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China: Commodities Slump Weighs on Stocks, PMIs Losing Momentum

A slump in Chinese metals prices and weakness in crude oil sent equity markets across the region lower. Oil price tumbled 3% from Thursday’s settlement in New York while trading sentiment was already weak amid fears that Beijing’s crackdown on speculation and borrowing could hurt metals demand. The Hang Seng subindex that tracks Chinese shares also widened losses. Meanwhile, investor worries of China’s regulatory crackdown on speculative trading sent commodity futures prices sharply down for a second straight session.

China’s private sector mfg PMI fell to 50.2 in April due to cost saving layoffs, slower output and new orders, and lower confidence. The Service PMI slipped as well, but indicated Services are doing better than Mfg. China has been a factor in the nominal global reacceleration. But as policymakers tighten, China’s growth should slow. A handoff to U.S. fiscal stimulus is crucial. Right now, solid corporate earnings are helping prolong investors’ patience.

 

 

Japan: More Evidence of An Upturn

The Services PMI softened in April, but remained in expansionary territory. Input prices and business confidence cooled slightly while new orders, output, hiring, and backlogs of work rose marginally. The robustness of the fourth quarter and the first quarter appears to be moderating in the second quarter, but respectable growth will likely continue.

Auto sales had another good month in April. According to the BoJ minutes from March’s meeting, the central bank thinks private consumption has been resilient thanks to the sturdy labor market. This is evident for durable goods purchases, but less so for overall retail sales.

 

U.S: 16 Non-Manufacturing Industries Reporting Growth in April

In April, upward pricing pressure in the industries strengthened as the Non-Manufacturing Prices Index (57.6, +4.1) accelerated, making prices greater than the 2016 average of 52.7. However, inflation only becomes worrisome when the Index prints above 60 for more than a quarter. The 16 non-manufacturing industries reporting growth in April, listed in order, were: Wholesale Trade, Utilities, Arts, Entertainment & Recreation, Mining, Retail Trade, Construction, Professional, Scientific & Technical Services, Information, Management of Companies & Support Services, Public Administration, Health Care & Social Assistance, Real Estate, Rental & Leasing, Other Services, Finance & Insurance, Accommodation & Food Services, and Transportation & Warehousing. The only industry reporting contraction in April was Agriculture, Forestry, Fishing & Hunting.

 

House Panel Approves Plan to Undo Parts of Dodd-Frank Financial Law

The House Financial Services Committee launched a Republican-supported rollback of Obama-era financial regulations, voting 34-26 along party lines May 4 for a plan to undo significant parts of the 2010 Dodd-Frank law. The committee vote sent the Financial Choice Act to the full House. Here are key details of the bill:

  • It would require a failing firm to go through bankruptcy proceedings instead of a process through Dodd-Frank in which regulators liquidate the firm outside of bankruptcy, called the Orderly Liquidation Authority.
  • Healthy banks would get significant regulatory relief from restrictions on capital and dividend payouts so long as the bank maintains an average leverage ratio of at least 10%.
  • It would modify capital rules to give banks more flexibility in how they guard against “operational risks” like big-ticket legal liabilities.
  • The CFPB would be stripped of its powers to supervise firms and pursue certain fair-lending violations that are “unfair, deceptive or abusive acts or practices,” known as Udaap. The CFPB could enforce other consumer financial protection laws.
  • All companies would be allowed to communicate confidentially with the Securities and Exchange Commission about potential initial public offerings and withhold company communications with regulators from investors.
  • It would prohibit the SEC from completing a rule aimed at giving activist investors more firepower to defeat company board candidates.
  • It would give outsiders more input on the SEC’s enforcement priorities and strategies by requiring the agency to create an advisory committee to “offer recommended reforms.”

 

 

Thoughts

Still, given the accuracy of the first round opinion polls, Macron will likely win the presidency. But concerns about populism are likely to return, especially with the upcoming (probably 2018) Italian election. Against this backdrop, Brexit negotiations have also turned more antagonistic.

The ADP report showed private payrolls expanded by +177k jobs in the U.S. in April. The FOMC reiterated in its statement that the committee is looking past the noise in 1Q. It is likely that the Fed will raise rates in June. While the U.S. mfg PMI is peaking, svc growth remains solid, and inventory rebuilding should help growth going forward.

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Chenjiazi Zhong is a portfolio management professional responsible for portfolio structuring, optimization, asset allocation, and fund due diligence. Prior to this function, Chenjiazi worked as an investment banking analyst at Lehman Brothers. Chenjiazi published the book “Alternatives Thinker: Endowment Investment Philosophy to Active Portfolio Management” in 2013. Serving as a guest writer, my weekly column, “Investment Conversations with Chenjiazi”(now “Market Recap with Jiazi”), sponsored by SprinkleBit Holdings Inc., is published on Sunday at 8:00am EST, covering topics of weekly economic update, market recap, outlook, interpretation of global markets and political events, advice on dynamic optimization of asset allocation strategies, and how to adjust asset classes in a portfolio context to actively manage risk. Chenjiazi holds a Ph.D. in finance, an MBA in finance from University of Miami, and a BBA in finance from École Supérieure de Commerce (ESC). Chenjiazi writes in English, French, and Mandarin Chinese.

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