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Daily Agenda: SocGen Strategist Believes Equity Market “On Fumes”

More somber data from Europe; TD Bank and CIBC announce earnings; expectations for flat claims data in the U.S.

All remains quiet on the investment front. With European markets in limbo ahead of next Friday’s European Central Bank report and U.S. markets continuing to reflect a risk-on attitude, little has changed so far this week in global investor sentiment. U.S. equity markets continued to register low volumes during trading this week, a trend that was evident in July as well — suggesting that many investors’ minds, if not themselves, are still on the beach. A lack of volatility, combined with clear signals at Jackson Hole, has brought carry trades in the currencies of high-yielding developed economies, notably Australia and Canada, back into favor.

Despite this calm — or rather, in light of it — in a note released today, Société Générale strategist Albert Edwards laid out his concerns that a market correction is overdue. He notes: ”Much has happened over the summer, but two landmark firsts have occurred only recently, with the S&P 500 breaking above 2,000 and the ten-year bund yield breaking below 1 percent. Our Ice Age thesis has long called for sub-1 percent bond yields and I see this extending to the U.S. and U.K. in due course. It is the equity markets where I have been consistently surprised. Quantitative easing has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes.”

Europe posts downbeat macro data. German August unemployment posted a slight increase to 6.7 percent in a release today from the Federal Labor Office. Separately, the European Commission’s August Economic Sentiment Indicator for the euro zone contracted by 1.5 to 100.6, significantly lower than consensus forecasts, while the EU-specific index fell to 104.6.

U.S. economy is on track to keep pace. Revised U.S. second-quarter gross domestic product is forecast to remain unchanged, according to economists’ consensus forecasts among economists. While concerns had been raised in the lead-up to the initial release that adverse weather conditions would cause a slower rebound, strong gains in inventories and domestic consumption are helping buoy aggregate results. Weekly initial jobless claims are expected to remain roughly flat from last week’s significant improvement of 14,000 fewer job seekers. U.S. July National Association of Realtors pending home sale data is also scheduled for release today, with consensus expectations for a 1 percent month-over-month reading, after –1.1 percent in June.

Canadian bank earnings released. Toronto-Dominion Bank announced third-fiscal-quarter profits of C$2.11 billion ($1.94 billion) for the third consecutive quarter, with net income exceeding that by $107 million. Canadian Imperial Bank of Commerce also posted an increase in profits of 4.7 percent for the period on the back of strong performance in the bank’s capital markets division. This completes the earnings season for Canada’s Big Five banks, following last week’s announcement from Royal Bank of Canada.

Investors buy into distressed Chinese credit. Huarong Asset Management Co., China’s largest bad-debt management company, announced regulatory approval for a sale of 21 percent of its shares to outside investors. The deal will bring in an additional 14.5 billion yuan ($2.36 billion) in capital. Investors include Goldman Sachs Group, Warburg Pincus and Khazanah Nasional, Malaysia’s sovereign wealth fund.

Another Swiss bank sheds a layer of secrecy. For the first time in its 218-year history, Geneva–headquartered private bank Lombard Odier released earnings, following corporate restructure in response to regulatory pressures. Geneva’s oldest private bank announced net income of 63 million Swiss francs ($68.9 million) for the first half of 2014, a cost-to-income ratio of 80 percent and disclosed 211 billion francs in total client assets. The bank follows its competitor Pictet, which released earnings for the first time in its history on Tuesday.

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