Take Five: Reshuffle the decks


After one of the most severe equity market selloffs in decades comes the June 26 “Russell Recon”, the once-a-year re-jig of FTSE Russells’s U.S. index range, tracked by over $9 trillion in assets.

Bank of America analysts predict big changes this year, with a greater skew towards mega-cap tech stocks. Those “moving up” may include names such as Zoom (ZM.O) Slack (WORK.N) and Crowdstrike (CRWD.O), which have risen in price amid the shift to remote working.

In healthcare, BofA sees the “biggest style shift” in the mid-cap index, forecasting their share to be reweighted to 23% from 17%.

As funds adjust portfolios for the new weightings and components, reshuffle day tends to bring huge trading volumes, especially towards the end of the session. Last June saw 1.279 billion shares representing $42.59 billion change hands in just 1.14 seconds, according to the Nasdaq index.

(GRAPHIC – Russell rebalances among the busiest trading day: here)


Economies are only just exiting stringent coronavirus lockdowns, but some policymakers are already hinting at another kind of exit – from their crisis-related stimulus.

Not all of them, however. The Fed has assured markets it won’t balk at further policy easing. But comments by the Bank of England, the People’s Bank of China and the Norges Bank have surprised some — the latter has even flagged plans to raise rates from 2022.

The BOE cited signs of economic recovery as a reason to slow the pace of its bond buying. And PBOC governor Yi Gang said policymakers should consider the “timely withdrawal of policy tools in advance” because of the potential for a “hangover”. The PBOC is seen not cutting rates for the second straight month.

Data showing UK public debt surpassing 100% of GBP will reinforce fears of a debt surge stemming from emergency blank cheques. Markets aren’t spooked yet, especially as the Fed remains in easing mode. But stay tuned for more exit strategy talk.

(GRAPHIC – Public debt ratios: here)

3/V, U, L, PMI

What shape will it be? – The V of a swift rebound, or the U of an (eventual) grind higher, punctuated by coronavirus scares, news of job cuts, social unrest and corporate bankruptcies? Or the depressing flatline of an L? Flash estimates of June business activity may give us some indication.

Signs are that despite new infections in China and some U.S. states, the worst is over for big economies. Chinese factory activity returned to growth in May, while most countries saw a bounce in retail sales and manufacturing. U.S. and European purchasing managers’ indexes (PMI) turned higher in May even if they remained in contraction territory.

June PMIs should reflect more positive momentum coming through as lockdowns eased further. Then again, recent market swings suggest there’s just one economic indicator in focus for investors these days, and that’s the coronavirus case count.

(GRAPHIC – Global manufacturing PMIs hit by coronavirus: here)


After tapping on the brakes, is the People’s Bank of China again feeling for the accelerator? The government has flagged a cut to banks’ reserve ratios, which would free up cash for loans. But anyone hoping for a full-throttle response should brace for disappointment.

The PBOC is seen holding interest rates steady in June for the second straight month. It is also draining money from the financial system, aiming to direct stimulus away from arbitrage plays and into the real economy.

Governor Yi Gang has also made clear that any measures are temporary and bring risks of a “hangover”. The easing path ahead seems to be narrow, not broad, and leading to credit rather than cash.

(GRAPHIC – China bond yields, RRR: here)


Not much exit talk in other emerging markets where central banks are trying to reverse some of the economic devastation with swingeing interest rate cuts.

Brazil, Russia and Ukraine have delivered big reductions so now the spotlight falls on Turkey, Egypt, Mexico, Philippines and Hungary. Hungary, Philippines and Egypt are likely to leave rates unchanged but may flag some easing for later in the year.

Turkey might be more of an assured bet for a cut on June 25. Its move in May was the ninth straight reduction in an easing cycle that began last July.

Expect a cut in Mexico too given a 30% drop in April industrial production and below-target inflation. Rates fell to 5.5% last month and JPMorgan predicts an end-2020 rate of 3%.

(GRAPHIC – EM central banks cut rates at record clip: here)

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