Macro

In today’s briefing:

What to Expect of EM Rates When Expecting US Rates to Stay Volatile?
EA: Core Trend Ripped Above 2%

What to Expect of EM Rates When Expecting US Rates to Stay Volatile?

The risk of US yields continuing to rise is high especially with inflation not having peaked yet, the Fed potentially reducing its balance sheet, and real rates still negative.
The high volatility in US rates does not bode well for EM rates due to their high correlation even though EM local debt is overall cheap based on most metrics.
Until the volatility in US rates subsides, it is best to focus on cross-country and curve trades in EM, with my preference for curve steepening trades in several countries.

EA: Core Trend Ripped Above 2%

EA HICP inflation was confirmed at 5.0% y-o-y for Dec-21, while the ex-tobacco index printed at 109.97 (HTRO: 109.98).
A leg down in Jan-22 should start a headline trend. The step-up in the core inflation impulse is more critical for us.
It implies upside and, for the first time since the sovereign debt crisis, it shows inflation settling near 2%.

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Jan 20

Macro: Value Funds Move to Record Underweight in India and more

In today’s briefing:

Value Funds Move to Record Underweight in India
UK: Inflation Trend Is Not a Friend

Value Funds Move to Record Underweight in India

By Steven Holden

India moves to largest underweight country holding among EM Value managers. Current underweight the highest on record.
Among Value managers, India saw net fund outflows of $322m, the underweight increase by -1.92% and a further 7.7% of managers move to underweight over the last 6-months.
Reliance Industries (RIL IN) is the key underweight, whilst Bajaj Finance Ltd (BAF IN)Bharti Airtel (BHARTI IN) and Larsen & Toubro have been avoided by EM Value managers altogether.

UK: Inflation Trend Is Not a Friend

Another month of substantial upside inflation pressure creates broad-based income destruction. What started as base effects and built with narrow shocks (inc-energy) has increasingly become an awkward trend phenomenon.
That painful trend could continue causing upside inflation surprises until the brisk nominal expansion burns itself out. Second-round effects of inflation in wages are needed to extend it.
The BoE is likely to do its bit by hiking again on 3 February.

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Jan 19

Macro: Singapore: Multiple Catalysts and more

In today’s briefing:

Singapore: Multiple Catalysts, Upside Surprise to 2022 Growth Likely
Sino-Indian Tensions: Sleepwalking into a Crisis?
US Equities with Rising Yields and Oil
Is the Risk Premium High Enough in the Russian Ruble?
The Fed’s QT Explained (No, it’s Not The End Of The World)
UK: Labour Market Keys Open BoE Doors

Singapore: Multiple Catalysts, Upside Surprise to 2022 Growth Likely

First, we see borders being opened progressively through the year, allowing the return of migrant workers whose absence has constrained production in key sectors.
Second, Singapore’s manufactured exports will prosper as semiconductor demand continues to strengthen, even off a high base.
Third, the recovery in regional demand will spur a rebound in the cluster of services that cater to the region including finance and trade.

Sino-Indian Tensions: Sleepwalking into a Crisis?

This is a highly political year for leaders of both countries, a time when neither can afford to be seen backing down should there be an unintended clash.
Yet, an arms build-up and an increasing contest for influence in the Indian Ocean region are creating conditions that an accidental confrontation could escalate into something nasty
Unless the top leadership intervenes with measures to cool tensions and build confidence, we would not be surprised to see another round of clashes like the one in May-June 2020.

US Equities with Rising Yields and Oil

By Shyam Devani

The rise in Oil and US Yields has come at a time when the equity market is struggling to maintain recent highs
These dynamics are probably linked as a hawkish Fed & rising yields across the curve question one of the major supports for US equity markets – cheap money
The chart below shows that we saw something similar a few months ago

Is the Risk Premium High Enough in the Russian Ruble?

The Russian ruble has been the worst-performing currency in EM over the past month leading to the question: Is the currency cheap based on the risk premium priced in it?
Comparing the current episode with the 2014 annexation of Crimea by Russia, we conclude that the market is pricing in a 10% probability of an invasion followed by crippling sanctions.
With the currency not particularly cheap and given the asymmetric risk-reward, I would opt to not have any exposure to it for the time being.

The Fed’s QT Explained (No, it’s Not The End Of The World)

By The Macro Compass

Quantitative Tightening is now old news: everybody and their mother are talking about it, and headlines about QT are everywhere.
While QT sets the direction of travel to be very different from QE, there are four main pillows the US will be using to engineer a softer landing.
In a nutshell: watch the announcement on the pace of QT, the updated Treasury issuance strategy and how repo rates and credit spreads trade.

