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CHART OF THE DAY: Draghi's "Whatever It Takes" Willingness

Editor's Note: The excerpt and chart below are from this morning's Early Look which was written by Hedgeye analyst Matthew Hedrick. For more info on how you can become a subscriber click here.

 

...Draghi’s “whatever it takes” continues to spell a willingness to increase his QE purchasing program (currently structured at ~ €60 billion/month – see Chart of the Day below). Look to Jackson Hole at the end of the month (Aug. 27-29) as an opportunity for Draghi to talk down the Euro. An increase in his QE target would send the Euro falling. 

 

CHART OF THE DAY: Draghi's "Whatever It Takes" Willingness - z. chart2


Broken Euro!

“The magician and the politician have much in common: they both have to draw our attention away from what they are really doing.”

-Ben Okri

 

But what could the Eurocrats really be doing beyond perpetuating a political ‘crisis’ in the Eurozone?

 

Interestingly, according to a new Opinium poll, only 14% of Brits, 17% of Dutch and 24% of French believe that the EU countries “should continue to progress towards ever closer union” and transfer more powers to Brussels. 

 

What does this poll suggest?

 

It’s another confirming signal that the Eurozone project has failed.  Like it or not, the union of uneven countries (today composed of 19 member states) guided under one monetary policy is deeply flawed; and the economic, political, and cultural divides across countries is not abating. The United States of America, therefore is not an apt analogy for the Eurozone.

 

Back to the Global Macro Grind

 

But would any Eurocrat come out and say this?  Not if they want to keep their job.

 

A great expose on Greece’s ex finance minister, Janis Varoufakis, in The New Yorker titled in jest “The Greek Warrior” reveals from the man himself the great political chicanery between the Greek government and those of the Eurozone member states around the most recent (3rd) bailout.

 

Varoufakis says the 19 governments could be divided into 3 groups:

 

  1. “There is a very small minority that believes in austerity, and in this program. Germany leads this minority.
  2. A second group – Ireland, Spain, Portugal, the Baltic states — has pursued austerity programs, and now fears that Syriza, if successful, would leave those countries exposed to radical domestic opposition.
  3. Then there’s another group, of substantial countries like Italy and France—especially France—who don’t believe in austerity. But they fear that if they side with us they will be punished. Their punishment would be austerity.”

 

Sound conflicted?  While we won’t take Varoufakis’s word as the final one, the point we’re trying to make is getting 19 states to agree on anything is a fool’s errand. There exists so many different agenda points – the problem is Eurozone countries are often more divided than united.

 

You don’t have to look further than the money trail to understand who is incentivized to play in this conflicted system. One great winner is Germany.  Two recent data points clearly demonstrate this reality:

 

  • A new report by the Halle Institute of Economic Research shows during the debt ‘crisis’ Germany (more than any other country) benefitted by the reduction in interest rates, namely in German bund rates declining by about 300 bps, yielding interest savings of more than €100 billion (or more than 3% of GDP) during 2010-15.  A significant proportion of this debt ‘crisis’ relief is attributable specifically to the Greek ‘crisis’. In short, Germany benefitted not only greatly from the flight to safety trade during the ‘crisis’ but also the debt savings helped it maintain its “fiscally conservative” budget balance.
  • Germany is expected to achieve a record trade surplus of 8.1% this year (vs 7.6% in 2014), according to recent report from the German Finance Ministry. A weaker EUR and strong USD (perpetuated by the Greek ‘crisis’) has supported lower energy prices and propelled Germany’s export growth (47% of Germany’s GDP is comprised of exports!)

 

Stay Short the EUR/USD!

 

On Tuesday we recommended another short signal in the EUR/USD via the etf FXE in our Real Time Alerts.

 

We think there are a few guiding principles to maintain this #EuroWeakness position:

 

