Equity rally has stopped for now

Nikkei futures still look the strongest on JPY flow

As we have been highlighting the since late last week the DAX and Nikkei futures look the strongest on price momentum. Both equity markets are high beta plays on the macro economy so if risk-on continues these two markets would likely see further momentum. In today’s session Nikkei futures looked relatively strong against a backdrop of more mixed equity markets in Asia. The move is partly currency flows weakening the JPY but also rising sentiment on the macro economy. 

Is India a train wreck about to happen?

For years investors have been in love with India. The world’s largest democracy had positive demographics and a low urbanization rate setting the country up for decades of super growth. Everyone piled into the country’s equities getting good returns in both local and foreign currency. But recently the growth engine as been sputtering with news yesterday that car sales in India had it worst ever fall in August down 24%.

On top of that, India’s banking sector has eclipsed Italy as the world’s worst bad-debt pile. We are potentially watching a credit crunch in the making. More strangely is it to see equity valuations in India with MSCI India Index valued at 1.5% dividend yield which makes Indian equities much more expensive than US equities which are already expensive in a developed market context.

Stocks to watch

Ford Motor is in focus as Moody’s downgraded the carmaker’s credit rating to junk status as cash flows and operating margins are expected to remain weak the next two years. It obviously bad for Ford Motor which has been struggling with a weak share price the past five years. The downgrade means higher financing costs which come at a bad time as the economy may slip into a recession within the next 12 months and the car industry is seeing increasing capital expenditures to fund the transition to electric vehicle technology. The company’s debt has a current credit default swap price of 183 basis points which is in line with Bloomberg’s default model. The 1-year default probability is 0.29% which at levels not seen since 2012.

Apple will announce at 17:00 GMT its 13^th iteration of the iPhone which is seeing slowing demand. The company is getting around 50% of its revenue from the iPhone so it’s an important event for Apple investors to watch. But Apple understands future growth is not coming from the iPhone but its Services segment (essentially digital sales) and its streaming business in TV and music.