Weekly Outlook: 2015, September 06 - 13

Why volatility is bad news for investment banks

Recent market volatility isn’t good news for investment banks, JPMorgan’s Kian Abouhossein and team argued, and leaves Goldman Sachs and Morgan Stanley near the bottom of their pecking order. They explain:

"Although volatility is good for investment banks, recent market turmoil has led to a spike in market volatility (avg VIX +100% since 15 Aug) which poses some residual short positioning risks such as correlation. Generally vertical movements have historically led to mark-to-market/hedging losses; however, IBs have not had material losses so far, in our view, due to i) lower inventory, ii) lower VaR & iii) better risk management. However, we note that IBs are not immune to the market movements & overall positioning may have impacted P&L negatively vs. 2Q leading to EPS cuts. We also take a cautious view that recent strong turnover, especially in equities could decline materially once markets settle – not just in Asia but globally. We reiterate our cautious view on credit trading as potential defaults could impact spread levels & client activity. Finally volatility could impact deal completion in 3Q and potentially 4Q. We cut our EPS by average 2-3% in 2015-17E. We now forecast 3Q15E IB revenues to be -19% q/q ex GS with FICC -18% (prev -14%), Equities -20% (prev -16%) and IBD -17% q/q (prev -13%). We prefer cash equity and macro geared IBs: UBS (UBS) and Deutsche Bank (DB). Our Global IB pecking order: UBS, Deutsche Bank, Credit Suisse (CS), Barclays (BCS), Societe Generale, Morgan Stanley, BNP Paribas & Goldman Sachs."

Attachment 15739

Shares of Goldman Sachs have risen 0.4% to $185.32 at 3:15 p.m. today, while Morgan Stanley has ticked up 0.1% to $33.81, UBS has ticked up 0.1% to $20.43, Deutsche Bank has gained 0.9% to $29.27, Credit Suisse has advanced 0.3% to $26.26, and Barclays has dropped 0.5% to $15.58.

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US Dollar - "We are thus headed into another week of uncertainty for the US Dollar, S&P 500, and other key assets. It is worth noting that FX volatility expectations have fallen for the week ahead. Yet it’s likewise clear that a bumpy Sunday market open in China, Japan, and other key markets could change that in a hurry. A US holiday on Monday the 7th may make for relatively illiquid market conditions, and caution is advised on what could be another challenging week for FX traders."

USDCAD - "The range-bound pattern from this week in USDCAD defines the levels of interest for this week. While USDCAD stays within the range, traders should look for low-risk setups to get long in the support zone of 1.3115-1.3160 with profit targets in the 1.3250-1.3300 area. Short positions should be careful, as this flies-in-the-face of the bigger-trend; but resistance being seen in this same 1.3250-1.3300 area could lend itself to additional range positions. Breaks of last week’s high at 1.3350 should be construed bullishly, and traders should then look to buy on dips upon breaks of this resistance."

Attachment 15774

AUDUSD - "Fueling RBA versus Fed policy divergence bets, building concerns about an FOMC rate hike just around the corner will probably amount to a strong headwind for risk appetite as markets ponder the implications of tightening against a backdrop of slowing global growth and rising asset-price instability. Needless to say, this only compounds of threat of deeper losses for the Australian unit."

Attachment 15772

NZDUSD - "Fed tightening fears will continue to be a potent catalyst for risk aversion through September. That means a hawkish tone is likely to sink the Kiwi, while a dovish one may offer the currency a lift."

Attachment 15773

GOLD - "prices look to open next week just above interim support at the 61.8% retracement of the August range at 1114 with a break of the 2015 low-day close at 1096 needed to put the broader downtrend back in control targeting 1067/70. Note that we’re still putting in the monthly opening range – a strategy that has served us well in gold for the past two months. We’ll be looking for a rebound early next week to test the monthly highs with a general bearish bias on the yellow metal sub-1155."

Attachment 15775

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September began with more volatility and more uncertainty. Rate decisions in Canada; New Zealand and the UK, Employment data in Australia and US consumer sentiment all stand out. These are the main events on our calendar for this week. Join us as we explore these financial highlights.

