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Buying European Banks? Good Luck With That

Editor's Note: Hedgeye Financials analyst Jonathan Casteleyn was on The Macro Show this morning discussing Brexit, European equities and a number of his high-conviction long and short calls. Below is an abridged transcript from today's episode in which Casteleyn explains why investors in European equities should "avoid the whole region."

 

Buying European Banks? Good Luck With That - europe geography

 

“This is what I think we should be talking about in Europe. The region is actually really unappealing as you can see in this time series of European bank stocks [see below].

 

Out of the 2008-2009 Financial Crisis, you saw a slight rebound in the banking sector but there’s been no recovery. Rates are down, growth is down, deflation is moving into the economy and there’s been no rebound in financial company profits. Essentially, the banks are dis-incentivized to make loans because they can’t do it profitably.

 

Buying European Banks? Good Luck With That - european stocks 6 20

 

Remember, this chart has nothing to do with Brexit and is proof that the financial sector is not a place to invest. Since credit is the lifeblood of the economy, the pull forward of consumption, Europe is in massive distress.

 

We just want to avoid the whole region.”


Call Invite with Top Washington Political Strategist Scott Reed

Hedgeye Potomac is hosting a call with one of Washington’s top political strategists, Scott Reed.

 

Reed will discuss the efforts corporate America will be undertaking on behalf of pro-business candidates this fall – as well as the outlook for control of Congress, the Republican and Democratic Conventions and the state of the presidential race.

 

The call will take place tomorrow, Tuesday, June 21st at 11am ET with prepared remarks from Reed followed by Q&A.

 

ABOUT SCOTT REED

 

Scott Reed is the senior political strategist at the U.S. Chamber of Commerce. He is responsible for overseeing the Chamber’s federal voter education program. Reed created and implemented the blueprint for that strategy to help recruit business-friendly candidates, overseeing traditional and digital advertising campaigns, and identifying credible messengers to showcase the importance of the free enterprise system.

 

Reed was campaign manager for Bob Dole’s 1996 presidential campaign. He oversaw the national campaign, which included political strategy, policy development, communications, and advertising during the GOP primary and the general election. In addition, he directed preparations for the 1996 Republican National Convention in San Diego and the vice presidential selection process of Jack Kemp. In 1993, Reed was appointed executive director of the Republican National Committee. He served as chief operating officer of the GOP during the historic elections in 1993 and 1994 when the Republicans gained control of both the House and the Senate for the first time in more than 40 years. During the Bush administration, Reed served as chief of staff to Secretary Jack Kemp at the Department of Housing and Urban Development. He directed personnel, political, and policy matters, employing a long-term empowerment and privatization program. 

 

CALL DETAILS

 

Toll Free:

Toll:

UK: 0

Confirmation Number: 13638941


JT TAYLOR: Call Invite with Top Washington Political Strategist Scott Reed

Hedgeye Potomac is hosting a call with one of Washington’s top political strategists, Scott Reed.

 

Reed will discuss the efforts corporate America will be undertaking on behalf of pro-business candidates this fall – as well as the outlook for control of Congress, the Republican and Democratic Conventions and the state of the presidential race.

 

The call will take place on Tuesday, June 21st at 11am ET with prepared remarks from Reed followed by Q&A.

 

ABOUT SCOTT REED

 

Scott Reed is the senior political strategist at the U.S. Chamber of Commerce. He is responsible for overseeing the Chamber’s federal voter education program. Reed created and implemented the blueprint for that strategy to help recruit business-friendly candidates, overseeing traditional and digital advertising campaigns, and identifying credible messengers to showcase the importance of the free enterprise system.

 

Reed was campaign manager for Bob Dole’s 1996 presidential campaign. He oversaw the national campaign, which included political strategy, policy development, communications, and advertising during the GOP primary and the general election. In addition, he directed preparations for the 1996 Republican National Convention in San Diego and the vice presidential selection process of Jack Kemp. In 1993, Reed was appointed executive director of the Republican National Committee. He served as chief operating officer of the GOP during the historic elections in 1993 and 1994 when the Republicans gained control of both the House and the Senate for the first time in more than 40 years. During the Bush administration, Reed served as chief of staff to Secretary Jack Kemp at the Department of Housing and Urban Development. He directed personnel, political, and policy matters, employing a long-term empowerment and privatization program. 

 

CALL DETAILS

 

Toll Free:

Toll:

UK: 0

Confirmation Number: 13638941

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition

Takeaway: Total equity products are averaging a weekly redemption of -$3.4 billion versus fixed income which is bringing in +$3.9 billion per week.

