Lots of interest in whether the PBoC’s targeted cuts will make any difference to China’s credit impulse. It’s something analysts will be watching further as a factor in prolonging the global business cycle. This is one theme we focus on today with two pieces, one from JPMorgan, the other from Antipodean Capital, that look at where we are in the cycle and how investors should allocate. Timing of the turn in this cycle has been tricky, but with QE and monetary tightening expected, a major market correction is due in 2017/18.
Substantive's Top Themes - Best of the Broker Notes
1. Dollar and Gold; Mirror Image Sentiment
In a note published late last week, Tim Hayes from Ned Davis Research wrote that in 2017 U.S. dollar weakness and gold strength have led to respective extremes of pessimism and optimism. Recent price action has seen corrections of those extremes in sentiment, Hayes writes, most likely to be followed by the resumption of the longer-term trends. For instance, the 200-day moving averages continue to fall for the dollar and rise of gold, consistent with other currency and commodity trends that have remained intact despite corrections. Along with its downtrend, longer-term influences remain negative for the dollar, including its overvalued condition, the lack of decisive real and nominal interest rate advantages, relatively weak U.S. economic growth, and U.S. fiscal uncertainty. If you'd like to access the full piece, click below to contact provider.
2. Global Credit Impulse Neutral, ex China
UBS chief economist, Arend Kapteyn, is one of the world's leading proponents of the global credit impulse, as a leading economic indicator. In his most recent piece, UBS chief economist, Kapteyn, provides an update on the credit impulse that follows up on work done during early summer. As Kapteyn notes, the impulse measure has been in decline all year, but this has been largely driven by China. Stripping that out, the 'Global ex-China’ credit impulse has actually largely moved sideways, while ex China EM has risen. Arend's work is all available on UBS Neo.
3. OPEC: Saudi-Russia Talks Hold the Key
Upstream problems in most OPEC countries have neutered compliance as an issue for the group, writes Bill Farren-Price from Petroluem Ppolicy Intelligence. Put simply, adds Farren-Price, OPEC's historical quota cheaters – Venezuela, Angola and Nigeria, among others – now have little ammunition to wreck the output deal. They are unable any longer to easily lift output. This means one thing, concludes the PPI report. Saudi Arabia and Russia, the two countries with significant, deliverable spare capacity, are in control of the cuts and their duration. King Salman's visit to Moscow this week should be watched carefully for signs of disagreement on the future of the cuts beyond March, says Farren-Price. If you'd like to view this report, or take a trial of the PPI product click below.
4. Late Cycle Dynamics, Sell Equities, Bonds, Buy Alternatives
Craig Ferguson from Antipodean Capital publishes very thorough daily global macro research, from both a fundamental and technical perspective. Each quarter he publishes a macro strategy review, which looks at the upcoming quarter. In his Q4 report notes that the US cycle is now 129% of normal cycle length, and all 22 of our US Recession Matrix indicator inputs are at historical extreme readings. But, the turn of the cycle is sometime off, writes Ferguson, perhaps into mid 2018, and quite possibly as late as November 2018. Ferguson goes on to explain why equity valuations maybe sustained that long, and why bond markets are mispriced for rate hikes. In summary, Ferguson argues these late cycle themes will bring tighter policy, but that policy divergences still exist. So tactically, investors should play those divergences, and incorrect market positioning. Asset allocation wise, investors should reduce stocks, EM, HY bonds, whilst raising allocations in alternatives, volatility, precious metals and bond exposures once yields have risen enough. If you would like access to this report, or Antipodean's daily, click below.
5. Investing in an Aging Global Business Cycle
The global expansion is in its 9th year. With most of the major developed economies at or nearing full employment and central banks starting to unwind the extraordinary policy measures put in place after the Global Financial Crisis, the natural question is: how much longer is left and how should an investor position for these unique late cycle dynamics? JPMorgan have built a very solid body of work on this theme over the past couple of months that we think all JPM clients should take to time to read and view if you haven't already. Back in late August John Normand, from the FICC research team, published a note:''What if a record-long expansion meets a record-slow Fed, '' and then two weeks ago, Joe Lupton from the US economics team published a note: ''Age isn't everything: Gauging the DM business cycle.'' JPM do a great job of packaging up their content, and have brought Normand and Lupton together, via JPMorgan TV, to discuss their recent research and re-examine the above question: how much longer is left and how should an investor position for these unique late cycle dynamics? JPM clients can access all of the above mentioned content on Morgan Markets.