The British pound hit a 31-year-low against the dollar today as the Bank of England warned that "the current outlook for UK financial stability is challenging."
Takeaway: San Francisco Fed head John Williams is full of baloney.
According to San Francisco Fed head John Williams, Brexit isn't "a big deal for the U.S. economic outlook."
Question: What happened between January and today to make the Fed significantly dial back rate hike expectations?
Answer: The U.S. economy continued to slow...
In other words, why should we listen to Fed forecasters who are so continually on the wrong side of their own predictions? Well, we shouldn't.
Here's the key Brexit excerpt from the wider interview via MarketWatch and other delusional statements:
Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses the ongoing U.S. earnings recession, sliding corporate M&A, the Bank of England's latest post-Brexit salvo, and China's efforts to massage its slowing economic data.
According to the Financial Times, "US companies face another bleak earnings season with analysts forecasting the longest profit recession since the financial crisis... Earnings of the major groups that comprise the S&P 500 index are seen falling 5 per cent in the second quarter from the same three-month period in 2015."
Our Take: As Hedgeye CEO Keith McCullough wrote earlier this morning, "The second quarter should be the worst quarter yet!" Proof? Below are the last year's earnings comps that 2Q16 is up against broken down by sector.
"Global investment banking fees fell by nearly a quarter in the first half of 2016 from a year earlier as market volatility hit capital markets and M&A deal making... Global fees for services ranging from merger and acquisitions advisory services to capital markets underwriting fell 23 percent to $37.1 billion at the end of June, the slowest first half for fees since 2012," Reuters reports.
Our Take: This is precisely why Hedgeye Financials analyst Jonathan Casteleyn remains The Bear on Lazard (LAZ). As Casteleyn wrote recently, "The M&A cycle peaked last year and historically new restructuring revenue takes 2 years to offset M&A losses."
Today, the Bank of England reduced a bank regulatory capital requirement that was set to be introduced next year "from the planned 0.5% of a banks' lending 'exposure' to 0%," the BBC writes.
That could potentially free up £150bn for lending the BoE says, as the Brexit vote added economic uncertainty to U.K. economy. "There is evidence that some risks have begun to crystallise," BoE head Mark Carney said today. "The current outlook for UK financial stability is challenging."
On a related note, the Pound/U.S. Dollar cross plunged to a 31-year low today and property funds M&G and Aviva halted redemption requests, as investors feared a peak in Britain's booming commercial property market.
Our Take: The worst may be yet to come for Europe's slowing economy.
In China's latest effort to make up economic growth numbers that suit its narrative, the Chinese government is "studying new methodologies to assess the economic contribution from industries seen as part of the 'new economy,' ranging from biotech firms to online retailers," Reuters writes.
Our Take: Hedgeye cartoonist Bob Rich has been all over China's massaging of its slowing economic data for some time now.
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Banks stocks around the world continue to crash today. No, it's not post-Brexit fallout. It's just another case of maniacal central planning gone awry.
The latest news comes from Italy. Here's the wrap from the Wall Street Journal:
"In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans."
Isn't it ironic that the European Commission authorized €150 billion in liquidity support for Italian banks last week? This measure will prove counterproductive as the ECB maintains its negative interest rate policy (NIRP). With no end in sight, Eurozone banks will continue to see a squeeze in their net interest margins.
So, while financial media continues to frame Italian banks as the problem child of Europe, it's more appropriate to turn your attention to the ECB. To be clear, central bank policies have been ravaging Europe's banks for quite some time now. Since the ECB announced NIRP in June 2014, European bank stocks are down -48% versus -6.1% for Euro Stoxx 600.
The BoJ announced NIRP in January 2016. Since then, Japanese bank stocks are down -27.3% versus -12.3% for the Topix.
Year-to-date, Financials (XLF) remain the worst performing sector in the S&P 500. The XLF is down -6.2% as the Fed has dialed back its rate hike rhetoric. The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings via net interest margins) hit a cycle low today. (Incidentally, Financials remain our favorite 2016 sector short.)
As desperate central planners push interest rates ever lower, banks are apparently struggling to make a profit.
Who'd have thought?
In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes a look at U.S. bond yields sinking to record lows and what may lie ahead.
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Takeaway: All-time lows in the 10-year Treasury yield is continued vindication for our Macro team's #GrowthSlowing call.
All-time lows in 10-year Treasury yields this morning.
Yet more vindication of our Macro team's global #GrowthSlowing call.
Here's brief analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:
"While “stocks” have these 1-week ramps, you have to take on a lot of volatility to time those returns – with the Long Bond and it’s proxies, both absolute and volatility adjusted returns have been awesome. All-time low this am for the US 10yr of 1.38% ahead of the Friday jobs report and the Q2 Earnings Recession season."
Macro tourists and the mainstream media missed an important callout in reporting fresh lows for sovereign bond yields this morning...
The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings) hit a new low for #TheCycle of 80bps today:
That's why our favorite macro call, long the Long Bond (TLT), continues to outperform:
In short, the bond market has figured out what still puzzles most stock-centric investors...
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