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Is the Canadian housing market in a bubble? Is it about to precipitate an nationwide financial crisis? If so, what can, or should, the BoC do about it? The mathematicians at Statistics Canada that produce the BoC’s CPI measures would like you to know shelter costs in BC and Ontario were up 1.4% and 2.7% respectively in 2016, and “owned accommodation” inflation in both provinces hasn’t cracked 3% since Strange Brew came out. Why such a dramatic divergence in the official statistics and data from actual sales? National Bank had some great charts on this last month: A report from the consultancy CD Howe identified this threat back in 2012:“To calculate the owner-occupied housing component in the CPI, Statistics Canada uses a so-called user-cost approach...Assumed prices for dwellings rather than actual prices for houses, and the inclusion of a mortgage interest component, makes the CPI less sensitive than otherwise to housing price changes.” The piece recommends that Statistics Canada construct and maintain, in addition to the current CPI, an inflation indicator based on a net-purchases approach. While the BoC has been asleep at the wheel on the subject, the folks at National Bank did it for them, constructing an index that mimics the US Case-Schiller index. What is interesting here is that the price spike is indeed isolated to Greater Toronto and the area around Vancouver. When taking out those metropolitan areas, the remaining cities, which combined with smaller cities and rural areas have 2/3s of the population, have seen zero real price appreciation this decade.With shelter costs 28% of the CPI index, you can see how incorporating this data would throw some sand in the gears at the BoC. Changing to that method would add 3.7% to the current CPI, bringing it to a tasty 5-handle. “Governor Poloz….Agustin Carstens from Banxico on line 2….ok, I’ll tell him you’re not here.” Is this bubble a threat to the whole economy? The financial system continues to look resilient. Canadian banks are 1) big, relative to the scale of the bubble, 2) wicked profitable, and 3) better capitalized than in 2008: Other financial metrics suggest there is much more resiliancy in the financial system than those in economies that have recently hit the pavement. And as much as I hate to cite Warren Buffett as a barometer, he did just throw a pile of money at Home Capital. Another factor is that more immigrants are arriving--about 70% of which show up in Vancouver or Toronto. This, combined with the foreign buyers discussed on Monday, are creating a localized scarcity of housing.I’ll spare you a ton of charts that show low uninsured loan/value ratios but a leveraged Canadian consumer...no smoking guns there--in my opinion they suggest an inevitable, but impossible to time, downturn and/or recession rather than a financial crisis. While Vancouver and Toronto are clearly insane, I just don’t see how that means the whole economy is on the edge of the abyss. So what is Poloz supposed to do? Here is the menu of options: Hike rates--you’re going to need to be aggressive, Banxico-style. Remember, “real” inflation is on a 5-handle, and nobody ever defused a financial time bomb with a couple of measly 25bp hikes! CAD will strengthen materially. Sorry Prairie provinces. Sorry exporters. Sorry oil sands workers and investors. You’re to be crucified in the name of financial stability. Macro-prudential measures--BoC has done some here, but nothing aggressive. Perhaps rightly, Poloz is hoping governments continue to do the heavy lifting. Sit on your hands and hope someone else fixes it. The current strategy, and prefered solution of bureaucrats worldwide since time immemorial. Where does that leave us trading CAD rates and FX? The market is pricing in a very slow and small tightening cycle from the BoC: roughly 48bps in hikes in the next year starting in Q4, and 66bps in the next two years. By contrast, for the next year the market is pricing in the following moves from other relevant central banks: Fed: +17bpsRBA: +6bpsRBNZ: +21bpsECB: The magic 8-ball says, “Ask again later.” But even rates modestly above the overnight came only after Poloz made some hawkish comments last week--a verbal intervention he thought was so important he did it in an interview with a radio station in Winnipeg. The Wilkins speech was on the tape too, but I’m still skeptical. Regardless, the move higher in rates left the 1y1y spread between US and CAD rates near the middle of a two year range, while the loonie still refuses to strengthen.A regression of the 1y1y us/cad rate spread vs. USD/CAD shows...not much. Nothing to see here, move along folks.Lower oil prices, low interest rates and the smoldering housing price bubble are the likely culprits holding back CAD. I would tend to agree with those seeing a technical bounce/squeeze in oil over the next few weeks, which should nominally support CAD. I don’t see a clear trade in rates--I’d more likely be a receiver than a payer. I don’t believe Poloz will deliver on the hawkish rumblings, and foreigners will continue to buy Canadian debt. Steepeners probably make more sense here than elsewhere. I’d reluctantly trade from the long side in CAD, more due to valuation, positioning, relative performance given global USD weakness, and the previously mentioned bias towards a s/t bounce in oil. If those views look inconsistent, it’s because they are. I don’t think we’re at the end of the road here-- I know there are a lot of ridiculous stories of price increases and leverage, but Canada looks like it is a choppy traders’ market rather than a macro opportunity.
