Category

Macro

Macro: A Blow-Off Top Ahead? and more

By | Daily Briefs, Macro

In today’s briefing:

  • A Blow-Off Top Ahead?
  • Russia:  Overweight Risk as Ukraine Tensions Rise

A Blow-Off Top Ahead?

By Cam Hui

The S&P 500 has been rising steadily since late February. As the stock market advanced, readings became increasingly overbought. The S&P 500 has spent two consecutive weeks above its weekly Bollinger Band (BB). Past upper BB episodes have tended to be signals of positive momentum that led to further gains. The market spent several months on an upper BB ride in late 2017 and early 2018 before it finally topped out.

It appears the S&P 500 is undergoing another melt-up, with a blow-off top ahead. In the past, overruns of a rising trend line have been signals of an imminent blow-off top that lasts no more than two weeks.

Despite our near-term caution, we expect any pullback to be no more than 5–10%. This is still a bull market. Both the Dow Jones Industrials and Transports have achieved fresh all-time highs, which are classic Dow Theory buy signals.

Investors should view any weakness as buying opportunities. Traders should be positioned for a possible blow-off top, followed by a sharp pullback.


Russia:  Overweight Risk as Ukraine Tensions Rise

By Steven Holden

Russia is the largest country overweight among active Emerging Market funds.  The average holding weight of 4.11% represents an overweight of 1.04% above the iShares MSCI Emerging Markets ETF weight (cash adjusted).

In the wake of new US sanctions and troops gathering on the Ukraine border, the key stock risks to active investors are overweight positions in Sberbank Of Russia Pjsc (SBER LI), LUKOIL PJSC (LUKOY US) and Yandex (YNDX US), with over 80% of the funds in our analysis holding one or more of these stocks.

The 2014 annexation of Crimea provides a useful insight in to the behavior of active investors during a period of political uncertainty.  EM investors were quick to react, reducing Russia exposure by 4.26% over the course of the year and over a quarter of funds moving from overweight to underweight.  Whether this situation reaches the heights of 2014 remains to be seen, but do not underestimate an active manager’s willingness to cut or reduce allocations when the investment case becomes muddied by political events. 


Before it’s here, it’s on Smartkarma

Macro: Make or Break for Bonds and more

By | Daily Briefs, Macro

In today’s briefing:

  • Make or Break for Bonds
  • Fed Credibility and Risks to Achieving Dual Mandate: Facing Ominous Comparisons to the Late-1960s
  • EA: Inflation Rising with a Soggy Bottom
  • GDP, SAMR, DCEP, USA-PRC and BRI

Make or Break for Bonds

By Shyam Devani

As we see yields slip this week, especially over the past 24 hours, the question now is whether there is more to this move or is it already over?

Technically we have clear levels and points of reference to watch.

From a cross market perspective, there are more doubts than answers at this stage…


Fed Credibility and Risks to Achieving Dual Mandate: Facing Ominous Comparisons to the Late-1960s

By Said Desaque

In the aftermath of the global financial crisis (GFC), the Fed had the difficult tasks of repairing household balance sheets and subsequently providing continued support for aggregate demand in the absence of consistent help from fiscal policy. The cause of the Great Lockdown was, however, fundamentally different to the Great Recession: Fed policy easing could not boost aggregate demand due to restrictions on social gatherings. Consequently, the Federal Open Market Committee (FOMC) took decisive action to ease potential stress on corporate balance sheets due to the shutting down of economic activity, while the responsibility of supporting aggregate demand was left to fiscal policy.
The FOMC views transitory breaching of the 2% inflation target as a desired policy outcome, but the big issue for financial markets, in its aftermath, will be the economic cost that will be incurred to re-gain price stability. FOMC members are confident that any inflation overshoot can easily be brought back under control. 
The speed of the US economy entering inflationary territory will hinge critically on the size of the fiscal multiplier, estimates of which vary significantly. Meanwhile, different segments of the Biden Administration’s fiscal stimulus will have idiosyncratic multiplier values, but the majority of costed measures are estimated to have magnitudes in excess of 1.
The political backdrop over the next eighteen months could have a major impact on inflation if there is any further fiscal easing and the Fed refuses to alter forward guidance due to a tight nexus with the US Treasury. Some comparisons are already being made to the mid-to-late-1960s when prolonged easing of fiscal policy sowed the seeds for rising inflationary expectations that undermined Fed’s credibility during the 1970s. Financial markets’ inflationary expectations have recently been based on a much flatter Phillips Curve that has allowed the Fed leeway to keep policy easier for longer, but an adverse shift is possible if inflationary expectations become unhinged due to FOMC complacency, an outcome similar to events in the late-1960s.        