The U.S. economy produced 173,000 jobs in August,falling short of estimates but with positive revisions and upbeat wage growth. The release came at a crucial timing of the rate-hike debate and the mixed report raised uncertainty, but we think the Fed could still bring on a “dovish hike”. In the euro-zone, things are far from quiet, with Draghi showing his will to act, weighing heavily on the euro. Commodity currencies couldn’t enjoy the Chinese holiday and were hit hard. Things are going to get messy again.

1. Canadian rate decision: Wednesday, 14:00. Canada’s central bank decided to lower its benchmark interest rate to 0.5% in July. This was the second cut this year, aimed to boost the economy. The BOC reduced its growth estimate in 2015 from its April projection after showing a mild contraction the first half of the year. However, the Central Bank forecasts a rebound in the second half of 2015, expecting 1.9% growth this year. Analysts expect the BOC will maintain rates this time.
2. US JOLTS Job Openings: Wednesday, 14:00. Job opening are eyed by the Fed as they provide a wider indication about the job market, even if this figure is delayed. In June, the figure stood on 5.25 million, and a rise to 5.33 million is on the cards for July.
3. New Zealand rate decision: Wednesday, 21:00. New Zealand’s central bank cut its benchmark interest rate by 25 basis points to 3.0% in July, in hope of raising inflation and boosting economic activity. The rate cut was in line with market forecast. The Central Bank growth outlook deteriorated since the last policy meeting in June. However, the local currency has decreased noticeably since then, aiding manufacturers with weaker commodity export prices. Analysts expect further cuts in September and in October as the slowdown in China starts to affect New Zealand’s economy. Economists forecast another rate cut to 2.75% this month.
4. Australian employment data: Thursday, 1:30. The unemployment rate in Australia edged up 0.2% in July reaching 6.3%, despite a job creation of 38,500 positions in July. Analysts expected a smaller addition of 10,200 jobs and unemployment rate of 6.1%. The reason behind the sharp rise in unemployment was an increase in the participation rate, reaching 65.1%. The rise in the number of job seekers may contribute to jobs growth in the coming months, which is a good thing for the Australian economy. Analysts expect a job gain of 5,200 positions and a decline in the unemployment rate to 6.2%.
5. UK rate decision: Thursday, 11:00. The Bank of England maintained interest rates at 0.5% in August despite one voting member calling to raise rates. Lack of inflationary pressures delayed the Central Bank’s decision to raise rates. However, Bank governor Mark Carney said a rise is “drawing closer”, but cannot “be predicted in advance”. The collapsing stock market in China and the talks over Greece’s debts painted a grim outlook of global growth, contributing to the Bank’s decision to postpone the rate hike. Nevertheless, the Bank expects inflation to return to target next year, rising 0.25% in the first four months and may double from 0.5% to 1% by the end of 2016. Analysts see not change in Carney’s monetary policy this time.
6. US Unemployment Claims: Thursday, 12:30. The number of Americans filing new applications for unemployment benefits rose last week by 12,000 to 282,000, exceeding forecasts of 273,000. However, the number of applications remain relatively low in time of a global slowdown. The four-week average increased 3,250 to 275,500. That average has fallen 9.2% over the past 12 months. The combination of steady job growth and low levels of applications suggests that the US economy will continue to expand in the coming months. Economists forecast the number of new claim will reach 279,000 this week.
7. US PPI: Friday, 12:30. U.S. producer prices in the US increased for a third straight month in July, rising 0.2% after a 0.4% gain in July. However, inflation pressures remained subdued against the backdrop of lower oil prices and a strong dollar. In the 12 months through July, the PPI declined 0.8% following 0.7% drop in June. It was the sixth straight 12-month decrease in the index. Producer prices are expected to decline by 0.1% in August.
8. US UoM Consumer Sentiment: Friday, 14:00. U.S. consumer confidence weakened for a second month in August, as households were more pessimistic the rate hike aftermath. The University of Michigan’s preliminary index of sentiment contracted to 92.9 from 93.1 in July. Economists expected a reading of 93.5. The global financial turmoil caused by China has yet to affect future sentiment reports. Americans forecast an inflation rate of 2.8% in the next 12 months, the same as in July, the report showed. Over the next five to 10 years, they anticipated a 2.7%, down from 2.8%. U.S. consumer sentiment is expected to dip further to 91.6.

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