Warning Signal for Global Stock Markets Flashing in Japan - Morgan Stanley

Asian Stock Markets

Morgan Stanley calls it “the end of easy,” that witching hour in global stock markets when economic growth is slowing, the Federal Reserve is tightening, and inflation is ticking up. After a long bull run, strategists the world over are getting nervous -- and watching for the top.

And over in Tokyo, a warning is starting to flash.

A feared rotation is taking hold, as investors dump the shares that propelled the good times, such as industrials and technology companies, in favor of an entirely different class of firms: those needed no matter how bad the economy gets. When investors become less optimistic about the future, the theory goes, that’s where they turn.

Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management Japan Ltd., has been to this rodeo before. And he’s alert to the danger.

Utilities, health-care, consumer staples and real estate stocks -- all so-called defensive shares -- are the top performers of the 11 industry groups in the MSCI Japan Index this year, beating information technology and industrial companies, so-called cyclical shares seen as benefiting the most from economic expansion.

It’s a change that hasn’t happened in the U.S. and Europe, where cyclicals are still mostly in the ascendancy as defensives generally lag behind. But Shigemi of JPMorgan Asset has a theory about that. Essentially, he says, Japan’s market can respond more to U.S. developments than the U.S. itself.

The MSCI Japan Utilities Index has jumped 15 percent this year, the best performance among the industry groups, as the broader Japan gauge retreated. Last year, when the MSCI Japan surged 18 percent, utilities were the only group to decline, tumbling 5.6 percent.

Concerns that the global economy may peak, uncertainties over President Donald Trump’s policies and the yen’s appreciation against the dollar earlier this year have contributed to the rally in Japanese defensives, according to Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management Ltd.

For Mitsushige Akino, it’s all about U.S. Treasuries. Yields on U.S. 10-year notes rose past 3.1 percent on Wednesday to the highest level in about seven years, helping fuel bets the Fed may need to raise interest rates three more times in 2018.

Japanese defensive shares have been harbingers of global equity downturns before. Most notably, they started to outperform cyclicals in 2007, not long before the global financial crisis sent equities tumbling. An index of global shares sank 44 percent the following year.

But the link doesn’t always apply. Defensives also started outperforming in early 2014, just before Japan raised its consumption tax. And that time, global equities continued to advance.

What will happen this time is hard to tell, but two questions are worth asking. Is Japan’s shift to defensives preceding a similar trend in other markets? And does it mean the bull run is set to end?

Morgan Stanley strategists including Michael Wilson are certainly monitoring for such a turning point. The research team isn’t convinced the market is ready to move into full defensive mode just yet, they wrote in a report dated May 13. But it does “bear close watching,” they wrote.

Morgan Stanley profit jumps 40 percent on trading boost

Global Stock Markets

Morgan Stanley (MS.N) reported a 40 percent jump in quarterly profit on Wednesday, as its trading business got a boost from increased market volatility. 

The bank’s net income applicable to common shareholders rose to $2.58 billion in the first quarter ended March 31 from $1.84 billion a year earlier.

On a per-share basis, the company’s earnings rose to $1.45 from $1.

Analysts on average were expecting a profit of $1.25 per share, according to Thomson Reuters I/B/E/S. It was not immediately clear if the numbers were comparable.

Shares of the sixth-largest U.S. bank rose 2.57 percent to $53.24 in pre-market trading.

After a subdued 2017, volatility has returned to the markets, roiling stocks, bonds, currencies and commodities on fears of a trade war between the United States and China as well as concerns about inflation.

This has led to big revenue gains at banks with sizable trading operations such as Morgan Stanley and Goldman Sachs.

organ Stanley’s sales and trading revenue rose 26 percent to $4.40 billion in the latest quarter, driven by a nearly 27 percent gain in equities trading revenue.

Morgan Stanley’s total revenue rose 13.7 percent to $11.08 billion.

Each of the businesses performed well, with significant client engagement across our global franchise, and Sales and Trading a particular highlight in a more active environment,

Rival Goldman Sachs posted a 31 percent increase in total trading revenue.

