Category

Macro

Macro: A Whiff of Rotation in the Air and more

By | Daily Briefs, Macro

In today’s briefing:

  • A Whiff of Rotation in the Air
  • Sector Review: Balanced Leadership and Rotation

A Whiff of Rotation in the Air

By Cam Hui

As the S&P 500 advanced to fresh highs despite widespread evidence of negative RSI and breadth divergences, the market faces a number of unanswered questions that may be indicative of possible impending leadership rotation.

On one hand, the market is exhibiting a series of bearish divergence from breadth indicators and risk appetite indicators. On the other hand, a number of reflationary green shoots are appearing, indicating that the cyclical trade is about to get a second wind. How the market resolves those questions will be clues to the next major leg for stock prices.


Sector Review: Balanced Leadership and Rotation

By Cam Hui

It’s time for another periodic review of sector leadership. Our latest RRG chart shows growth sectors (technology, communication services) and selected defensive sectors (consumer staples, healthcare, REITs) in the top half of the chart, indicating leadership positions. Value and cyclical sectors are the laggards in the bottom half.

We interpret these conditions as neither bullish nor bearish, but a story of balanced leadership. The high beta components of the S&P 500, growth and value, have been undergoing an internal rotation. As the economy shifted from an early-cycle recovery to a mid-cycle expansion (see How to Navigate the Mid-Cycle Expansion), market jitters over stalling global growth have risen. As a consequence, investors have rotated from the cyclical and reflation trade back into growth as growth stocks become more valuable when economic growth is scarce. At the same time, the stock market has also been supported by defensive sectors such as healthcare and real estate. Currently, value is showing some signs of early strength, but a turn in the value/growth relationship hasn’t been confirmed.

Our base-case scenario calls for a choppy range-bound market until the cyclical and reflation trade theme retakes market leadership. If the stock market were to definitively turn upward, leadership may have to come from high-beta small-cap stocks.


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Macro: Edtech/ Evergrande/ US-China/ Taiwan/ Tibet and more

By | Daily Briefs, Macro

In today’s briefing:

  • Edtech/ Evergrande/ US-China/ Taiwan/ Tibet
  • Global Capital Spending: Recovering After Resilience During Pandemic, but Nuances Persist

Edtech/ Evergrande/ US-China/ Taiwan/ Tibet

By Diana Choyleva

China News That Matters

  • We don’t need no (private) education
  • Evergrande, just not forever 
  • China’s new man in Washington 
  • PLA trains hard for Taiwan – and expands nukes?
  • The Chairman tours Tibet
  • 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.

Global Capital Spending: Recovering After Resilience During Pandemic, but Nuances Persist

By Said Desaque

The mainstream financial media mistakenly uses the term of animal spirits to encapsulate all forms of capital spending. While the COVID-19 pandemic temporarily crushed animal spirits, projects receiving prior approval simply had their start dates delayed. Non-commodity capital spending has remained resilient during the pandemic and will register robust gains in 2021.

China’s rise as an economic power means that Asia Pacific corporates are the main contributors to global capital spending, while Europe and North America’s share has declined significantly. Improved commodity prices means that Latin America should register strong capital spending in 2021, while Europe should make its significant improvement since 2006.

Structural factors forcing companies to invest in digital technology and environmentally-friendly production techniques will persist and help to underpin capital spending in the aftermath of the COVID-19 pandemic. Higher capital spending in the semiconductor sector will alleviate product shortages across various end users, but there are fears that higher investment will come on stream after demand rolls over producing another supply glut similar to 2018.

The pandemic has created great hype about the need for companies to invest in intangible assets, thereby further casting doubt on the relevance of the Q-ratio as a measure of equity valuation. US data indicates that equipment and structures still dominate aggregate capital spending and even technology companies need to undertake sizeable investment in tangible assets to conduct business.

Cyclical forces, notably in the US, will also determine the outlook for capital spending, particularly if there are risks of policy mistakes to counter higher inflation. High corporate cash levels have traditionally been supportive for capital spending, but difficulty in finding worthwhile long-term projects since the financial crisis has raised the ante on companies to deploy cash in merger & acquisitions, as well as share buybacks.


