2015.02.26 News


Let’s begin with some recent trends in the US housing market.

1. New home sales came in stronger than consensus – up 5.3% from a year earlier.

2. But the buyers increasing seem to be wealthier individuals. US new homes are consistently getting larger as builders focus on “luxury homes”.

Another way to analyse this trend is by looking at the difference between new and existing home prices.

In fact, according to the WSJ for the first time “builders have sold more homes priced above $400K than those below $200K.” Once again, the lack of affordable housing – both for purchase and rent – will become an increasing problem in the US.

3. The 30-year mortgage rates have risen back to 4%.

As a result mortgage refinance activity slowed.

4. Longer dated lumber futures (Sep-2015 shown below) have turned decisively lower. Markets seem to be anticipating soft construction demand this summer. Note that some of this may be driven by the housing market in Canada, which is about to undergo a correction.

Now let’s take a look at a couple of updates in the energy markets.

1. The steep futures curve (contango), cold weather in some parts of the US, and refinery outages are pushing US crude in storage to new highs.

2. At the same time US crude production shows no signs of slowing. The fundamentals remain quite bearish for crude.

A number of analysts and investors continue to suggest that the US equity market looks increasingly overextended. Here are two indicators.

1. From the technical perspective we see bearish investors disappearing.

2. From the fundamental perspective here is the median price/cash flow ratio. One could justify these valuations as long as rates stay at current levels. But if the Fed decides to hike this summer – as a number of economists believe – things could quickly turn ugly for the stock market.

Switching to the Eurozone for a moment, here are some trends to watch.

1. Expectations for economic growth diverge sharply between Spain and the rest of the Eurozone, particularly Italy.

2. French consumer confidence is recovering quickly.

3. The ECB (as well as the National Central Banks) will find it increasingly difficult to find enough debt to buy, as net issuance turns negative.

4. That’s why yields on government paper remain at or near record lows. Here are the yields on the 5-year French bonds and the 10-year Irish bonds for example.

Economic reports out of Brazil continue to be abysmal. Here is the FGV consumer confidence indicator.

Finally, a note on Ukraine where the CDS-implied probability of default is approaching 100%. According to Bloomberg, “Ukraine risks losing IMF support for aid if war escalates”. And Moscow is more than happy to make sure there is no end to hostilities.


– Morgan Stanley will pay $2.6bn to settle claims that it mis-sold mortgage-backed securities in the run-up to the financial crisis. The US Department of Justice had charged half a dozen banks with mis-selling – this settlement brings the total of mortgage-relatedpenalties to about $40bn. Goldman Sachs is likely to be the last of the banks to settle its case. (FT)
– Chinese cyber security alarm European and US companies have asked their governments to help stop the implementation of new Chinese regulations, which will force local and foreign banks to use only IT equipment deemed “secure and controllable” by Beijing. The groups warned that the rules would “hurt the development and integration of the Chinese banking sector in the global market”. (FT)
– Lenovo hacked after adware blunder Less than a week after being criticised for pre-installing advertising software on consumer laptops that exposed users to hacking, Lenovo’s website was hacked. Customers reported seeing videos of young people looking into web cameras and employee emails were leaked. (Bloomberg)
– Budget reprieve for France and Italy The European Commission decided not to fine France for failing to bring its budget deficit under the EU limit of 3 per cent of GDP in time. Italy also got a pass for not cutting its debt level because more leeway is given to countries facing recession. (FT)
– Paying for the privilege of lending Germany sold five-year debt at a negative yield for the first time . Negative-yielding bonds mean investors pay more than the face value of a bond plus interest payments and accept a guaranteed loss if they hold it to maturity. These securities are becoming more common and reflect a demand for haven investments. In Germany’s case, the ECB’s quantitative easing programme was seen as the main catalyst. (FT)

Fast FT

– US mortgage applications fizzle for third week
– US home sales fare better than expected
– France, Italy spared fine over budget breach
– Venezuela’s bolívar tumbles beyond 200 mark
– Aussie business spending numbers underscore gloom
After adjusting for the typical bias in firms’ investment intentions, the survey suggests that non-mining investment is likely to contract by around 7% over 2015-16 in year-average terms. This result suggests that firms remain very gloomy about the outlook and are unwilling to commit to lifting investment spending.”
– BoJ’s Ishida favours stable yen “the government appears to be less welcoming of further yen depreciation at this moment and is accordingly toning down its rhetoric on the need for additional QE.”
– Spanish Q4 GDP growth confirmed at 0.7%
– German unemployment falls by 20,000 in February “A strong start to the year for Germany’s jobs market.”
– UK GDP growth confirmed at 0.5% for Q4
– Eurozone economic confidence rises



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