Report urges countries to adopt more consistent prudential standards for Islamic banks and strengthen liquidity management frameworks
In an eventful overnight session which saw a historic transition in Saudi Arabia, an unexpected Republican victory in the Georgia Special Election, China's inclusion in the MSCI EM index and Travis Kalanick's resignation, S&P futures continued to fall, alongside stock markets in Asia and Europe, while oil prices extended their drop despite a larger than expected draw reported by API on Tuesday. The USDJPY continued its recent slide, dropping just shy of 111, while GBPUSD tumbled as low as 1.2589, the lowest since May announced the UK election, only to reverse and recover all gains ahead of the Queen's speech on Wednesday. Despite the much hyped inclusion of 222 mainland Chinese shares in the MSCI EM index starting May 2018, which will by only 0.73% to include Chinese A-shares, the Shanghai composite closed a modest 0.5% higher, as the initial euphoria fizzled following calculations that buying pressure from the MSCI shift would be muted. MSCI estimated the change, due around the middle of next year, would drive inflows of between $17 billion and $18 billion. China's market cap is roughly $7 trillion. The index provider also set out a laundry list of liberalization requirements before it would consider further expansion. "We suspect that it will be a long time before this happens," wrote analysts at Capital Economics in a note. While China's weighting in the MSCI Emerging Markets Index may ultimately rise to 40 percent or so, this rise is likely to be slow," they added. "The upshot is that any initial boost to equities is likely to be small." "Inclusion is unlikely to result in a significant shift in the underlying flow picture," Goldman Sachs economists led by MK Tang write in note. "While short-term sentiment could be favorable, over the longer term we continue to expect the CNY to move in a managed path, gravitating gradually towards a weaker level against the USD due to fundamental forces." More notably perhaps, the offshore yuan dropped, shrugging off MSCI’s decision to include mainland shares in its benchmark stock indexes while China's Ten-year sovereign bonds fall, with the yield rising the most in 6 weeks after the PBOC drained CNY 40bn in liquidity, even as S&P said it sees a "real possibility" of a China downgrade, for one simple reason: China continues to drown in debt. European shares fell for a second day as crude continued to edge lower. Haven demand spurred the yen and gold, which was poised to advance after five days of losses. For once oil’s woes had little impact in Saudi Arabia, where a palace reshuffle and good news from MSCI Inc. boosted equities. Shanghai stocks also advanced after the index provider added China’s domestic shares to its emerging-markets gauge. Another key overnight development, was the Saudi Royal reshuffle in which King Salman stripped the current crown prince, his nephew Mohammed bin Nayer, of his post, and replaced him with his son, Mohammed bin Salman. While speculation remains on what was the cause for the historic shakeup, with the ongoing collapse in the price of oil and resulting sharp saudi deficits cited as the most likely one, the local market took it in stride, with the Saudi Tadawul All-Share index rallying 3.3% after the news. Back to markets, Australia’s S&P/ASX 200 Index slumped 1.6%, erasing its gain for the year, as energy shares tumbled. BHP Billiton and Rio Tinto both slid at least 2.9 percent. While the SHCOMP eeked out modest gains, Hong Kong’s Hang Seng Index fell 0.6% perhaps due to rebalancing. European shares fell for a second day as crude extended its drop further into a bear market. Safe haven demand spurred the yen and gold, which was poised to advance after five days of losses. The ongoing weakness in crude and other commodities threatens to crush arguments from US central bankers that weak inflation rates will be transitory, adding to concerns of a Fed policy error that could unintentionally crimp the global economic recovery, according to Bloomberg. The Stoxx Europe 600 lost 0.7% with bank stocks leading the way. All eyes remained on oil, where signs of a growing glut of supply and rising Libyan output sent Brent crude futures skidding back to $45.50 as European trading gathered momentum. The slide in energy costs boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the Japanese yen. "Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market," Rabobank analysts told clients in a reference to Brent crude futures, which have slid almost 10 percent this month, and over 20% since the recent highs. Oil had shed 2% on Tuesday, taking U.S. crude futures into a bear market, a red flag to investors who follow technical trends. The moves in rates were just as dramatic, with the spread between yields on U.S. five-year notes and 30-year bonds shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes. Thirty-year German debt yields bonds also tumbled back toward two-month lows, adding to a more than 20-basis-point drop over the past month and ahead of what will now be a closely watched sale of 30-year debt in Berlin later. "The plunge in oil prices ignited a bull flattening on the German and U.S. curve," analysts at UniCredit said in a note adding that it suggested "reflation trades are finally deflated." The recent setback for crude and commodity prices as well some equity markets is partly over doubts of Trump's promised multi-trillion dollar stimulus program, which had raised hopes of boosted inflation and growth, and has been a huge disappointment instead. In currency markets, the flight from oil and into long-dated government bond benefited the safe-have yen which climbed to 111.120 per dollar. The U.S. currency was holding its own elsewhere though - oil and the greenback often move inversely. Against a basket of currencies, it was steady at 97.736 having touched a five-week peak overnight. The euro stood at $1.1146 after hitting a three-week low, while the dollar eased a touch on the yen to 111.17. Sterling was still in the firing line initially sliding back under $1.26 but since rebounding sharply and recoupong all losses. It took a spill after Bank of England Governor Mark Carney hosed down speculation that he might soon back higher interest rates, saying he first