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Macro: FX Dashboard: Will Asian Currencies Continue to Underperform? and more

By | Daily Briefs, Macro

In today’s briefing:

  • FX Dashboard: Will Asian Currencies Continue to Underperform?
  • Inflation: Will Your Anchor Hold?
  • China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity
  • China A-Shares – EM Fund Ownership Guide

FX Dashboard: Will Asian Currencies Continue to Underperform?

By Gautam Jain, PhD, CFA

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.

Separately, the attached file is a snapshot of the EM currency market in which 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 an EM currency index.


Inflation: Will Your Anchor Hold?

By Phil Rush

  • Surveys and other indicators now suggest that pricing pressures are rising. The coming months will be a major test for inflation targeting regimes aiming to keep expectations anchored and separated from realised inflation rates.
  • At least for now, inflation anchors appear to be holding, so the market may well be surprised at how quickly the base effects which drove up headline inflation and wages in 2021 go into reverse.

China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

By Roger Xie

  • China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. Hang Seng Tech Index (HSTECH INDEX) has declined 40% from its high in February this year.
  • In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit HKEX (388 HK) as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. 
  • China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.

China A-Shares – EM Fund Ownership Guide

By Steven Holden

China A-Shares represent the 6th largest country holding among active EM investors, if taken as a separate allocation from their non A-Share peers.  Average holding weights of 4.74% puts them sandwiched between Russia and Brazil, and inline with the benchmark iShares MSCI Emerging Markets ETF weight.

Industrials and Consumer Discretionary are the most widely held sectors, as well as being the largest allocations and biggest overweights in active EM portfolios.  Financials are the key underweight holding.

The most widely held stocks are Kweichow Moutai (600519 CH) and Midea Group Co Ltd A (000333 CH), both held by 23% of the funds in our analysis.  There is a reasonable gap to the 2nd tier, with Gree Electric Appliances (000651 CH)Sany Heavy Industry (600031 CH) and CATL (A) (300750 CH) held by 14% of funds at much lower average weights.

Over the last 6-months, Sungrow Power Supply (300274 CH) saw the largest increase in the percentage of EM Funds invested (+6.3%), followed by CATL (A) (300750 CH) and LONGi Green Energy Technology (601012 CH).


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Macro: ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off and more

By | Daily Briefs, Macro

In today’s briefing:

  • ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off, Indonesia Improving
  • TMI Snapshot:  Asynchronous Inflation Narratives
  • Rates 10y Dashboard: Attractive Yield Pick-Up of EM Local Debt over DM

ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off, Indonesia Improving

By Prasenjit K. Basu

While the US was the epicentre of the world’s first Covid wave (peaking in January 2021), and India the second (peaking in early-May 2021), the epicentre of the current third global Covid wave is ASEAN. While Indonesia was initially the worst hit, this wave has spread to Malaysia, Thailand and Vietnam (the latter two among the most successful in combatting Covid in 2020), with some scares in Singapore and the Philippines as well. ASEAN’s real GDP is estimated to have grown over 10% YoY in 2Q 2021 (helped by a very depressed base from 2Q 2020) but the renewed Covid surge is set to weaken the economic recovery in 2H 2021. 

In July 2021, Indonesia has had more new Covid cases than any other nation globally. But the worst of Indonesia’s Covid wave was reached on 18 July 2021 (at a 7-day moving average of 50,039 new daily infections), and these have since receded by nearly a fifth. The biggest hit will occur in 3Q 2021 growth, but Indonesia’s real GDP should exceed 6% YoY in 4Q 2021, bringing full-year growth to about 5%. The worst-hit ASEAN economy (and polity) is Malaysia, where there have been 3 successive Covid waves in 2021, the last of which has not yet reached its peak. Consequently, the greatest economic and political uncertainty in 2H 2021 will be in Malaysia, which has the highest per capita Covid case load in South or South-east Asia (at 31,334 cases per million population). We expect real GDP to grow no more than 3% YoY in 2H 2021 despite a low base. 

