Macro surprises and rising ECB expectations

USD on the decline again today loosening financial conditions in emerging markets and financial markets in general. A falling USD is typically a net positive for global equities. It reinforces our view that equities will continue to rise into the next two weeks’ central bank meetings. First central bank meeting is ECB on Thursday. We expect a bold move from ECB as the slowdown and lower inflation expectations are deviating ECB from its policy framework. In order to be credible ECB must deliver an accommodative package while balancing the need to protect European banks from further negative deposit rates. The most likely package is a combination of lower deposit rate, restart of QE programme and a tiering system for excess reserves. The tiering system allows banks (primarily German, French and Dutch banks) to move part of its excess reserves from the deposit facility (-0.4%) to the main refinancing operations (0%). If around 90% of the €1.9trn excess reserves (minus the €130bn minimum requirement) can be moved to the main refinancing operations, then European banks could in aggregate save around €7bn annually. This would immediately change valuations of European banks and lift sentiment broadly in Europe. We are overweight European banks going into the ECB meeting next week.

Bond volatility has recently risen dramatically measured by the MOVE Index to levels not seen since 2013 when former Fed Chair Ben Bernanke made is now famous ‘QE tapering’ remarks and 2015 during the emerging markets and oil market squeeze. This could have negative consequences for risk parity strategies and potentially lead to overall leverage reductions in risk parity portfolios causing these portfolios to be net sellers. In general liquidity is low in bonds and the last couple of weeks liquidity has been thin in corporate bonds where yields in some cases have dropped below the bid-ask spread. It seems many market participants are chasing momentum and price action in bonds which sets the bond market up for a “mini crash” when the flow reverses.

Lululemon shares jump 4% in extended trading yesterday as the company selling yoga pants lifted its FY guidance on EPS to $4.63-4.70 from $4.51-4.58. When shares start trading today in New York they are poised to reach a new-all-time-high. The Q2 numbers (ending on August 4) were strong with revenue growth y/y accelerating and gross margin expanded from Q1. Lululemon has an impressive free cash flow generation combined with good top line growth per CAPEX invested.

We Company (pending IPO) is said to have lowered its IPO valuation from its recent $47bn valuation capital raise round with SoftBank Group earlier this year. People close to the deal have said to Bloomberg News that We Company’s valuation range has been lowered to $20-30bn. The NYC professor Scott Galloway, famous for commenting on everything happening in the technology industry, published a crushing view on We Company calling it WeWTF. In that same article he said that any Wall Street analyst who believes it’s (the company) worth over $10bn is ‘lying, stupid, or both’.