wanted to see how the economy coped with Brexit talks. Oracle scheduled to report earnings later on Wednesday, while numbers on existing home sales will be published on the macro side Market Snapshot S&P 500 futures down 0.3% to 2,431.00 STOXX Europe 600 down 0.8% to 386.28 MXAP down 0.5% to 154.46 MXAPJ down 0.9% to 500.76 Nikkei down 0.5% to 20,138.79 Topix down 0.4% to 1,611.56 Hang Seng Index down 0.6% to 25,694.58 Shanghai Composite up 0.5% to 3,156.21 Sensex down 0.2% to 31,222.18 Australia S&P/ASX 200 down 1.6% to 5,665.72 Kospi down 0.5% to 2,357.53 German 10Y yield fell 1.4 bps to 0.248% Euro down 0.04% to 1.1130 per US$ Italian 10Y yield fell 4.4 bps to 1.62% Spanish 10Y yield fell 2.2 bps to 1.363% Brent Futures down 0.6% to $45.76/bbl Gold spot up 0.2% to $1,246.00 U.S. Dollar Index up 0.01% to 97.77 Top Overnight News from BBG Theresa May will make her first attempt to engage with Britain’s new political landscape as she publishes a legislative program heavy on Brexit and likely to be light on anything controversial U.K. first secretary of state Damian Green tells BBC radio there’s still every possibility of Conservative Party deal with DUP; government currently lacks overall majority in parliament with legislative program due later on Wednesday in Queen’s Speech Saudi Arabia’s Deputy Crown Prince Mohammed Bin Salman was named to replace his cousin as heir to the throne in a shake-up that consolidates the 31-year-old leader’s power in the world’s biggest oil exporter Emmanuel Macron’s justice and European affairs ministers quit, bringing to four the number of members of his cabinet who have left in recent days amid various ethics investigations Chinese stocks were little moved by their addition to MSCI Inc.’s benchmark indexes as investors weighed the symbolic importance of inclusion against the limited impact on short-term inflows Republican Wins U.S. House Seat in Georgia After Close Race Oil Slide Hits Stocks; MSCI China Impact Is Muted Housing Finance Overhaul May Come Before Dodd-Frank, Warner Says Saudi Crown Prince Seen Keeping Oil Policy Aimed at Higher Price Uber CEO Travis Kalanick Quits Under Pressure From Investors BMC Software, CA Said to Weigh Deal to Combine, Take CA Private Sears Canada Is Said to Prepare to Seek Creditor Protection Sinopec, JD.com Discuss Cooperation on Logistics, Finance Sharp Says FY 2016 Sales to Apple Fell 18.8% Y/y to 542.1b Yen Mithra Completes Recruitment for Added Estelle® Safety Study Asia equity markets traded mostly negative following the downbeat Wall St. close, where energy lagged after WTI crude briefly slipped below USD 43/bbl to hit a 9-month low. ASX 200 (-1.6%) underperformed with the index dragged by weakness across commodities, while Nikkei 225 (-0.4%) was dampened by a firmer JPY. Shanghai Comp. (+0.2%) and Hang Seng (-0.6%) were mixed with the mainland bourse kept afloat following MSCI's inclusion of China A-shares in its Emerging Market index, which in turn also dampened stocks in South Korea due to expected outflows from the decision. 10yr JGBs are mildly higher with mild demand seen amid weakness in stocks, while the BoJ were also in the market for JPY 1.03fin of JGBs ranging from 1yr-10yr maturities. Top Asian News Toshiba Picks Bain-Japan Group as Preferred Chip Unit Buyers Freeport Indonesia Workers to Extend Strike for Third Month Australia Law to See Online Retailers Pay More Sales Tax Vanke’s Wang Exits After Tussle Over China’s No. 1 Developer China Stocks Win MSCI Entry as $6.9 Trillion Market Goes Global MSCI Sees $17b of China Inflows Under Current Inclusion Plan Singapore June COE Second Open Tender: Summary (Table) Allianz Seeks to Bulk Up in Asia in Wait for China Permit China Steel Rebar Extends Drop as ‘Off-Season’ Demand Takes Toll EU markets trade in the red, a continuation from yesterday's US session. Energy continues to struggle, with WTI futures looking to once again attack the USD 43.00/bbl level. Financials lead the downside however, not helped by earnings downgrades this morning, with prudential (-16%) the clear laggard in FTSE 100. Fixed Income markets are evident of the risk off sentiment — Gilts and Bunds continue to tick higher as global uncertainties continue. Spreads to the Bund have been mixed, with the lOy Spain trading well, 0.50bps tighter to Bunds, contrasting with a 0.50bps widening for BTPs. UK PM May stated that the Brexit needs to be delivered in a way the commands maximum public support, while May added they will work with parliament, businesses and devolved governments to ensure a smooth and orderly exit.30 UK Conservative MPs are reported to have told PM May they will not accept a Brexit without a deal. The DUP was reported to have threatened to walk away from talks with the Conservative party over forming a government. Last night there was speculation that the Conservatives could even open talks with the Liberal Democrats' 12 MPs about supporting the Tory Government if the DUP talks fail. Top European News Gecina to Buy Eurosic for $2.8 Billion to Add Paris Offices Provident Financial Falls 20% After Warning on Consumer Credit Credit Suisse to Bolster Leveraged Finance Business: FT Australian Regulator Postpones Decision Date on Bayer, Monsanto Novo Nordisk’s Victoza Heart Benefit Claim Backed by FDA Panel May Faces New Political Reality With Brexit-Heavy Program Macron Loses Two More French Ministers as Bayrou, Sarnez Quit U.K. Budget Deficit Narrows in Fiscal Boost for Hammond Italy’s Gentiloni: U.K. Not Very Strong at Start of Brexit Talks In currencies, FX markets again influence by the political mess in the UK, where we have a minority government scrambling for seats. The DUP have threatened to walk away from talks according to the media, but insiders suggest talks are ongoing, so earlier speculation that Theresa May and her band of not-so merry men will turn to the LibDems is premature. Nevertheless, GBP remains under pressure, as yesterday's catalyst of gov Carney's distancing from hawkish sentiment at the MPC has seen 1.2600 relinquished, but all too briefly as yet. EUR/GBP grinds higher to test 0.8850, but has stopped short of this level by some 5 ticks or so as yet. Elsewhere, we have seen a modest pullback in the USD in line with the Treasury curve, where the key 10yr rate is now just under 2.15%. USD/JPY is testing moderate support ahead of 