Chinese startup company Nio hires eight banks for up to $2 billion U.S. IPO

Asian Stock Markets

Chinese electric vehicle startup Nio has hired eight banks including Morgan Stanley (MS.N) and Goldman Sachs (GS.N) to work on a planned U.S. stock market listing this year worth up to $2 billion.

Other banks are Bank of America Merrill Lynch (BAC.N), Credit Suisse (CSGN.S), Citigroup (C.N), Deutsche Bank (DBKGn.DE), JPMorgan (JPM.N) and UBS (UBSG.S), said the people, declining to be identified as the deal details are not public.

Nio’s proposed IPO of $1 billion-$2 billion comes as the firm, founded by Chinese internet entrepreneur William Li in 2014, seeks fresh capital to finance its expansion and investments in areas including autonomous driving and battery technologies, one of them said.

At the top end of the potential offering size, Nio’s IPO would become the biggest Chinese listing in America since the $25 billion public float of e-commerce giant Alibaba Group Holding Ltd (BABA.N) in 2014.

In October 2016, Chinese logistics company ZTO Express raised $1.41 billion from an IPO in New York.

Nio declined to comment on its IPO plans. UBS, Citigroup and Goldman declined comment while the other banks did not immediately respond to Reuters emailed request for comment.

Shanghai-based Nio, formerly known as NextEV, is among the first of a raft of Chinese electric vehicle firms to launch a production vehicle, with many so far only showing concept cars.

It launched sales of its first mass production car - the ES8 pure-electric, seven-seat sport-utility vehicle in December, at about half the price of American peer Tesla’s Model X.

It has also vowed to bring an autonomous electric car to the U.S. market by 2020.

Nio counts Asian tech behemoth Tencent Holdings Ltd (0700.HK) as its main backer alongside investment firms Hillhouse Capital Group and Sequoia Capital.

Last November, the firm raised more than $1 billion in its latest fundraising round, led by existing investor Tencent, valuing the firm at about $5 billion.

Morgan Stanley Takes on Goldman, Buffett With Bullish Bond Call

Global Stock Markets

Morgan Stanley says it’s time to get bullish on bonds -- even as Goldman Sachs Group Inc. and Warren Buffett issue warnings.

The sell-off in Treasuries, that began in earnest in September and ramped up in January, is ending, according to Morgan Stanley strategists.

Not so for Goldman Sachs Group Inc., which is running its models through a scenario in which yields on 10-year notes hit 4.5 percent -- though it expects that number to be closer to 3.25 percent by the end of this year.

Warren Buffett cautioned over the weekend that bonds can lift risk levels in portfolios as inflation eats away at returns.


There’s a lot at stake following the six-month rout in the $14 trillion U.S. government bond market that helped trigger jitters in global equities after years of gains.

While record levels of short positioning in Treasury futures may augur the next leg down as the risk premium for holding longer-dated notes climbs, it’s far from a given that tighter U.S. monetary policy will drive ever higher yields after an almost 1 percentage point jump in the 10-year yield.

After U.S. economic growth picked up last year and the Fed looking more determined to stick to its tightening path now, comments from Chair Jerome Powell during his first public speeches since taking over from Janet Yellen will be closely scrutinized this week.

Bond-market veteran Bill Gross has said a mild bear market in bonds was confirmed last month and Ray Dalio, manager of the world’s largest hedge fund, says the bull run seen over the past 30 years is over.

The value for Morgan Stanley is buying bonds at the long end of the Treasury curve. Hornbach’s team advised maintaining an existing bet that the gap between two-year notes and 30-year Treasuries will narrow from its current level of about 92 basis points, according to the report on Saturday.

Hornbach called 2016 the year of the bull for bonds and was vindicated when yields fell to record lows four months later. Yet, 10-year yields failed to push as low as his forecast for 1 percent.

China Construction Bank Seen as Pick for BlackRock, Goldman

If you think things will keep getting better for China’s biggest banks, look no further than China Construction Bank Corp.

Goldman Sachs Group Inc. and Morgan Stanley are among at least 16 brokerages that have raised their target prices for China’s second-largest bank this year. Institutional investors including BlackRock Inc. and Invesco Ltd. have recently increased their CCB holdings, data compiled by Bloomberg show.

