Daily Agenda: Athens Pushes for New Financing Terms

People’s Bank of China data shines a light on shadow banking; oil inventory data on deck; AOL and PepsiCo report earnings.


Krisztian Bocsi

Greek Finance minister Yanis Varoufakis today presents arguments to an emergency assembly of the Eurogroup, the consortium of euro zone finance ministers. Observers expect that the former academic will request a temporary bridge loan to buy time for Athens while negotiations over a debt restructuring continue. While leaders from Germany and other European Union stalwarts publicly have declared that there will be no deal — with German Finance minister Wolfgang Schäuble explcitly stating as much today — there are indications that a compromise may be on the horizon. According to a report issued this morning by the cross-asset research department at Société Générale, key elements of Varoufakis’s proposals appear to focus on cutting the target for the primary budget surplus; keeping 70 percent of the “good” troika reforms; and a debt swap to replace loans from European Monetary Union governments and rescue funds and an emergency humanitarian plan. According to the report, “The most likely scenario is that the Eurogroup and the Greek Finance minister agree on a technical extension that lays out a timeframe for the bargaining process on the debt relief.” While averting a Greek departure will be soothing for near-term market sentiment, if this scenario does in fact come to pass, investors will be left to ponder the long-term implications of setting a precedent for individual economies within the euro zone to chart an independent course.

PBOC casts a light on shadow banking. A new economic indicator was introduced by the People’s Bank of China today: total social financing, an attempt to calculate total credit outside the formal banking system. Estimates of the so-called shadow banking pool of private debt by the bank were previously not published publicly. At roughly 123 trillion yuan ($19.8 trillion) in total, outstanding social financing was up 14.3 percent year-on-year, was worth 193 percent of GDP in 2014. With yearly average growth of 19.3 percent, this ratio has grown to more than eight times 2002 levels.

Oil supplies plentiful. Weekly Energy Information Administration data of crude oil stockpiles is scheduled for release today, with consensus forecasts for no significant shift as inventories remain at historic high levels. This follows the release of International Energy Agency projections yesterday for an average per-barrel price of $55 for 2015. Front-month futures contracts for West Texas Intermediate grade crude declined by nearly 5 percent in trading yesterday.

Large-caps report earnings. AOL reported better-than-forecasted earnings for the final quarter of 2014 on increased advertising revenues. Despite reporting results today that came in near the top of analyst estimates, PepsiCo indicated that currency fluctuations had a significant negative impact on fourth-quarter earnings. Whole Foods and Tesla Motors will be among the companies reporting after equity markets close in New York.

Portfolio Perspective: Energy Sector Slowly Gaining Back Investor InterestJohn Kosar, Asbury Research

A recovery by the beleaguered energy sector has been one of the most anticipated events in recent memory, largely because of seemingly endless investor attraction to buying the bottom in a presumably undervalued asset. A 29 percent collapse in the Energy Sector SPDR ETF (XLE) between June 2014 and mid-January 2015, during which time the ETF underperformed the S&P 500 SPDR ETF (SPY) by 30 percent, certainly made this asset potentially attractive by those standards.

The key, though, is not only correctly determining when an asset is undervalued but more importantly, when investor assets start moving back into that sector because arbitrarily jumping into a collapsing asset is one of the most potentially dangerous things that an investor can do. Back in late November, our own in-house metric, which measures historic versus daily ETF asset flows, showed that just 11 percent of sector bet-related assets were being allocated to energy, compared to an historic 20 percent. About five weeks later, in early January, our metric showed that investor assets were slowly but measurably moving back into energy from other sectors, which was a key component of moving our model back to an overweight status. Since then, XLE has risen by 8 percent while outperforming SPY by 7 percent.

Finally — and perhaps most important — is our data shows that the biggest inflow of ETF-related investor assets over the past one-week, one-month and three-month periods has been into energy. This pattern of positive inflows is key to fueling and maintaining a rise in the price of an asset. Should it continue, it could help propel energy-related assets to additional gains this quarter and potentially into midyear.

John Kosar is the director of research at Schaumburg, Illinois-based financial information services provider Asbury Research.