111.00, but this is all inside familiar territory and suggests a period of range bound trade ahead. This goes for EUR/USD also, but we sense the demand in EUR/GBP is adding an artificial bid here as the lead EUR rate looks prime for a deeper setback after the sold resistance seen ahead of 1.1300, and now at 1.1200. EUR/CHF heavy in the mid 1.0800's supports this view. In commodities, West Texas oil fell 0.2 percent to $43.41. Futures tumbled more than 2 percent on Tuesday, touching the lowest since August. Gold rose 0.2 percent to $1,245.98 an ounce after falling for five straight days. Oil had shed 2 percent on Tuesday, taking U.S. crude futures 20 percent off recent highs and thus into official bear territory, a red flag to investors who follow technical trends. "Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market," Rabobank analysts told clients in a reference to Brent crude futures, which have slid almost 10 percent this month. The weakness in crude and other commodities threatens to dent arguments from U.S. central bankers that weak inflation rates will be transitory, adding to concerns of a Fed policy error that could unintentionally crimp the global economic recovery. Looking at the day ahead, it's a quiet day for data with only US existing home sales for May out this afternoon. Away from the data the BoE Chief Economist Andy Haldane is scheduled to speak at midday today while the Queen’s speech will be the other big focus. US Event Calendar 7am: MBA Mortgage Applications, prior 2.8% 10am: Existing Home Sales, est. 5.55m, prior 5.57m 10am: Existing Home Sales MoM, est. -0.36%, prior -2.3% DB's Jim reid concludes the overnight wrap It it seems apt that Oil was one of the major market movers yesterday. WTI fell -2.19% yesterday to close at $43.23/bbl (although did hit an intraday low of $42.75/bbl). That means it has now fallen a little over 20% from its highs back in February (using close-to-close prices – closer to 23% using intraday pricing) and therefore slipping into the definition of a bear market. Rather than there being one specific catalyst yesterday the move just appeared to be an extension of the slide that we’ve seen for the last few months now with markets questioning the impact of the OPEC-led output cuts and also a reinvigorated US shale market. Risk assets were hit hard too as a result. The S&P 500 (-0.67%) suffered its biggest decline since May 17th while the Stoxx 600 (-0.70%) was down a similar amount. EM currencies sold off while sovereign bond yields fell in tow. 10y Treasuries ended the day 3.2bps lower at 2.157% while 10y Bunds were 1.9bps lower at 0.258%. Oil is now back to levels last seen on September 16th last year and even though we’ve rallied hard since February 2016, Oil has only been lower than this for 6% (188 days) of the time since the start of 2005. That is mostly made up of 44 days in 2008/09 and 112 days in late 2015/ early 2016. So these are pretty stressed levels relative to the past decade or so. Given that Oil has returned back to start of 2005 levels we thought we would publish our usual monthly asset performance chart from this date to put the lethargic performance of Oil in some context over the last 12 and a half years. Keeping it in USD hedged terms only for simplicity sake, of our usual asset classes we monitor the biggest winners have been the Shanghai Comp (+286%), Gold (+189%), Hang Seng (+177%), S&P 500 (+163%) and EM Equities (+160%). So while Oil is net flat it’s not stopped equity markets rallying incredibly over that time. US and EUR credit indices have returned anywhere from +34% to +109% and DM bond markets have returned +38% to +61%. In fact outside of currencies only 4 assets have fallen in the last 12 and a half years (and therefore unperformed Oil). Those include the FTSE MIB (-10%), European Banks (-34%), the Broad Commodity Index (-38%) and Greek Equities (-68%). Clearly the financial crisis and peripheral European concerns of the last decade are the big themes there. Away from Oil the other notable news yesterday came last night after markets closed with the announcement that China’s A-shares will be included in MSCI’s benchmark indexes for the first time following three previous failed attempts. The index complier plans to add 222 large cap China A stocks which will mean they occupy an aggregate weight of 0.7% in the emerging markets index. According to the FT that is a larger number of stocks and overall percentage than MSCI had previously proposed. Stocks will be added in two stages in May and August next year. Significantly this marks a fairly major landmark for China in as far as integrating into the global financial markets. The announcement has seen Chinese equity markets firm up this morning which is helping to offset falling energy stocks. The Shanghai Comp is currently +0.13% after being up as much as +0.45% while the CSI 300 is +0.52%. In contrast the Hang Seng (-0.30%) is in the red along with the Nikkei (-0.23%), ASX (-1.35%) and Kospi (-0.56%). Oil is little changed while US equity index futures are also pointing towards a slightly weaker open. As we go to print headlines are also hitting the screens noting that Saudi Arabia's King has replaced the Crown Prince, replacing him with his son Mohammed bin Salman. Moving on. With the calendar fairly thin again today expect there to be a reasonable amount of focus on the Queen’s speech at 11.30am BST in the UK. With no deal reached yesterday it appears that an agreement between the Conservatives and the DUP parties will not be made in time for it. So it’s likely that the government will today present its legislative programme with no guaranteed majority. Several days of debate is expected to commence following the speech with votes then expected to go ahead on June 28th and 29th. The Telegraph ran a story last night suggesting that DUP MP’s are threatening to walk away from a deal entirely. So it’s very fragile situation. Of course this all comes with the first week of Brexit negotiations getting underway and for which more and more details will emerge in weeks to come. Brexit was a big focus in Governor Carney’s Mansion House speech yesterday with the Governor stating that he wants to see how the economy reacts to the reality of Brexit negotiations. Carney also talked about “mixed signals on consumer spending and business investment” along