Thailand and Vietnam, both extremely successful in containing Covid in 2020 (although Thailand’s tourism-dependent economy nonetheless suffered a severe hit from the drying-up of tourist arrivals) are now seeing their first wave of Covid infections, in July 2021. The peak of the current Covid wave is not yet detectable in either country. Vietnam’s Covid wave is concentrated in the south (Ho Chi Minh City and surrounding provinces), but Thailand’s is concentrated around the main economic centre, Bangkok, and its surrounding provinces. However, the base effect is more helpful in Thialand than Vietnam (the latter having continued to grow in all four quarters of 2020), so we expect Vietnam’s real GDP to grow 5% YoY and Thailand’s 5-6% YoY in 2H 2021. Despite a major alarm being raised in Singapore as well, the latest Covid wave is very mild in the island-republic, and real GDP in Singapore is consequently likely to grow 7.2% in 2021.  


TMI Snapshot:  Asynchronous Inflation Narratives

By Elan Gore

  • This year’s narrative from US treasuries suggests a short-lived inflation/overheating scare in Q1, which coincided with Winter Storm Uri and the Texas power crisis, along with an initial phase of tapering talk from regional Fed presidents which subsequently faded; since the March peak, 10yr yields are down -45bps or a whopping -26%, representing the view that inflationary pressures have been entirely transitory
  • The picture from 5yr TIPS breakevens and the 5yr5yr has been more closely attuned to commodities:  In the past 6 months, 5yr TIPS breakevens and 5yr5yr have been 74% and 70% correlated with copper prices vs. the 10yr yield’s 46%, though correlations with oil have been low; breakevens peaked with copper in May and bottomed in June-July
  • While 10yr yields continued to grind lower in July, our text mining is picking up a new surge in reports of supply constraints, which have been strongly correlated with breakevens and reflect corporate commentary in the current earnings season
  • The inflation narrative from treasuries appears to be asynchronous with the Q2 earnings season narrative from cyclical corporates, who are uniformly reporting worsening raw materials inflation expected in Q3 and lingering supply constraints
  • Nonetheless, our text mining acknowledges that talk of tightening financial conditions last spiked in March and has not resurfaced since, and expectations of a massive US infrastructure package have faded

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 software text-mines 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. 


Rates 10y Dashboard: Attractive Yield Pick-Up of EM Local Debt over DM

By Gautam Jain, PhD, CFA

US rates volatility has picked up again and is close to the highs of the year despite the US 10y yield dropping. With rising US rates volatility, the EM-US 10y spread is now close to its widest in 5 years, suggesting that if US long-end rates stay low then EM local debt can start attracting inflows. We use two factors to identify some of the countries that may be targeted for inflows.

Separately, the attached file is a snapshot of the EM 10y rates market in which 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 an EM rates index.


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Macro: Bonds & FX: Here Comes Trouble and more

By | Daily Briefs, Macro

In today’s briefing:

  • Bonds & FX: Here Comes Trouble
  • FX Dashboard: Cross-Correlations Between EM Currencies Rise Sharply

Bonds & FX: Here Comes Trouble

By Shyam Devani

Developments over the past 24 hours have meant that US 10Y breakeven is now at its highest for more than a month. Importantly the level highlighted yesterday at 2.38% has given way. The setup now argues for a move to 2.55% – close to the trend highs seen in May

Unless nominal yields rise by more than 15bps, real yields are either going to stay unchanged at low levels or move even lower into negative territory, as they have started to do again today

At the same time developments in China’s equity markets remain bearish which is now beginning to feed through to the currency.

With Chinese and European authorities both on the dovish side, is this the time for the Fed to stay on the fence or be hawkish? Instead, could a dovish Fed provide the trigger for a weakening USD (perhaps ex USDCNH) and ultimately a rise in Gold?


FX Dashboard: Cross-Correlations Between EM Currencies Rise Sharply

By Gautam Jain, PhD, CFA

We are not expecting the FOMC meeting tomorrow to be market-moving. Having said that, with the (negative) correlation between the US dollar and EM currencies the highest since 2012, any implications for the dollar from the meeting tomorrow would ripple through EM currencies. This impact is likely to get exacerbated by the rising correlations within the EM FX universe, which implies that we are currently in a “risk-on/risk-off” period.

