***The roundup below is an example of our internal data-driven research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***
- Key Takeaways:
- In China, the official July Manufacturing PMI data confirmed the slowdown we saw with last week’s flash PMI report. The slowdown was broad based, with every sub index except Supplier’s Delivery Time decelerating on a sequential and trending basis (see attached). While somewhat offset by the sequential nudge up in the Non-Manufacturing PMI report, the decline in the manufacturing segment of the economy calls into question the sustainability of the nascent recovery we’ve seen in the property market thus far through June (also attached). Still, mainland Chinese markets ended lower Monday, with Shanghai down -1.1%, Shenzhen down -2.7%, the H-Shares down -1.1% as margin debt continues to decline and capital outflows accelerate on a trending basis. We continue to believe a long H-Shares (FXI)/short A-Shares (CAF) is the best way to be positioned to the extent you are involved in China, as well as being naked long the yuan (CYB) and naked short base metals (DBB, JJC) and commodity currencies (CCX).
- With the advent of the July Manufacturing PMI data – which accelerated to five-month high across both the headline reading and Output sub index – Japan continues to be the bright spot of Asia from an economic and financial market perspective. We continue to see substantial upside in Japanese shares over the intermediate-to-long term as continued cyclical recovery + prospective structural economic improvement amid Abenomics is backstopped by aggressive monetary easing that is likely to remain in place amid the country’s debt and demographically challenged inability to meet the LDP’s aggressive growth and inflation targets.
- South Korea’s Manufacturing PMI improved slightly to 47.6 July from a reading of 46.1 in June, but it was still the second-weakest reading in the past two years and calls attention to the trending deceleration in South Korean economic growth that our models have been calling for amid the confluence of difficult base effects and mounting cyclical headwinds such as the recent MERS outbreak and slowing global growth. The deceleration in Export growth to -3.3% YoY in July is additional confirmation of the aforementioned dour outlook.
- Turkey’s transition to #Quad1 in the third quarter is being confirmed on the margin with the advent of the July Manufacturing PMI (50.1 from 49 in June), CPI (+6.8% YoY from +7.2% in June), Core CPI (+7.3% YoY from +7.5% in June) and PPI (+5.6% YoY from +6.7% in June) data. In spite of this cyclical economic improvement, the TRY remains under pressure vs. the USD, falling -3.1% MoM (7th largest monthly decline amongst the 24 EM currencies tracked by Bloomberg) due to elevated political consternation associated with the lack of a government and monetary policy reform.
- In Russia, the stench of stagflation is beginning to accelerate with the advent of the July Manufacturing PMI data, which declined to 48.3 from 48.7 in June. #Quad4 deflation risk is accelerating globally as the threat of a policy mistake out of the Federal Reserve intensifies as we inch closer to September. As Brent crude oil crashes to new post-crisis lows (-17.1% MoM), Russian capital and currency markets – like many other EM assets – are plunging alongside broad based commodity deflation. Specifically, the RUB -10.8% vs. the USD over the past month, the largest monthly decline amongst the 24 EM currencies tracked by Bloomberg.
- JUL Manufacturing PMI: 50 from 50.2
- JUL Non-Manufacturing PMI: 53.9 from 53.8
- JUL Caixin-Markit Manufacturing PMI: 47.8 from 49.4 in JUN and a flash reading of 48.2
- Most of the major sub-indexes increased the pace of pullback in July, but job shedding slowed from June and backlogs rose at a marginal pace as downside pressure on prices continued to mount.
- Commentary noted that average selling prices fell "at the sharpest rate since January, with a number of firms cutting their charges due to increased competition for new work."
- Capital outflows reignites debate over direction of markets (StreetAccount):
- FT discussed how a debate between China bulls and bears has been reignited after forex reserves have moved lower for four consecutive quarters.
- The paper noted that some see this as a sign to get out of the markets, while others see it as progress in China liberalizing its exchange rate.
- A separate FT article cited some more bullish fund managers and discussed some pockets of the market that they see as good opportunities to invest in, while a Bloomberg article also played down concerns surrounding capital flows.
- Sheng warns of downward pressure on China's economy in H2 (StreetAccount):
- National Business Daily cited comments from PBoC official Sheng Songcheng, who warned the economy was facing downward pressures in H2 amid slowing investment and anemic exports.
- He specifically highlighted concerns around the retail sector and the PBoC’s Q2 survey which indicated Chinese companies weren’t optimistic about their outlook.
- He added that the CNY2T bond swap program may be insufficient to cover maturing debt and also raised concerns over soft land revenues for LGFVs.
- However MNI cited comments from Monetary Policy Committee Fan Gang in the People's Daily saying slowing growth was transitory and GDP will expand at 7-8% annually for the next 20-20 years.
- JUL Manufacturing PMI: 51.2 from 50.1 in JUN and a flash reading of 51.4
- Japan's PMI came in at a five-month high of 51.2.
