Trading with point and figure

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* EVENTS PREVIEW **
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It will be a busier day in terms of data, which may impinge on markets current dual obsession, the political roadmap to Brexit, and the escalating risks of a major Eurozone banking crisis, with its current epicentre in Italy, about which we would wholly concur with former ECB governor Binis Smaghi (http://www.bloomberg.com/news/artic...-systemic-banking-crisis-socgen-chairman-says). Statistically the US ADP Private Employment estimate and weekly jobless claims are likely to take pride of place, with China's FX reserves and German & UK Industrial Production also on the menu. On the policy side of the equation, the ECB June 'minutes' will likely be less interesting than the debate in the Dutch parliament on "Euro Area Challenges", and the Banca d'Italia regular report on Italian banks' balance sheet aggregates. Govt bond comes via way of a UK 10-yr Gilt auction, along with a mix of long-dated debt auctions in Spain and France.

However with Italian banks seemingly on the precipice of a total meltdown, and the need for an immediate recapitalization, while a seventh UK property fund is 'gated' to stem cash outflows, it is the health of the European banking system that is once again a key overriding theme / risk. This is perhaps rather more 2012 than 2007/2008, but the risks are very real, and very proximal. Some care should be taken in over-interpreting 'market signals', for example the widening in the GBP 3-mth Libor/OIS spread - see attached chart - which is far more a function of OIS rates moving to discount BoE rate cut(s), with Libor rates lagging, than per se signalling systemic risk. As for the UK property fund meltdown, the concern, beyond the ostensible failure to learn the lessons from New Star's demise during the GFC, is that if property assets are going to have to be liquidated, then the fact of forced sellers will have a very negative impact on realized prices, and therefore the NAV of many funds will at best be nebulous, and should there be collateralization and securitization involved, the siren call of the CDO/CLO debacle looms large as a comparison. The mismatch in this case is however one that is primarily about liquidity, rather than the GFC's massive term/liability mismatch. But it also highlights that post-GFC regulation has not only massively impaired the processes of financial market mediation (aka 'market making'), and as BoE's Haldane has pointed out shifted, rather than dissipated risk to the fund management sector, per se heightening the risk of higher amplitude and more frequent fluctuations in asset prices and financial activity. The exacerbating elements of the huge post 1998 FX reserve accumulation by EM central banks and the seemingly perpetual deployment of NIRP/ZIRP & QE by DM central banks can certainly be said to be something akin to pouring oil on fire, in so far as asset prices no longer reflect anything to do with value, but rather are the dictate of the financial repression, which in an era of rapid change due to the technological revolution and globalization makes for a very unstable concoction of high octane risks.

** U.K. - Industrial Production **
- As has been the case with many UK growth measures in Q2, April's 2.0% m/m rise in headline production and an even more impressive 2.3% m/m jump in Manufacturing Output got Q2 off to an unexpectedly strong start, after a patchy Q1 and a weak Q4. Unsurprisingly, the consensus looks for a mean reversion with both measures seen falling, -1.0% and -1.2% respectively, which would still imply a solid pace of growth in Q2, which should be sustained in June, if the PMI and CBI surveys are reliable guides. The irony would appear to be that, as with the German Orders data yesterday, the pick-up reflects improving demand from the Eurozone, as the recovery there gains some traction, thought today's very sharp and unexpected 1.8% m/m fall in German Manufacturing Output does offer a counter to that, though the latter is in part due to public holiday timing effects.

** U.S.A. - June ADP Employment / Labour report **
- In terms of the US labour report, the 'shock' 38K May Payrolls (accompanied by downward revisions to prior readings) is by inference expected to prove to have been an 'outlier' (in part due to the Verizon strike), with June seen rebounding to 175K, for which a 267K Initial Claims reading during the payrolls week would appear to offer support for. As ever it should be remembered that the FOMC sees the 'breakeven rate' for Payrolls as somewhere in the 80-100K area. Per se the implied 3-month average for Payrolls, in the (unlikely) event that the consensus forecast is correct would be 112K. As ever the Unemployment Rate will also be closely watched, with last month's slide to 4.7% from 5.0% predicated on an encouraging 484K fall in Unemployment, a meagre 26K rise in Employment, but marred by a 458K contraction in the workforce, which in turn saw the Participation Rate slip to 62.6% from 62.8%. Average Hourly Earnings in May posted a solid 0.2% m/m 2.5% y/y rise, but this was largely dismissed as being immaterial in the context of Payrolls, but should the latter prove to be less 'dramatic' (i.e. weak) in June, and if the usual 0.2% m/m forecast proves correct, then the y/y pace will pick up to 2.7% y/y. Eminently 'the ZIRP and NIRP forever' protagonists will argue that a solid, if unspectacular labour report is historical, and a lagging indicator, and that mounting uncertainties (not least the US's elections) will weigh on labour demand going forward. However that is now the consensus view, and the risk is more that the Fed's flip-flopping on policy may leave it vulnerable to falling way behind the curve, if the US H2 growth and inflation measures prove to be rather more resilient.
from Marc Ostwald
 
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