  1. The political crisis in the Eurozone isn’t going away. Extend & Pretend policy from the Eurocrats isn’t a viable solution to fix deep sovereign ails and the flawed structure of the single monetary union. ‘Real’ solutions and compromise to Greece’s debt ‘crisis’ cannot be reached in mere days with band-aid bailout packages.  Greek bailout #3 isn’t going to work, just like #2 didn’t work. 
  2. Draghi and Merkel remain poised and incentivized by a weak Euro.  So follow the money!  Draghi’s agenda is to will growth and inflation across the region. Germany is his best horse. A weak Euro is in Merkel’s best interest to support her country’s export powerhouse.
  3. Draghi’s “whatever it takes” continues to spell a willingness to increase his QE purchasing program (currently structured at ~ €60 billion/month – see Chart of the Day below). Look to Jackson Hole at the end of the month (Aug. 27-29) as an opportunity for Draghi to talk down the Euro. An increase in his QE target would send the Euro falling.
  4. Janet Yellen’s Fed is increasing looking de-facto hawkish on policy. In the last week the BOE talked down inflation (and the Pound Sterling); the BOJ remains mired in economic maladies pressuring the Yen lower; China devalued the Yuan to support its exports; and Draghi’s QE bazooka for the Eurozone remains fully loaded, with no prospect for a rate hike before the Fed. His goal of achieving a 2% inflation rate is a far out pipe dream, increasing the likelihood of more QE.

Broken Euro! - Euro cartoon 05.18.2015

 

While we see growth and inflation globally continuing to slow into year end, on a relative basis the currency wars will promote winners and losers.  As we originally outlined as one of our Top 3 Global Macro Themes for Q3 2015, #EuropeSlowing, we continue to like the EUR/USD as a relative loser.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.10% - 2.28%

SPX 2073 - 2115
USD 96.20 - 98.47
EUR/USD 1.08 - 1.13
Oil (WTI) 42.10 - 47.18

Gold 1075 - 1128

 

Keep your head down and eye on the ball,


Matthew Hedrick

 

Broken Euro! - z. chart2


The Macro Show Replay | August 13, 2015

 


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August 13, 2015

August 13, 2015 - HE DTR 8 13 15


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks

Takeaway: A whopping -$7.3 billion was yanked from domestic stock funds last week, much worse than the 2015 weekly average of -$2.9 billion.

Investment Company Institute Mutual Fund Data and ETF Money Flow:
Investors continued to pull money from financial markets last week. All asset classes experienced redemptions except for international equity funds, which took in +$3.5 billion, and equity ETFs which were only slightly above break-even at +$85 million in contributions. While an exodus from domestic equity has been in progress since 2014, a newer trend of fixed income outflows has developed. So far this year, domestic equity mutual funds have lost a cumulative -$90.8 billion in withdrawals, including a massive -$7.3 billion outflow last week (the worst start to the first 31 weeks to any year this cycle running at over -$18.0 billion worse than 2012, the prior softest start to an annual period). Meanwhile, total fixed income mutual funds and ETFs have experienced negative flows in 7 of the last 9 weeks, including a -$5.0 billion outflow last week.

 

Investors appear to be using a significant portion of domestic equity withdrawals for their contributions to international equity funds, as international equity has experienced an almost mirror inflow of +$92.0 billion. Additionally, the chart below displays the generally inverse relationship between domestic stock outflows and international equity inflows. Our preferred proxy for these growing domestic redemptions is shorting T. Rowe Price (TROW) stock with over 60% of its assets-under-management in mutual funds (see our TROW report HERE).


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI20

 


In the most recent 5-day period ending August 5th, total equity mutual funds put up net outflows of -$3.8 billion, trailing the year-to-date weekly average inflow of +$36 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$3.5 billion and domestic stock fund withdrawals of -$7.3 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$4.4 billion, trailing the year-to-date weekly average inflow of +$1.5 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$106 million and taxable bond funds withdrawals of -$4.3 billion.


Equity ETFs had net subscriptions of +$85 million, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$582 million, trailing the year-to-date weekly average inflow of +$868 million and the 2014 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI1


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI2


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI3


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI4


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI5


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI12


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI13


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI14


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI15


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI7


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors continued to make significant withdrawals from the long treasury TLT ETF given worries over a possible rate hike by the Fed. The TLT lost -$365 million or -7% in redemptions last week. Meanwhile, the XLB materials ETF experienced the largest inflow last week on both a percentage and dollar basis. Investors contributed +$122 million or +5% to the XLB.


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI17


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.2 billion spread for the week (-$3.8 billion of total equity outflow net of the -$5.0 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.9 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI10



Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | What's $7 Billion Among Friends? Another Massive Outflow in Domestic Stocks - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 


Joshua Steiner, CFA







Cartoon of the Day: 20,000 Central Planners Under the Sea

Cartoon of the Day: 20,000 Central Planners Under the Sea - Currency wars cartoon 08.12.2015

 

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