Neighbours Slam Door On Qatar

Qatar’s markets received a battering as four of the country’s Middle East neighbors cut ties in a row over its stance on Iran and Islamist extremists.

The nation’s dollar bonds tumbled and contracts used to bet the Qatari riyal will weaken surged the most since 2009. More than two-and-a-half times the daily average of shares changed hands on the key stock index in Doha, where many Muslims are fasting for the holy month of Ramadan, as the gauge slipped the most in more than seven years. With Monday’s selloff, the country’s main equity benchmark became the worst performer globally this year.

 

The disagreement marks an unprecedented low in the relationship between the Arab nations, and for relations in the six-nation Gulf Cooperation Council in particular. It’s a stark reminder to investors of the potential volatility and geopolitical risks associated with the region, at a time when markets like Saudi Arabia and Egypt are intensifying efforts to lure foreign cash.

“For people that don’t know the region very well, they have an image of the Middle East, including the GCC, to be a somewhat unstable region, and I think this maybe confirms what they had feared,” said Tarek Fadlallah, chief executive officer of Nomura Asset Management Middle East. “For those who are familiar with the region, it will be unsettling, but maybe not critical in how they look on making investments for the foreseeable future.”

Yields on Qatar’s $3.5 billion in bonds due 2026 increased 23 basis points to 3.366 percent, the highest level since March.

 

Twelve-month forward contracts for the riyal jumped as much as 203 points to 405 points, the highest level in more than a year, indicating increased bets Qatar could devalue its currency. The contracts traded at 350 by 2:09 p.m. in Doha, up 148 points on the day. The riyal is pegged at 3.64 per dollar.

The country’s QE stock index fell 7.3 percent by the market close on Monday in Doha. Qatar Gas Transport Ltd., Aamal Co, Qatari Investors Group QSC and Gulf International Services QSC dropped by the maximum of 10 percent allowed by the exchange. Six other companies on the country’s 19-member main index dropped between nine and 10 percent, including lender Masraf Al Rayan QSC, which contributed the most to the index move. Qatar National Bank, which has a weighting of 17.9 percent in the index, fell 6 percent.

The benchmark is the worst performer globally this year, posting losses of 12 percent while shares from emerging markets gained more than 18 percent.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

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Red Flag For Bonds

As of late Monday trading, the 10-year U.S. Treasury note was trading at a yield of 2.25 percent per year, while the two-year note yielded 1.28 percent per year. At 0.97 percentage point, the “spread” between the longer-maturity note and the shorter-maturity one is hovering at the lowest levels seen since October.

This is not only a titillating factoid to discuss with friends, but a sign that bond investors aren’t quite buying the idea that the economy is heating up.

Longer-term bonds generally command greater yields than shorter ones, and the more enthusiastic the expectations for inflation, the greater this difference tends to be. After all, an investor doesn’t want to lock up their money for a decade only to receive a sum that’s worth less in those future dollars. Since faster economic growth is thought to lead to greater inflation, and inflation expectations tend to change the yields for longer-term bonds more dramatically than that of shorter-term bonds, it is easy to see why the yield spread is commonly taken to be an indicator of economic growth expectations.

Right now, is doesn’t appear to be indicating anything good.

“The Treasury market is telling us a very different story about the big pickup in growth that the consensus is looking for in the second half of the year,” Matt Maley, equity strategist at Miller Tabak, wrote in a Monday commentary piece.

As Peter Boockvar of The Lindsey Group sees it, the spread is telling a story about both what traders think the Federal Reserve will do, and how they think the economy is likely to respond to those actions. As he alludes to, short-term bonds tend to be guided closely by expectations of Fed policy, while longer-term yields more purely reflect economic expectations.

When it comes to the falling spread, “It’s becoming clear the reasoning and that is a Fed that is intent on raising short rates due to their statistical employment and inflation hurdles having been met (and thus backward looking viewpoints) and market worries about how the economy will handle that reflected in the drop in long rates,” Boockvar wrote in a Monday note.

Others say the yield spread is not serving up a yield sign — yet.

The short end of the yield curve is “rising on expectations of tighter monetary policy, while the low end is more correlated to growth … so I think the case could be made that the curve continues to narrow,” Oppenheimer technical analyst Ari Wald said on Monday.

Yet this doesn’t worry Wald, who noted that the yield spread turned fully negative before each of the four most recent recessions.

“We don’t think the flatter curve is a warning,” he said. “As long as banks can borrow short[-term debt] and lend long[-term debt], we think the economy can do just fine and the stock market can do just fine.”

