportedly furloughed its Russian staff for at least the next month.  It suspended new orders.  It wants to avoid secondary sanctions from the US.  Similarly, Ericsson made a similar decision, suspending its business and putting its local employees on paid leave.  While there may be attempts to find a workaround, these kind actions illustrate the power of the threat of secondary sanctions and will have impact over time.  At first, inventories will be drawn down, but in a few months, the shortages will become more apparent. 

Japan's Finance Minister Suzuki stepped up his warning about yen weakness, saying that officials are closing monitoring the foreign exchange market, "including the recent depreciation of the yen with a sense of vigilance." It produced a small pullback in the dollar, which remains firm, though just shy of the 2015 high (~JPY125.85). With today's move, the greenback has extended its rally for the eighth consecutive session.  A convincing break of that old high, and the next important chart area is around JPY130.  The Australian dollar found support at $0.7400 is posting minor gains for the first time since last Tuesday.  Still, the upticks look vulnerable and may not be sustained after running into offers near $0.7440.  A break of the $0.7400 area could spur another leg down toward $0.7320.  Note that there is an option at $0.7400 for about A$726 mln that expires today. The US dollar is little changed against the Chinese yuan near CNY6.3700.   It has been confined to yesterday's ranges in quiet turnover.  The PBOC set the dollar's reference rate at CNY6.3795.  The median projection (Bloomberg survey) was for CNY6.3775.  

Europe

The UK employment data were mixed.  Jobless claims fell 47k in March after a revised 58k decline in February (initially -48k), and the ILO measure of unemployment slipped to 3.8% from 3.9%. Average weekly earnings rose as expected 5.4% (from 4.8%) in the three-months year-over-year measure including bonus payments, and 4.0% (from 3.8%) without.  However, job growth itself disappointed.  Payrolls gained 35k employees.  The median forecast from the Bloomberg survey called for a gain of 125k.  Moreover, the 275k increase reported in February was cut to 174k. The employment change (3-month-over-three months) was expected to be 52k in February but instead was a modest 10k.  A month ago, the swaps market was pricing in more than 50 bp hike next month.  It is now less than a 15% chance of a 50 bp move.  That is ahead of tomorrow's March CPI figures.  CPIH, which includes homeowner costs, is expected to have accelerated toward 5.9% from 5.5%.  

Germany's ZEW investor survey was poor, but not quite as bad as the median guesstimates in Bloomberg's survey.  The assessment of the current situation deteriorated to -30.8 from -31.4. It is the weakest since last May.  The deterioration pre-dates Russia's invasion of Ukraine.  The expectations component also weakened, slipping to -41.0. Here is where the war has taken a clear toll.  It collapsed from 54.3 in February to -39.3 in March.  The April reading is the lowest since March 2020 when the pandemic first struck.  

It looks like the Swiss National Bank has been intervening against in the foreign exchange market.  In the past two week, the domestic sight deposits have risen by 1.2%, the most in at least a year.  The euro may have put in a double high last month near CHF1.04.  The break of CHF1.02 neckline, and its inability to resurface above it yesterday looks ominous.  The objective of the technical formation suggests another run at CHF1.000, which it briefly traded below in early March for the first time since early 2015, when the SNB lifted the cap on the franc.   With a minus 75 bp policy rate, and a 75 bp 10-year yield buying the franc is expensive.  Its strength against the euro seems to warn of downside risks for the euro and upside risks for European stress.  

After sliding for seven consecutive sessions, the euro managed to post a small gain of a few hundredths of a cent yesterday.  It completed unwound the short-covering gains on Macron's slim victory in the first round.  The euro is under pressure again. It slipped below $1.0860 and found some bids in late Asia/early European activity.  Nearby resistance is seen around $1.0880.  There are options for almost 870 mln euros at $1.09 that expire today and almost 1.35 bln euros that expire there tomorrow.  For the third consecutive session, sterling is fraying $1.30 support.  It has yet to close below it, but bounce seem to be getting smaller.  A convincing break would bring our $1.2830 target into focus.  It may not be today.   Still, the $1.3020-$1.3040 area offers initial resistance.  

