Thursday, May 14, 2015
Is Equity Volatility Set to Rise?
Even casual observers of the forex markets will have noticed that it has been a bit of a wild ride over the last several months. And, while currency volatility has spiked, equities have remained relatively placid. If this chart showing the historic relationship between the VIX and forex volatility is any indication, the current calm environment could be upended fairly abruptly:
Can Crude and Copper Keep Rallying with China Slowing?
Yesterday saw the monthly slue of Chinese economic stats and the key feature among them was the continued broad-based weakness. The weakness in some of these statistics has been so pronounced (some things like IP and retail sales are at levels near or below those seen at the depths of the financial crisis) that it has us wondering if the price of oil and copper can continue to rally in the face of an increasingly slower China? We will let our readers make that call. Below we simply show Chinese industrial production (blue line, left axis) overlaid on the price of Brent crude oil (chart 1) and copper (chart 2).
Wednesday, May 13, 2015
Long-End Of US Yield Curve Suggests A Stronger Yen
The relationship between the Japanese Yen and the spread between the US 30-year treasury yield and US 10-year yield has had a very tight negative correlation (-0.85) over the past 10-years (since 1986 when the bond spread series begins the correlation is -0.61). Since the end of March, the 30/10 spread has widened by 18 basis points to its widest levels in about 7 months. The Yen, meanwhile, is basically unchanged against the USD in the past two months. In 2012 after a divergence opened up, the yen began a multi-year period of weakness as it moved from 78 to 120. It will be worth watching if the divergence this time sparks a rally in the yen or if the long end of the yield curve is about to flatten out once again.
Tuesday, May 12, 2015
Could the Bond-Bund Spread Widen Even Further?
We first discussed the historic extreme in the spread between German Bunds and U.S. Treasuries last April (here). And that relationship has continued since, propelling the difference (in red, below) to levels well above those reached over the last two decades:
(Germany in blue, U.S. in grey)
With the recent action in yields, is it reasonable to predict that this spread will contract back to more normal levels? That remains to be seen, of course. What we can say for sure is that, while we have heard a bit of buzz about a convergence in yields, no one has mentioned the potential for an even wider disparity (similar to that of the mid-80s):
If the U.S. stays on the path of "normalization" while Greece continues to provoke bouts of panic in Europe, such a scenario might not be too far-fetched.
With the recent action in yields, is it reasonable to predict that this spread will contract back to more normal levels? That remains to be seen, of course. What we can say for sure is that, while we have heard a bit of buzz about a convergence in yields, no one has mentioned the potential for an even wider disparity (similar to that of the mid-80s):
US Equity Leadership (Still) Hasn't Changed
We mentioned two weeks ago how equity performance has flip-flopped in the second quarter and how asset prices are most likely just in a counter-trend rally. Since then, others have picked up on this theme with a lot of folks calling for higher bond yields in particular (we aren't so sure). If equity markets are in the process of a trend change, one would expect leadership to change as well. As we will show in the charts below, this doesn't look to be happening from a relative performance perspective in the US. All data is in USD, on an equal-weighted basis and as of 5/8/2015 close.
Over the past four years, US health care has dominated equity leadership. It is up over 227% while the second best performing sector, consumer discretionary, is up only 108%. This may be a surprise to many but YTD US health care stocks are still leading the way as they have gained 12% in 2015. The laggard over the past four years, energy, has picked up in 2015 and especially in the second quarter. Utilities may soon take over as the worst performing sector over the past four years.
Of the top three stocks in health care that we track and have four years of history for, all are still in significant uptrends. Gilead is looking a little shaky but has not yet begun to underperform the MSCI ACWI in any significant way.
In the consumer discretionary sector, the top three performers again remain in a solid uptrend. Tesla recently tested a support line but positively bounced off of it. These "high fliers" most likely need to begin to considerably underperform to signal any major trend change.
Consumer staples have been the third best performer over the past four years but is only marginally higher YTD. Again, however, we don't see any trend change for the leaders over the past four years on a relative performance basis.
Now lets flip our focus and look at a few of the worst performers. It would make sense that if this was a true trend change some of the worst performers of the bull market should be outperforming. Unfortunately for these stocks, this rally in the second quarter just looks like bounce in an otherwise downward trend. In the case of Whiting Petroleum, it failed right at the downtrend line. This stock could be a bellwether in a sense for the energy industry if it can fight through the downtrend line and begin to establish a base.
Lastly, the three absolute worst performers over the past four years (the three energy stocks above are numbers 4th, 5th, and 7th worst) are Avon Products, Freeport-McMoRan, and Joy Global. Even with the benefit of a pretty good bounce over the past month (at least for Freeport-McMoRan), these stocks are still stuck in their significant downtrends.
Over the past four years, US health care has dominated equity leadership. It is up over 227% while the second best performing sector, consumer discretionary, is up only 108%. This may be a surprise to many but YTD US health care stocks are still leading the way as they have gained 12% in 2015. The laggard over the past four years, energy, has picked up in 2015 and especially in the second quarter. Utilities may soon take over as the worst performing sector over the past four years.
Of the top three stocks in health care that we track and have four years of history for, all are still in significant uptrends. Gilead is looking a little shaky but has not yet begun to underperform the MSCI ACWI in any significant way.
In the consumer discretionary sector, the top three performers again remain in a solid uptrend. Tesla recently tested a support line but positively bounced off of it. These "high fliers" most likely need to begin to considerably underperform to signal any major trend change.
Consumer staples have been the third best performer over the past four years but is only marginally higher YTD. Again, however, we don't see any trend change for the leaders over the past four years on a relative performance basis.
Now lets flip our focus and look at a few of the worst performers. It would make sense that if this was a true trend change some of the worst performers of the bull market should be outperforming. Unfortunately for these stocks, this rally in the second quarter just looks like bounce in an otherwise downward trend. In the case of Whiting Petroleum, it failed right at the downtrend line. This stock could be a bellwether in a sense for the energy industry if it can fight through the downtrend line and begin to establish a base.
Lastly, the three absolute worst performers over the past four years (the three energy stocks above are numbers 4th, 5th, and 7th worst) are Avon Products, Freeport-McMoRan, and Joy Global. Even with the benefit of a pretty good bounce over the past month (at least for Freeport-McMoRan), these stocks are still stuck in their significant downtrends.
Monday, May 11, 2015
Has Sales Growth Peaked for the Cycle?
Sales growth estimates for companies around the world began sliding towards the middle of 2014 as the price of oil began its months-long setback. In the first chart below we show the average and median company's next 12 month sales growth estimate for the MSCI World Index which shows that the level of expected sales growth took a significant step down into the first quarter of 2015.
When we compare the three month change in the level of sales growth and compare that change to WTI oil the relationship between sales growth and oil prices becomes more apparent. In the next chart below we observe that the red and blue lines (average and median company's sales growth estimate) dipped below the zero level last year just as oil started its plunge and then stayed negative through April 2015. This is essentially the first derivative of the chart shown above. The rate of change of sales growth estimates was negative for a full 10 months.
Then as oil rebounded, so did sales growth estimates. The only problem is that the 1-quarter percent change in the price of oil peaked out at the end of April and is very unlikely to stage another 35% gain over the next quarter. This has us asking whether sales growth estimates are themselves about to peak, or at the very least slow significantly, in line with the rate of change in the oil price?
Then as oil rebounded, so did sales growth estimates. The only problem is that the 1-quarter percent change in the price of oil peaked out at the end of April and is very unlikely to stage another 35% gain over the next quarter. This has us asking whether sales growth estimates are themselves about to peak, or at the very least slow significantly, in line with the rate of change in the oil price?