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By Graham Bishop, Investment Director at Heartwood Investment Management 

July’s readings of the Markit Purchasing Manufacturers’ Surveys (PMIs) offered no real standout surprises. However, they seem to support our view that global growth is softening at the margin in the second half of this year, and that we are seeing less synchronised performance between economies. In fact, the improvement in global manufacturing over the last year may now have reached its cyclical peak.

Our analysis shows that fewer countries are making a positive contribution to global manufacturing growth, a trend that has been building since March. Only 30% of individual countries saw accelerating growth rates in July compared with nearly 80% of countries at the end of last year (based on the index change over the last three months).

Percentage of countries with faster rates of manufacturing activity (3-month change)

Source: Markit Purchasing Managers’ Surveys, Bloomberg

Source: Markit Purchasing Managers’ Surveys, Bloomberg

There also appears to be more dispersion at the individual country level. Manufacturing surveys in the last three months show that developed economies are now outperforming emerging economies – a situation that contrasts with earlier in the year when we saw a higher degree of synchronisation in global growth. Emerging economies, especially the commodity exporters and to a lesser extent China, are contributing to this divergence. In the case of China, there remains a discrepancy between the official and ‘unofficial’ manufacturing surveys, which we monitor closely. Even among developed economies, though, we are seeing wider levels of dispersion at the country level. Much of the developed world’s current outperformance is attributable to the Eurozone members, while the UK is one of the weakest countries and the US is plateauing.

Manufacturing surveys are of course a proxy and do not tell the whole story about general economic conditions. However, they are an important barometer of overall business sentiment and, as we saw in 2015, the health of manufacturing can have important ramifications for the broader economy.

We do not yet consider this moderation in activity to be overly concerning. Moreover, it is only to be expected that some of the froth has evaporated from the elevated readings seen earlier this year. For now, we believe that these slower rates of expansion signal the transition from a cycle of manufacturing improvement and recovery to one of stabilisation.

There is, though, one important caveat. The marginal softening in global manufacturing, and perhaps broader economic momentum, is occurring at a time when central banks are considering removing monetary policy accommodation. While we believe the current environment remains supportive to risk assets and corporate fundamentals, we are starting to take a more cautious view further out as policymakers continue to normalise monetary conditions. In consequence, we believe that it is prudent to begin reducing risk in portfolios incrementally.


World stocks’ dance to continue, but inflation could mute the music – Reuters poll



World stocks' dance to continue, but inflation could mute the music - Reuters poll 2

By Vivek Mishra and Rahul Karunakar

BENGALURU (Reuters) – The bull-run in global stocks fuelled by cheap cash and reflation hopes will continue for at least another six months but a rise in bond yields as inflation expectations grow could throw a spanner in the works, Reuters polls found.

Despite severe economic damage from the pandemic, MSCI’s global stock index — which tracks shares across 49 countries — notched up all-time highs this month, having risen over 70% since hitting rock-bottom in late March amid ample liquidity from central banks and massive fiscal stimulus.

In recent trading sessions, world stocks have pulled back as a rapid surge in global bond yields raises expectations that major central banks could eventually turn less accommodative in a bid to tame inflation.

But even as a gauge of equities slipped this week on hints of rising inflation led by higher oil prices and the strongest copper price in nearly a decade, the Feb. 12-24 polls of nearly 300 equity strategists found the trend of stock market gains was set to continue this year.

All 17 major stock indexes polled on by Reuters, from Tokyo to Toronto, were expected to end 2021 higher from here, with nine predicted to extend their record-setting rallies.

Fifteen of those indexes have already breached the mid-2021 consensus level and 10 indexes are above the end-2021 median level predicted in the previous poll in November.

In response to an additional question, over two-thirds, or 79 of 111 analysts, said the run-up in global stocks would continue for at least another six months, including 58 who said over a year.

“It’s the health-crisis nature of this recession that has led to the greatest monetary and fiscal policy response in history. It’s not that people are so bullish about the future but rather they are flush with cash and the excitement of making money,” said Michael Wilson, chief U.S. equity strategist at Morgan Stanley.

“Our advice here is to take pause and observe a bit as these excesses are wrung out; but bear in mind we are at the beginning of a new economic cycle and that usually means a multi-year bull market has begun.”

