Global growth hopes have been boosted recently with Korean GDP expectations being raised and a strong IFO, which has provided some respite for the dollar in the short term. It is these rallies that investors should be selling into, says the Macro Research Board (see below) as the dollar nears a cyclical turning point. The catalyst might also be the resignation of Japan Prime Minister Abe. Below JPMorgan provide guidance on the extent of market moves should that occur. But, at the same time, it is by no means the death knell of Abenomics.
Substantive's Top Themes - Best of the Broker Notes
1. The EM Breakout
Jeffrey deGraaf from Renaissance Macro Research is upfront in this report that he was a little too early in reducing his conviction level on EM vs DM. While he wasn’t bearish, it was simply more of an incremental move towards increasing doubt. He’s reassessed, arguing buying into recent weakness would have been the better strategy, because EM FX is now breaking out on a multi-year basis with the MSCI EM vs MSCI Developed on the cusp of doing the same. Against the greater macro backdrop of a weak US dollar environment (driven by yield, growth, and policy differentials) it stands to reason that EM currencies and therefore EM equities will continue to do well, he writes in this report. He identifies countries for outperformance, with Mexico his top pick for longer term investing based on RenMac’s SERM scores. For developed-only managers, RenMac have revisited and updated their correlation study between European stocks and EM performance, selecting the best looking charts from within the top 20 European stock/EM correlations. Click below to request access directly from RenMac
2. MRB: Will the USD Revive?
At the end of 2016 MRB began writing that its long-term bullish view on the dollar was coming to an end, and that the cyclical advance that characterized the long period of appreciation was maturing. In this report they argue that this cyclical advance is not over yet, but upside will be limited and more narrowly defined. As a result their approach is to continue to sell into strength. rotating towards the euro, Swedish krona, Mexican peso and currencies of EM Asia ex-China. As for the Yen, they recommend a continuation of being underweight the Japanese currency. Click here to request access to the full report directly from MRB.
3. The End of Abenomics; Impact on the Yen and Japan
JPMorgan's Tohru Sasaki, Shumpei Kobayashi and Maoko Ishikawa have put together their market views on Japan in the event that Abe is forced to resign. Their view essentially boils to down to short and medium term effects. In the short term, a large strengthening in the Yen due to positioning and a sell off in equities (forecasts included within the piece), but price reversion thereafter. The logic is sound. ABe may be the current front person, but fundamental governement policy is very unlikely to change if the governement remains in LDP hands. JPM clients can view the full note on Morgan Markets.
4. Demand For Duration Versus QE Wind Down
Interesting piece here from the team at RDQ Economics, on US Treasury yields. They discuss how QE has likely reduced the supply of duration relative to the demand for duration which then caused a lowering of term premiums and real yields. As QE begins to be unwound - firstly in the US, RDQ anticipates these forces will reverse. This piece, and other research from RDQ can be purchased on AlphaExchange and Research Pool. RDQ can also be read on the SmartKarma platform.
5. Stay Over-weight Equities (for now)
Longview Economics have maintained a consistent equities overweight to their asset allocation work for several years, at a time when many strategists prematurely called an end to the bull markets. In this piece, strategist Harry Colvin writes that with the Fed rate hiking cycle underway, and with other central banks shifting towards more hawkish language, the central question for asset allocators is whether policy tightening is about to expose the structural fragility of the global economy. Longview maintain a sanguine view, saying that despite gradual tightening steps by the Fed, those key indicators still point to loose monetary conditions and therefore ongoing economic expansion. It’s also clear that the US corporate sector is in relatively good health, the report adds. Colvin therefore continues to recommend staying OW risk assets in longer term portfolios. Longview's research can be purchased by the piece, or by subscription on Alpha Exchange. Alternatively contact the provider directly.