Separately, the attached file is a snapshot of the EM currency market in which 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 an EM currency index.


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Macro: China: Policy Moves Show Who’s Boss and more

By | Daily Briefs, Macro

In today’s briefing:

  • China: Policy Moves Show Who’s Boss
  • Singapore: Unusual Hints of a Major Shift in Policy
  • Bonds & Commodities – An Interesting Mix
  • The Week That Was in [email protected] – Indonesia’s Wave, Del Monte, and Grab’s Alliances
  • Alpha Bites: Receive Czech 5y Vs Pay Poland 5y Rate

China: Policy Moves Show Who’s Boss

By Manu Bhaskaran

The recent regulatory blitz on China’s technology/internet companies and now the edutech sector has significantly unnerved financial markets. The key takeaway from a macro standpoint is that the balance between the state and private enterprise has shifted even more in favour of the state, continuing a trend that had begun earlier. Private enterprises in China must now recognise that the Chinese state’s strategic priorities will take precedence over corporate interests to a greater extent than in the past. The blunt assertion of the state’s interests over private enterprise in China will raise the risk premium of investing in Chinese assets.

The crackdown on the online education sector indicates that the Chinese leadership sees the demographic trends as a serious threat to their ambitions for the nation: it is almost certain that they will reinforce these measures with more radical moves on the provision of childcare/infant care as well as parental leave and subsidies for child-raising.

There is also the view that the housing sector will be next in line for regulation. Our prior is that regulatory action on this front will be somewhat more calibrated, given the housing market’s centrality to the economy, and the relatively high level of financial vulnerabilities that have built up over time in certain pockets of the property sector.

We expect more forceful action in areas where regulators have been behind the curve, for instance in China’s financial markets where a number of financial and accounting scandals have hurt the credibility of its capital markets. To this end, the ongoing regulatory blitz could result in some positive changes to the structure of China’s economy over the long term.

Given this fundamental change, the business sector in China – especially domestic private firms – will rethink its strategy in various ways. The less high-profile wealthy could move more capital abroad. Hong Kong businesses would accelerate the diversification and restructuring of their businesses.


Singapore: Unusual Hints of a Major Shift in Policy

By Nigel Chiang

Emerging policy signals suggest that there has been a deep rethinking of fundamental policies.

Singapore appears poised to see potentially ground-breaking policy changes in areas where the government has long resisted change, such as the minimum wage and tax measures to redress increased inequality.


Bonds & Commodities – An Interesting Mix

By Shyam Devani

The developments taking place on Copper and the wider London Metals Exchange Index, indicate further gains from here in base metals. The corrections over the past couple of months seem to be over and we might even be ready to rally back to the trend highs.

Should that unfold, it would only bring inflationary pressures back to the fore and help push breakevens higher, which has already started to happen.

Combining that with the recent trouble in Chinese equities & the low nominal yields has resulted in the lowest ever print on US 10 year real yield today.

Unless one believes nominal yields are going to shoot up quickly (not a belief held here even if there seems to be little value in Bonds) then this picture should continue to provide a positive backdrop for precious metals and a negative one for the USD generally.


The Week That Was in [email protected] – Indonesia’s Wave, Del Monte, and Grab’s Alliances

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 CrossASEAN Indonesian Strategy – Peaks and Troughs, CrossASEAN insight provider Angus Mackintosh puts forward his Indonesia market strategy as COVID-19 cases swell but he takes a constructive view on the recovery.

In Malaysia: Growing Despair As Covid-19 Crisis Spirals Out of Control, Manu Bhaskaran takes a closer look at Malaysia’s political outlook as Malaysians are angry at how the government is handling the COVID-19 crisis.

Equity Bottom Up

In Arwana Citramulia (ARNA IJ) – Glazed Porcelain, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading tile producer post its recent results.

In ComfortDelgro (CD): Buy On (Temp) Weakness, Henry Soediarko returns to look at Comfortdelgro Corp (CD SP) after the Singaporean government placed a ban on dining-in as part of the stricter measures to handle the delta variant.  