with the “still subdued domestic inflationary pressures, in particular anaemic wage growth”. So pretty dovish overall particularly in light of the more hawkish BoE meeting last week. Sterling tumbled -0.85% yesterday to close at $1.263 and is now below the big election night spike lower, and at the lowest since April. It’s worth adding the Chancellor Hammond also spoke yesterday at the Mansion House and reiterated that the Government will “remain committed to the fiscal rules set out at the Autumn Statement….to a balanced budget by the middle of the next decade”. In other words no indication that the Government will be changing course any time soon but he did acknowledge that the election shows that Britain had become weary of austerity so maybe higher taxes are planned for some. He also spoke about prioritising jobs and the economy in Brexit talks which was different to the campaign trail rhetoric from his leader. Away from the BoE it was also a busy day over at the Fed. The Chicago Fed’s Evans spoke again and said that he was a little nervous on inflation but overall still positive about the US economy. He also suggested that the Fed could wait until December before deciding whether or not to tighten again. Vice-Chair Fischer acknowledged that low rates have contributed to rising house prices in certain countries while the Boston Fed’s Rosengren voiced some concerns about financial stability risks as a result of a long period of low rates. Meanwhile House Speaker Paul Ryan delivered his eagerly awaited tax speech but it ended up being pretty short on exciting details for markets. Ryan emphasised that the current administration is “”going to fix this nation’s tax code once and for all” while also saying that “we need to get this done by 2017”. It’s worth noting that Ryan avoided the much debated border adjusted tax issue although in a TV interview just after did also note that the BAT isn’t dead but that officials are also working on possible alternative proposals. Before we wrap up, in terms of the limited macro data out yesterday, in the US the current account deficit for Q1 revealed a deficit of 2.5% of GDP during the quarter which is little different to that seen on average over the past eight years. In Germany a drag lower from energy prices saw Germany’s PPI fall -0.2% mom in May and a little bit more than expected. Looking at the day ahead, it looks set to be another quiet day for data with only UK public sector net borrowing data for May due out this morning and US existing home sales for May out this afternoon. Away from the data the BoE Chief Economist Andy Haldane is scheduled to speak at midday today while the Queen’s speech will be the other big focus.
Demand for safe assets from emerging markets creates a headache for policymakersThis week’s Economist riff takes us to Canada. Are Canadian housing prices in a bubble? There’s little doubt the answer is yes. The article discusses some of the macro-prudential measures the government and Bank of Canada have taken, and their relative (lack of) effectiveness.Tough to argue with that chart, when the price/rent ratio is materially outperforming peak prices from 2006 in the US, as well as Australia frothy prices. But is Canada on the precipice? The article correctly points out the source of the bubble is capital flight from Asia, mainly China. This chart shows there has been an avalanche of capital leaving China looking for a safe destination with stable rule of law. Canada certainly fits the mold.How has the Chinese government and the PBoC reacted to this capital flight? They have tightened capital controls in a variety of ways. This chart would argue they’ve actually been quite effective at it. Reserves have stabilized, and so has CNY. Similarly, front end rates in China have cranked higher as the authorities squeeze shorts. The combination of higher front end rates in China and tightening capital controls may not be completely uncorrelated to the recent slowdown in Vancouver and Toronto housing prices. The international economics textbook would say this is unsustainable--Chinese authorities will be playing whack-a-mole trying to stop capital from leaving the country, and Canada will continue to be an attractive destination. So with money still seeking to leave China, are we near the end for the Canadian housing market? I believe the answer is again a resounding “no”, for a few reasons: I would agree with the article here that Canadian banks are well regulated and capitalized. The shadow banking/zero down/ARM binge we saw in the US hasn’t gotten there (yet). There may be some bodies buried in the yard, but not system-wide.It’s clear that it will be a reversal of the capital flows from China that finally pops the housing bubble, which will likely be because of a hard landing/financial crisis in China, coinciding with a cratering in commodity prices. As I discussed last week, there are clear signs of a Chinese credit boom. But I don’t see the signs that there is a bubble popping there. I recognize front end rates are inverted but I don’t see the spark that is going to ignite the tinder--maybe a dead whale beaches itself onshore tomorrow, but given the firepower and incentives of the Chinese government, I suspect that day is well in front of us. The catalyst for an end, or a reversal, of the flows has to get back to value. The Chinese will repatriate their capital when and if there are cheap assets to buy domestically. But today there is huge value in exporting capital for your average Chinese citizen. And for these people, Canada still looks cheap. Not only do you gain a significant improvement in the rule of law, but CAD is near historically cheap levels on a REER basis, while CNY is still looks overvalued. Bubble economies tend to have overvalued currencies as the “story” behind capital flows overwhelm reality. The REER in Canada shows that is not the case, in fact, arguably the opposite. And it is worth noting that #2 in this measure is USD, which has been another huge beneficiary of foreign flows over the last several years. Source: BIS I’m not going out to buy a condo in Vancouver tomorrow morning. And I can see how foreign demand could make domestic assets expensive enough to price out local consumption and investment and submarine the economy. But I don’t see the evidence that we are there yet.