EA: Inflation Rising with a Soggy Bottom

By Phil Rush

  • EA HICP inflation for Mar-21 was confirmed at 1.3% y-o-y while the ex-tobacco index was marginally weaker than expected at 106.09 (Heteronomics: 106.12) for 1.26% y-o-y. Clothing was softer with transport and housing offsetting, mostly owing to Italy changes.
  • The headline rate is set to rise further from base effects over the next two months before slumping in July. A likely rise above target in the Autumn should be fleeting as underlying inflation provides a soggy bottom rather than a firm foundation.

GDP, SAMR, DCEP, USA-PRC and BRI

By Diana Choyleva

China News That Matters

  • China posts fastest GDP growth on record
  • One month to comply, Beijing tells big tech
  • You can even spend DCEP deep in the South China Sea
  • Climate talks for veteran envoys 
  • Debt trap? Montenegro’s road to nowhere

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.


Before it’s here, it’s on Smartkarma

Macro: Rates 10y Dashboard: Greater Dispersion Within EM Means More Trading Opportunities and more

By | Daily Briefs, Macro

In today’s briefing:

  • Rates 10y Dashboard: Greater Dispersion Within EM Means More Trading Opportunities
  • FX Dashboard: South African Rand’s Outperformance Continues

Rates 10y Dashboard: Greater Dispersion Within EM Means More Trading Opportunities

By Gautam Jain, PhD, CFA

In this note, we measure the dispersion within EM rates and show that it has risen recently, which is indicative of more trading opportunities.

Separately, the attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


FX Dashboard: South African Rand’s Outperformance Continues

By Gautam Jain, PhD, CFA

In this note, we go over the reasons behind the strong performance of the South African rand (ZAR) and argue that while the environment is supportive, continued outperformance may lead to an opportunity to short the currency.

Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


Before it’s here, it’s on Smartkarma

Macro: Smartkarma Webinar | Investor Positioning in Emerging Markets and more

By | Daily Briefs, Macro

In today’s briefing:

  • Smartkarma Webinar | Investor Positioning in Emerging Markets
  • The SPARS Pandemic Scenario Vs COVID-19
  • FX Dashboard: Correlation of Taiwan Dollar with Rest of Asia Picks Up
  • Rates 10y Dashboard: Which Countries Have the Steepest Curves?
  • EU: Waiting in the Wings for Hamilton
  • Sweden: Careering Around the Target

Smartkarma Webinar | Investor Positioning in Emerging Markets

By Smartkarma Research

On our next Webinar, we welcome Insight Provider Steven Holden for a general analysis of fund positioning across countries/sectors and stocks, to highlight under-owned and over-owned areas of the market using Steven’s unique data-driven approach.

The webinar will be hosted on Wednesday, 21 April 2021, 17:00 SGT/HKT.

Steven Holden is the CEO and Founder of Copley Fund Research, an independent provider of research on equity fund positioning and performance. Set up in 2014, Copley focuses on global, global EM, US, Asia Ex-Japan and China active equity funds, covering over US$4 trillion in assets across 1,300 active managers.


The SPARS Pandemic Scenario Vs COVID-19

By Douglas Kim

I am an X generation. The COVID-19 pandemic has probably become the single most pivotal event impacting this X generation in this world. The second most important event was probably the 9-11 terror. It has been nearly 15 months since the COVID-19 pandemic started to break out world-wide. Millions of lives have been lost. In the midst of all this damage, millions of people are getting vaccinated. Despite much knowledge gained about this virus, the future remains unknown.

In this insight, I go through the details of a scenario analysis conducted by the Johns Hopkins Center for Health Security in 2017 called The SPARS Pandemic (2025-2028). Remember, this was a futuristic fictional scenario about a potential coronavirus that sweeps across the world sometime in the future (2025-2028). This document has been publicly available in the past three and half years. Recently, it has received more attention since some of the events and timeline that are included in this document are so eerily similar to the COVID-19 pandemic.


FX Dashboard: Correlation of Taiwan Dollar with Rest of Asia Picks Up

By Gautam Jain, PhD, CFA

We discuss the recent underperformance of the Taiwan dollar in the context of the possibility that the US Treasury may label the country a currency manipulator this month.

Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


Rates 10y Dashboard: Which Countries Have the Steepest Curves?

By Gautam Jain, PhD, CFA

In this note, we look at curve steepness across emerging markets to identify countries where curves are relatively steep and where they are relatively flat.

Separately, the attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


EU: Waiting in the Wings for Hamilton

By Phil Rush

  • The current Covid19 crisis is an opportunity for the EU to force the door open a little further towards sharing debt – the Hamiltonian moment.
  • However, the attitude of any new German administration to further fiscal entanglement with southern Europe is unclear.  We believe the doom loop has yet to be extinguished.

Sweden: Careering Around the Target

By Phil Rush

  • CPIF inflation rose to 1.9% in March, very close to the RB’s target, while the CPI rate was bang in line with the consensus and ourselves, at 1.7%.
  • We still expect inflation to accelerate to the peak in April before driving back to a near-1% trough in July. Our 2021 call is broadly a consensus one but is above the local view.

Before it’s here, it’s on Smartkarma

Macro: Singapore At Risk from Increasing Scrutiny over Global Tax Games and more

By | Daily Briefs, Macro

In today’s briefing:

  • Singapore At Risk from Increasing Scrutiny over Global Tax Games
  • Q1 Earnings Preview: The Calm Before the Storm
  • UK: Trade Rebounds Better than GDP
  • Rates 10y Dashboard: Which Countries Offer High Yields Relative to Their Volatilities?
  • TMI Snapshot:  Text-Mined Inflation Indicators Take a Breather After February-March Breakout
  • FX Dashboard: Peru’s Currency and Rates Are Already Reflecting Election Risk
  • The Philippines: The Broader Implications of New Deal with Manila Water Are Negative

Singapore At Risk from Increasing Scrutiny over Global Tax Games

By Nigel Chiang

There is a growing international political backlash against MNCs’ “profit-shifting” practices, with more governments now moving to limit their ability to exploit tax expedients offered by havens such as Ireland, Switzerland, the Netherlands, Luxembourg, and Singapore.

Crucially, there is now a good chance of a global agreement that will deprive these countries from pursuing such strategies; the US Treasury’s new proposal to the OECD for a global minimum corporate tax is far more palatable to US lawmakers as it side-steps the thorny issue of digital taxes that plagued similar talks in the past.

Singapore and Hong Kong, in particular, are vulnerable, given their historical reliance on tax incentives to attract FDI, including business headquarters.

For Singapore, the significance goes deeper: its reliance on tax incentives likely explains its historically good FDI performance despite the relatively low rate of return on foreign direct investment that the economy offers vis-a-vis the region and other high income advanced economies. Shorn of the use of such expedients, policymakers will need to manage the likely root causes of this underperformance: high business costs that has eroded economic competitiveness, and adverse (labour and total factor) productivity differentials.


Q1 Earnings Preview: The Calm Before the Storm

By Cam Hui

Q1 earnings season is about to begin in earnest, with JPMorgan Chase scheduled to report on Wednesday and the rest of the big banks this week. Ahead of the reports, equity volumes have plunged even as the S&P 500 rose to all-time highs.

It’s quiet, maybe a little too quiet. Have Q1 earnings been discounted by the market?

We believe the market is poised to report strong Q1 earnings and virtually all macro and fundamental conditions point to a re-opening boom. In all likelihood, Q1 will be another blowout quarter for earnings. We are inclined to give the bull case the benefit of the doubt.


UK: Trade Rebounds Better than GDP

By Phil Rush

  • UK GDP limped up by 0.4% m-o-m in Feb-21, with services growing at half that rate in the ongoing lockdown. Few businesses have reopened even by 4 April, so March is also likely to remain fairly flat. January’s smaller fall slightly shrinks our Q1 dip call to 1.9%.
  • External trade data were more depressed in January and have recovered more swiftly, especially in exports to the EU. The underlying deficit still deteriorated on non-EU weakness, although these data may remain distorted by post-Brexit reporting changes.

Rates 10y Dashboard: Which Countries Offer High Yields Relative to Their Volatilities?

By Gautam Jain, PhD, CFA

In this note, we address the question that if US rates volatility continues to come off, then which countries are most likely to attract inflows, assuming no idiosyncratic issues.

The attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


TMI Snapshot:  Text-Mined Inflation Indicators Take a Breather After February-March Breakout

By Elan Gore

  • Our text-mined Inflationary-Deflationary Diffusion Index hit its highest reading since 9/2018 in late March at +3.4x STDEVs, but pulled back in April MTD on partial alleviation of extreme supply disruptions
  • The Diffusion Index has been 74%/65% correlated with 5yr5yr Fwd inflation rates in the T12/T24M, and measures the relative momentum of inflationary/reflationary expressions in online media relative to deflationary/disinflationary expressions
  • Tracking reports of supply constraints, disruptions and shortages, maximum pressure was clearly seen in February at >2x STDEVs, leading the recent peak in the GSCI; while momentum is still positive, the situation has improved following the Texas freeze and Suez Canal blockage
  • Today’s CPI report showed a second month of stability in Owners’ Equivalent Rent (single largest CPI component at 24%) following relentless pressure averaging -11bps/month between February 2020-January 2021, reflecting improving sentiment among homeowners in the YTD; but the BLS report continues to see deceleration in primary rents, which is now notably diverging from private rent surveys
  • Our Rising Rents indicator, which measures the momentum of media reports of increasing US rents, broke out notably in March 
  • Property management software provider RealPage reported a third consecutive month of sequential acceleration in national rents, with March rents up +0.7% M/M after +0.6% in February and +0.2% in January; Y/Y rent comps improved to -0.7% from February’s -0.9% and 124 out of 150 metro areas seeing Y/Y increases in rent; other private surveys paint an even more optimistic picture of national recovery in rents and rent collection rates
  • While the Fed has repeatedly stated its objective of allowing inflation to “run hot”, the recent pause in the GSCI, 5yr5yr and cyclical/value outperformance suggests inflationary pressures may be taking a breather from the breakneck pace seen in February-March
  • The underlying environment clearly remains reflationary, but evidence of a potential overshoot in market-based indicators (TIPS breakevens at 13-year highs, for example) may require further cooperation from the commodity complex to justify elevated expectations

TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade & traditional media. Our proprietary tools text-mine the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income & individual equities. 


FX Dashboard: Peru’s Currency and Rates Are Already Reflecting Election Risk

By Gautam Jain, PhD, CFA

The first round of Peru’s presidential election has produced a negative outcome with a leftist candidate headed to a second round against a right-wing candidate with a high rejection rate. However, with the currency already reflecting these risks combined with record levels of international reserves, a buying opportunity could open up before the second round.

Separately, the attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


The Philippines: The Broader Implications of New Deal with Manila Water Are Negative

By Nicholas Chia

  • Details of the revised deal with Manila Water Co (MWC PM) have been released. The provisions of the new deal appear to be more onerous. More importantly, the clash between President Duterte and the influential landed families undermines efforts to improve the investment climate in the Philippines. 
  • The BSP can afford to breathe easier, for now, as inflationary pressures eased for the first time in 6 months. The data suggests the supply-side price pressures have yet to percolate across large swathes of the economy.
  • Fiscal prudence remains the rule of the game in the Philippines, as conservative economic managers remain reluctant to spend more, to the detriment of the economy.

Before it’s here, it’s on Smartkarma

Macro: The Week That Was in [email protected] – Grab’s SPAC Plans and more

By | Daily Briefs, Macro

In today’s briefing:

  • The Week That Was in [email protected] – Grab’s SPAC Plans, Indonesia Hospitals, and ThaiBev
  • Alpha Bites: Long Indonesia Rupiah (IDR) Vs Short Singapore Dollar (SGD)
  • How Powell “The Un-Volcker” Is Remaking The Fed
  • Internal Rotation + Seasonality = Higher S&P 500
  • Sri Lanka: Closer to Being Asia’s Argentina Despite Swaps from PRC’s Poisoned Chalice
  • Accelerating Global Recovery Boosts Asian Exports, Inflation Risks Contained

The Week That Was in [email protected] – Grab’s SPAC Plans, Indonesia Hospitals, and ThaiBev

By Angus Mackintosh

The week that was in [email protected] is filled with another eclectic mix of differentiated, substantive, and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights over the past week.

We add below a NEW section, which includes emerging themes in ASEAN and selects important news flow or developments for commentary, which may impact SE Asian companies and markets. 

Macro Insights

In Singapore: Snag in Succession Points to Deeper Weaknesses in Political System, Manu Bhaskaran discusses the recent hiccup with succession plans in Singapore and the political consequences. 