In Del Monte Philippines IPO Initiation: Tempting Fruit, Arun George takes a closer look at Del Monte Philippines (1575316D PM) as the company is in the process of pre-marketing for its IPO.

In Del Monte Philippines IPO: Valuation First-Look, Arun George returns to look at Del Monte Philippines (1575316D PM)‘s potential valuations and present his forecasts on the company. 

In Bank Central Asia – Good, But New Credit Challenges Ahead, Thomas J. Monaco returns to look at Bank Central Asia (BBCA IJ) after the bank released a solid set of 2Q2021 results. 

In SCC: Expected Strong 2Q21E but Would Lose Momentum in 3Q21E, Country Group returns to look at Siam Cement (SCC TB) and expects a strong set of 2Q2021 results driven by its Packaging business expansion and better petrochemical prices. 

In BBL: 2Q21 Result Was in Line with Our Expectation, Country Group reports back on Bangkok Bank Public (BBL TB) after the company released a better than expected set of 2Q021 results. 

In PLANB: Expect Solid Recovery Period in Mid 4Q21, Country Group reiterates its BUY rating for Plan B Media (PLANB TB) but expects the company to report a net loss in 2Q2021. 

In KBANK: 2Q21 Result Was in Line with Our Expectation, Country Group circles back to Kasikornbank PCL (KBANK TB) after the analyst meeting came out with a positive tone after the bank posted a solid set of 2Q2021 results. 

In BEM: Expect Earnings to Remain Dull at Least in 2Q21 and 3Q21, Country Group takes a look at Bangkok Expressway and Metro (BEM TB) which is still experiencing contraction due to the 3rd wave of COVID-19. This has reduced average daily toll traffic to 770k trips/day (-21%QoQ -4%YoY) and MRT ridership to 119k trips per day (-44%QoQ -11%YoY). 

In Bukalapak IPO: Revenue Take Rate Moving Up, But Not Fast Enough, Oshadhi Kumarasiri returns to look at Bukalapak (BUKA IJ) as it priced its IPO at the top end of the range.

Credit Insights

In Morning Views Asia: ABM Investama, Evergrande Real Estate Group, Medco Energi, credit specialist Leonard Law, CFA revisits Medco Energi (MEDC IJ) after its announced a rights issue. 

In Morning Views Asia: ABM Investama, Evergrande Real Estate Group, Medco Energi, credit specialist Trung Nguyen takes a look at ABM Investama (ABMM IJ) after Moody’s assigned B1 rating to their Notes, and at the same time placed it on review for possible downgrade (in line with its other ratings).

In Morning Views Asia: Agung Podomoro Land, Bright Scholar Education, Lifestyle International Holdings, Trung Nguyen maintain his “Hold” recommendation on the Agung Podomoro Land (APLN IJ) 5.95 24 as he sees a high likelihood of the company’s notes 5.95 24 being restructured.


Alpha Bites: Receive Czech 5y Vs Pay Poland 5y Rate

By Gautam Jain, PhD, CFA

In this week’s Alpha Bites, we recommend receiving the 5-year rate in Czech Republic vs paying the 5-year rate in Poland via IRS. Poland’s rates have outperformed its regional peers on the back of the uber-dovish monetary policy stance of the central bank and the June CPI reading coming off slightly from May. We continue to find the nominal and real rates in Poland to be too low in comparison with other countries, particularly Czechia, and unlikely to sustain at current levels with inflation running hot on the back of easy monetary and fiscal policies.


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Macro: What You Should and Shouldn’t Worry About and more

By | Daily Briefs, Macro

In today’s briefing:

  • What You Should and Shouldn’t Worry About

What You Should and Shouldn’t Worry About

By Cam Hui

Forget about the Delta variant slowing economic growth!

There are some key risks to the equity outlook to be concerned about for the remainder of 2021, stalling growth from the Delta variant is not one of them for most advanced economies. Nevertheless, investors should monitor rising China tail-risk as overleveraged property developers like China Evergrande wobble financially. As China Evergrande falls into the “too big to fail” category, we expect Beijing would step in to resolve any defaults in an orderly manner to minimize the fallout. In addition, U.S. equity prices may stumble once the market gains greater clarity on Biden’s plan to raise corporate tax rates.