“In fact, the level and direction of the yield curve now looks a lot like it did in 1994 and it looks a lot like it did in 2004 — years where you still wanted to be invested in stocks,” Wald added.

Kevin Caron, a portfolio manager at Washington Crossing Advisors, agreed that only an inverted yield curve would be a real warning signal, and pointed out that a spread at this level has been seen “a couple times already in this recovery, and it didn’t indicate anything in the way of a recession.”

However, he granted that the decline in the yield curve is telling us something about investor sentiment.

“The flattening ties into the fading of expectations for some kind of fiscal push this year,” Caron said Monday . “This is the broader representation of a resetting of expectations, in the United States at least, and the expectation for maybe slower growth than what we expected just after the election.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

 

Trouble Down South

Brazil’s Bovespa stock market was briefly halted as investors reacted to corruption allegations against Brazilian President Michel Temer.

Stocks plunged more than 10% at the start of trading, prompting circuit breakers to kick in and halt dealings.

President Temer was forced to deny a newspaper report that he had given consent to paying off a witness in a huge corruption scandal.

The Supreme Court has authorised an investigation into the allegations.

On Thursday Mr Temer said in a TV statement: “I never authorised any payments for someone to be silent. I did not buy anyone’s silence. I fear no accusations.”

“I have nothing to hide. I never authorised anyone to use my name”

“We cannot throw so much hard work [on reforms] done for our country in the rubbish bin.”

“I will not resign. I will not resign. I know what I have done.”

Investors are concerned that Mr Temer’s reform plans could be derailed. The Ibovespa index closed more than 8.8% down at 61,575 points.

Mr Temer is trying to get pension reforms through Congress that would mean men would have a minimum retirement age of 65, and women 62, and most people would contribute more. There is currently no minimum retirement age.

There are also labour reforms on the cards to weaken trade union bargaining powers and make hiring and firing workers easier.

“I’ve never seen anything like this”, said one trader with decades of experience.

Trading was delayed in Sao Paulo’s stock exchange and once it opened, the circuit breaker stopped all operations within just a few minutes. That has not happened since the global financial crisis of 2008.

In a fortnight Mr Temer was about to start pushing his economic reform plan through Congress.

Until Tuesday markets were very optimistic – but now many don’t see how Mr Temer can keep his job if the allegations about a tape in which he condones a bribe payment are true.

What happens next? If Mr Temer keeps his job, he will need a Herculean effort to get Congress behind him again. If not, the Brazilian Congress will have to chose a new president indirectly.

Getting reforms approved is no longer a top priority for a country still in deep crisis.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Chinese Clean Up

China’s drive to clean up its financial system may be scaring some investors away from mainland shares, but for MF Solutions it’s the perfect time to switch strategy.

The London – Shenzen based firm, is seeking out mainland consumer and property stocks after taking profit on investments in Hong Kong-traded Chinese equities. Jitters over Beijing’s regulatory crackdown have sent the Shanghai Composite Index down more than 4 percent from an April peak, narrowing the mainland benchmark’s price premium over offshore Chinese shares to the least in two years this week.

“A shares, especially the larger caps listed in Shanghai, those have become much more attractive from an overall valuation standpoint,” said Ken Wong, a fund manager for Eastspring in Hong Kong. “We are actively looking at potential investments in A shares as a result of gap closure between A and H shares.”

Wong isn’t the only big investor shrugging off the regulatory measures, which are seen as part of China’s wider campaign to reduce a record leverage pile.

Mark Mobius welcomed the crackdown, saying it is “overdue.” The executive chairman of Templeton Emerging Markets also favors mainland, or A shares, over Hong Kong-listed H equities in the long term, saying A stocks will gain an edge on the back of China’s recovering economy. The legendary developing-market investor said last month that offshore-traded Chinese shares had become too expensive.

The Shanghai Composite dropped as much as 1.4 percent Thursday, after a review of risk in China’s financial markets received the backing of President Xi Jinping and the Communist Party’s powerful politburo. As well as whipsawing the stock market, the flurry of initiatives from Chinese regulators this month have helped propel 10-year government bond yields to their highest level in almost two years.

Buy Cheap

Chinese stocks listed in Shanghai are consistently more expensive than those in Hong Kong because officials limit new offerings and capital controls make it one of the few places domestic investors can park capital. The Shanghai Composite sank to a price-to-earnings valuation of 17.7 on April 24, making it the cheapest versus the MSCI China Index since October, data compiled by Bloomberg show.

