Chinese equities rallied today sharply off lows hit last week after the People’s Bank of China announced a fresh cut of 25 basis points to the benchmark one-year lending rate. The PBOC also lowered deposit rates by 25 basis points, bringing the one-year interest earned by savers down to 2.25 percent while expanding the ceiling on rates paid by banks to 150 percent. This is the third rate cut by China’s central bank since November. In the official statement accompanying the announcement, bank policymakers stated that the Chinese “economy is still facing relatively big downward pressure. At the same time, domestic prices remain at low levels and real interest rates are still higher than historical average levels, providing room for continuous use of interest rate tools.” Many analysts are interpreting this as a signal that easing measures will continue to be deployed in the near term. For equity investors in Chinese markets, for now anyway, bad economic news appears to remain good for stock prices.
TPG Capital to buy Cushman & Wakefield. EXOR, an investment vehicle owned by the Agnelli family, has agreed to sell its 75 percent stake in Cushman & Wakefield, the largest privately owned commercial real estate brokerage in the world. Fort Worth, Texas–based $67 billion TPG Capital will pay roughly $2 billion in cash and assumed debt according to the terms of the deal announced today. TPG will combine Cushman’s operations with its own DTZ division, creating a challenger to dominant industry players CBRE Group and JLL.
Greek negotiations remain stalled. Greece and the Eurogroup, the euro zone’s finance ministers, are meeting today in Brussels with the hopes of reaching an accord on the Mediterranean country’s debt. Analysts are looking at today’s talks with one eyebrow raised. In a note to clients today Société Générale in a client note that “nobody expects a deal today, but at least we need to see signs of progress towards an end-of-June deal.” According to the note, June represents the hard deadline since, even if Athens misses this week’s payment to the International Monetary Fund, there will be a 30-day window before it is officially declared a default. A missed payment or the issuance of IOUs to meet domestic obligations will cause temporary tensions in sovereign spreads, however, the note continues.
Bank of England holds rates steady. As had been widely anticipated by economists, the Bank of England today announced no change to benchmark interest rates of the current asset purchase facility. With consensus market forecasts for no tightening by the bank until 2016, the press conference today by bank governor Mark Carney will be a focus for pound-denominated market narratives. With inflation remaining tepid despite nine consecutive quarters of growth, Carney’s dovish tone has remained pronounced in recent months.
Aramco to launch spree of acquisitions. Media reports today indicated that Saudi Arabian Oil Co., better known as Aramco, the world’s largest oil-and-gas company, will be spending up to $80 billion in acquisitions abroad in the coming five years. This strategic shift follows on the heels of the recent shake-up in the control of the state-owned oil company after the shift in succession for the Saudi throne.
Chinese car sales slow down. April sales data released today by the China Association of Automobile Manufacturers indicated sales of new noncommercial vehicles reached 1.67 million for the month. At a 3.7 percent increase from the same month in 2014 this represents a multiyear low growth rate as a combination of market saturation and recent economic concerns tempers demand for new cars in China. Commercial vehicles registered a contraction of nearly 20 percent year-over-year as corporate investment levels have tapered off on weaker activity.
Noble Energy buys into U.S. shale field production. Houston–based Noble Energy announced today that it has agreed to acquire Houston–based Rosetta Resources for $2.1 billion in an all-stock transaction. The deal, a nearly 40 percent premium to Rosetta’s closing stock price on Friday, provides Noble with a footprint in Texas’ Eagle Ford Shale field and the Permian Basin oil regions at a time when many producers are shuttering capacity because of low crude prices.
Portfolio Perspective: U.S. Equity Sector Performance Indicates Bullish Conviction — Adam Grimes, Waverly Advisors
Sector flows and relative performance can provide some insight into market psychology. Generally, defensive sectors have underperformed in recent swings, and cyclical — that is, more speculative — sectors have held on to strength well. This is a subtle but important sign of underlying bullish conviction.
Our sector weighting is strongly bullish, holding overweights in health care, discretionary spending and tech stocks. We are underweight materials, which we think is still appropriate, but we would caution any holders of underweights or shorts in energy to be mindful of risk and to consider moving toward market weights.
Energy stocks deserve attention, It is important to realize, however, that these are more commodity plays than stock plays at this time. Furthermore, direction in crude oil is far from certain. Even though we think there is a high probability that a bottom is forming, it could take quarters and we could see new lows in crude over the next few months. This may be a case where with proper risk management, adding to allocations on sharp sell-offs can make sense.
Adam Grimes is the managing partner and CIO of Pittsford, New York–based research and asset management firm Waverly Advisors.