From an economic perspective, the global recovery should continue into 2022 and beyond and be supportive of higher stock prices. Expect some volatility over the coming months, but investment-oriented accounts should maintain their equity commitments.


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Macro: ‘Japanification’ Is Coming and more

By | Daily Briefs, Macro

In today’s briefing:

  • ‘Japanification’ Is Coming
  • Floods/ Fertility/ Prosperity/ Enmity/ Walls
  • Not “risk-On” or “risk-Off”, Rather What’s the Risk?
  • US Economy Enters H2 Robustly, but Fed’s Outlook Being Increasingly Questioned by Bond Investors
  • UK: Retail Gorges on Failing Normalisation

‘Japanification’ Is Coming

By Michael J. Howell

  • World markets are facing a major policy error ahead
  • Taper-talk is a worry, but QE is not the real problem
  • Policy-makers want to end QE, but keep interest rates low
  • Too much debt is the bigger problem, and low interest rates encourage debt
  • World is falling towards a ‘Japan’-like debt trap

Floods/ Fertility/ Prosperity/ Enmity/ Walls

By Diana Choyleva

China News That Matters

  • Deadly rains in central China
  • Not one, not two, but a “three-child” policy 
  • Zones “R” Us
  • US and China agree to meet
  • Seal off the borders! New walls, old fears
  • 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.

Not “risk-On” or “risk-Off”, Rather What’s the Risk?

By Olivier Desbarres

In the past fortnight US Treasury yields across the maturity spectrum have oscillated in reasonably wide ranges, with the highs coinciding with the release on 13th July of US CPI-inflation data. The shape of the yield curve today is almost the same as it was on 8th July.

The US rates market has tentatively found its feet, for now at least – tentatively because volatility remains reasonably high both in terms of yield levels and yield spreads.

The pace of Dollar NEER appreciation has also slowed and volatility remains low while the S&P 500 and Brent crude oil price have been choppy in multi-week ranges.

The inverse correlation between the Dollar NEER and S&P 500 has somewhat broken down so far this month. We estimate that since 28th June the S&P 500 and Dollar NEER have respectively gained about 1.8% and 1.2%.

In that sense the Dollar has not traded like a “safe-haven” asset, at least not in the purest sense of the term in our view.  Instead the appreciation in the Dollar NEER since 10th June has largely coincided with the flattening of the 2s-10s Treasury curve.

Finally, the relative performance of major currencies does not clearly point to either “risk-on” or “risk-off” having prevailed, in our view. Since the 36-month low in the Dollar NEER on 10th June, weighted-baskets of EM currencies (excluding Renminbi) and developed market currencies have both depreciated about 3% versus the US Dollar.

Our overall take is that US (and global) markets in recent weeks can neither be categorised as “risk-on” or “risk-off”. Instead it has been a case of “what is the risk?”.

Specifically we think markets are still weighing whether i) they should be more concerned about a potential slowdown in US and global growth or CPI-inflation remaining sticky at high levels and ii) how central banks will adjust monetary policy, in terms of their QE programs and outlook for policy rate hikes (an arguably granular picture at present).

Macro data point to rapid global economic growth having slowed in June (but remained positive) and we will elaborate on our outlook in the next FIRMS report.


US Economy Enters H2 Robustly, but Fed’s Outlook Being Increasingly Questioned by Bond Investors

By Said Desaque

According to the National Bureau of Economic Research (NBER), the Great Lockdown was the shortest in US history, thereby raising questions about the necessity of continued stimulus, notably by the Fed, but employment remains well below its previous cyclical peak. The economy is displaying some late-cycle signals that are historically associated with impending overheating, but US Treasury investors are discounting a significant slowing in economic growth and, consequently, reduction in inflationary pressures.