One day after China's rate policy unexpectedly decoupled with the Fed, and in light of recent developments in China's loan market discussed last night, Goldman's MK Tang writes that the firm has "received a number of inquiries on yesterday’s China money and credit data, as well as recent PBOC rate actions." To answer all lingering questions, Tang has published the following handy Q&A "to link these issues together by answering some of the key questions." China: Q&A on money and rates Q1. Didn't the PBOC suggest that its interest rate policy was partly tied to the Fed policy? Yes, but it does not have to be. The PBOC did not raise rates on open market operations (OMOs) today (and also kept 7-day repo rate fixing broadly stable at 3.44%), despite the Fed hike overnight. This is in contrast to March 16, when the PBOC raised OMO rates by 10bp immediately following the increase in Fed funds rate. Although the PBOC cited the Fed hike as a reason for its move on that occasion, domestic conditions (e.g., growth, inflation, financial leverage) seem to have been more important factors for its actual stance on interbank liquidity. Given the recent growth moderation from the very strong pace at the start of the year, announcements of tighter prudential policies from other agencies, and advancement in financial deleveraging (more on this below), the PBOC has in recent weeks signaled a less hawkish policy stance. In any event, we already expected an incrementally easier PBOC stance given the credit headwinds in the pipeline (see here) (Exhibit 1). Another reason why the PBOC may feel less pressure to hike is that the pace of FX outflow has slowed partly on tighter capital control. This increases the scope for China’s interest rate policy to be independent (as a reminder: according to the “impossible trinity” thesis, a less open capital account allows a country to maintain an independent monetary policy even without a flexible exchange rate regime). We also note that the abrupt RMB appreciation two weeks ago as well as the USD soft patch could also help reinforce RMB sentiment and mitigate potential outflow pressure driven by higher USD rates, in lieu of a corresponding rise in domestic rates. Exhibit 1: Interbank interest rates have trended down in the last several weeks Source: CEIC Q2. What is "financial leverage"? How is this different from shadow banking? While there is no universally adopted definition on these concepts, it is useful to distinguish two types of leverage in China. 1. One is credit extended to the real economy (i.e., non-financial corporates and households). This includes i) transparent forms of financing (e.g., bank loans, corporate bonds), ii) traditional shadow banking credit (e.g., trust loans, entrusted loans, undiscounted bank acceptance bills), and iii) newer form of shadow credit (e.g., credit extended by funds and brokers’ special purpose vehicles but booked as equity investment). The first two components are included in the official credit data (TSF), while the third one may not be. In light of this, last year we introduced our "money-implied" credit measure which should also capture this last credit component. In recent months, policy tightening has prompted a much more rapid slowdown in this shadowiest credit component than those reflected in TSF, as we recently discussed (Exhibit 2). 2. The other type of leverage is related to financial institutions borrowing money to invest in financial assets such as bonds, and this is often referred to as “financial leverage”. This is different from the first form of leverage in that the borrowing does not directly go toward supporting the real economy (see our note here for more discussion). This is not reflected in either TSF or our own money-implied credit measure (both of which are intended to include credit extended to the real economy only). There is no comprehensive data on this sort of leverage, though one proxy could be the amount of interbank repo borrowing by fund institutions (Exhibit 3). Exhibit 2: The part of credit to the real economy not captured in official data seems to have slowed particularly rapidly in recent quarters Source: Goldman Sachs Global Investment Research Exhibit 3: Fund institutions have borrowed heavily in the interbank repo market , suggesting high financial leverage Source: CCDC Q3. Why was M2 growth so weak in May? Is it because of financial deleveraging? Yes, but not entirely. At 9.6%yoy, M2 growth in May was even slightly weaker than the previous lows in early 2015. And indeed, M2 data had also surprised on the downside in the previous two months. In a statement yesterday, the PBOC suggested that the M2 weakness was to a large extent due to a moderation in financial leverage (the second type of leverage discussed in question 2 above). In particular, M2 held by NBFIs (non-bank financial institutions) grew at a very slow 0.7%yoy, vs. 10.5%yoy