UK: Labour Market Keys Open BoE Doors

UK unemployment continued to decline after furlough. Activity levels are low and falling, but the 4.1% UR implies capacity as tight as when the BoE hiked to 0.5% in Nov-17.
A hike in Feb-22 now appears likely, barring imminent news. Vacancies and wage growth have fallen back to 2019 levels, supporting the Bank rate’s return to 0.75% later this year.
The cautious policy outlook in 2019 carried the gradual and limited mantra, contrary to current fears of aggressive tightening.

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Jan 18

Macro: China: Easing Underway…but Will It Move the Needle on Where It Counts? and more

In today’s briefing:

China: Easing Underway…but Will It Move the Needle on Where It Counts?
Indonesia: Fiscal Dynamics On A Solid Footing
The Week That Was in [email protected] – Indonesian Digital Banks, Singapore’s SPAC, and Thai Banks

China: Easing Underway…but Will It Move the Needle on Where It Counts?

By Nigel Chiang

Looking beyond today’s better-than-expected GDP data, China’s economy is facing swelling headwinds.
Consumer spending is weak, the property sector shakeout persists, and covid-related restrictions are beginning to cause supply chain problems.
More stimulus will be needed, today’s tepid monetary easing and other measures taken so far will not suffice.

Indonesia: Fiscal Dynamics On A Solid Footing

By Nicholas Chia

For 2021, the fiscal deficit is projected at 4.65% of GDP, or a full percentage point lower than the budgeted 5.7% of GDP, thanks to heftier commodity royalties.
An upside surprise to growth and inflation, and looming tax adjustments from April 2022 will guide the fiscal deficit down with revenues on a bounce.
Risks are twofold. First, parliament could backtrack on fiscal commitments. Second, there is a salient risk of an disorderly evolution of financial conditions because of BI’s debt purchases.

The Week That Was in [email protected] – Indonesian Digital Banks, Singapore’s SPAC, and Thai Banks

By Angus Mackintosh

The Week That Was in [email protected] is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across South East Asia.
The past week saw insights on the rise of digital banks in Indonesia together with a look at Singapore Banks from Daniel Tabbush and Thai Banks from Country Group.
Sumeet Singh also looks at Singapore’s first SPAC listing and we discuss the changing the Buy Now Pay Later landscape together with Astra International (ASII IJ) car sales and more.

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Jan 17

Macro: Time to Turn Defensive and more

In today’s briefing:

Time to Turn Defensive
Fade the Value Rebound
Long-Short Trade of KOSPI200 & KOSDAQ150 Amid Osstem Implant Employee Embezzlement Disaster

Time to Turn Defensive

We wrote a week ago that investment-oriented accounts should turn cautious on the stock market, but traders shouldn’t be ready to turn bearish just yet.
The sell signal has arrived and the tone of the stock market is turning decidedly bearish.
Technical internals are deteriorating and our base-case scenario calls for a 5–10% pullback. A downdraft of 20% represents an outlier case but would need a major catalyst.

Fade the Value Rebound

The economy is transitioning to a mid-cycle phase of its expansion. Economic and earnings growth momentum are fading after the initial V-shaped recovery in stock prices.
Similar episodes in 1994, 2004 and 2010 resolved themselves with sideways and choppy stock markets.
Investors should not expect superior performance from value and cyclical sectors. Instead, focus on stocks with quality growth characteristics and defensive names.

Long-Short Trade of KOSPI200 & KOSDAQ150 Amid Osstem Implant Employee Embezzlement Disaster

By Douglas Kim

There is an interesting long-short trade that is setting up nicely amidst the Osstem Implant (048260 KS) employee embezzlement disaster.
Osstem Implant is currently included in the KOSDAQ150. Going forward, there is a strong possibility that Osstem Implant is excluded in KOSDAQ150 index.
Osstem Implant is currently involved in an employee embezzlement case worth 221 billion won. This employee stole the company’s money and traded more than $1 billion in stocks.