America

The US reports March CPI today.  No one in Bloomberg's survey with 48 respondents expect year-over-year pace to slow.  The question is the magnitude of acceleration from February's 7.9% pace.  The range of forecasts is between 8.2% and 8.6%.  The median and average converge in the middle near 8.4%.  If the median is right in looking for a 1.2% month-over-month increase, it will be the first time since September 2005 that consumer prices increased by more than 1% in a month.  The core rate is expected to rise by 0.5%.  It has been rising by 0.5%-0.6% a month since last October.  Given the strong increase in CPI in Q2 21 (cumulative 2.2%), some economists are suggesting inflation could peak with today's report.  It is possible, though if the median forecast in Bloomberg's survey is fair, then CPI would have risen by a cumulative 2.6% in Q1 22.  The core rate is a different story.   It rose by a cumulative 2.4% in Q2 21 and with a 0.5% increase in March, it would have risen by a cumulative 1.6% in Q1 22.   While there is headline risk, it is noise.  The signal emanating from Fed officials is monetary accommodation will be removed and that the Fed funds target is on its way to neutral setting, for which the overwhelming majority see between 2.25% and 3.0%.  The median dot is at 2.375%.  The December Fed funds futures imply a year rate of a little more than 2.5%.  

Mexico's CPI is also accelerating. When it was reported last week, the March CPI rose to 7.45% year-over-year. It is the highest level in more than two decades.  To be sure, under President AMLO Mexico did not use fiscal policy to replace lost incomes during the heart of the pandemic like many countries, including the US did.  Nevertheless, price pressures are acute. However, at the same time, the Mexican economy does not enjoy the strength of the US.  Yesterday, Mexico reported that industrial output slumped 1% in February.  The median forecast (Bloomberg) was looking for a 0.3% increase.   The US reports March industrial production later this week.  In the Jan-Feb period, it rose by almost a cumulative 2%.  The newswire survey shows that the median expectation is for the Mexican economy to expand by 2.0% this year (IMF's forecast for 2.8% may be revised lower at the upcoming Spring meetings). Recall that the Mexican economy contracted by 0.2% in 2019 before the pandemic took another 8.2% of its output.  It grew 4.8% last year.   The swaps market has about 120 basis point of tightening by Banxico in the next three months and about 145 bp by the Federal Reserve.  Despite the risk off mood, the jump in US rates, and the unexpected drop industrial output, the Mexican peso strengthen yesterday to its best level in three days.  

A few hours after the Reserve Bank of New Zealand hikes rates tomorrow, the Bank of Canada will follow suit.  The odds of a 50 bp hike by the RBNZ has ticked up to about 75%.  That warns that a 25 bp hike may be seen as disappointing and weigh on the New Zealand dollar.  The swaps market had been split between a 50 bp and 75 bp hike by the Bank of Canada.  However, as cooler heads prevail, the market has come back to 50 bp.  The BoC is also expected to begin its balance sheet roll-off.  

The Canadian dollar is extending its loss despite the widely expected hike.   The US dollar continues to rebound off the year's low set near CAD1.24 a week ago.  It has retraced now over half of the losses seen since the March 15 high near CAD1.2870.  It was found by CAD1.2635.  The next retracement (61.8%) is closer to CAD1.2700.  That may be too far today.  The main driver seems to be the risk-off mood.  Changes in the exchange rate are inversely correlated with changes in the S&P 500 (~0.75) by the most since last July.  Many see the Canadian dollar as a petro-currency.  The correlation of changes of the exchange rate and WTI is inverse by about 0.1.  The greenback is extending its losses against the Mexican peso.  It is trading at a five-day low around MXN19.85  in the European morning.  The year's low was set last Monday near MXN19.7275.  There is little that stands in the way of a retest.  There is little below it ahead of last week's low by MXN19.55.  

