Posts Tagged ‘Australia’
Where’s The “Value”?
Saturday, 15 June 2013 15:50
No Comments

With the world seemingly of the belief that the US is the cleanest dirty (it is not), we thought it might be useful – should you have money burning a hole in your sidelines pocket that ‘needs’ to be invested in stocks – to at least comprehend how rich or cheap the rest of the world is. UBS global equity strategy heat-map below identifies the most expensive (red) and cheapest (blue) sectors across 20 regions (and the aggregate) in one easy pocket-size cocktail-party-usable cheat-sheet. The US currently is most expensive and intriguingly Australia the cheapest relative to their own historical valuations.

(click image for large legible version)

(Read more…)

 

 

Notes;

Dark blue (very cheap) = current relative valuation < -1.5 standard deviations from historical average.

Light blue (cheap) = current relative valuation between < -1.5 and <-0.75 standard deviations from historical average.

No colour (neutral or N/A) = current relative valuation between > -0.75 and <+0.75 standard deviations from historical average.

Peach (expensive) = current relative valuation between > +0.75 and <+1.5 standard deviations from historical average

Red (very expensive) = current relative valuation between > +1.5 standard deviations from historical average

Source: UBS research.

    



 
Currency Positioning and Technical Outlook: Dollar Still Heavy
Saturday, 15 June 2013 06:50
No Comments

The US dollar lost ground against all the major currencies over the past week. The yen (3.5%) and New Zealand dollar (2.0%) led the pack against the greenback. Canada, Australia and Norway were the laggards, the worst was flat and the best–up almost a percent. (Read more…)  

We had anticipated a better showing for the US dollar. Yet, indicators suggest we were early and that the near-term risk is still to the dollar’s downside.  

Of course, the key is how the market responds to the FOMC statement.  We have consistently argued that the Fed is unlikely to taper as early many participants and observers have suggested:  Not in June, the summer or September.  Our base line view was for a tapering late this year, but see a strong case to be made for allowing the next Federal Reserve chairperson have the distinction; partly on economic grounds, and partly drawing insight from game theory.  We recognize the desire to enhance the Fed’s anti-inflation credentials after a prolonged period of unorthodox and extensive easing of policy.

Both the Fed’s “tapering” and ECB’s “open mindedness” regarding a negative deposit rate were types of forward guidance, but now the rubber must meet the road, so to speak.  Neither is inclined to follow through with what we have argued was a successful feint.  In any event, we expect that the Fed’s $85 bln a month in long-term asset purchases will continue unabated.  And the ECB is likely to find in the flash PMIs more reason not to give up on their expectations for a gradual recovery going forward.  

As the euro rose against dollar over the last few weeks, the premium the US offers on 2-year money has been more than halved.  In recent days this has begun recovering and is consistent with a softer euro.  However, the price action itself remains constructive and the euro finished the week just above the retracement objective near $1.3340.   The RSI and MACDs are getting stretched, but have yet to turn.    

In addition, the lows from March and May in the $1.2750-$1.2800 area may be a double bottom.  The neckline is near $1.3200.  The minimum objective of the patter is $1.3650-$1.3700, which is near the year’s highs.  A move back below the $1.3200 area would negate the double bottom.  Initial support is pegged in the $1.3260-80 band.   

Arguably, the most striking thing about the yen’s 8.1% rise against the dollar over the past month has been the incredible volatility.  One-week implied vol reached 25% last week and the 3-month poked through 16% briefly.  Both are two-year highs.  

As with the euro, so too with the yen–we are seeing greater dollar weakness than we had anticipated.  The charts do not suggest a turn is necessarily imminent, but rather that we are in the latter stages of the move.  We had thought the JPY95 area, which has been our quarter-end forecast, would offer better support.  The week’s lows near JPY93.80 are set to be challenged at the start of the new week.  Some  some optionality and stops are thought to be near  JPY93.50.   A break could spur a move toward JPY91.50.   

A move now back above the JPY96.20 would suggest a low is in place.  Perhaps, the performance of the Nikkei can be instructive.  We might feel more comfortable with picking a bottom to the dollar against the yen if the Nikkei were to trade higher after giving up nearly 50% of the gains seen since mid-Nov 2012.  

The broader dollar setback and favorable economic news from the UK has lifted sterling to 4-month highs.   As with the euro, sterling’s technical studies are getting stretched, but no sign of an imminent top.  Provided the $1.56 area holds, sterling can move test the $1.5800 area.  

The dollar has a much deeper retracement of its gains against the Swiss franc in recent weeks.  While the euro recovered a little more than 60% and sterling a bit more than 50%,  the dollar has shed 80% of this year’s gains against the Swiss franc.  Given the current dynamics, it seems risk to pick a dollar bottom against the Swiss franc until one thinks the dollar is about to recover against the Japanese yen.  A move above CHF0.9300-30 would be technically constructive.  

While the dollar does not look to have quite bottomed yet against the majors, it can probably be better bid against the dollar-bloc.  Near the pre-weekend low, the US dollar has returned nearly 50% of this year’s gains against the Canadian dollar.  The disappointing merchandise sales figures saw the US dollar recover.  The data offers important insight into the Canadian economy and that insight is not particularly encouraging:  New orders fell by nearly 1% and inventories rose.   The report points to a cooling of the industrial sector.  Technically and on a risk-reward basis, the Canadian dollar looks interesting as a short leg of crosses or against the US dollar outright.  The CAD1.0200-40 offers the first band of resistance.  

in the second half of last week, the Australian and New Zealand dollars turned in better perfromances.  This seemed to be more a question of short squeeze that has only marginally something do do with those countries per se and more to do with market positioning.  That said, it is true that expectations for a July RBA rate cut have been scaled back.

