Do ETF Flows Affect Exchange Rates?

Given the vulnerability of the equity market to a potential downside shock we thought we’d highlight a piece from Deutsche Bank quant strategists Nicholas Weng and Rohini Grover who recently published some interesting research on the relationship between equity ETF fund flows and currency returns, where they find a significant relationship, and which makes the tracking of detailed fund flow data (available daily without sampling error) all the more important. Weng and Grover reckon their valuation model would complement the better recognized BEER and FEER models. DB clients can view the full note on the bank’s research portal.

Hold On, The Reflation Trade May Still Have Legs

While the G7 bond markets signal a very low inflation, low growth world, the global freight and logistics index is just shy of its all-time high, which the Jefferies asset allocation team argue is evidence that the reflation trade is not over. This piece presents a series of other indicators that attempt to reinforce this idea; global trade has emerged from recession, PMIs still expanding, inventory-to-shipment ratios falling, Intra EM trade rebounds. At the same time, the increasing divergence between global equity market performance and bond markets has raised questions as to whom is right. Jefferies clients can access the full note on the bank’s portal.

Spokes in the Wheels of US Equities

Greg Weldon of Weldon Financial is a veteran macro strategist who delivers a highly engaging daily 15-minute video, where the narrative runs alongside a series of charts, that can also be downloaded by clients. Weldon has been ahead of his time with this approach, and we’re seeing more strategists adopt something similar format. We highlight last week’s Weldon special focus, which is on the US equity market, and it’s ‘’intensifying ‘risk’ profile, both fundamentally and technically,’’ as Weldon puts it. He homes in on specific sectors, healthcare, pharma, financials to make the case that equity markets (including FTSE) are close to a potential bearish tipping point. If you’d like access to the video, click below to request complimentary access.

Betting on the anti-Macro

Two big macro drivers for returns in this bullish cycle for stocks have been interest rates and oil prices, two asset classes that are very hard to get right, no less than this year, said Ned Davis Research in an April 10th report, citing its own client surveys from the beginning of the year. One way to work around this unpredictability is to invest in Tech, which minimizes the influence of these two factors, this report says. Of course, this is a now a widely recognised attribute of tech stocks, but NDR provided some guidance on which stocks (ETFs) are least sensitive to rates and oil. And while the secret may be out, funds continue to flow in. NDR also focuses on REITS. These stocks have a strong negative sensitivity to interest rates, and an even stronger negative sensitivity to the yield curve. So, no surprises, given the outlook for rates at the beginning of the year, that most clients expected REITs to underperform, added NDR. Well, interestingly these are starting to emerge from the ashes, as rates have backed off from their peaks. Perhaps undervalued? Click below to request complimentary access to this piece.

French Vote for Procrastination

Vincent Deluard of INTL FC Stone wrote this piece last week, but us is no less interesting, as he provides some fascinating perspective on French politics by highlighting the great dichotomy that has dominated the picture over the last 35-years; A desire to be part of the great European project, versus the natural pull towards French socialism and the desire to have control over its own destiny. Deluard argues that the 2017 election promised to finally resolve these conflicting forces once and for all. The reality, it now seems, is that it this won’t happen. Indeed very little may be resolved by this election either way, whether that be reform, or France becoming more independent. Deluard sees the French electorate choosing procrastination instead of real change, and a move to a more Italian style of politics. Deluard then discusses the market implications, both from an equity market and bond spread perspective. Click below to request access to the full note.

Stagflation, Hyperinflation; Opportunities Abound

We expect stagflation and then its remedy, hyperinflation to begin shortly after, writes Paul Brodsky from Macro Allocation. The thing is investors aren’t for this, and opportunities abound, he says. In this note he outlines some of these opportunities. If you’d like to read the full note, click below to request from Macro Allocation. Thye’re happy to provide on a complimentary basis.

Brexit: What You Need to Know

Yesterday all the headlines were about the calling of a snap election in the UK. How much risk gets pricked in around this event in June is too early to say. But on the assumption that the Conservative Party remains in power, nothing changes too much on the Brexit process. Vincent Deluard from INTL FC Stone has produced this engaging and informative note on the Brexit process moving forward. While we appreciate that you have had you fill on research covering this topic, we think Deluard offers a fresh perspective on this topic. For instance, his views of the potential ”Big Bang” in Europe, which might be considered as a solution to Brexit. It’s gaining some momentum as the ”big idea” in European chancelleries

French Elections: Battle for the Undecided

Nightberg is a US based macro research firm founded by former Bridgewater and Moore Capital analysts Birgir Haraldsson and Mario Manna. Their political analysis (an essential part of their investment framework) is anchored to Predata’s election signals that are crafted by combining various social media sources, such as Twitter and Wikipedia, whereby they create state-of-the-art metadata indicator scores. These scores are not equivalent to polls, but do help in detecting how the pendulum of sentiment is swinging ‘on the ground’ in real-time. In their latest piece they assess both recent polling results with the digital political footprints of the candidates in the French elections. The results suggest Le Pen is in a reasonably strong position: she’s currently leading in both domains. Click below to request access to this report.

Fed Balance Sheet and the Dollar

Deutsche Bank’s Alan Ruskin has produced a fairly balance piece on what the reduction in the Fed balance sheet means for the dollar. While balance sheet reduction is likely to be ”materially supportive” for the USD, it’s a long way from being a game changer, says Ruskin. In fact, a bear steepener – which is what balance sheet reduction implies – would typically weaken the dollar, writes Ruskin. But not all bear steepeners are created equal. A steepener driven by balance sheet reduction represents policy tightening and an increase in real long-term rates. This has very different consequences for currencies, where inflation is pushing up yields and driving curve steepening. Yesterday DB hosted a conference call late last week that covered everything from the mechanics of running down the balance sheet to its implications for all rates and FX markets. Ruskin’s piece is on the research portal, while you can contact your local salesperson for the dial in code for the call replay.

The Big Questions on Trump’s Energy Policy

Divya Reddy, Practice Head of Eurasia Group’s Global Energy Group, recently hosted a conference call to discuss the implications of President Trump’s executive orders on energy. Some of the key questions addressed were: What will be the fate of the Clean Power Plan following Trump’s executive order on energy? What will be the impact on the US power mix of repealing the plan? Will coal see a renaissance? Will renewables see a rout? Will the US remain in the Paris Agreement? If you would like to listen to this recording, Eurasia Group are happy to make it available on a case-by-case basis.