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Jan 15

Macro: Strong Fed Policy Conviction Contrasts with PBoC and more

In today’s briefing:

Strong Fed Policy Conviction Contrasts with PBoC, as Global Supply Chains Lose Their Appeal
COVID-19/ Economy/ CCP/ Environment/ Lunar
Vikings At The Gate
Does Chile’s Rate Curve Flattening Offer an Opportunity?
UK: Output Recovery Arrives Less Late

Strong Fed Policy Conviction Contrasts with PBoC, as Global Supply Chains Lose Their Appeal

By Said Desaque

There is a high degree of divergence in the conviction held by the Fed and People’s Bank of China about their respective economic outlooks for 2022.
Asian countries remain reluctant to jettison their tough approaches to COVID-19, particularly China, hence raising the risks of continued disruption to global supply chains as seen in the automotive sector.
Demographic, environmental and geopolitical forces have reduced the attraction of offshoring supply chains. Labour shortages will boost the importance of capital productivity as US onshoring gathers momentum.

COVID-19/ Economy/ CCP/ Environment/ Lunar

By Diana Choyleva

Omicron reaches China. It will test China’s defences and its ability to showcase a “successful” Olympics.
China vowed to accelerate investment and boost domestic consumption to help stabilize growth. It’s much easier to get investment going than it is to get consumers to spend more.
Racing ahead of schedule, China’s electric cars are on track to reach 20% of nationwide auto sales this year, well ahead of the government’s forecast of 2025.

Vikings At The Gate

By The Macro Compass

The power of the rate of change of things is very important here. Look at money creation for example. The extreme volatility in credit creation is a result of Covid-policies
we may be in for a 2019-like contraction in USD reserves in the financial system already before year-end.
I am even tempted to say that you should both buy the USD and duration (in most currencies) with an arm and a leg already now.. And equities overall..

Does Chile’s Rate Curve Flattening Offer an Opportunity?

With global rate curves bear-flattening, slopes in several emerging countries have reached extreme levels, arguing for steepening trades. I discuss the arguments for and against a steepening trade in Chile.
The main arguments in favor are the slowing growth and inflation likely peaking in the coming months, which imply that the monetary tightening may be in the late stages.
To initiate the trade, I prefer to wait until the MPC meeting later this month for the central bank to provide more clarity on the potential duration of the cycle.

UK: Output Recovery Arrives Less Late

UK output growth exceeded expectations as it jumped by 0.9% m-o-m in Nov-21 to be 0.2% above its pre-covid peak.
Health spending helps offset the suffering in some sectors, but most have completed their recovery, albeit with a distribution inside each. Renewed covid-related disruption probably knocked GDP in Dec-21.
We raise our GDP growth forecasts by 0.3pp to 1.0% q-o-q in 4Q21 and 0.7% in 1Q22. Front-loaded growth also means less room to grow later, but potentially more inflation.

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Jan 14

Macro: Singapore: Multiple Catalysts; Upside Surprise to 2022 Growth Likely and more

In today’s briefing:

Singapore: Multiple Catalysts; Upside Surprise to 2022 Growth Likely
US: Tight Labour Market and Still-Abundant M2 Make for an Inflationary Cocktail

Singapore: Multiple Catalysts; Upside Surprise to 2022 Growth Likely

By Nigel Chiang

The economy is primed for robust growth this year on buoyant global demand, “catch-up” growth in pandemic-impacted sectors, strong household balance sheets, and further upside in the private investment recovery.
Consensus growth forecasts for 2022, currently tracking at 4%, are probably too conservative given this sanguine outlook.
We forecast GDP growth at 5.0-5.5%; the output gap will turn positive earlier than policymakers envisaged (~mid-2022). Inflation will remain firm, compelling MAS to tighten policy aggressively in April, October.

US: Tight Labour Market and Still-Abundant M2 Make for an Inflationary Cocktail

By Prasenjit K. Basu

CPI inflation (7%YoY) is at its highest since the Volcker era (June 1982), core CPI inflation (5.5%YoY) its highest since February 1991, driven by 12-14%YoY growth in M2 during 2H21.
The ‘disappointing’ NFP still brought the unemployment rate down to 3.9% in December 2021, well below the NAIRU, resulting in a 4.7%YoY rise average hourly earnings (wages).
We expect at least 4 hikes in the Fed Funds rate this year, taking it to 1.25% by end-year, with QE4 likely abandoned at the Jan25-26 FOMC meeting.

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Jan 12

Macro: Omicron Variant: Mere Speed Bump Rather than Pothole in Path to Recovery and more

In today’s briefing:

Omicron Variant: Mere Speed Bump Rather than Pothole in Path to Recovery
Geo-Political Risks: Indo-Pacific Arena Heats Up

Omicron Variant: Mere Speed Bump Rather than Pothole in Path to Recovery

PMI surveys show the regional economies performing well. Manufacturing is supported by improving demand. Price pressures, while diminishing somewhat, remain a risk, though.
The omicron variant will produce a surge in infections across our region. However, if the pattern in South Africa is repeated, this surge will end fairly quickly.
It helps that governments are avoiding overly stringent responses, helped by rising vaccination rates. Consumers and businesses have also learnt to adapt better to surges of infections.