Shares of China’s four biggest banks have rebounded since late 2017 as economic growth accelerated and investors bet they will cope betterthan their smaller rivals with the government’s crackdown on excessive debt. CCB’s financials are “trending the best,” thanks to its strong deposit franchise, widening loan spreads, conservative handling of bad debts and higher capital ratios, according to Morgan Stanley.

All except one of the 30 analysts tracked by Bloomberg who follow CCB recommend buying the stock and none say sell, giving the lender a consensus rating of 4.87 out of 5. By contrast, only 22 of 29 recommendbuying Industrial & Commercial Bank of China Ltd., the nation’s largest lender.

Shares of CCB may rise 19 percent in the next 12 months to HK$10.03 in Hong Kong, according to a consensus price target compiled by Bloomberg. CCB and ICBC are currently trading slightly above the value of their net assets, while Bank of China Ltd. and Agricultural Bank of China Ltd. remain below book.

CCB trades at 6.5 times estimated forward earnings per share, more than the 5.5 times two-year historical average, according to data compiled by Bloomberg.

The bank’s return on equity was 16.5 percent as of last September, the highest among the top four banks. Its net interest margin may expand 12 basis points by the end of next year, more than the estimated 8-point increase by ICBC, Morgan Stanley analysts including Richard Xu wrote in a report last month.

CCB has been setting aside more money for soured debts than required, giving it further room for earnings growth. The bank’s allowances rose to about 163 percent of nonperforming loans in the third quarter, higher than the official 150 percent requirement. Its bad-loan ratio was 1.5 percent as of September, lower than the industry average of 1.74 percent.

Shares of CCB rose 21 percent in Hong Kong last year, less than the 35 percent increase at ICBC. CCB shares trading in Hong Kong are about 29 percent cheaper than those in Shanghai -- a bigger discount than the 24 percent at its largest rival.

Earnings Season

FM Wealth Management News Letter

We are now coming up to earnings season, so we are warning you now that the numbers may not live up to the S&P 500 (SPY) rally we have seen during the last little while.

The reason for that is that the rally has been pricing in the flow-through of benefits of the new tax reforms, and these benefits won’t yet be seen in fourth quarter earnings from 2017.

In fact, it is expected that EPS will decline from a 3Q17 by 0.3% as charges related to income tax are expected to be booked.

This of course does not mean that the rally is not justified we can just call it premature or anticipatory.  In the chart below Morgan Stanley (MS) illustrates how EPS estimates have increased for 2018 after the tax bill was passed on 15th December. You should note that 4Q17 figures only show a tiny gain.

These are only estimates based on guidance and we cannot be 100% sure that these estimates will be met, or how much the tax bill may contribute, but the equity rally since mid December was largely due to the expectation of these increases.

EPS increases obviously increase the P/E ratio, which then starts to cause concerns about valuations.

The S&P 500 P/E ratio moved above 25 in December for the first time since the beginning of the bull market in 2009 in fact with the gains we saw over the last two weeks, it now stands at 26.16.

This high P/E number is unlikely to come down significantly as it adjusts to fourth quarter numbers.

Full year EPS estimates are for $110.57 (based on GAAP), which at the current S&P 500 closing prices of 2802.56 means a P/E ratio of 25.34. This will make some investors uncomfortable over the next few months.

At the very least it won’t encourage further multiple expansion. This may make the rally may stall for a while until the market has a better idea of 1Q18 numbers.

This was a point made by Morgan Stanley in their note on earnings.

Top brokers name 3 ASX shares to buy today

Australian Stock Markets

With earnings season on the horizon, leading brokers have been as busy as ever preparing forecasts and recommendations.

Three shares which have fared well and been given buy ratings are listed below. Here’s why brokers think you should buy these shares:

BHP Billiton Limited (ASX: BHP)
According to a note out of the Macquarie equities desk, its analysts have retained their outperform rating and lifted the price target on the mining giant’s shares to $38.00. The broker has done this after upgrading its bulk commodity price forecasts amid strong demand and supply restrictions. While I do agree that BHP Billiton is a buy, I’d be pleasantly surprised if its shares were to reach Macquarie’s target which implies potential upside of approximately 24% for its shares over the next 12 months.