growth in M2 held by the real economy. The PBOC statement is in line with our assessment that the worst of financial leverage growth is probably behind us. Judging from the recent rate spreads in the interbank market (R007 minus DR007; i.e., general average repo rate less repo rate applied to banks only) and bond market (bond yields minus swap rates), liquidity pressures faced by NBFIs and the scale of bond positioning seem to have been meaningfully reduced in the past several weeks (Exhibits 4 and 5). Exhibit 4: Premium paid by NBFIs to borrow in interbank has narrowed and become less sensitive to underlying liquidity conditions Source: WIND Exhibit 5: Bond valuation (relative to swap) has also become less over-valued Source: CEIC That said, financial deleveraging does not seem to have been the only major reason for the slow M2 growth. A slowdown in liquidity accrued to the real economy (i.e., the first type of leverage discussed in question 2) also seems a likely key contributor (Exhibit 6). In particular, our proxy for M2 held by the real economy has been trending downward since late 2016 and probably fell much further in May, given information from the PBOC statement (our proxy is the sum of cash in circulation, and household and non-financial corporate deposits). The weakness in M2 held by the real economy is a particularly strong signal for slower credit extended to the real economy, because some other key forms of the real economy's financial savings (e.g., wealth management products, insurance products) are apparently also under pressure, given various regulatory tightening measures. Conceptually, a lower level of the real economy’s total financial savings (deposits plus non-deposit financial savings) is a likely reflection of less credit extended by the financial system to the real economy. This suggests that the trend of overall credit (including also credit not captured in TSF) extended to the real economy might have been softer than suggested by official credit data (we do not have sufficient data to update our money-implied credit measure beyond Q1 yet). If so, this would be a continuation of the pattern from Q1 and in line with our view for continued drag on credit given the past rise in market rates. Exhibit 6: M2 held by the real economy has been decelerating since late 2016, and probably slowed further in May Source: PBOC, Goldman Sachs Global Investment Research Q4. What is the outlook for interbank rates? We continue to expect interbank liquidity to be kept at a fairly stable level as in recent weeks, given slower growth momentum, material progress in financial deleveraging and a tightened capital control that can limit outflow pressures from higher US rates. Moreover, on a forward-looking basis, we expect the past increase in market rates to continue feeding through to actual lending rates (Exhibit 7), which could slow credit further. This argues for slightly easier interbank rates (as what we have already seen in the last few weeks) to pay for insurance against the credit headwinds in the coming months. On the other hand, given the cyclical strength in export demand, less leakage via FX outflow as well as an apparently stronger politically-driven willingness of local governments to support demand, economic activity could continue to perform fine despite the ongoing credit slowdown. For commodity demand in particular, our commodity team colleagues have suggested that bank loans (which have remained solid) may matter more than other forms of credit (which has slowed more rapidly). Overall, in our view, significant pre-emptive accommodation seems unlikely—we may not have any major monetary easing unless weakness in growth materializes. Exhibit 7: Market interest rates tend to lead bank lending rates by roughly 6 months Source: PBOC, CEIC, Goldman Sachs Global Investment Research
(Reuters) - U.S. life insurer Prudential Financial Inc said it appointed Lata Reddy to chair its not-for-profit arm, the Prudential Foundation.
Shares of Prudential Financial, Inc. (PRU) gained 50.56% in the last one year, significantly outperforming the Zacks categorized Multi line Insurance industry's 35.26% increase.
The Zacks Analyst Blog Highlights: East West Bancorp, Summit Financial Group, 1st Source, First Bancorp and People's Utah Bancorp
The Zacks Analyst Blog Highlights: East West Bancorp, Summit Financial Group, 1st Source, First Bancorp and People's Utah Bancorp
By Tobias Adrian and Aditya Narain June 8, 2017 The headquarters of the Bank for International Settlements in Basel, Switzerland, which houses the Basel Committee on Banking Supervision (photo: Christian Hartmann/Reuters/Newscom) Calculating how much capital banks should have is often a bone of contention between regulators and banks. While there has been considerable progress on […]
Prudential Financial (PRU) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.