Equity Bottom Up

In Grab – Biting the Bullet with a SPAC Listing?, CrossASEAN Insight Provider Angus Mackintosh reports back on Grab (0967655D SP) as it looks to be going ahead with a SPAC listing through Altimeter Capital in the US. 

In Siloam International Hospital (SILO IJ) – A Quickening Metabolism, CrossASEAN insight provider Angus Mackintosh revisits Siloam International Hospital (SILO IJ) after the company released a very solid set of FY2020 numbers. 

In Airport of Thailand (AOT): 3rd Wave Is a Charm, CrossASEAN Insight Provider Henry Soediarko discusses the outlook for Airports of Thailand (AOT TB) in light of rising COVID-19 cases in Thailand.

In ThaiBev BeerCo Pre-IPO – Valuation Updates and Crystallizing Growth Potential for BeerCo, Zhen Zhou, Toh updates on the progress on this upcoming IPO and looks at the valuations for Thai Beverage (THBEV SP) in light of the impending spin-off. 

In CHIB: Better Capitalisation, Liquidity & Efficiency Offset Asset Quality Concerns, Paul Hollingworth reports back on China Banking (CHIB PM) after its FY20/19 results show strong fundamental trends.

In VNG (VinaGame): The Only Tech Unicorn In Vietnam, Alec Tseung discusses Vinagame Corp (0113477D VN) and sees exciting prospects ahead.  

In Singapore Exchange – Into Merlion’s Mouth, Thomas J. Monaco takes a look at SGX (SGX SP) in light of its recent plans to allow SPAC listings but does not see this as any sort of panacea.

Sector and Thematic 

In Quiddity M&A Guide 2021: Thailand, David Blennerhassett provides an updated guide on Mergers and acquisitions of public companies in Thailand. 

Credit Insights

In Indika Energy – Earnings Flash – FY 2020 Results – Lucror Analytics, credit specialist Trung Nguyen revisits Indika Energy (INDY IJ) after its FY 2020 results came in weaker than expected. He expects the company will have a  better performance in FY2021.

In Morning Views Asia: China Aoyuan Property, CIFI Holdings, Lippo Karawaci, Sirtex Medical, Trung Nguyen provides an update on Lippo Karawaci (LPKR IJ) after the company reported a strong set of Q1/21 marketing sales. 


Alpha Bites: Long Indonesia Rupiah (IDR) Vs Short Singapore Dollar (SGD)

By Gautam Jain, PhD, CFA

In this week’s Alpha Bites, we recommend going long the Indonesian rupiah (IDR) against the Singapore dollar (SGD) in a beta-neutral ratio. SGD NEER has appreciated close to its strongest level in a year ahead of the MAS policy meeting where we do no expect tightening yet. Meanwhile, IDR has been hit by uncertainty due to potential changes to the central bank’s mandate. However, with real rates among the highest in the world, we expect flows to stay supportive in Indonesia.


How Powell “The Un-Volcker” Is Remaking The Fed

By Cam Hui

Jerome Powell is turning out to be the Un-Volcker Fed Chair. Paul Volcker wrung all the inflation expectations out of the system and convinced everyone that the Fed is an inflation hawk. By contrast, Jerome Powell is attempting a mirror image policy of convincing everyone the Fed is an inflation dove. For investors, this has several implications:

  • The bond market’s inflation expectations are too high, expect lower yields, especially at the short end of the yield curve.
  • Barring any pandemic hiccups, this is a V-shaped recovery. Small caps perform especially well in such environments.
  • Similarly, cyclical and value exposure is expected to outperform.

Internal Rotation + Seasonality = Higher S&P 500

By Cam Hui

We normally only give seasonality secondary consideration in our analysis. But April is the most bullish month of the year for the S&P 500 in the last 20 years and positive 80% of the time. Combined with the recent healthy internal rotation in the market, and if seasonality continues to track, the stock market should grind higher for the remainder of the month.

We conclude from our analysis that the market can continue to rise in April. A healthy internal rotation has occurred that has relieved the pressure of overbought excesses. Several potential opportunities have arisen as a result of the market rotation:

  • A opportunity to lighten up on growth stocks;
  • A opportunity to buy into value stocks;
  • A bond market rally; and
  • A possible bullish set-up for gold and gold stocks.