There are a certain number of generally agreed upon facts.  First, the short-term speculative community has established a large short Australian dollar position.  Second, the Aussie has fallen a long way in a relatively short period of time.   Third, sentiment remains bearish.  Fourth, despite the depreciation, the central bank and private sector models still show the Aussie to be significantly over-valued.  

Taken together, these mean that while the Australian dollar is susceptible to a short-squeeze, it probably is not carving out a significant low.  It put in a 3 cent bounce from lows early last week to Friday’s high.   The pre-weekend price action warns that that might be it.  A break of $0.9500-20 area could signal the resumption of the downtrend.  

The dollar also looks constructive against the Mexican peso, even though it made fresh two-week lows before the weekend.  It did recover and technical support just below MXN12.60 held.  We expect range players to look a return toward MXN12.85-90. 

Observations on the speculative positioning in the CME currency futures:

1.  In the CFTC’s reporting week, the gross short currency futures positions were cut across the board.  Gross long position adjustment were more mixed; the euro, yen, sterling and Swiss franc longs expanded, while the Canadian and Australian dollars and Mexican peso were reduced. 

2.  There were four significant gross position adjustments (more than 10k contracts):  Both the gross euro longs were added to (25.2k contracts) and shorts were covered (18.9k contracts); gross sterling shorts were cut (18k contracts) and long Mexican peso positions were liquidated (-22.8k contracts).

3.  The net currency futures positions were reduced (by a large 44k contracts in the euro and 24k contracts in sterling) across the board.  The Australian dollar was the lone exception.  The net short position grew as gross longs were cut more than gross shorts.  

4.  The net short euro position is the smallest since late February when it switched from net long.  The next short yen position is the smallest since early May.  The net short sterling position is the smallest since March.  The net Australian dollar position, which is now short 63.3k contracts, was long 85.5k contracts at the end of Q1.  The net long peso position has been more than halved since early May.  

    



 
PIMCO’s Bill Gross “Which Way For Bonds?”
Friday, 14 June 2013 13:36
No Comments

Authored by Bill Gross via PIMCO,

Why Way For Bonds? Mapping A Path Forward.

Q: Can you explain what is happening in markets now? (Read more…)
Gross: In 1980, the Federal Reserve, led by Paul Volcker, tightened the quantitative noose to tame double-digit inflation, fueling an unprecedented tailwind for bond prices. Thirty years later we find ourselves at the other extreme, as central banks print money in the trillions of dollars to stimulate economic growth, and inflation is abnormally low. While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds. Rather, what we’re seeing is the continuation – and acceleration, in some respects – of the de-levering process, a key distinction that may be getting lost in some of the noise over the past few weeks. The Fed, the Bank of England, and now the Bank of Japan have all committed to holding their easing stance until growth targets are hit. We don’t see the Fed raising rates in a meaningful way for at least the next few years.
 
That said, we believe caution is warranted not just for fixed income investors, but for investors in all risk assets. Central banks have reached a critical inflection point in which the negatives of their aggressive policies may be outweighing the positives and in fact hampering growth. Where their monetary repression has succeeded, however, is in forcing investors to take increasing amounts of risk, but for lower yields and more volatile returns.
Q: When do you expect the Fed to begin to take its foot off the QE pedal? Are rising rates a concern?
Gross: The Federal Reserve has cited an unemployment rate of 6.5% as its threshold for pulling back on monetary policy. At the same time, Chairman Bernanke wants to avoid the mistake of premature tightening, as occurred disastrously in the 1930s. While we agree with this reasoning, we are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors. The Fed shares these concerns as well, which is why some members are considering a reduction or tapering of purchases. From a technical perspective, the Fed may also be forced to taper its purchases to match the shrinking U.S. budget deficit. But there’s a difference between a mild reduction and a decision by the Fed to materially scale back its bond purchase program. The economy has yet to achieve escape velocity, and unemployment is still stubbornly high and structural in nature. So while we may see some tapering, possibly by the end of the year, we do not expect the Fed to remove the trough for some time or for this to signal a dramatic increase in rates. Rates will fluctuate over the shorter term, of course, and it’s our job as active managers to effectively position our clients’ portfolio if that occurs. This is something we have done for our investors for decades.
 
Q: How are you positioning Total Return to navigate this environment?
Gross: While it’s natural to want to reach for higher returns, an investment strategy’s success depends on carefully weighing potential rewards against the long-term costs, using the insights you’ve gathered on the ground and on a macro level through rigorous analysis. Today, given the economic uncertainty and rich market valuations, we think that the fortitude to wait for more attractive opportunities is a valuable attribute. Our goal for the Total Return strategy is to enhance our dry powder, seek prudent alpha and reduce risk – not dramatically, but to average or slightly below-average levels. Fortunately, PIMCO has a wide array of tools at our disposal to accomplish that. So, among other things, we’re avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors, managing volatility and increasing exposure to countries with higher-quality balance sheets such as the U.S., Brazil, Mexico and Australia. And we are seeking out and taking advantage of opportunities in the market. For example, we believe intermediate Treasuries are currently attractively priced at around 2%.
…
 
Q: With bond markets so uncertain, what steps can investors  take to ensure they’re prudently pursuing their financial  goals?
Gross: It’s important for investors to remember the reasons they own bonds in the first place – namely for the potential for the preservation of capital, income and growth, relative steadiness and typically low to negative correlations with equities. These needs – which will only become more urgent as millions of baby boomers head to retirement over the next decade and a half – are long term, regardless of what markets are doing today. So fixed income should always have a place in a portfolio. Still, there are ways to navigate challenging markets without feeling stuck. One is to expand your investment universe by going global.