Как стало известно "Ъ", в России может появиться новый крупный золотодобытчик, способный занять второе место на рынке. Речь идет об объединении Petropavlovsk с "Золотом Камчатки" Виктора Вексельберга с возможной последующей консолидацией с Highland Gold Романа Абрамовича или GV Gold. Помешать планам могут большие долги Petropavlovsk, сложности в структурировании сделки и управлении объединенной компанией.Группа "Ренова" Виктора Вексельберга будет добиваться контроля в золотодобывающей Petropavlovsk, где уже стала крупнейшим акционером (22,34% акций и 6,88% голосов в конвертируемых облигациях), рассказали источники "Ъ". Сейчас "Ренова", контролирующая вместе с дружественными фондами Sothic Capital Management и M&G Debt Opportunities (входит в Prudential) около 40% Petropavlovsk, требует смены совета директоров компании. Собеседники "Ъ" говорят, что в случае победы на собрании акционеров в июне следующим шагом может стать объединение "Золота Камчатки" "Реновы" с Petropavlovsk. Более того, ряд источников "Ъ" утверждает о предварительных переговорах по слиянию консолидированной компании с Highland Gold (крупнейший акционер Роман Абрамович) и GV Gold, подконтрольной владельцам Ланта-банка во главе с Сергеем Докучаевым.Контроль в Petropavlovsk (капитализация на LSE на 2 июня - около $340 млн) и ее слияние с собственными активами "Ренове" нужны как для защиты инвестиций на фоне разногласий с основателями золотодобытчика Петером Хамбро и Павлом Масловским (свыше 9% акций), так и для увеличения ликвидности "Золота Камчатки", объясняют собеседники "Ъ". Но для реализации планов нужна поддержка миноритариев Petropavlovsk, ведь сама "Ренова" голосовать не сможет, уточняет один из источников "Ъ". Другой собеседник слышал, что камчатская компания может быть оценена для сделки в $500 млн.В рамках потенциального объединения с Highland Gold (на LSE в пятницу стоила около $635 млн) ключевым аспектом может стать достройка Petropavlovsk к 2019 году автоклава (POX) для упорных руд - они есть у обеих компаний, в частности у Highland Gold это Тасеевское месторождение в Забайкалье (ресурсы - 5 млн унций золота с содержанием 5,1 г на тонну).Для владельцев GV Gold аргументом может стать наличие у Petropavlovsk листинга. У самой GV Gold его до сих пор нет, хотя компания неоднократно рассматривала перспективы IPO и на этом настаивает американская Blackrock (17,99%), у которой есть определенные требования к ликвидности бумаг в портфеле, объясняют источники "Ъ". Возглавивший в апреле GV Gold Герман Пихоя (входил в 2013-2017 годах в совет директоров "Золота Камчатки") говорил Reuters, что "компании с капитализацией до $1 млрд могут стать очень интересными двигателями консолидации", но GV Gold в любом случае хочет и сама подготовиться для IPO к весне 2018 года.Павел Масловский, основатель и гендиректор Petropavlovsk, об увеличении структурами Виктора Вексельберга доли в капитале компании, 27 ноября 2015 года "Интерфаксу": "Мы спокойно на это реагируем. Если есть какие-то далеко идущие планы, то они рано или поздно будут известны".В России 518 золотодобытчиков, шесть из них добыли в 2016 году около 140 тонн из общего объема (261 тонна), а на долю 35 крупнейших приходится 78% добычи, потенциал для консолидации есть, говорит глава Союза золотопромышленников Сергей Кашуба. Слияние Petropavlovsk (в 2016 году добыла 12,95 тонн золота) с "Золотом Камчатки" (5,1 тонны) и Highland Gold (7 тонн) позволит объединенной компании с добычей около 25 тонн соревноваться за второе место в России с Polymetal (24,77 тонн).При слиянии с GV Gold вместо Highland компания с 18,4 тонн в год займет четвертое место вслед за российскими активами Kinross (20,7 тонн).Два собеседника "Ъ" считают наиболее вероятным слияние с Highland Gold, указывая, что "Ренова" предлагает в новый совет Petropavlovsk партнера юрфирмы Skadden, Arps, Slate, Meagher & Flom Брюса Бака, специалиста по M&A, который консультировал Романа Абрамовича по сделкам "Сибнефти", Evraz и при покупке ФК "Челси", совет директоров которого он возглавляет. Skadden консультировала и консорциум Alfa-Access-Renova при продаже 50% в ТНК-BP "Роснефти".В самих компаниях от официальных комментариев отказались, в Highland Gold назвали информацию "рыночными спекуляциями". Источники "Ъ", близкие к Highland Gold, GV Gold и их акционерам, говорят, что "были разные предложения", но детальных переговоров нет. Пока у Petropavlovsk не запустится POX, все разговоры о слияниях останутся спекуляциями, считают собеседники "Ъ". Источник "Ъ", близкий к "Ренове", и вовсе утверждает, что ей "не нужны другие активы, ни с кем и ни о чем там не разговаривают". Однако еще в 2016 году заявлялось о возможной трехсторонней сделке с участием Petropavlovsk, "Амур Золота" Мусы Бажаева и "Золота Камчатки", но она развалилась. Источники "Ъ" этой весной называли вероятным поглощение "Реновой" Petropavlovsk.В то же время участники рынка отмечают, что, кроме сложностей в структурировании на уровне акционеров, встанет вопрос о гендиректоре, который мог бы "рулить махиной с географией активов во всю страну". Олег Петропавловский из БКС добавляет, что у Petropavlovsk большой долг (на конец 2016 года - $598,6 млн, или 3 EBITDA), ей нужны деньги на достройку POX и не менее года с момента запуска, чтобы выйти на проектную мощность, поэтому перспективы масштабного слияния для компаний даже на горизонте двух-трех лет выглядят "крайне неоднозначными".Анатолий Джумайло(https://www.kommersant.ru...)
Prudential Financial (PRU) seems to be a good value pick, as it has decent revenue metrics to back up its earnings, and is seeing solid earnings estimate revisions as well.
Aflac Inc. (AFL) boasts an excellent franchise and strong market position in supplemental health insurance in both Japan and the U.S.