Sri Lanka: Closer to Being Asia’s Argentina Despite Swaps from PRC’s Poisoned Chalice

By Prasenjit K. Basu

Sri Lanka’s public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China’s support is a poisoned chalice (with an “unequal treaty” already handing one port, Hambantota, to China’s control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. 

Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka’s external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka’s annual exports of goods & services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. 

Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch’s estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn’t cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. 

The Rajapaksa government has spoken of two approaches to meeting its external obligations — using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the “Malaysia template” (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks’ bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka’s current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China — which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment. 


Accelerating Global Recovery Boosts Asian Exports, Inflation Risks Contained

By Manu Bhaskaran

  • The global recovery is gaining traction and feeding through strongly into more robust export growth in Asia. The forward-looking indicators for exports remain upbeat.
  • One risk to Asia’s growth is that new virus variants spark off further surges in COVID infections – but this risk is likely to be contained as vaccines are rolled out and improved vaccines are introduced.
  • A second risk to Asia is an unexpectedly strong revival in global inflation. However, we do believe the chances are low, so long as inflationary expectations remain well-anchored and the slack in the global economy and major labour markets persists. There is a growing risk though of an abrupt shift in Federal Reserve policy signals: we see a robust recovery making its ultra-easy policy stance increasingly untenable. 

Before it’s here, it’s on Smartkarma

Macro: Bitcoin US$341 and more

By | Daily Briefs, Macro

In today’s briefing:

  • Bitcoin US$341,250? This Is Not a Forecast….Well Not Yet!
  • NPS Raises Domestic Equity Allocations

Bitcoin US$341,250? This Is Not a Forecast….Well Not Yet!

By Michael J. Howell

  • High street inflation has two components: monetary inflation and cost inflation
  • Gold price is sensitive to monetary inflation and it is trading well-below its ‘liquidity-based’ fair-value
  • Existence of Bitcoin as a rival monetary inflation hedge has lopped-off US$158/oz from gold’s ‘fair-value’
  • Gold price ‘fair value’ assuming unchanged Bitcoin is US$2527/oz
  • But on same basis, Bitcoin’s liquidity-based fair-value assuming no change in gold price, is a staggering US$341250/coin

NPS Raises Domestic Equity Allocations

By Douglas Kim

On 9 April, the NPS announced that it will change rules to increase the allocation of Korean stocks, which would be the first time in a decade. This adjustment could be implemented starting next week. This change comes after a lot of pressure by the retail investors.

NPS increased the strategic asset allocation (SAA) limit for domestic equities from the current 2% to 3%, increasing the percentage of Korean stocks it can hold from the current band of 14.8% -18.8% (+/- 2% with 16.8% as base) to 13.8% -19.8% (+/- 3% with 16.8% as base). NPS’s target of the domestic equity allocation is 16.8% (of total fund amount). As a result of this change, the sale of domestic stocks by the NPS is expected to slow down.


Before it’s here, it’s on Smartkarma

Macro: Singapore: Snag in Succession Points to Deeper Weaknesses in Political System and more

By | Daily Briefs, Macro

In today’s briefing:

  • Singapore: Snag in Succession Points to Deeper Weaknesses in Political System
  • Norway: CPI Surprise, Surprise
  • Consumption/ Billionaires/ Taiwan/ Boycotts/ Climate
  • Strong US Economic and Equity Market Outlooks: Investors Only Have Policy Mistakes to Fear

Singapore: Snag in Succession Points to Deeper Weaknesses in Political System

By Manu Bhaskaran

  • The abrupt about-turn by Heng Swee Keat, the PM-designate, has sent shockwaves through Singapore’s highly measured polity. Trade and industry minister Chan Chun Sing is believed to be in pole position to pick up the baton from Heng during the looming cabinet reshuffle, due in 2 weeks’ time.
  • Strong political institutions will help Singapore weather the current political uncertainty. But the latest development highlights deep-seated weaknesses in the political set-up in Singapore.
  • Changes to informal norms of political contestations could usher in more divisions within the ruling party over time. The over-reliance on a narrow and select group of individuals at the highest echelons of power leaves the party with little room for error.

Norway: CPI Surprise, Surprise

By Phil Rush

  • Inflation in Norway surprised on the downside this month, mostly due to household energy bills, but with clothing and airfares also disappointing.
  • The recent shift in Norges Bank signalling towards a potential tightening in 2021 looks exposed to us, as we are more cautious on the pace of exit from pandemic restrictions.

