My Diary 323 --- Eye on Fundamentals, Worse getting Ugly, Love is Delayed and Pick Gold & Coal, Dump Zinc
September 5, 2007
I know that the passage of this summer will not bring me any cool air. Thus, today I want to make a note on each major asset classes.
Markets Not Cool Yet
Although it is true that volatility has subsided somewhat, markets have not returned to any sense of "normal" ( or “Cool” in my words), at least not in the status that existed prior June. The equity market and the credit markets continued their divergence due to concerns about global banks (USD gets squeezed everywhere), while the in-line and better ISM and Auto sales numbers actually cheered US shares yesterday(S&P + 1%).
Today, European stocks fell for the first time in six days, while Asian shares (except for China&HK) extended losses and U.S. stock-index futures dropped. Asian credit spread has widened by 20-50bp in the HY space. Negative news flows also include the continued climb in LIBOR fixing rates in the
It seems to me that the markets’ focus is still very much on ST movements. As a result, trading activities remain choppy and news related to central bank policy, credit conditions, and the balance sheets/perceived stability of financial market participants are things catching your eyeballs.
Eye on Fundamentals and CBs
Overall, I think the current environment requires a keen focus on possible changes to the fundamentals. This is particularly at a time when markets, in particular equities and commodities, are not pricing much risk going into 2008. This is reflected in equity analysts’ revisions to earnings, which remain skewed to the upside. For many companies I visited recently, they claimed that they will retain their CapEx plans for the next 18 months and maintaining their strong earnings guidance.
What equity market turns out to me that the Bernanke’s speech has been taken by investors as a “promised” cut, but we should keep in mind that the FED needs evidence. The real economy didn’t get bite so far as the ISM showed an typical inventory drawdown and this implies that how the rest of the world’s strength may just keep the US’ factory running as witnessed by the import/export gap. Certainly, the economic fundamentals haven’t seemed too bad, but everything takes times to spread away.
What also important are other major central banks’ decisions, including RBA tonight, BOC tomorrow, ECB, BOE and others – A busy season now.
Worse getting Ugly!
With the US Libor rates going higher, today the HKD HIBOR made the new high in the past 6 years. Overnight rate is only around 4.5%, however, the 3M HIBOR was fixed at 4.966%, the highest in the past 6 years( I repeat again). Who said the market confidence has been restored by Discount Rate cut and CB’s liqudity injection!!!
According to Bloomberg, distressed bonds are increasing at the fastest rate in 4 years on growing concern that the era of record-low defaults is coming to an end. Reason is investors’ risk appetite declined substantially in the past two months as losses in subprime-related securities caused sudden increases in the cost of credit and sparked concern that the worst U.S. housing market in 16 years will slow the economy.
In fact, the amount of distressed bonds has risen more than fivefold to $24.8 billion since June, according to an index Merrill Lynch & Co. began compiling in 1997. Today, Moody's expects the % of borrowers missing payments to double to 3.5% next year, as HY companies struggle to refinance about $22.7 billion of debt, up from $17 billion in 2007. Do you feel cooling down now.... Hardly to believe.
Live Yen, Dead USD
Today, Japanese yen (115.65/$) rose against all of the 16 most-active currencies as climbing money market rates suggested global banks are reluctant to lend, causing investors to reduce so-called carry trades. In the opposite side, the Dollar fell against the yen before the release of Fed’s Beige Book which may highlight signs of an economic slowdown.
USD (DXY=80.96) now ended a two-day rally on speculation an increase in money market borrowing costs will prompt the Fed to improve access to funds by cutting its benchmark interest rate this month. Market is guessing Beige Book may show mortgage defaults and rising financing costs are curbing demand in the world's biggest economy.
Love Is Delayed
HSI closed above 24000 for the first time today, but Gains were limited on concern
Actually, since SAFE's announcement, Hang Seng Index has climbed 18% and HSCEI Index has jumped 31%. They're the world's best performers among 89 global benchmarks tracked by Bloomberg. I clearly remember one of our HK fund managers said on August 20 ---
White-hot A-share markets continue the upsurge, a trend which I think now is driven less by fundamentals and more by liquidity. Signs of accelerating bubble growth are increasingly apparent in the A-share market, largely due to the excessively low interest rate. Sentiment is hinged on uncertainties in the macro front and A-share market liquidity, including the upcoming CPC Convention. My bottom-line is the hot market will continue to be hot with increased volatility in September. My best suggestion is to focus on large-cap blue chips and improving portfolio defensiveness. What I learned the most in recent sell-off is that portfolio management is not just about pure value or return, it is about managing the irrational market behavior.
For the A/H market cross trades, I think HK Stock Express is dependent on the state of the A-share market. If A-shares continue its rally, I do not expect my main land fellows will rush in like no tomorrow. Those ppl who remember B-shares experience in 2001 won't blindly chase the H-shares that International investors here want to unload. Smart mainland Chinese are much smarter than they think……Well, average Chinese’s IQ is only second behind Jewish (I forget where I read this piece… you can Google it anyway!)
Recent financial market turbulence, while concentrated on the credit and equity markets, has not left commodity markets unscathed. Investors continue to swing between concerns over slow growth and fears on supplies shortage.
Gold has floundered during the recent turmoil, raising concerns that it has lost the decade-long “safe haven” status. This is largely due to the heavy central bank sales (CBGA 500ton at most). In any case, central bank sales are currently an important source of supply for the market, given struggling mine supply growth (+3% in 1H07 In China and Indonesia, but more than offset by de-hedging) and dwindling scrap. Demand wise, fabrication demand is an important factor for the gold price, ubderpinned by other real demand forn industrial, retail investment and ETFs. One country you have to watch is India, which accounted for 31% of global jewellery demand in H1 and 58% of net retail investment. I think, once a weakening trend in the US Dollar becomes apparent, investors will come back. Well, the stock performance for 2899HK is very good, if you follow the yellow metal.
Merrill today raises the forecasts for thermal coal prices by 8% to $65 per ton for the Japanese FY2008.The rationale for the upward revisions are 00 1) China's withdrawal from the seaborne thermal coal market (mainly due to robust Chinese domestic demand for coal); 2) supply disruptions in Indonesia due to heavy rains; and 3) ongoing rail and port constraints in Australia.
Along with aluminium,Zinc has been one of the worst performers of the base metals complex and its price today is barely changed from it low point of around USD2800/t reached in June 2006. Zinc's recent poor performance can be explained by four key factors --- 1) 32K ton increase in SHEX’s stocks + unreported Chinese zinc stocks (+100K ton) more than offet 88K ton drop in LME; 2) weak conditions are being reported in the physical market (US premiums fell from USD282/t); 3) there is concern about rising mine supplies (+5.4% yoy in 1H07); and 4) the galvanising sector is still depressed which is critical since it currently accounts for 55% of consumption.
Watch out for the base metals, as zinc falls to 14 months low on excess supply worries could lead to falls in other metals. Now this is really a hot season….. Really!!!
Good night, my dear friends