Recent US inflation overshooting is partly related to supply chain dislocations caused by different COVID-19 vaccination policies adopted by sovereign governments and disruption to global trade, but pressures due to the latter could persist for the remainder of 2021. Despite falling recently, congestion at US West Coast ports could rise further if vessels are forced to wait for cargo from exporters before returning to their point of origin under new laws being considered by Congress.
Real-time data on the US economy shows continued recovery in consumer services in H2, although housing activity has been steadily cooling during 2021. Manufacturing activity remains buoyant, underpinned by robust consumer spending, but semiconductor shortages are holding back output and sales of automobiles.
The recovery in revenues has significantly boosted US companies’ financial health, thereby allaying last year’s fears of excessive leverage when firms took advantage of the Fed’s intervention in corporate credit markets. Meanwhile, a policy mistake by the Fed presents the biggest threat to the corporate sector, particularly a slow reaction to persistent upside inflation outcomes in 2022 H2 that forces more hawkish policy settings to satisfy bond investors’ appetite for higher inflation-adjusted returns.     

UK: Retail Gorges on Failing Normalisation

By Phil Rush

  • The mix of UK retail sales in Jun-21 made the outcome a disappointment, despite dull headlines. Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. The failure to normalise threatens the recovery’s extent.
  • Rising infections are fuelling a broader surge in disrupted behaviours. Several hundred thousand people are legally required to isolate with guidance and school closures afflicting double that again. We still expect the recovery to disappoint in H2.

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Macro: US Bonds & Asset Markets: Time for Another Rotation and more

By | Daily Briefs, Macro

In today’s briefing:

  • US Bonds & Asset Markets: Time for Another Rotation
  • ECB’s New Broom Throws up a Dust Cloud
  • Rates 10y Dashboard: South Africa’s Rate Curve Set to Steepen

US Bonds & Asset Markets: Time for Another Rotation

By Shyam Devani

The rally in bonds has met its targets and seems to have run its course. Now as we are at very low levels of yield again, it seems unlikely that there is much juice left in this recent trend. Instead of reversing though we believe there is a risk of continued low nominal and real yields which should provide opportunities elsewhere.


ECB’s New Broom Throws up a Dust Cloud

By Phil Rush

  • The ECB’s new strategic framework adopts a symmetrical 2% inflation target, but forward guidance remains opaque and open to interpretation.
  • The growing impact of the Delta variant plus the opaque nature of the forward guidance suggests that a September taper now looks less likely than December.
  • The ECB sees the risks associated with reducing stimuli too soon as greater than those of sustaining stimulative policy for too long.

Rates 10y Dashboard: South Africa’s Rate Curve Set to Steepen

By Gautam Jain, PhD, CFA

We expect South Africa’s rate curve to steepen as recent riots have slowed the economic recovery, likely pushing monetary tightening further out. Meanwhile, the worsening fiscal balance and outflows should pressure the long end higher. Instead of positioning for steepening now, we would wait for the curve to steepen to enter a flattener.

Separately, the attached file is a snapshot of the EM 10y rates market in which 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 an EM rates index.


Before it’s here, it’s on Smartkarma

Macro: Malaysia: Growing Despair As Covid-19 Crisis Spirals Out of Control and more

By | Daily Briefs, Macro

In today’s briefing:

  • Malaysia: Growing Despair As Covid-19 Crisis Spirals Out of Control
  • BoE: How to Unwind QE Concerns
  • FX Dashboard: Stay Bullish on the Chilean Peso

Malaysia: Growing Despair As Covid-19 Crisis Spirals Out of Control

By Manu Bhaskaran

Malaysian tensions will come to a head this week when Parliament is called into session. A change of government is possible as is a more fundamental political realignment amid bubbling resentment on the ground over the government’s mis-management of the response to the pandemic.


BoE: How to Unwind QE Concerns

By Phil Rush

  • The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.
  • Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.
  • Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.

FX Dashboard: Stay Bullish on the Chilean Peso

By Gautam Jain, PhD, CFA

The Chilean peso has given up its outperformance from earlier this year following the central bank’s dovish hike. We remain constructive on the currency on the back of the market-friendly outcome of the presidential primaries last weekend, upward revisions to Chile’s growth, the outlook for copper prices, and the possibility that the central bank raises rates faster than currently priced.

Separately, the attached file is a snapshot of the EM currency market in which 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 an EM currency index.


Before it’s here, it’s on Smartkarma