 

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Economics

After a near 10% rally this week can the Netflix share price make a comeback?

The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to…

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The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to introduce a new ad-supported, cheaper subscription. The company also announced it is to lay off another 300 employees, around 4% of its global workforce, in addition to the 150 redundancies last month.

Netflix has been forced into a period of belt-tightening after announcing a 200,000 subscriber-strong net loss over the first quarter of 2022. The U.S. tech giant also ominously forecast expectations for the loss of a further 2 million subscribers over the current quarter that will conclude at the end of this month.

netflix inc

The company has faced increasing sector competition with Paramount+ its latest new rival, joining Amazon Prime, Disney+, HBO Max and a handful of other new streaming platforms jostling for market share. A more competitive environment has combined with a hangover from the subscriber boom Netflix benefitted from over the Covid-19 pandemic and spiralling cost of living crisis.

Despite the strong gains of the past week, Netflix’s share price is still down over 68% for 2022 and 64% in the last 12 months. Stock markets have generally suffered this year with investors switching into risk-off mode in the face of spiralling inflation, rising interest rates, fears of a recession and the geopolitical crisis triggered by Russia’s invasion of Ukraine.

Growth stocks like Netflix whose high valuations were heavily reliant on the value of future revenues have been hit hardest. No recognised member of Wall Street’s Big Tech cabal has escaped punishment this year with even the hugely profitable Apple, Microsoft, Alphabet and Amazon all seeing their valuations slide by between around 20% and 30%.

But all of those other tech companies have diversified revenue streams, bank profits which dwarf those of Netflix and are sitting on huge cash piles. The more narrowly focused Meta Platforms (Facebook, WhatsApp and Instagram) which still relies exclusively on ad revenue generated from online advertising on its social media platforms, has also been hit harder, losing half of its value this year.

But among Wall Street’s established, profitable Big Tech stocks, Netflix has suffered the steepest fall in its valuation. But it is still profitable, even if it has taken on significant debt investing in its original content catalogue. And it is still the international market leader by a distance in a growing content streaming market.

justwatch

Source: JustWatch

Even if the competition is hotting up, Netflix still offers subscribers by far the biggest and most diversified catalogue of film and television content available on the market. And the overall value of the video content streaming market is also expected to keep growing strongly for the next several years. Even if annual growth is forecast to drop into the high single figures in future years.

revenue growth

Source: Statista

In that context, there are numerous analysts to have been left with the feeling that while the Netflix share price may well have been over-inflated during the pandemic and due a correction, it has been over-sold. Which could make the stock attractive at its current price of $190.85, compared to the record high of $690.31 reached as recently as October last year.

What’s next for the Netflix share price?

As a company, Netflix is faced with a transition period over the next few years. For the past decade, it has been a high growth company with investors focused on subscriber numbers. The recent dip notwithstanding, it has done exceedingly well on that score, attracting around 220 million paying customers globally.

Netflix established its market-leading position by investing heavily in its content catalogue, first by buying up the rights to popular television shows and films and then pouring hundreds of millions into exclusive content. That investment was necessary to establish a market leading position against its historical rivals Amazon Prime, which benefits from the deeper pockets of its parent company, and Hulu in the USA.

Netflix’s investment in its own exclusive content catalogue also helped compensate for the loss of popular shows like The Office, The Simpsons and Friends. When deals for the rights to these shows and many hit films have ended over the past few years their owners have chosen not to resell them to Netflix. Mainly because they planned or had already launched rival streaming services like Disney+ (The Simpsons) and HBO Max (The Office and Friends).

Netflix will continue to show third party content it acquires the rights to. But with the bulk of the most popular legacy television and film shows now available exclusively on competitor platforms launched by or otherwise associated with rights holders, it will rely ever more heavily on its own exclusive content.

That means continued investment, the expected budget for this year is $17 billion, which will put a strain on profitability. But most analysts expect the company to continue to be a major player in the video streaming sector.

