Daily Note – Tree hugging traders?

17 JuneSummary

Hippies don’t make good traders, Greenpeace bet against euro loses millions

South Africa: Negative rating actions, but market somewhat relieved

Russia: CBR keeps rates on hold, but warns of possible further rate hikes

Eurozone: ECB likely to refrain from new measures for next few months

Good morning,

Poor old Greenpeace. Apparently, tree huggers don’t make good traders, and a massive bet against the Euro has cost the virtuous, foot soldiers of the environment millions!

Greenpeace lost €3.8m after bad bets in the market last year. The Guardian reports that they got sucked into betting on a falling euro:

According to a statement released on Sunday, in the second half of 2013 an employee at the environmental campaign group’s Amsterdam headquarters took out currency exchange contracts that speculated on a weak euro… Greenpeace says the staff member, who worked in its international finance unit, was not acting for personal gain but failed to obtain authorization from senior management. He has since been released from his contract.”

It’s nice to see that rogue traders are not limited exclusively to investment banks and the human emotions of greed and fear affect even those who regard themselves as being on a higher virtuous plain to the rest of us!

United States: Homebuilder sentiment improves

Table 1 17 JuneThe US housing market is essential for the recovery, so it’s good to see that the NAHB housing market index increased to 49 in June (vs. consensus 47), from 45 in May. In the past, we have found the homebuilders’ index to be a decent leading indicator of housing starts, which are out later today.

Figure 1: United States NAHB Housing Index

Figure 1 17 June

 

Elsewhere, industrial production was up a solid 0.6% in May (vs. consensus +0.5%). Manufacturing production, representing about three-quarters of total industrial production by value, rose 0.6% (vs. consensus +0.6%).

We expect the Federal Reserve at their meeting tomorrow to revise upwards the economic outlook for the US economy.

South Africa: Negative rating actions, but market somewhat relieved

Fitch affirmed South Africa at BBB but changed its outlook from stable to negative. The market was somewhat relieved (with a small rally in FX, rates and CDS following the news) as it seemed to have priced in a much more aggressive downgrade in both rating and outlook. (See chart below)

Figure 2: South African 10 Year Yield & Rand FX

Figure 2 17 June

This move effectively reduces some of the concerns over another potentially damaging downgrade later this year. Actions by Fitch or Moody’s remain possible (given their negative outlook), but they would only be ‘catching up’ with the others.

And frankly, I have never put much store in what these agencies have to say. They tend to be backward looking not forward looking indicators.

The fundamentals underpinning the S&P downgrade, in particular, the slower growth outlook is already in market pricing. S&P now sees real GDP growth at 1.9% in 2014, following a small contraction in Q1.

Russia: Rates on hold, but warns of possible further rate hikes

Table 2 17 JuneIn line with expectations, the CBR board maintained its policy rates unchanged but said it could raise rates if it sees medium-term inflation risks. Russia risks stagflation and this is a serious worry for them.

Figure 3: Russian CPI Core YoY %

Figure 3 17 June

I maintain my view that rates will remain on hold through Q3 but the risk in Russia is that the economy seizes up as a result of political instability and inflation rises because of Rouble weakness.

Eurozone: ECB likely to refrain from new measures for next few months – BBG sources

A story from Bloomberg cites “two euro-area central bank officials” who argue that ECB easing could be counteracted by bank cash hoarding until bank stress tests/reviews are completed. The tests are due around October.

This shouldn’t come as any surprise and I’m not sure this Euro bounce will last.

See chart below of the recent Euro price moves. $1.35 remains the key level ahead of the FOMC meeting tomorrow.

Figure 4: Short Term € Chart

Figure 4 17 june

Table 3 17 June

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