Consumption/ Billionaires/ Taiwan/ Boycotts/ Climate

By Diana Choyleva

China News That Matters

  • Holiday tourists reach pre-COVID levels but spending lags
  • Beijing hits a century of billionaires; beats New York
  • PLA squeezes Taiwan by air and sea
  • “Genocide Olympics”, anyone?
  • Bitcoin undermines China’s carbon emission’s goal

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.


Strong US Economic and Equity Market Outlooks: Investors Only Have Policy Mistakes to Fear

By Said Desaque

Household-based measures of US labour market strength in March suggest the Federal Open Market Committee (FOMC) will not need to alter forward guidance in 2021, despite the much larger-than-expected increase in non-farm payrolls. Meanwhile, strong readings in the ISM surveys for manufacturing and services last month suggest Q1 growth in excess of +6%, although the trajectory for Q2 will depend heavily on how new stimulus payments are utilised by US households.
Hitherto, stimulus payments to households have produced unintended consequences, notably the paying down of credit card debt and higher retail activity in the US equity market as opposed to being spent in its entirety in the real economy. The shutting down of the economy in 2020 provided households an opportunity to repair balance sheets, but the level of thrift is currently still higher than a year ago, thereby suggesting that fiscal policy easing has not been totally effective in boosting consumer spending.
The biggest threats to the outlook for US equities stem from potential policy mistakes by the Fed and the Biden Administration, notably the latter’s plans for further fiscal policy expansion under the auspices of infrastructure programmes. Strong economic expansion and a rise in the velocity of circulation of money will test the tenability of the FOMC’s forward guidance and asset purchases as pressure on hitherto well-anchored inflationary expectations will ultimately increase.    

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Macro: FX Dashboard: Short Dollar Positions Have Been Cleaned Up and more

By | Daily Briefs, Macro

In today’s briefing:

  • FX Dashboard: Short Dollar Positions Have Been Cleaned Up
  • Rates 10y Dashboard: Korean Asset Swap Spreads Have Widened

FX Dashboard: Short Dollar Positions Have Been Cleaned Up

By Gautam Jain, PhD, CFA

We discuss the current positioning in the dollar, which has gone from heavy short to close to flat now, based on CFTC data, and its implications for future dollar moves.

The attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


Rates 10y Dashboard: Korean Asset Swap Spreads Have Widened

By Gautam Jain, PhD, CFA

In this note, we address the reasons behind the underperformance of South Korean bonds relative to interest-rate swaps and argue that further widening of the asset swap spread may present an opportunity.

The attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


Before it’s here, it’s on Smartkarma

Macro: US 10 Year Yield – What to Watch and more

By | Daily Briefs, Macro

In today’s briefing:

  • US 10 Year Yield – What to Watch
  • Commodity Currencies and the JPY
  • FX Dashboard: LatAm FX Has Started Outperforming Against Asia FX
  • Rates 10y Dashboard: Positioning Supports Long End of Mexico

US 10 Year Yield – What to Watch

By Shyam Devani

The price or yield action on US 10 year Treasury is now beginning to reveal a loss of momentum and indicate at least a consolidation if not lower yields in the short term.

A move below 1.58% would be particularly telling.

What this, and the developing price action on Oil, tells us about equities is up for interpretation – though from our stand point the bias is to remain cautious on equities as we settle into the new month and quarter.


Commodity Currencies and the JPY

By Shyam Devani

Two weeks ago in a note titled Commodity Currencies and Their Warnings we examined their short term setups and potential declines (mainly against the USD)

This was largely on the back of a slip in the Oil price and long term levels being tested on major commodity indices. A lot of the indications in that note are still valid.

Since then, we see fresh indications that yields will likely slip too which brings some JPY crosses into focus. While there have not been any breaks as yet, key levels on AUDJPY and CADJPY should be watched closely.


FX Dashboard: LatAm FX Has Started Outperforming Against Asia FX

By Gautam Jain, PhD, CFA

In this note, we go over the reasons that Latin American currencies have started outperforming against their Asian counterparts, a trend we expect to continue with a range-bound dollar.

The attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


Rates 10y Dashboard: Positioning Supports Long End of Mexico

By Gautam Jain, PhD, CFA

We expect long-end rates in Mexico to perform well and show that the technical backdrop is supportive with the drop in foreign positions over the past year.

The attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


Before it’s here, it’s on Smartkarma