In this report, UBS’s Japan economist James Malcolm looks at the implications of what has become a material tail risk — the end of Abenomics. Malcolm argues that a substantive shift in economic policy looks unlikely even if there was a change in leadership or government (as has been widely speculated in the media). However, in such a scenario, markets would likely be less certain of a new administration’s commitment to overcome deflation, potentially requiring steps such as an early signal of intent to reappoint Governor Kuroda, whose term expires in April. Malcolm sees USDJPY as a bigger risk that the equity market under this scenario. UBS clients can view the full note via UBS Neo.
In this note Kevin Gaynor from Asset Allocation strategy and Bilal Hafeez and Sam Bonney from FX Strategy provide 12 charts and accompanying rationale on the business cycle, early warning indicators, China, UK Perspectives, grounds for normalization, the runaway euro and US small business and consumer sentiment. The Nomura research team also publish a neat scorecard/cheatsheet on the economic outlook and market wrap up which covers all asset classes which we recommend.
ClearMacro provides tools to support investors’ multi-asset asset allocation decision making and portfolio construction, and to design and back-test systematic asset allocation strategies. We think is a unique and interesting offering. They also publish a weekly tactical allocation piece, ‘’ClearTactical’’ In this week’s edition they look at the rising risks in EM equities amid peaking global growth, and rising political and geopolitical risk. European equities look like the best bet into year-end, the report says. The ClearMacro team are happy to provide complimentary access to this report. Click below to request.
CapitalAlpha’s Kim Monk has been prolific in her coverage on Capitol Hill with the repeal of ObamaCare. In her latest report she updates her odds of potential outcomes. She writes that if repeal and replace fails she expects Congress will try to quickly move a bipartisan market stabilization package. However, Monk would not expect such a package to move until September, potentially too late to impact 2018 rates. Further, reaching bipartisan consensus even on a stabilization package may prove more challenging than expected for the reasons she discusses in this note. CapitalAlpha think it’s entirely possible Republicans just fund the CSRs and do nothing else. If you would like access to this report click below to request it directly from CapitalAlpha directly.
CIBC was one of the top 3 forecasters for EURUSD in the second quarter so we thought it worth highlighting their latest monthly. Here they write that as a result of global central bankers showing signs that they’re beginning to ease off the accelerator, the divergence between the Fed and its counterparts will be much less, which will likely see the US dollar suffer as a result of both more competitive foreign yields and its own wide current account deficit. CIBC have kindly provided access to the full report. Click below.
UK inflation in June was weaker than even the most dovish forecasts of Heteronomics, a specialist UK macroeconomic research firm run by Philip Rush. In this report he dissects the data, and argues that this dip alleviates pressure on the MPC in the short-term, but the trade-off is increasingly uncomfortable amid falling unemployment. This piece and other UK research from Heteronomics can be purchased on AlphaExchange (1 minute to register) and ResearchPool, and can be viewed on the SmartKarma platform. Alternatively contact Rush directly.
Chris Krueger from the Cowen Washington Research Group has just published this particularly gloomy outlook on the Trump legislative agenda following the latest failure by legislators to make any progress on health care reform. Krueger says nine post-election months spent on health care have gone right down the tubes. Attention will now turn to a potential government shutdown. Krueger says a two-week October shutdown is now the base case – which reopens with deal on debt ceiling, SCHIP, and sequester. Furthermore, the idea that tax reform will now be easier because GOP self-preservation will kick in, but Krueger is skeptical. He says no tax cuts next year is his base case. To get access to the full note, click below.
We always find Entext’s Macro Weekly Briefing a thought provoking and diverse read. This week’s edition is no different, covering US Healthcare reform, the EM cyclical bull market, Chinese insurance companies and the rise in quant investing and AUM. It’s the latter subject that caught our attention the most. The report’s author, Sean Maher, takes a critical look at the role the latest innovations in quantitative analysis have made to returns. Maher argues that adding ever more idiosyncratic data sources and PhDs alongside the rise of AI is meant to generate alpha, but aggregate quant performance has been poor since 2015. Furthermore, statistical back testing of various factor strategies is the staple of the quant world, but is very vulnerable to a sustained regime shift. Maher concludes that, as in biology where diversity breeds systemic resilience, the danger of a growing quant ‘monoculture’ is that we’re creating a far more brittle market structure. Food for thought. Entext research can be purchased on RSRCHXchange, or AlphaExchange (1 min to register), alternatively viewed on the SmartKarma platform.
With the positive tone in oil prices and the weaker USD expected to help commodity prices (see yesterday’s editors note here,) we thought we’d highlight this interesting note from Richard Iley on the US shale market, and the latest data on Drilled but Uncompleted (DUCs) wells in the shale sector, also known as, the ‘fracklog,’ which continued to climb in June, hitting a fresh all-time high. Iley is an independent macro-economist, who most recently was head of EM and Asia ex-Japan economics at BNP Paribas in Hong Kong. Iley reminds that reader that DUCs are wells that have been drilled by producers, but have not yet been made ready for production. The number of DUCs necessarily has implications for the price elasticity of US shale supply. The higher the number of DUCs, the more supply that can arrive rapidly in response to any increase in prices. Therefore, think of DUCs as an extra layer of shadow inventory hanging over the market, Iley adds. The ultimate conclusion here is that the risks to crude prices over the next 3-6 months continue to look skewed heavily to the downside even as rig counts flatten out and inventories dip for seasonal factors. Iley reckons OPEC will struggle to announce further cuts that can offset the continued likely upward march of US shale output. This piece and other research published by Iley is available on SmartKarma.
ANZ’s China Economist, Raymond Yeung, distils the China theme down to 10 charts here, arguing that 2017, at least the first half, seems to be a rare year for China as the data flows have surprised on the upside. For instance the RMB exchange rate has been surprisingly strong. MSCI has also added China’s A-shares to its emerging markets index, a decision that has surprised many observers, while June’s data flows have taught analysts not to discount the upside risks too early for 2017. This is perhaps a ‘black swan’ this year, concludes Yeung. If you’d like access to this piece, click below to request the report from ANZ directly.