Portfolio positioning in banks
During the week, we continue to monitor U.S.-China trade negotiations which in our view, remain a drag on investor sentiment. Post recent results/earnings announcements by domestic Banks, we are now reviewing our banking exposure across portfolios.
U.S.-China trade negotiations remain a drag on investor sentiment
In our view, it appears, the U.S. and China are negotiating on smaller deals as a means to build trust for larger deals. During the week, the U.S. announced it will examine ZTE sanctions whilst China also announced they will commence a review of the QCOM/NXPI deal. China also removed the possibility of tariffs on sorghum which was used as a retaliatory measure in response to U.S. steel tariffs.
In our view, we believe the market is expecting that China will not oppose a closing of the trade deficit by the U.S; the problem is that we cannot see how the U.S. can produce enough to reduce the deficit by $200bn. This issue is also separate to China stealing US intellectual property, where we see potential for Chinese reforms in exchange for lesser restrictions on Chinese investment in the U.S. than threatened and proposed.
Portfolio positioning in Banks under review
In the past few months, the under performance of banks relative to the wider ASX200 has meant that our original market-weight sector positioning in domestic banks has become an overweight. Indeed, our concern going into 2018 for Financials, resulted in the introduction of CYBG Plc (CYB) into the portfolio (seeking diversification away from domestic banks and royal commission implications). Post the recent results update by the banks, we see the following key risks to their outlook:
- Over leveraged consumer with significant household debt
- Implications for costs (and cost to income ratio targets) as a result of recommendations following the royal commission
- A period of low loan growth (majors expected to grow below system growth)
- Higher funding costs
- Expectations of house price declines.
As such, we are now reviewing our banking exposure and portfolio positioning.
Speculators take on asset managers over ultra-long bonds
Asset managers have taken a record net long position in U.S. ultra-long bond futures, a stance that’s directly at odds with the unprecedented net short built up by speculators, according to Commodity Futures Trading Commission data for the week ended May 15.
The divergence comes at a crucial time for the Treasury market, with the recent sell-off threatening to put an end to its long bull run. The yield on the 30-year bond last week plowed through key levels and climbed as high as 3.26 percent, a mark unseen since 2014.
Emerging markets malaise deepens as currencies break below key level
Rising U.S. Treasury yields, sluggish equity markets and political risk are weighing on emerging-market currencies. The MSCI Emerging Markets Currency Index closed below its 200-day moving average on Friday for the first time since January 2017, capping its worst week since November 2016.
Harvard economist Carmen Reinhart turned heads earlier in the week after saying emerging markets are in worse shape now than during the global financial crisis in 2008.
Hedge funds continuing to cut their net-long oil positions despite Brent’s surging price
Hedge funds have cut their net-long positions on Brent crude for a fifth consecutive week, despite the underlying commodity’s price surging in recent times, and topping over $80, a level unseen since 2014.
The position cuts show a divergence in views between those confident in Brent continuing to reach $100 a barrel, and others who are apprehensive about the outcome of the OPEC meeting next month.
Europe Stoxx 600 experiences longest streak of weekly gains since 2014
The Stoxx Europe 600, a key benchmark of European equities, posted its eighth consecutive week of gains last week, marking its longest streak since 2014.
These gains come despite political risk in Italy, as a weaker euro, profit momentum, combined with lessening global trade tensions all contribute to this rally.
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