Catapult Group International Ltd (ASX: CAT)
Analysts at Morgans have retained their add rating and $2.97 price target on the sports analytics company’s shares following yesterday’s quarterly update. The broker was pleased to see its cash flows come in ahead of expectations and believes that the company is on course to achieve its full-year guidance. As I said yesterday, I’m a big fan of Catapult but I’m hanging back until it is clear the company can operate a highly profitable business.

SEEK Limited (ASX: SEK)
A note out of Morgan Stanley reveals that its analysts have retained their overweight rating on the job listings company following a review of the media sector. Further, the broker has lifted its price target on SEEK’s to $21.50, believing it will be a winner from the shift of ad spending from old media to new technologies. REA Group Limited (ASX: REA) was also named as a share to buy for the same reason. I think SEEK is a good long-term option for investors and expect it to deliver decent returns over the next few years thanks to this trend.

Wall Street traders brace for meager paychecks as bonus season approaches

Some traders at the largest Wall Street banks are about to get big, fat zeroes for bonuses while they watch markets thrive.

Trading revenue was down significantly across the industry during the fourth quarter, wrapping up a year in which clients around the globe sat idle as market volatility hovered near historic lows.

The big five Wall Street banks – JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Bank of America Corp (BAC.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) – reported an average revenue decline of 32 percent for the fourth quarter, and 12 percent for the full year. Even though stock markets hit new highs and bond markets moved little, executives said it was hard to generate income from inactive customers.

As a result, bonuses could be 10 percent to 20 percent lower than the prior year, and traders who sit on desks that posted losses could get nothing at all, consultants and recruiters said in interviews.

Morgan Stanley cuts exposure to U.S. equities in favor of Europe

European Stock Markets

Morgan Stanley cut its exposure to U.S. equities and increased its weighting in European equities on Wednesday, saying the U.S. stocks’ strong recent rally made it unlikely they could continue to outperform this year.

 

“U.S. stocks have outperformed and are now close to our year-end price target with limited upside, while the backdrop for European stocks outperformance is intact,” the U.S. bank’s strategists said in a cross-asset note.

They increased their overweight in European equities from 2 percent to 3 percent relative to the benchmark, and cut their U.S. equities overweight to 1 percent from 2 percent.

The S&P 500 .SPX has shot up more than 9 percent since the start of October 2017, while Europe's

STOXX 600 has managed less than a third of that return over the same period.

The cross-asset strategists kept their preference for equities over bonds, with credit the least favored, in a late cycle environment they said was heading for a “tricky handoff” at the end of the first quarter with PMIs likely to peak and inflation potentially rising.

They think the best ‘reflation’ plays lie in being overweight energy and financial equities.

Why is Everyone Calling for a Crash

FM Wealth Management Newsletter

Last week the S&P (SPX) dropped and held to the support region estimate that we set out within 3 points, and began a rally up after reaching that level.

 
Not withstanding all the Hindenburg like prediction, regarding market valuations and near record low volatility.  We are only scratching the surface of all the reasons analysts have been putting in front of investors as to why this market is, in their opinion, “too high.” You may ask is this time different? Is it possible that we have finally conquered the boom and bust business cycles and therefore stock market will rally on forever?

Absolutely not.

But it is also ridiculous for economists and seasoned investors to suggest that because their methods of market evaluation have failed them, that they therefore need to conclude that we need to prepare for a market crash, it does make us question the logical of perspective of their analysis.
In other words how does one come to the conclusion that if an analysis method is not working, then you must prepare for a crash?

If one understands the nature of technical divergences, then you can also come to an understanding of fundamental divergences, and of course this would begin to explain why most standard methods of evaluating the stock market have been useless for two years now.

If we look at a statement by MIT Nobel Laureate, Paul Samuelson who recently stated, that even John Maynard Keynes was challenged for altering his position on some economic issue. Keynes replied to this challenge by saying, “When my information changes. I change my mind. What do you do?” So should they begin to see that fundamental nature of the stock market has changed, and therefore have people changed their minds? No-way. Instead they choose simply continue to apply their old analysis methods and of course conclude that we are going to crash.