Its strategy to invest in localised content produced specifically for international markets has proven a good one. It has strengthened its offering on big international markets like Japan, South Korea, India and Brazil compared to rivals that exclusively offer English-language content produced with an American audience in mind.

The approach has also produced some of Netflix’s biggest hits across international audiences, like the South Korean dystopian thriller Squid Games and the film Parasite, another Korean production that won the 2020 Academy Award for best picture – the first ever ‘made for streaming’ movie to do so.

Netflix is also, like many of its streaming platform rivals, making a push into sport. It has just lost out to Disney-owned ESPN, the current rights holder, in a bid to acquire the F1 rights for the USA. But having made one big move for prestigious sports rights, even if it ultimately failed, it signals a shift in strategy for a company that hasn’t previously shown an interest in competing for sports audiences.

Over the next year or so, Netflix’s share price is likely to be most influenced by the success of its launch of the planned lower-cost ad-supported subscription. It’s a big call that reverses the trend of the last decade away from linear television programming supported by ad revenue in its pursuit of new growth.

It will take Netflix at least a year or two to roll out a new ad-supported platform globally and in the meanwhile, especially if its forecast of losing another 2 million subscribers this quarter turns out to be accurate, the share price could potentially face further pain. But there is also a suspicion that the stock has generally been oversold and will eventually reclaim some of the huge losses of the past several months.

How much of that loss of share price is reclaimed will most probably rely on take-up of the new ad-supported cheaper membership tier. There is huge potential there with the company estimating around 100 million viewers have been accessing the platform via shared passwords. That’s been clamped down on recently and will continue to be because Netflix is determined to monetise those 100 million viewers contributing nothing to its revenues.

If a big enough chunk of them opt for continued access at the cost of watching ads, the company’s revenue growth could quickly return to healthy levels again. And that could see some strong upside for the Netflix share price in the context of its currently deflated level.

The post After a near 10% rally this week can the Netflix share price make a comeback? first appeared on Trading and Investment News.

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Government

Aura High Yield SME Fund: Letter to Investors 24 June 2022

The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation….

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The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation.

Inflation and Monetary Policy 1,2

This week, RBA Governor Philip Lowe spoke about the department’s monetary policy intervention to tackle inflation in the evolving economic environment. Over the last six months, similar factors have continued to put pressure on food and energy prices – namely the war in Ukraine, foods on the East coast, and Covid lockdowns in China. The ongoing lockdowns in China are causing disruptions in manufacturing and production and supply chains coupled with strong global demand that is unable to be met. These pressures have forced households and businesses to absorb the rising cost of living.

To demonstrate the rise, the RBA reporting this week on Business Conditions and Sentiments saw:

  • Almost a third of all businesses (31 per cent) have difficulty finding suitable staff;
  • Nearly half (46 per cent) of all businesses have experienced increased operating expenses; and
  • More than two in five businesses (41 per cent) face supply chain disruptions, which has remained steady since it peaked in January 2022 (47 per cent).

* The Survey of Business Conditions and Sentiments was not conducted between July 2021 to December 2021 (inclusive)

Inflation is being experienced globally, although Australia remains below that of most other advanced economies sitting at 5.1 per cent. The share of items in the CPI basket with annualised price increases of more than 3 per cent is at the highest level since 1990 as displayed in the graph below.

With additional information on leading indicators now on hand, the RBA has pushed their inflation forecast up from 6 to 7 per cent for the December quarter, due to persistently high petrol and energy prices. After this period, the RBA expects inflation will begin to decline.

We are beginning to see pandemic-related supply side issues resolve, with delivery times shortening slightly and businesses finding alternative solutions for global production and logistic networks. Whilst there is still a way to go in normalising the flow in the supply side and the possibility that further disruptions and setbacks could occur, the global production system is adapting accordingly, which should help alleviate some of the inflationary pressures.

The RBA’s goal is to ensure inflation returns to a 2-3 per cent target range over time, with the view that high inflation causes damage to the economy, reduces people’s purchasing power and devalues people’s savings.