With over 65%, or 72 of 110 strategists who responded to a separate question, expecting corporate earnings to return to pre-COVID-19 levels within a year, stock markets from developed to emerging were forecast to rally through 2021. [EPOLL/JP][EPOLL/IN][EPOLL/RU][EPOLL/EU][EPOLL/BR][EPOLL/US][EPOLL/CA]

“In some sectors and markets, corporate earnings are now above their pre-virus levels, whereas in the energy sector and some of the other badly hit sectors they are still below,” noted Simona Gambarini, a markets economist at Capital Economics.

“That is why we think the next leg-up in equity markets will coincide with a rotation towards coronavirus-vulnerable sectors.”

But concerns were growing for a significant market correction as surging U.S. Treasury yields on rising inflation prospects have triggered caution over pricey equity valuations.

Those fears have already hit shares of high-flying growth companies and top technology-related firms, which were at the heart of a stunning rally that drove major indexes to record levels.

That was also reflected in a market gauge of inflation expectations, the Treasury Inflation Protected Securities’ (TIPS) break-even rate, which has risen this month, with the yield on 30-year U.S. TIPS rising above zero for the first time since June.

When asked about the likelihood of a significant correction — commonly defined as a fall of 10% or more — in stock markets in the next six months, 87 of 115 respondents said it was “likely”, including 27 who said “very likely”.

“Yes, there are those pesky rising long-bond yields that could, like an overlooked reactor vent, be the fatal flaw in the blueprints that blow everything up,” said Michael Every, global strategist at Rabobank.

“But let’s overlook that systemic risk … After all, central banks can always adopt yield curve control if needed and take away that market function — striking it down and seeing it disappear without shoes or underpants left as reminders.”

(Other stories from the Reuters Q1 global stock markets poll package:)

(Reporting by Vivek Mishra and Rahul Karunakar, Additional reporting and polling by correspondents in Bengaluru, London, Mexico City, Milan, New York, San Francisco, Sao Paulo, Buenos Aires, Tokyo and Toronto; Editing by Jonathan Cable and Catherine Evans)

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GameStop stock doubles in afternoon; even Reddit is surprised



GameStop stock doubles in afternoon; even Reddit is surprised 3

By David Randall and Sinéad Carew

NEW YORK (Reuters) – GameStop Corp shares more than doubled in afternoon trading on Wednesday, surprising those who thought the video game retailer’s stock price would stabilize after recent hearings in the U.S. Congress prompted by the fierce rally and steep dive that upended Wall Street in January.

GameStop shares were up 60% after hours at around $146, following a 103% rise during the day’s trading.

Trading in GameStop was halted several times following a rally that began around 2:30 pm Eastern time Wednesday with no obvious catalyst.

Analysts that follow the stock could not point to one single reason for the sharp move, offering reasons that included a corporate reshuffle.

“GameStop announced the resignation of its CFO last night. Some may have taken this as a good sign that RC Ventures is making a difference at the company in terms of trying to accelerate the shift to digital,” said Joseph Feldman, an analyst at Telsey Advisory Group.

Stephanie Wissink, analyst at Jefferies Research declined to comment on the afternoon stock spike but referred to her research report following the CFO resignation. Wissink said it did not seem like a coincidence that the CFO resigned after the company settled with activist investor Ryan Cohen’s RC Ventures.

“We expect GME to pursue a CFO with a more extensive tech (vs. retail) background, which will be a signal of the direction the company is due to take in coming years,” Wissink wrote in her note.

The spark also seemed to take posters on Reddit’s popular WallStreetBets forum by surprise.

“Why is GME going back up. is it Melvin covering?!,” one user wrote.

In January, shares of GameStop soared more than 1,600% as retail investors bought shares to punish hedge funds such as Melvin Capital that had taken outsized bets against the company. Melvin Capital said it lost 53% before closing its position in GameStop.

Other so-called “stonks” – an intentional misspelling of ‘stocks’ – favored by retail traders, also shot higher in Wednesday afternoon trading. AMC Entertainment Holdings Inc gained 18%, while BlackBerry Corp rose nearly 9%. Shares of Canadian cannabis company Tilray Inc gained nearly 13%.

The retail trading frenzy was the subject of hearings in Washington last week, where Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who had boosted the stock with his videos, reiterated that he was a fan of the stock.

Shares of GameStop remain nearly 74% their all-time high reached on Jan. 27 despite Wednesday’s rally.