Gains in Hong Kong-traded stocks had already narrowed the gap considerably, with the MSCI China up 17 percent this year, hitting a 21-month high this week. The Shanghai Composite, meanwhile, is 39 percent below a peak reached in mid-2015.

“We buy wherever is cheap,” Eastspring’s Wong said. “Right now there are definitely some opportunities in some of the larger names on the A-share side.”

Utilities have led declines in Shanghai over the past two weeks, reducing the P/E premium on the Shanghai Stock Exchange Public Utility Index to the least since October versus the MSCI China Utilities Sector Index. Industrial & Commercial Bank of China Ltd., the biggest Chinese stock traded on both the mainland and in Hong Kong, saw its Shanghai shares drop to the cheapest level relative to its Hong Kong equities in almost a month.

Mobius’ View

“From a longer-term perspective the H and A share markets should merge in behavior as the Chinese market becomes more liberalized,” Mobius said by email April 26. “In the meantime however, this is not the case and the local market is more dynamic with a greater number of investors, so we can expect A shares to outperform if the current positive economic environment holds.”

The Templeton chair’s view may seem too bullish to analysts who see increased scrutiny of China’s financial sector as a headwind for the stock market. In a survey at the end of March, tightening liquidity conditions amid China’s de-leveraging campaign were cited as a reason to be cautious about mainland shares. The Shanghai Composite will end 2017 at 3,525 points, according to the median of eight analyst and fund manager targets, down from a consensus of 3,800 points in a separate survey in December.

The measure climbed 0.1 percent by the close on Friday, while the MSCI China Index fell 0.2 percent.

Adrian Zuercher, head of Asia Pacific asset allocation at UBS Group AG’s private banking arm in Hong Kong, is also in the bulls camp. He sees Beijing’s campaign to contain risk as a good sign, as it shows officials have enough confidence in the economy to embark on some tough reforms — even if it causes some market volatility in the short term.

“In the medium- to long term A shares look pretty attractive,” said Zuercher. “You have more growth stocks in these areas — it’s more the private sector company that could start to show a lot of earnings growth. So in the long term we definitely look in to onshore China.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

ETF’s – Weapons Of Mass Destruction

Exchange-traded funds are “weapons of mass destruction” that have distorted stock prices and created the potential for a market selloff, according to the managers of the FPA Capital Fund.

“When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now,” Arik Ahitov and Dennis Bryan, who run the $789 million fund, said in an April 6 letter to investors in the actively managed fund.

The flood of money into passive products is making stock prices move in lockstep and creating markets increasingly divorced from underlying fundamentals, the managers said. As the market moves ever higher, there’s the potential for a sharp decline. The U.S. ETF market has about $2.7 trillion in assets, the majority in products that track indexes. ETFs have attracted more than $160 billion in new flows so far this year.

“This new market structure hasn’t been tested,” Bryan said in a telephone interview, noting that the stock market has never gone through a major downturn when passive investors were as important as they are now. “We could get an onslaught of selling.”

For more than two decades under former manager Robert Rodriguez, Los Angeles-based FPA Capital was among the top-performing stock funds in the U.S. From 1986 to 2010, it returned 14.5 percent a year compared to 8.5 percent for the Russell 2000 Index.

The fund has struggled in recent years, in part, because the managers, finding too few attractive stocks to buy, have parked 35 percent of their money in cash. FPA Capital trailed 99 percent of peers over the past five years and the Russell 2000, with a 4 percent annual return, according to data compiled by Bloomberg. The fund is a concentrated stock fund. Its biggest equity holding as of March 31 was Western Digital Corp., which makes computer-storage devices.

While several high-profile money managers of active funds have raised concerns about ETFs, equity ETFs account for about 7 percent of the U.S. stock market’s value.

In a February letter to investors, Seth Klarman, who runs the $30 billion Baupost Group, said that as more investors opt for passive investing over active management “the more inefficient the market is likely to become.”

In the same letter, Klarman cited Nikolaos Panigirtzoglou, a global market strategist at JPMorgan Chase in London, who, according to Klarman, has warned that the inflows into ETFS will “make markets more brittle” and “susceptible to more severe crashes.”

Call Options Whatever You Want

Traders are buying so many S&P 500 call options right now that the ratio of those contracts to put options hit an all-time high Wednesday, according to Credit Suisse.

A call option is the right to acquire a stock in the future at a preset price. A put option is the right to sell.

“The biggest trend, the most notable thing, is the resumption of the call buying in the S&P,” said Mandy Xu, derivatives strategist at Credit Suisse. With “Trump coming out with a new tax plan, we’ve seen that upside demand in the market.”

