Global Macro Strategy

  • What Andy is working on:

    • BU: LWIL or Last Week I Learned AQR, Midterms, and Oil

      ECB’s AQR or stress tests

      By now, the results of the European Central Bank’s asset quality review results for 130 European banks have come out and the markets weren’t too surprised. The reason is that most of the information was gratuitously released last week to ensure the markets would have exactly this response. Nobody at the ECB wanted a big surprise over how many banks failed (25) and everybody at the ECB wanted to give the appearance of being tough, but fair in their findings. As a reminder, the European Central Bank takes over supervision of the major Eurozone banks on November 4th. Click here to go the to report at the ECB. Below is a graph of the countries in Europe with the number of banks that failed the test.

      Screen Shot 2014 10 27 at 7.41.14 AM 277x300 BU:  LWIL or Last Week I Learned AQR, Midterms, and Oil

      Generally, here’s what most analysts said about the results:

      1. The process was fair and credible.
      2. The results provided details necessary for deep dive checking.
      3. The outcome was for additional capital raising, but not a lot more.

      This implies that the major crunch for European banks is over and they may eventually return to lending. Remember, the ECB has been pressuring banks to raise capital, shed assets, and realistically value loans over the AQR inquiry. At the same time, the ECB’s Draghi has been saying they will help make more liquidity available to banks to stimulate lending. Therefore, it should come as no surprise that Europe’s economy has stalled as banks weren’t lending and may not reach lending levels that would stimulate economic growth in the near future.

      US Midterms

      On November 4th, US voters will go to the polls for the midterm elections to decide on who will control Congress for the next two years. As most know, all of the members of the US House of Representatives are up for election and 1/3 of the US Senate is up for election. A year ago, the House Tea Party members shut down the US government as they refused to fund spending. This drove down Republican approval ratings to the lowest since President Obama took office. It brought up speculation that not only would the Senate stay Democrat, but also that the House may turn Democrat as well.

      Then three things happened to change the course of Congress. One, the Ryan-Murray budget agreement that funded the US government for 2 years and took away the prospects of another government shutdown. Two, a short-term agreement to raise the US debt ceiling so that the US government would not default on their debt. Three, the ACA or Obamacare rollout disaster. All three combined to change the way voters viewed Republicans and President Obama. It’s the latter that is key for the midterms.

      Below is the Gallup Quarterly Presidential approval rating.

      Screen Shot 2014 10 27 at 8.07.44 AM 300x153 BU:  LWIL or Last Week I Learned AQR, Midterms, and Oil

      As you can see, President Obama is at the lows of his presidency. Why does this matter? The table below is from Real Clear Politics and links the rating and how many Senate seats will likely turnover.

      Screen Shot 2014 10 27 at 8.17.03 AM 177x300 BU:  LWIL or Last Week I Learned AQR, Midterms, and Oil

      It shows a strong potential for a “wave” election whereby 10 seats turn from Democrat to Republican. This outcome would have strong, positive implications for things like slowing the regulatory burden on US businesses (regulatory cost 2012-2013: $349 billion) to increasing the chances for tax reform.

      Oil

      Below is a 3 yr chart of WTI and the sequence of breaking support points at almost every level.

      Screen Shot 2014 10 27 at 8.27.07 AM 300x148 BU:  LWIL or Last Week I Learned AQR, Midterms, and Oil
      Click here for larger graph

      The next target is $77.30.

      Here are my three major concerns about oil:

      Prices are not sustainable over $100 due to US demand destruction via higher prices back in 2007 and production efficiencies due to horizontal drilling since 2005.

      Congress may use oil production credits as payfors to offset lowering the overall business tax rate as tax reform efforts build in 2015.

      Mexican production comes on-line fast than anticipated. Remember 30% of Eagle Ford shale is in Mexico.