Financials

The near-term (next month or two) market dynamics in EM risk assets remain a coin toss. Beyond that the outlook for EM risk assets remains downbeat. EM financial markets are complacent and there are many potential negative EM/China developments that could derail the current EM rally. A new trade: go long the KOSPI / short EM overall equity index.

We turned more cautious on banks in January, but in hindsight, could have become outright bearish. Banks are headed for a triple whammy of profit trouble. Loan growth is set to cool, the credit cycle has shifted from tailwind to headwind and the yield curve continues to flatten. Moreover, following several years of downsizing, banks are no longer shedding labor. In fact, banks are adding staff, according to BLS data (middle panel). The timing of hiring is questionable, given that our measure of productivity growth, bank loans/bank employment, is now decelerating (bottom panel). That will undermine profitability, particularly against a backdrop of net interest margin compression. Expectations in the swap curve are for an ongoing yield curve flattening (top panel). It will be very difficult for long-term Treasury yields to rise sustainably as long as other global government bond yields are melting, because the divergence will cause outsized U.S. dollar appreciation which transmits deflationary pressure into the U.S. The implication is ongoing net interest margin compression. Bottom Line: Downgrade the S&P banks index to underweight. This also moves our overall financials exposure to below benchmark. For additional details please see yesterday's Weekly publication. The ticker symbols for the stocks in this index are: BLBG: S5BANK - BAC, BBT, C, CFG, CMA, FITB, HBAN, JPM, KEY, MTB, PBCT, PNC, RF, STI, USB, WFC, ZION. bca.uses_in_2016_04_26_001_c1 bca.uses_in_2016_04_26_001_c1

Like the economy, banks show no major imbalances. But the "glide path" for credit is slower than in previous cycles.

Sell the bounce in banks, which face a triple whammy of earnings threats. This will reduce our financials sector allocation to underweight, making room for last week's energy upgrade.

Last month, we highlighted that the S&P consumer finance index had far undershot bullish readings from our macro indicators, reflecting company specific issues. As the latter fade into the rearview mirror, relative performance should reengage with its upbeat outlook. For instance, the tighter U.S. labor market is pushing up wage & salary growth, supporting robust gains in revolving consumer credit (second panel). Rising income growth also suggests credit quality is unlikely to become a profit drag, paving the way for a re-rating in historically attractive relative valuations. That contrasts with the corporate sector, which is struggling with highly-indebted balance sheets and faltering profit growth (our Corporate Health Monitor is shown advanced, bottom panel). It is no wonder that personal loans are outpacing C&I credit growth (third panel) This backdrop is bullish for consumer finance stocks relative to the market, and relative to the S&P bank index. We reiterate our overweight S&P consumer finance index recommendation as well as our recently established pair trade vs. banks. The ticker symbols for the stocks in this index are: BLBG: S5CFINX - AXP, COF, SYF, DFS, NAVI. bca.uses_in_2016_04_22_001_c1 bca.uses_in_2016_04_22_001_c1

Treasuries appear overbought in the near-term, especially given evidence of a rebound in global manufacturing, but we would need to see evidence of a sustained re-synchronization of global growth before advocating a shift to below benchmark duration on a 6-12 month horizon.

In this <i>Special Report</i>, we discuss the state of the New Zealand business cycle and propose some trade ideas to capitalize on the excessive pessimism currently at play in New Zealand bond and currency markets.

The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.

The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.

The previous Insight showed that capital formation has hit a brick wall as a consequence of ebbing risk tolerance. That is robbing the corporate sector of much needed growth capital, and will reinforce the need for retrenchment. As a result, the outlook for capital market profitability is bearish. To make matters worse, capital markets firms have been slow to downsize this cycle. Usually headcount is quick to react to slumping revenue, as a shrinking bonus pool necessitates fewer employees. However, capital markets employment growth has not yet started to contract, warning that revenue disappointment will be compounded on the bottom line. While net earnings revisions are negative, earnings are still expected to outpace those of the broad market in the coming twelve months, which is far too optimistic in the absence of resurgent economic confidence. We expect the S&P capital markets index to sink to new relative performance lows. Stay with a high-conviction underweight. The ticker symbols for the stocks in this index are: BLBG: S5CAPM - GS, BLK, BK, MS, SCHW, STT, TROW, AMP, BEN, NTRS, IVZ, AMG, ETFC, LM. (Part II) Capital Markets: From Bad To Worse (Part II) Capital Markets: From Bad To Worse