Oil’s excess speculation

With net long positions in oil having risen to all-time highs, it may be time for the recent rally to take a breather, writes Credit Suisse. Historically speaking, once very elevated speculative positions start to roll over, the oil price has fallen significantly (with the oil price falling by between 12% and 60% on the last 4 occasions that speculative positions rolled over from very high levels), notes Credit Suisse. In this wide ranging note, Credit Suisse’s equity research team examine Saudi Arabia’s battle for market share, and what that means for oil’s price action as well as multiple tactical plays, across a variety of sectors, that take advantage of the recent rally, which maybe coming to an end.


China’s inclusion in SDRs matters

For the last decade Beijing and the IMF have fought a bitter war of words over the alleged undervaluation of China’s currency. That conflict formally ended on Tuesday when Deputy Managing Director David Lipton announced that the IMF the renminbi is no longer undervalued, says Gavekal Dragonomics. This was no surprise for the market, says Gavekal, but it does set the stage for an increased global role for the RMB in line with China’s over-arching and non-negotiable goal: for China to regain its rightful place at the centre of global economics, markets and politics. Things seem to be heading in the right direction after Lipton made clear that the IMF was onboard in having China’s currency status recognized by inclusion in the currency basket for the IMF’s Special Drawing Rights. Such an inclusion is a symbolic issue, notes Gavekal, but this piece explains many of the measures that China is implementing to become a globally important financial market. These developments need to be followed closely, as does its relations with the US which span everything from the creation of new supranational, global trade agreements  and military brinkmanship.


Why the RBNZ needs to cut rates

On April 23 the Reserve Bank of New Zealand left the door open for the prospect of monetary easing. For some analysts this seemed to signal an admission by the RBNZ that monetary conditions were inconsistent with the central bank being able to achieve its 2% inflation target mid point. With the door ajar, they now need to act with more than one rate cut, writes Redward Associates. This is far from the consensus view among forecasters, and this report analyses in detail the outlook for core inflation, GDP, and some key drivers, not least the Fonterra’s outlook for dairy prices, as the basis for its view on the required monetary accommodation.


Risks for JGBs on Japan rebalancing

Recent failed JGB bond auctions have once again highlighted the risks of Japan’s monetary experiment, writes Lombard Street Research, who have produced some very detailed analysis the portfolio rebalancing that has taken place in Japan since last year. This was initiated by Government Pension Investment Fund’s (GPIF), but has yet to be followed by private sector pension funds. As Lombard notes, GPIF’s actions are just the beginning. The note then points to the potential risks to the domestic fixed income market, and Japan’s vulnerable fiscal position.


The rise of generation Y

Also known as Millennials, a demographic born after 1980, this group of the population is set to become a dominant economic force, both in terms of accumulated wealth and consumer spending usurping the Baby Boomers, according to Bank of America Merrill Lynch, who have published their analysis on Millennials, as part of their ”A Transforming World” series. It makes for fascinating reading, full of interesting statistics, and a catalogue of labels that define and represent this generation. The piece also highlights eight entry points for investors wishing to play the Millennials theme.


What’s the matter with Kansas?

All eyes have been on the regional business surveys this week and it’s been a pretty lacklustre performance, with the most depressed being Kansas where the survey’s main components for production, orders, shipments, and employment all deteriorated significantly during March and April, and didn’t recover this month, writes Yardeni Research. Yesterday the Dallas survey also painted a fairly depressing picture coming in well below expectations. Yardeni’s research suggests that the average of these six surveys’ regional composite indexes is much better correlated with the national M-PMI than is Markit’s flash M-PMI. Their conclusions are that the Fed’s headwinds are blowing harder through the soft patch than they believe. If so, then none-and-done (rate hikes)  is still on the table too.


A ‘scarcity premium’ where none exists

Recent comments from ECB’s Coeure, where he said the central bank will accelerate the pace of purchases over May and June to avoid the summer lull only reinforce the fact that European rates markets are nor pricing any ‘scarcity premium,’ says the Royal Bank of Canada. Their fixed income strategists make particular reference to how Bund asset swap spreads have now cheapened to pre-QE levels. In this report, RBC reaffirms earlier trade recommendations, and adds further favourable rationale for these trades.


USDJPY breaks the boredom

After months of range-bound activity, USDJPY broke the 122 level and traded to 7-year highs, and should it breach 124.14, next stop could be 135. Therefore, with this significant technical break in the pair, it’s important to review the drivers for the move and whether this will prove to be the launching pad for a significant further move higher in USDJPY. Saxobank’s FX strategy team examine the likely key drivers going forward, and produce a mix of possible scenarios, but conclude USD strength, driven by US economic data will be key. If there’s a return to stronger data, then a combination of USD strength and light positioning, then the move higher could be aggravated and front-loaded if traders fear getting left out of a new trend in the days ahead.


China’s equity market surge

China’s 3 main equity benchmarks are showing the largest positive back-to-back risk-adjusted returns across ALL regions and assets on both a 5- and 90-day basis, writes Rareview Macro. The headline writers, says Rearview, point to backdrop of this performance – weak economic data and too much liquidity – as an indicator of an ominous stock market correction. This is the wrong narrative, says Rareview.  The Chinese economic slowdown needs to be seen as a ”China restructuring” theme, that sits comfortably alongside the “Japanese reflation” or “European recovery” themes. Like Japan and Europe, Chinese markets were priced for insolvency and any reversal of a generational loss will result in a multi-year asymmetric outcome. In simpler terms, this is only just the beginning. This piece then provides a detailed analysis on what is really going on with China’s state-owned enterprises and those worrying levels of debt that has had so many investors worried about China, as an investment destination.

 


Letting go of the Greek reins

It’s like a slow motion train wreck. For months Greece has been edging its way to what seems the inevitable Grexit. Most analysts see this as a binary situation. But there could be another way, says Bank of America’s Athanasios Vamvakidis. Leave them alone. If Europe prefers to avoid Grexit, Vamvakidis offers a theoretical scenario that’s worth considering given the high risks ahead for Grexit. It involves, to name just a few, repaying the Greek bonds held by the ECB, re-profiling loans to the Greek government, and leaving Greece alone to achieve its fiscal targets, with no more ESM or IMF. Who knows, it might work. Top marks for originality.