Geo-Political Risks: Indo-Pacific Arena Heats Up

The US and Japan are further strengthening their defence ties as they face up to China’s challenge: they will step up collaboration on military technology.
China’s BRI projects may be turning out to be costlier than it had expected, particularly in Sri Lanka and Pakistan.
China is likely to recalibrate strategy to deal with these challenges. It needs to dial down its assertiveness towards other Asian countries and will revise its BRI.

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Jan 11

Macro: The Week That Was in [email protected] – Bukalapak’s Bank and more

In today’s briefing:

The Week That Was in [email protected] – Bukalapak’s Bank, Thailand Debt Restructurer, and Sea Ltd
Alpha Bites: Pay India 5y Vs Receive Mexico 5y Local Rate
EA: UR Beating the Fresh Hawks
The Macro End Game

The Week That Was in [email protected] – Bukalapak’s Bank, Thailand Debt Restructurer, and Sea Ltd

By Angus Mackintosh

The Week That Was in [email protected] is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across South East Asia.
The first week of the year saw Insights on Bukalapak (BUKA IJ) which took a stake in Allo Bank Indonesia plus Sea Ltd (SE US) as Tencent reduced its stake.
In Thailand, Daniel Tabbush wrote on debt collector JMT Network Services (JMT TB) with a number of results pre-views including on Thai banks and Siam Cement (SCC TB).

Alpha Bites: Pay India 5y Vs Receive Mexico 5y Local Rate

With rates in India vulnerable to a further correction in the US, I recommend paying India 5y vs receiving Mexico 5y rate in a beta-neutral ratio.
Real rates in India are the lowest among major emerging countries, which along with rising inflation expectations and strong growth should pressure the RBI to raise rates soon.
Mexico is appealing as a receiver against paying in India because the central bank is further along in its monetary tightening cycle as is evident from the high real rates.

EA: UR Beating the Fresh Hawks

The EA cycle is performing surprisingly well in absolute and even relative terms, with a record pace and consistency of decline in its unemployment rate.
Its change since 4Q19 is much nearer to Norway than the UK and US, let alone languishing Sweden. High vacancies match the recovery, implying it is demand-led.
Further sustained progress in ending ingrained disinflationary expectations should allow the ECB to focus more on this cyclical story. The ECB may not wait long in 2023 before hiking.

The Macro End Game

By The Macro Compass

What’s the Macro End Game? In short, another great reset of our monetary system . We often talk about what markets are going to do next month, or this year.
We like the feeling of being in control of asset class performances: after all, achieving consistent alpha year after year is has remained an elusive task for many.
This obsession about short-term market performance puts investors at great risk of missing the forest for the trees

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Jan 10

Macro: Waiting for the Sell Signal and more

In today’s briefing:

Waiting for the Sell Signal
2022 = Twenty-Twenty, Too?
India’s Trade-Led Acceleration in GDP Unlikely to Lose Momentum in 2022

Waiting for the Sell Signal

While we have become more cautious in the past few weeks, technical indicators have not flashed any intermediate-term sell signals just yet.
Long-Term investors should position themselves cautiously by reducing equity weights.
Traders should not be overly eager to turn bearish. Wait for the tactical sell signal first.

2022 = Twenty-Twenty, Too?

Investors should position for slower growth in the first half of 2022.
Fixed income: Prepare for a flattening yield curve and long bond duration.
Equities: Long defensive sectors and large-cap growth stocks as duration plays for their interest rate sensitivity.

India’s Trade-Led Acceleration in GDP Unlikely to Lose Momentum in 2022

By Prasenjit K. Basu

India’s goods exports grew 41.4% in 2021, outpacing most of the world (including Taiwan, Korea and China). Services exports stayed robust too, and both will boost growth in 2022.
Fixed investment spending was up 11% YoY in Q2-FY2021/22, and will likely strengthen further on the back of accelerating corporate profits (evident in surging corporate tax revenue).
Despite renewed disruptions from India’s Third Wave of Covid, we expect real GDP to grow over 10% in FY2021/22 and 8%+ in FY2022/23, boosted by robust exports.

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