In other words we saying that this “Market melt-up” would have the effect of breaking down old paradigms and correlations, thereby leaving many confused as to the nature of the market.
So did anyone take notice of this very thing happen?  Yes they did. In early 2017, Andrew Sheets at Morgan Stanley began to take notice, and noted that  that while ‘crash’ is not a term used lightly adding that “our editors here at Morgan Stanley won’t let us use it without a good reason” he “struggles to think of another word to describe just how much, and how sharply, cross-asset correlations have fallen. In just four months, we have gone from a market of unusually close linkages across markets, to one with usually divergent returns.”

Our objective methodology allowed us to attain a 30% gain off the 2016 lows, despite our invalidated expectations for a break out set up to occur. What were are trying to say here is that anyone who analyses the Markets needs to develop methodologies that give them advance warning as to when their primary expectations are wrong, rather than stubbornly clinging to something that is not working.

When the market changes, what should we do?
As long as the S&P does not break down below last week’s low, it should be able to take us to 2610 SPX or possibly even higher. Having said that we are acutely aware that the depth of the drop last week has certainly weakened the SPX.

If it were not for the IWM pattern we saw, we would almost assume the SPX has topped. Because of this IWM pattern we saw it is still likely set up to rally in the coming weeks to the 150+ region before a larger degree top is made – as long as it does not break 143.90. For this reason, we still will retain an open mind that the SPX can reach higher targets.

Futures snapshot at 7:07 a.m. ET:

* Oil prices traded higher, supported by a strong gasoline market, but rising output from OPEC producers revived concerns about a fuel supply overhang.

* Shares of IBM (IBM.N) fell 3.2 percent in premarket trading after the company's quarterly revenue came in below expectations. 

* United Continental Holdings (UAL.N) was down 2.5 percent, a day after the airline's quarterly results beat expectation but said costs rose. 

* Morgan Stanley (MS.N) rose 0.8 percent after the bank's quarterly profit rose 11.4 percent.

* Vertex Pharmaceuticals (VRTX.O) jumped 27.3 percent after the company reported positive results for its cystic fibrosis triple combination treatment. 

* Discovery Communications (DISCA.O) was up 5.6 percent after a source told Reuters that the company and Scripps Networks Interactive (SNI.O) are in merger talks. Scripps was up 14.1 percent.

* Dow e-minis 1YMc1 were down 12 points, or 0.06 percent, with 11,948 contracts changing hands. 

* S&P 500 e-minis ESc1 were up 1.25 points, or 0.05 percent, with 78,754 contracts traded. 

* Nasdaq 100 e-minis NQc1 were up 14.25 points, or 0.24 percent, on volume of 19,695 contracts.

Futures rise as earnings take center stage

U.S. stock index futures rose on Wednesday, giving investors a reprieve a day after Wall Street lost its footing following weak results from some corporate heavyweights.

* Earnings will continue to be in the spotlight. Morgan Stanley (MS.N) reported a surge in quarterly profit, rounding up earnings for the big U.S. banks. Its shares rose nearly 2 percent in premarket trading.

* Key companies scheduled to release results after markets close on Wednesday include Dow component American Express (AXP.N), eBay (EBAY.O) and Qualcomm (QCOM.O).

* Tepid quarterly numbers from Goldman Sachs (GS.N) and Johnson & Johnson (JNJ.N) raised worries about pricey market valuations and pulled the major U.S. stock indexes lower on Tuesday.

* Overall profits of S&P 500 companies are estimated to have risen 10.7 percent in the latest quarter - the best since 2011, according to Thomson Reuters I/B/E/S.

* Despite some weak spots, earnings seem to be promising. Of the 45 S&P 500 companies that have released results so far, nearly 76 percent have topped earnings estimates, according to Thomson Reuters I/B/E/S.

* The dollar, which has been beaten down by growing concerns about President Donald Trump's economic agenda, rose on Wednesday after U.S. Treasury Secretary Steven Mnuchin said the president was not trying to talk down the strength of the currency.

* While no top-tier economic data is due on Wednesday, investors will keep an eye on the Federal Reserve's Beige Book, which will give a glimpse into economic conditions across the United States. The data is due at 2:00 p.m. ET (1800 GMT).

* Shares of IBM (IBM.N) sank more than 5 percent to $161.33 after the company reported a bigger-than-expected decline in revenue for the first time in five quarters.