Editor's Note: Below is a complimentary research note originally published June 16, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

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Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending June 8th, Large Cap and Emerging Markets were the only active equity categories to have net contributions. Large Cap took in meager +$346 million and Emerging Markets gained +$130 million, however losses in the other categories brought total equity mutual fund flows to -$3.8 billion. Meanwhile, active fixed income flows came in strongly at +$5.0 billion. Global bonds, with a -$755 million outflow, was the only fixed income category to experience a net withdrawal. In passive ETFs, bond inflows of +$2.9 billion slightly outpaced equity ETF contributions of +$2.3 billion. The year-to-date scorecard is telling with total equity products (including ETFs) shedding -$3.4 billion versus all fixed income product which is averaging +3.9 billion in subscriptions (lead by tax-free munis with a +1.2 billion weekly average inflow).

 


[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI1

 

In the most recent 5-day period ending June 8th, total equity mutual funds put up net outflows of -$3.8 billion, trailing the year-to-date weekly average outflow of -$2.5 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$5.0 billion, outpacing the year-to-date weekly average inflow of +$2.5 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$2.3 billion, outpacing the year-to-date weekly average outflow of -$895 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.9 billion, outpacing the year-to-date weekly average inflow of +$1.5 billion and the 2015 average inflow of +$1.0 billion.

 

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 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI2

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI3

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI4

 

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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.

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI12

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI13

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI14

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI15

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - 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 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI7

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$537 million or +4% to the health care XLV ETF and +$331 million or +4% to the long treasury TLT ETF.

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - 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.

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI17

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$9.4 billion spread for the week (-$1.5 billion of total equity outflow net of the +$7.9 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$2.4 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI10 2

 


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:

 

[UNLOCKED] Fund Flow Survey | Hallmarks of a Phase Transition - ICI11 


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 6 20

 

Daily Market Data Dump: Monday - sector performance 6 20

 

Daily Market Data Dump: Monday - volume 6 20

 

Daily Market Data Dump: Monday - rates and spreads 6 20

 

Daily Market Data Dump: Monday - currencies 6 20


MONDAY MORNING RISK MONITOR | BREXIT FIXATION

Takeaway: The market is fixated on Brexit. Today, the market is positive. Last week, the story was fear. The overall takeaway: volatility.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM11

 

Key Takeaway:

Although markets are reacting positively this morning to a poll showing the UK is more likely to stay in the EU, fear prevailed last week, and risk measures flashed mostly red. The overall takeaway is that the upcoming Brexit vote on Thursday is creating volatility on both sides of the dial. CDS widened globally last week, even in the US where the resilience of recent weeks gave way and the median bank swap widened by 10 bps to 99. Additionally, the high yield YTM jumped by 15 bps to 7.26%, and the CDOR-OIS spread, a measure of counterparty risk in Canada, widened by 1 bps to 40.

Risk measures in our heat map below are mostly negative across all durations.

 

Current Ideas:
MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 13 improved / 6 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Negative / 1 of 13 improved / 7 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 3 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM15


1. U.S. Financial CDS
– With investors worrying about the domestic implications of a Brexit, all domestic financials swaps widened last week. Moneycenters were most heavily affected, widening by an average 10 bps.

Widened the least WoW: AON, GNW, ALL
Widened the most WoW: MS, GS, C
Widened the least WoW: AON, RDN, SLM
Widened the most MoM: MS, GS, WFC

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM1

 

2. European Financial CDS – With Thursday's Brexit vote approaching, Financials swaps mostly widened in Europe last week. The median CDS widened by 9 bps to 131.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM2

 

3. Asian Financial CDS – Chinese bank swaps all widened, in part due to MSCI deferring the addition of China's A shares to the EM Index. That deferral delays an expected capital inflow to the country of tens of billions of dollars. In India, 2 of 3 financials swaps widened.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese swaps stood out, widening by 33 bps to 316.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM18

 

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Russian sovereign swaps widened the most, by 15 bps to 264. Meanwhile, with Rio de Janeiro declaring a state of financial disaster so that it can more easily manage the government's scant resources, Brazilian swaps tightened by -2 bps to 341.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM16

6. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 7.26% versus 7.11% the prior week.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 9.0 points last week, ending at 1901.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM6

8. TED Spread Monitor  – The TED spread fell 2 bps last week, ending the week at 39 bps this week versus last week’s print of 41 bps.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM7

9. CRB Commodity Price Index – The CRB index fell -1.8%, ending the week at 192 versus 196 the prior week. As compared with the prior month, commodity prices have increased 4.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM8

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 was unchanged at 9 bps.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 1 basis point last week, ending the week at 2.01% versus last week’s print of 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM10

12. Chinese Steel – Steel prices in China rose 0.1% last week, or 3 yuan/ton, to 2339 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 149.5 trillion RMB as of May 31, 2016 (data released 6/15/2016), which is up +15.5 trillion RMB or +11.5% year over year. Month-over-month, credit is up +553 billion RMB or +0.4%. Note: this data is only updated monthly.


MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM20

15. 2-10 Spread – Last week the 2-10 spread was unchanged last week at 91 bps. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 1 bps to 40 bps.

MONDAY MORNING RISK MONITOR | BREXIT FIXATION - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT

 

Patrick Staudt, CFA



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