Monday, August 20, 2018
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S.Obata

TODAY

The general tone is starting positive this morning, amidst some big headline stories including Pepsi/Sodastream, more headlines around Elon Musk, another Venezuelan currency devaluation, and ongoing turmoil in Turkish markets.

As far as Turkey is concerned, BCA research notes: “We do not believe that Turkey's woes signal a repeat of the Asian Crisis across the EM complex.”  While caution is warranted, their view is that the situation is somewhat unique and contagion is not likely.

US dollars are holding up this morning, while there is relatively little activity in the major currency space. 
 
Tax-cut driven growth
Top Down charts highlights just how impressive the earnings growth of the S&P 500 companies has been in 2018.  Much of that is thanks to corporate tax cuts delivered.  Urban Carmel also notes that with 90% of the 500 companies having reported, results look great on many metrics.  While we are seeing this impressive growth, maybe it’s time to for a reminder that bull markets do not die of old age.  (They are usually killed by the central bank, at some point).
 
Four big known unknowns
Mohamed El-Erian lays out the biggest risks for U.S. equity investors. Diverging growth in the global economy sits at the top of the list, while Turkey sits all the way at the bottom. While there are loads of “known unknowns” such as Turkey and the trade skirmish, divergent growth is not getting nearly enough attention, especially as pressure continues to mount on technically fragile asset classes. In a world of “high debt and depleted policy ammunition” fighting the next downturn may not be as easy as most expect.
 
An emerging bear
Speaking of fragile assets classes, emerging markets are on the cusp of bear market territory. As we write the MSCI Emerging Markets index is down 19.65% from its high close in January. Ben Carlson also writes on the short history of emerging market corrections & bear markets. Looking back to 1994 there have been 11 corrections and 13 different bar markets, outnumbering those in the U.S. by nearly 2 to 1. By hey, no risk no reward, and the ensuing gains are often seen as worth the wild ride.
 
 
Shutting the door on China
It appears that what happened with the botched Aecon acquisition is becoming more commonplace around the world. After a surge of foreign acquisitions, China is having a tough time getting approvals for acquisitions around the world. Trumps latest update to the legislation for the Committee on Foreign Investment is making it even tougher for even minority interests in areas such as infrastructure, technology and anything to do with personal data.

 
 

A demographic handover
Generation-Z is set to take over Millennials as the most populous generation some point next year. The demographic handover is good news for delivery services, gadget makers and the so-called gig economy. Meanwhile, it presents new challenges to educators, event planners, luxury brands and even golfers -- a game where the average age of U.S. participants now exceeds 50. While the developed world may not realize the global shift, areas in Africa and Southern Asia are projected to see ratios top even 2-1.
 
 
Weaning off the bailout
While still far from on the right side of the balance sheet, Greece received the last of its bailout payments on Monday after nine years of financial nursing. Athens will now begin to rely on bond markets to refinance its debt, leaving behind harsh economic restrictions that the bailouts carry. While the country still struggles with high debt and unemployment, it’s a good sign for both the Eurozone and Greece.
 
 
 
Diversion: You can now own Muhammad Ali’s 1976 Alfa. Happy bidding.

COMPANY NEWS

PepsiCo is buying SodaStream International for $3.2bb, that is 11% higher than their closing price on Friday. They are making a bet on the razors-and-blades model, getting machines into the consumer home and then selling them the product needed to enjoys their products. Tyson Foods is picking up $2.4bb of chicken nuggets from Marfrig Global Foods. The new Marfrig will have a much bigger focus on beef after selling their stake in nugget production and following their move to buy National Beef Packing Co. a deal announced back in April.  Tesla shares are poised to open lower again this morning. The SEC is investigating what CEO Musk knew and when, before issuing his Tweet that he is looking to take the company private.
 

COMMODITIES

Oil is down -0.30% to $65.71 . Hedge funds are paring back on their bullish positions in crude oil and refined fuels despite impending U.S. sanctions on Iran. It seems the focus has shifted away from supply fundamentals and towards concerns about EM contagion and how it may impact demand going forward.

Gold is up 0.68% to $1,192.20 . Precious metals are moving higher to start the week as the USD pares recent gains against the EUR and JPY. Still, gold is still below the key $1200 level while silver remains well below $15. Rates have been supportive with 10s trading down to <2.85% from a high of >2.89% last Thursday.

In other commodities news…

Exclusive: China shifts to Iranian tankers to keep oil flowing amid U.S. sanctions - sources” – RTS

U.S. firms warn next China tariffs to cost Americans from cradle to grave” – RTS

'Absolutely devastating': Kvisle blasts feds' regulatory overhaul” – BNN BBG

Commodity prices suffer as emerging markets tumble” – $FT 
 

FIXED INCOME AND ECONOMICS

The USD is peeling back a bit this morning after hitting a 52 week high last week as the dollar-weighted index managed to trade just shy of the 97.00 level. Note that the greenback has gained +7.8% since the middle of April which has coincided with the plight of gold and emerging markets. There are other currencies in the world worth talking about other than the big dollar of course, so let’s drop some ink on other noteworthy developments from the past several sessions. The Turkish Lira was the main headliner, surging +6% last week after Qatar pledged a $15 billion lifeline and bank regulators announced measures to curb short selling. More eye-opening was the Banking Regulation and Supervision Agency deciding to cut banks’ swap transactions to 25% of shareholder equity from 50% in an attempt to limit offshore. Threats of additional sanctions by the U.S. tempered gains late in the week and remain a key risk going forward. Down under, Australia’s economy edged closer to the RBA’s full employment estimate (5.0%) with the jobless rate dropping to its lowest level (5.3%) since 2012. The overall July report was a mixed bag helping to contribute to the AUD sinking to a near two year low (1.3882) against the greenback, but reports that trade negotiations between the U.S. and China will resume this week provided additional support allowing the AUD to rebound from earlier losses. The South African Rand dropped nearly -4.0% and 1-month implied volatility spiked to its highest level since 2011 last week after Moody’s signaled fiscal consolidation will be slower than expectations as a result of slowing growth and an unbudgeted public-sector wage bill. Governor Kganyago lowering the bank’s 2018 growth forecast amid deteriorating consumer demand underscores a fragile economy while contagion risk from the Turkey crisis supplements the trepidation in EM and threatens to accelerate outflows. The -2.5% decline in oil dragged the commodity-linked Norwegian Krone lower (-1.0%) despite signals the Norges Bank is on track to begin tightening next month. The central bank left their deposit rate at 0.50% during last week’s interim policy meeting and the lack of a major change in the economic outlook or inflation since the June meeting imply they will likely move forward with a September tightening move.
 

CHART OF THE DAY

QUOTE OF THE DAY

In the business world, the rearview mirror is always clearer than the windshield.

- Warren Buffett


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Charts are sourced to Bloomberg unless otherwise noted.

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