- Employment remained robust and manufacturers increased buying. Although input prices rose, they did so below the pace of the long-run average.
- The output sub-index, as well as the headline index, were both at five-month highs.
- JUL Vehicle Sales: -1.3% YoY from 5.4%
- Kuroda reiterates currently no need for additional monetary easing (StreetAccount):
- In an interview with the Yomiuri Shimbun, Bank of Japan governor Haruhiko Kuroda reiterated that he currently saw no need to expand QQE.
- He also reiterated his optimistic outlook on the economy, saying that the underlying price trend continued to rise, while acknowledging that private sector forecasts are more pessimistic than the BoJ's.
- A separate MNI article apparently citing the Yomiuri interview cited Kuroda as saying that "If China's economic-growth rate deteriorates it will have a big impact" on the Japanese economy.
- Motivation to raise minimum wage likely to garner political support (StreetAccount):
- The Nikkei speculated that Abe's move to push a minimum wage hike was likely to garner support amid falling rankings.
- The article noted that the government was more vocal than usual in supporting the legislation, while a source at the Cabinet Office said that the government support was unexpected.
- A second Nikkei article also discussed Prime Minister Shinzo Abe's falling poll numbers.
- JUL Manufacturing PMI: 51.2 from 50.1 in JUN and a flash reading of 51.4
- JUL Manufacturing PMI: 52.7 from 51.3
- Pimco Lobbies India to Ease Bond-Buying Curbs as Rupee to Shine (Bloomberg):
- Pacific Investment Management Co. wants India to ease foreign-investment curbs so it can buy more of the nation’s sovereign debt, its top pick in Asia after China.
- “We’ve spoken to policy makers in May to increase that limit and as and when that happens, we are happy to buy more of local government bonds,” said Luke Spajic, Singapore-based head of Asia portfolio management at Pimco, which manages $1.52 trillion of assets globally. “What makes India attractive is the prospect of a broad-based growth opportunity, which can lead to a lot of returns on the financial assets.”
- Regulators in Asia’s third-largest economy have capped overseas holdings of sovereign debt at $30 billion, seeking to limit the impact of capital outflows due to global events such as the Federal Reserve raising U.S. interest rates. Rupee government notes handed investors the region’s best returns in the past year as slowing inflation allowed Reserve Bank of India Governor Raghuram Rajan to cut borrowing costs and the government acted to shore up its finances.
- JUL Exports: -3.3% YoY from -1.8%
- JUL Imports: -15.3% YoY from -13.6%
- JUL Trade Balance: $7.76B from $10.24B
- Sentiment was broadly downbeat surrounding South Korean data, with most of the focus on trade.
- Although exports remained in negative territory, much of the downside pressure was attributed to falling energy prices, but a global oversupply in goods was also cited.
- JUL Manufacturing PMI: 47.6 from 46.1
- South Korean PMI also improved slightly to 47.6 July vs 46.1 in June, but it was still the second-weakest reading in the past two years.
- Commentary noted that manufacturers saw slowing demand from both domestic and international clients in July, and also cited MERS as a headwind.
- JUL AIG Manufacturing Index: 50.4 from 44.2
- JUL TD Securities Inflation Gauge: 1.6% YoY from 1.5%
- JUL Manufacturing PMI: 47.1 from 46.3
- JUL Manufacturing PMI: 47.3 from 47.8
- JUL CPI: flat at 7.3% YoY
- JUL Core CPI: 4.9% YoY from 5%
- JUL CPI: flat at -1.1% YoY
- JUL Core CPI: flat at 0.9% YoY
- Other Asia
- Other LatAm
- JUL Manufacturing PMI: 48.3 from 48.7
- Bank of Russia Scraps Easing Pledge, Setting Policy Adrift (Bloomberg):
- The four words Russia’s central bank didn’t say have brought new intrigue to its monetary policy. By omitting the phrase from June that it will be “ready to continue cutting” borrowing costs as inflation decelerates further, Governor Elvira Nabiullina left economists searching for clues to the path of interest rates.
- After a half-point cut to 11 percent on Friday extended the easing cycle that began in January, data due Tuesday or Wednesday will show inflation quickened in July to 15.8 percent from a year earlier, the first uptick in four months, according to a Bloomberg survey.
- Policy makers warned that “the balance of risks is shifting toward considerable economic cooling” and said faster price growth last month was temporary, caused by an increase in state-regulated utility tariffs.
- South Africa
- JUL Manufacturing PMI: flat at 51.4
- JUL Manufacturing PMI: 50.1 from 49
- JUL CPI: 6.8% YoY from 7.2%
- JUL Core CPI: 7.3% YoY from 7.5%
- JUL PPI: 5.6% YoY from 6.7%
- Other Emerging Markets
DM Asia Investment Ideas Summary (as of 10:10am):
Emerging Market Investment Ideas Summary (as of 10:10am):
ETF Divergence Monitor (as of 10:10am):
Data Source (unless otherwise noted): Bloomberg L.P.
