Daily Agenda: Markets on FOMC Watch
Guotai Junan Securities announced IPO in Shanghai; first MERS death reported in Germany; developer Kirk Kerkorian dies, age 98.
At 2 pm today, markets will hit a critical sentiment point when the Federal Open Market Committee makes its policy announcement. Consensus forecasts are now for no tightening until later in the year. The fixed-income research department at Barclays, for one, has noted that current Fed funds futures contracts suggest a 65 percent probability of a hike in September. Nevertheless, market risk narratives will hinge on any minute shift in language during today’s press conference by Federal Reserve chair Janet Yellen.
Venezuela to receive $5 billion in credit from China. State-owned oil company Petroleos de Venezuela is receiving a $5 billion loan from China to expand capacity, according to reports yesterday. With more than 95 percent of export income made up of fuel shipments, Venezuela has experienced a severe economic downturn in the face of the oil price slump. Although details of the agreement are not yet public, analysts expect that the terms will call for repayment in crude in keeping with other credit facilities extended in recent years to the nation by Beijing.
Euro zone inflation rises. Eurostat data released today indicated that consumer prices rose in May across the 19-nation currency bloc, with the headline price index at 0.2 percent for the month. Core prices remained in line with expectations at 0.9 percent year-over-year.
Guotai to go public. According to filings made at the Shanghai Stock Exchange today, Guotai Junan Securities, China’s largest investment bank by revenue, is planning an initial public offering that would see the firm’s capitalization reach nearly $5 billion. If accomplished, the float will be the largest domestic initial offering in China since 2010.
U.K. employment rate unchanged. According to data released this morning by the Office for National Statistics, U.K. unemployment remained flat at the seven-year low of 5.5 percent hit in April. The same report indicated that wage growth accelerated for the month.
Germany reports first MERS death. While Middle East Respiratory Syndrome (MERS) continues to dominate headlines in South Korea, Germany reported its first death from the illness on Wednesday. The individual is believed to have contracted the sickness while visiting the Arabian Peninsula.
Kerkor “Kirk” Kerkorian, dies, 98. The son of Armenian immigrants died yesterday at his home in Beverly Hills, California. A self-made businessman, Kerkorian was an influential developer in Las Vegas and a successful Hollywood investor who later acquired significant interests in automotive companies during the 1990s. An eccentric and attention-shy man, Kerkorian did not allow his name to be attached to his various charitable endeavors.
Portfolio Perspective: The Crawl — John Vail, Nikko Asset Management
Regarding the Fed’s intermediate term approach to normalizing rates, we have long been told that our term at Nikko Asset Management “baby steps” was too disrespectful of the process. Fed Vice Chair Stanley Fischer coined the term “crawl,” however, so we are happy to use that. A crawl, however, indicates relatively steady hikes, whereas the Fed has adamantly said that investors should not expect a path of 25 hikes per meeting. We believe the Fed should be clear not to rule out this latter approach, as this would still be a “crawl.” If unpredictability is a goal, perhaps the answer is to hike 12.5 basis points at some point. Indeed, we have been told by experts that the first hike must be 25 basis points. Though wouldn’t a 12.5 basis points would be more consistent with a gradual crawl? Or if not at the first hike, then perhaps 12.5 basis points at the one following?
Despite the pain of hearing more about Greece, investors must clearly understand that it is important and that a major event is imminent. Indeed, Grexit is a major factor for the Fed. If it happens, the euro will likely decline and Fed won’t wish to hike in such an uncertain environment.
John Vail is the chief global strategist for Nikko Asset Management in New York. He also the head of the group’s global investment committee.