Household Wealth 3

Growth of 1.2 per cent in household wealth, equivalent to $173 billion, was reported in the March quarter. The rise was a result of an increase in housing prices in the March quarter. Prices have started reversing since that read.

Demand for credit also boomed, with a record total demand for credit of $218.8 billion for the March quarter. The rise was driven by private non-financial corporations demanding $153.2 billion, while households and government borrowed $41.9 billion and $17.5 billion respectively. 

We will likely see a significant shift in household wealth and credit demand in next quarter’s report given the rising interest rate environment, depressed household valuations and elevated pricing pressures. 

Portfolio Management Commentary

A lag in leading economic indicators has shifted the RBA’s outlook, with an increase in the expected level of inflation to peak at 7 per cent and rate rises to come harder and faster in the near term. From a portfolio standpoint we are not seeing any degradation in our underlying portfolio and open dialogue with our lenders has us confident in their borrowing base. We are maintaining a close eye on the economic environment to ensure we maintain the performance of our Fund and ensure our lenders are in a position to maintain performance and strive to capitalise off the back of economic shifts.

1 RBA Inflation and Monetary Policy Speech – 21 June 2022

2 RBA Inflation and Monetary Policy Speech – 21 June 2022

3 Australian National Accounts: Finance and Wealth

You can learn more about the Aura High Yield SME Fund here.

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Economics

Home Showings Across US Plunge 24%, Mortgage Rates Remain Elevated

Home Showings Across US Plunge 24%, Mortgage Rates Remain Elevated

Authored by Naveen Anthrapully via The Epoch Times,

Home showings across…

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Home Showings Across US Plunge 24%, Mortgage Rates Remain Elevated

Authored by Naveen Anthrapully via The Epoch Times,

Home showings across the United States have fallen, according to a report by the National Association of Realtors (NAR), with all four regions registering a decline.

Home showings—when a potential buyer takes a private home tour with an agent—were down by 24 percent year-on-year in May, with total showings across the country at 785,005, said the NAR SentriLock Home Showings Report. SentriLock is a lockbox and real estate management solutions company.

All four regions in the United States saw a decrease in showings year-on-year, with the Northwest falling by 55 percent, Midwest by 29 percent, West by 27 percent, and the South by 14 percent.

Total SentriLock cards fell 2 percent YoY to 214,868. The cards allow realtors access to Sentrilock lockboxes—which hold keys to a home and allow communal access to all real estate agents—and indicate the number of realtors who conduct the showing.

The number of showings per card, which reflects the strength of buyer interest per listed property, decreased 23 percent YoY in May nationwide. Region-wise, showings per card in the West fell by 29 percent, the South by 23 percent, and the Midwest by 22 percent. Only the Northeast registered an increase at 45 percent.

Meanwhile, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell by two points to 67 in June, which the organization called a “troubling sign” for the housing market and broader economy.

According to NAHB Chair Jerry Konter, the six consecutive monthly declines of HMI is a “clear sign of a slowing housing market in a high-inflation, slow-growth economic environment.”

This is the lowest HMI reading since June 2020. The index had hit a record high of 90 at the end of 2020 when the pandemic triggered strong demand for homes.

Elevated Mortgage Rates

The fall in home showings is happening as mortgage rates remain at elevated levels. A 30-year fixed-rate mortgage had an average interest rate of 5.81 percent as of June 22, according to data from Freddie Mac.

Realtor.com is expecting home prices and mortgage rates to continue climbing while home sales drop as buyers get priced out from homeownership, based on a June 13 analysis of market trends. The rise in mortgage rates is driven by the U.S. Federal Reserve hiking interest rates to control inflation, the company noted.

“Rising interest rates have shifted the foundation of the economy as well as the housing market. So many homebuyers take out mortgages so that rising rates affect how expensive homeownership is,” said the company’s Chief Economist Danielle Hale. “It’s causing buyers to make tough trade-offs and disrupting the housing market.”

Tyler Durden Sun, 06/26/2022 - 18:30

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