-Darius Dale, Director
Hedgeye's Restaurant & Consumer Staples Sector Head Howard Penney and Analyst Shayne Laidlaw hosted a Q&A session today to share updates on all their best ideas and answer questions from viewers.
They touched on the possibility of General Mills (GIS) acquiring WhiteWave Foods (WWAV) and highlight some of their current ideas, including McDonald’s (MCD) LONG, Chipotle (CMG) LONG, WhiteWave (WWAV) LONG and Hain Celestial (HAIN) SHORT. Thanks to everyone that tuned in and submitted questions!
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Takeaway: While the chatter is on Greece's 20% drop this morning, we remain focused on China and the US junk bond market.
Our focus of late has been on China and the US high yield market. Last week saw both those areas put in small, counter-trend rallies. High yield backed off slightly last week, falling 5 bps to 6.94%. Meanwhile, China saw steel prices and soverign swaps both decline, albeit small. Our bearish view on both remains unchanged.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 4 out of 12 worsened / 1 of 12 unchanged
• Long-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS - Swaps tightened for 12 out of 27 domestic financial institutions. With the second quarter GDP reading coming in at 2.3%, within the range of economist estimates, and the Federal Reserve keeping interest rates near zero, swaps were unchanged at the median.
Tightened the most WoW: AXP, ACE, GS
Widened the most WoW: CB, MBI, GNW
Tightened the most WoW: ACE, ALL, AIG
Widened the most/ tightened the least MoM: MMC, MBI, SLM
2. European Financial CDS - Swaps mostly widened in Europe last week as Eurozone inflation was shown to be a minimal 0.2% in July and Eurostat reported increased unemployment in the region on Friday. After not trading for a number of weeks, swaps for Russia's Sberbank traded at +70 bps higher than their last mark given the Bank of Russia's cutting interest rates for the fifth time this year and citing economic risks.
3. Asian Financial CDS - Chinese banks saw their swaps widen by +2 bps to +7 bps on the week. Meanwhile, the Japanese and Indian banking complexes were generally flat to tighter.
4. Sovereign CDS – Sovereign swaps mostly widened over last week. Spanish sovereign swaps widened the most, +6 bps to 95, followed by Italy, which widened +5 bps to 116.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Turkish sovereign swaps widened by +11 bps to 236 while on the opposite end of the spectrum Mexican swaps tightened by -4 bps to 136.
6. High Yield (YTM) Monitor – High Yield rates fell 5 bps last week, ending the week at 6.94% versus 6.99% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 2.0 points last week, ending at 1882.
8. TED Spread Monitor – The TED spread fell 2 basis points last week, ending the week at 24 bps this week versus last week’s print of 26 bps.
9. CRB Commodity Price Index – The CRB index fell -3.2%, ending the week at 203 versus 209 the prior week. As compared with the prior month, commodity prices have decreased -9.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 10 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 13 basis points last week, ending the week at 1.47% versus last week’s print of 1.34%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China rose 4.9% last week, or 104 yuan/ton, to 2239 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 152 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and -1.8% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
7/24/15 HAIN | COSMETIC DECEPTION
7/23/15 CPB | Analyst Day Notes
RECENT NEWS FLOW
Saturday, August 1
K | Announced the completion of new master contract agreement with BCTGM, the primary workforce for cereal manufacturing (click here for article)
Thursday, July 30
MDLZ | Downgraded to neutral from buy at Goldman Sachs, however target price increased to $46 from $43
CAG | Eliminating BPA from canned packaging (click here for article)
Wednesday, July 29
BN-FR / SBUX | Partner up to create a Greek yogurt brand for sale at retail (click here for article)
WFM | Caught a few downgrades as a result of poor performance stemming from the pricing scandal (3Q15 earnings release here)
MDLZ | Investing more than $130mm to modernize North American supply chain (click here for article)
Tuesday, July 28
CAG | Rumored to be in talks with TreeHouse and Post regarding private label auction (click here for article)
PG | Appointed David Taylor, a company veteran to President and CEO (click here for article)
LWAY | Probiotics gaining adoption (click here for article)
Monday, July 27
UNFI | Downgraded to market perform from outperform at BMO Capital, target cut to $52 from $71
GOOG | Google recently attempted to acquire Impossible Foods, a plant-based cheeseburger company (click here for article)
Food and organic stocks that we follow outperformed the XLP last week. The XLP was up 1.3%, the top performer from our list was BDBD posting an increase of 20.5%, although BDBD is still down -43.2% in the last 52 weeks. This sharp increase was due to an activist disclosing his stake in the company.
From a quantitative perspective, the XLP remains bullish on a TRADE and TREND duration.
Food and Organic Companies
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.38%
SHORT SIGNALS 78.42%