The Dollar
With the US dollar index getting smoked again on the heels of the healthcare reform news, it is just 3.3 pts from a 50% retracement of the entire rally off the May 2014 low. The dollar weakness weighted on the Nikkei overnight as it fell .6% and the export heavy DAX is down by almost 1%. US stocks continue to trade great in the face of mediocre economic growth and a tightening of monetary policy and I don’t know whether that is on hopes that attention will now turn to tax reform or the hopes that a weaker dollar helps corporate earnings. If it’s the latter, I want to remind all that the S&P 500 rallied 20% as the dollar index rallied by 30% from May 2014 thru the peak at the end of December.
FIBONACCI RETRACEMENT CHART OF DXY
On the dollar weakness, most commodities are higher with ag leading the way with crop prices trying to get back what it lost last week after the new USDA report. Summer droughts have developed in some key planting areas and the USDA yield numbers will likely be proven too optimistic. Oil is up about 1% while copper is down about ¼ of a percent.
Japan
This was also noteworthy and maybe impacted the overnight action in Japanese stocks and the yen and it was a Bloomberg news story that said “Some officials at the Bank of Japan are increasingly concerned about the sustainability of the BoJ’s purchases of ETF’s, according to people familiar with discussions at the central bank.” Odds though are low that any changes are made at this week’s meeting but I guess nationalizing the countries bond and stock markets maybe be finally causing some to want to hit the pause button since it’s been a road to nowhere and just imagine what happens if they stop buying at some point. Of course some in the BoJ really believe in what they are doing and just feel that an ETF adjustment would be needed (buying more names in the Topix) rather than cut back. I guess the real point is that the major distortions being created are finally being realized by some. There are limits to QE.
United States
JD Power gave us their new update last night on the US auto market. Their Used Vehicle Price June Index was unchanged m/o/m but is down 7.6% y/o/y. The continued highlight on used car prices is obviously because of its impact on financing, auto loan books and new car sales/leases. Because the average term of a loan has been so stretched out over the last few years, it’s really easy now to have the car worth much less than the loan. Sounds really familiar.
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I forgot to mention this yesterday but C&I loans for the week ended July 5th slowed to a 1.4% y/o/y growth rate vs 1.8% last week. This growth was 7% in 2016. On an absolute dollar basis, C&I loans outstanding are no different than they were in late October. All bank loans and lease growth slowed to 3.1% y/o/y vs 6.1% last year. These numbers speak for themselves.
Europe
Investor confidence in the Germany economy cooled a bit in July. The ZEW index fell to 17.5 from 18.6 and that was slightly below the estimate of 18. Current Conditions moderated by 1.6 pts to 86.4 vs the estimate of no change. As the numbers were only down a touch, the ZEW said “The outlook for German economic growth in the coming 6 months continues to be positive.” This number is rarely market moving as the IFO is a more relevant measure of German business as it surveys actually businesses instead of investors.
The UK
Facing shrinking real wages, the UK citizen got a respite in June as CPI was reported flat m/o/m instead of rising by .2% as expected. Versus last year headline prices are still up 2.6% and 2.4% at the core. The UK 2 yr yield is falling by 4 bps and the pound is the only major currency that is down vs the dollar in response. Wholesale prices did rise more than expected as PPI was up 9.9% y/o/y vs the forecast of up 9.4% but it is a slowdown from the 12.1% spike in May. Margins also are still getting squeezed as output prices were up by 3.3%. The BoE can take a deep breath but the most extreme monetary policy in the history of this institution cannot be defended with a straight face in light of these inflation figures, irrespective of Brexit.
China
China apartment prices in June rolled a perfect score! On a y/o/y basis, 70 of 70 cities surveyed saw price gains for new apartments. For existing ones, the score was close to perfect with 66 saying up. Versus last month, 60 of 70 cities saw price gains for new stuff vs 56 in May while 60 of the used product reported priced increases, the same number as the month prior. Price gains continued to cool in the big cities. In Beijing, prices were up ‘just’ 10.7% y/o/y vs 13.5% in May. Shanghai saw prices higher by 8.6% vs 11% last month while prices in Shenzhen were up only 2.7%, half the pace as the month prior. Last June, prices in Shenzhen were higher by 47% y/o/y. While prices in their largest cities slowed down, they instead picked up in smaller cities in one big game of whack a mole. Property makes up 1/3 of the Chinese economy.
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A day after we saw ‘Black Monday’ in many small stocks in China on regulatory crackdown concerns, there is a story today that Chinese officials want banks to reduce the yield they offer on wealth management products. While it will hopefully reduce this unstable and out of control form of wholesale financing as yields become less attractive, it also creates huge risk in that this ‘ponzi scheme’ gets tipped over since many WMP’s need to be constantly rolled over. More whack a mole. On concerns with funding restrictions, overnight SHIBOR rose 7 bps to a 2 week high and the 7 day repo rate was higher by 20 bps, also to a 2 week high. After a late day rally, the Shenzhen index did break a 6 day losing streak that shed 6% with a .6% rise. The small cap ChiNext index was up by .6% too after yesterday’s 5.8% plunge. The Shanghai comp was up by .4% by the H share index was lower by .25%. The yuan is riding the dollar weakness and rallied both onshore and off.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.