(Reporting by David Randall; Editing by David Gregorio)


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Analysis: Central banks say no tapering. Markets aren’t buying it



Analysis: Central banks say no tapering. Markets aren't buying it 4

By Sujata Rao and Dhara Ranasinghe

LONDON (Reuters) – Central bankers worldwide have been unequivocal: There are no plans to cut back on money-printing any time soon, let alone raise interest rates.

Markets don’t seem to be buying it.

U.S. 10-year Treasury yields rose on Wednesday to one-year highs above 1.4%, extending this year’s near 50 basis-point jump that has dragged up sovereign borrowing costs in Europe, Japan and elsewhere.

The reckoning is that the spending step-up by U.S. President Joe Biden’s administration and post-vaccine economic reopening will fuel a global growth-inflation rebound, forcing central banks to “taper” or withdraw stimulus ahead of schedule.

A brighter outlook may indeed justify higher yields. But what has started to spook markets is a sudden move up in so-called real yields, or returns in excess of inflation. That shift can tighten financial conditions, suck cash from stock markets and in general, hamper the recovery.

It’s spooking policymakers, too. From the Federal Reserve’s Jerome Powell to New Zealand’s Adrian Orr, many have weighed in this week to stress policy will remain loose for some time.

But the mantra they have chanted for years seems now to be falling on deaf ears.

Powell, the world’s most powerful central banker, knocked yields just a couple of bps lower even after commenting that the inflation target was more than three years away.

Euro zone yields only briefly heeded European Central Bank chief Christine Lagarde’s warning on Monday that the bank was “closely monitoring” the recent rise in yields.

(GRAPHIC – Who’s uncomfortable with rising bond yields?:

(GRAPHIC – Powell reassures bond markets but yields stay high:

The reason, according to ING Bank is that markets are pricing “with an increasing degree of conviction” the end of ultra-easy policies.

“Market confidence in the strength of the U.S. recovery is so strong and widespread that the tapering boat has sailed already,” they said, predicting “tapering” to happen by the end of 2021, earlier than the early 2022 predicted by Fed surveys.

“We expect consensus is converging to our view,” they added.

Money markets show investors expect a Fed rate rise next year; some bet on an even earlier move. Euro-dollar futures suggest a roughly 64% chance of a 25 basis-point rate hike by the end of 2022. A week ago it was seen at 52%.

If travel, dining out and shopping fully resume in coming months, it could unleash trillions of dollars in pent-up savings worldwide. Just in the United States, personal savings totaled $2.38 trillion at a seasonally adjusted annual rate in December, higher than at any time before the pandemic.

(GRAPHIC – U.S. savings:

That makes it an inflection point of sorts for the economy, according to April LaRusse, head of fixed income investment specialists at Insight Investment. At times like this, even strong forward guidance can fall flat, she said.

“Markets hear central bankers saying ‘Stop it, markets, you are going too far’, but they are worrying central banks might change their mind as new data emerges,” LaRusse said.

“Markets are saying: ‘Yes, we believe what you are saying, but conditions could change and could necessitate a change of policy’.”


It’s a similar picture elsewhere.

In New Zealand, Orr’s highlighting of potential downside risks to the economy contrasted with the buoyant picture painted by data.

Bond yields shrugged off his comments to hit 11-month highs. More importantly, overnight index swaps (OIS), instruments allowing traders to lock in future interest rates, have started pricing a small possibility of an end-2021 rate hike.

Not long ago it was seen cutting rates below 0%.

BNY Mellon noted across-the-board rises in one-year forward inflation swaps — essentially gauges of future inflation — from Canada to Australia.

“Risks are now more toward further removal of easing prospects,” they added.

There is of course the possibility that the pledges to keep policy ultra-loose in the face of recovering growth only fan inflation expectations further. So, could markets force central banks to act rather than just jawboning?

Here the Fed faces less of a dilemma than its peers.

Japan’s 10-year yields are near the highest since late 2018 at 0.12%, posing credibility issues for a central bank that aims to hold yields around 0%.

The ECB too, already struggling to lift growth and inflation, may have to step up bond purchases under its emergency asset-purchase programme to combat rising yields.

“At the moment it’s a tension between markets and central banks rather than a conflict, though that might come,” said Jacob Nell, head of European economics at Morgan Stanley.

“The attitude of the Fed is that if markets think growth is stronger than we do then that’s fine, it will help growth and inflation expectations. So the Fed won’t fight the market — it just doesn’t believe it.”

(Reporting by Sujata Rao and Dhara Ranasinghe; Editing by Hugh Lawson)


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