Xu calls this ratio the “call skew” and here’s the chart the bank sent clients Wednesday showing the metric at a record level.

The jump in the ratio of call-to-put buyers came ahead of the Trump administration’s afternoon announcement on a highly anticipated tax proposal.

Call skew began climbing after the November U.S. presidential election, and the last time call skew hit a record was Feb. 14, Xu said. The S&P 500 climbed about 3 percent in the following days before setting its most recent closing record on March 1.

Stocks and call skew levels then dropped as Republicans pulled their health-care bill, creating worries about whether market-friendly tax reform would be passed. Growing concerns about geopolitical tensions from North Korea to anti-EU sentiment in France also pressured stocks.

So far this week, the S&P 500 has rallied nearly 2 percent after the first round of a French presidential election on Sunday that showed centrist candidate Emmanuel Macron remaining the favorite against far-right populist candidate Marine Le Pen.

That said, stocks don’t have an all-clear signal. Congress has yet to vote on tax reform, while overseas surprises could rock markets again.

Xu also thinks the bullish bet from call options buyers is probably near its limit around these record levels.

“It’s pretty extreme as it is. In order for it to go higher we probably need something more concrete or substantial to extend that,” she said.

But that’s obviously not the whole Options story. S&P 500 is but one vehicle amongst a myriad of many such as commodities and metals with both Gold and Silver looking attractive right now. Oil – well, nah.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Hong Kong V Singapore

Many cities lay claim to being important financial centers, but two metropolises are usually seen vying for the title of Asia’s most important financial hub: It’sHong Kong versus Singapore.

Singapore is a gateway to Southeast Asia and is seen as a wealth management hub, but Hong Kong boasts easy access to China’s trade and capital flows, and has held the title of top global IPO market for two consecutive years.

“I think that Singapore is really in the right place as where the growth is. So if you think about the deep capital markets here, this ability to finance regional growth, its focus on wealth management, that sort of access to regional and international wealth management [are] opportunities from Singapore,” Anna Marrs, regional CEO of Standard Chartered said on Monday.

As for Hong Kong, proximity to China is seen as the number one reason many Chinese companies choose to list there. Currently, almost 8,000 companies are listed on the Hong Kong Stock Exchange compared to about 800 on Singapore’s.

“If you’re talking about the equity markets, Hong Kong, you know, is part of greater China and the Chinese story is alive and well — and kicking. From an equity markets perspective, I think the Hong Kong capital markets is still extremely strong, valuations are not that stretched,” said Tan Su Shan, managing director of Singapore’s DBS.

But Standard Chartered’s Marrs said in an interconnected world, proximity isn’t enough. Her bank, she said, is now looking at Hong Kong as a gateway to markets beyond China — through Beijing’s “One Belt, One Road” plan to connect markets along the ancient Silk Road.

“When you look at where China is investing, and you look at the One Belt, One Road markets, it’s not just about Hong Kong,” Marrs said.

Despite the opportunities, both Hong Kong and Singapore face various financial challenges.

In Singapore, slowdowns in a number of legacy sectors like oil and gas, construction and shipping are weighing on the financial industry.

Standard Chartered saw income down by about 6 percent in Singapore last year, and saw fewer private wealth clients. According to Marrs, one of the key places to hedge against risks is in the technology sector: Singapore is the technology headquarters for Standard Chartered, and in 2016 it launched a new innovation lab there in conjunction with its Smart Nation plan.

DBS also pointed to technology as a catalyst for its growth, not only in its domestic market, but also in new markets like India and Indonesia. Digital financial services are bringing access to liquidity, deposits and loans to the masses in those markets.

“How DBS wants to play in this field is to be able to harness this fabulous technology, to be able to give us that reach and that ability to reach out to a bigger market, a wider market without the cost that comes with an incumbent, you know, branch-based banking,” Tan said.

Hong Kong, meanwhile, faces challenges in corporate governance and auditing as a result of doing business with China. Moreover, while it does have a budding financial technology industry, Ke Yin, CEO of CITIC Securities International said that this is one industry where Hong Kong lags behind mainland China.

Chris Wei, the Asia Chairman for Aviva said that Singapore is leading Hong Kong when it comes to innovation in fintech, and he cited the Singapore government’s support for innovation as a reason.

“For example, giving access to financial institutions, to Singapore government databases for identity validation, for anti-money laundering validation etc., that helps a lot. So I think Singapore has taken a little bit of a lead in that. The journey is not over, it’s a long-term one, but that, I think, is the next wave,” he said.

Cheerio.

The Pinstripe and Bowler club shares information with MF Solutions Ltd.