Will Bitcoin Oust the Euro?

Bitcoin could make further strong gains if consumers and businesses use it across the board. This is unlikely, though, owing to network effects and the hostile stance of governments, writes Dr Jörg Krämer, Chief Economist at Commerzbank. He argues that in the developed countries at least, there will hardly be any stable demand for bitcoins, and it will no doubt continue on a rollercoaster ride. Included within the article is an attempt by Commerzbank to provide a calculation on the fair value of bitcoin. This question is getting some attention, with RealVisionTV producing ” The Big Story – How The Hell do you Value Bitcoin?” , which is worth checking out too. This Commerzbank analysis based on Krämer’s opinion piece in today’s edition of the FAZ newspaper. Commerzbank clients can read teh full note via the bank’s research portal. 

The Era of Low Volatility Will Unwind Formulaically

Dean Curnutt, founder of Macro Risk Advisors puts today’s low vol climate into context in this piece, which was also published on BloombergView. In this piece he discusses the way in which the shattering of a strong degree of market consensus lies at the heart of risk-off events.  With that in mind, he looks at what the means for today’s asset prices. 1) He argues that the probability of a recession is low, corporate earnings will grow and the S&P 500 will continue to rise. Both model and surveys driven approaches generally forecast a recession probability of less than 15% the next 12 months.  Among the 8 strategists that have submitted year-end 2018 price targets on the S&P 500 to Bloomberg, not one forecasts a decline in the index over the next year. 2) Inflation and interest rates are low and stable, and with high confidence, markets believe they will remain that way.  Inflation options imply only a 16% chance that CPI will exceed 3% over the next year.  The MOVE index of interest rate implied volatility just reached an all-time low. 3) Geopolitical risk poses little threat. Implied volatility on the Korean won has receded to levels not observed since 2014 as investors shrug off heated rhetoric between the US and DPRK. 4) Equity market volatility is low and will remain that way.  VIX option prices imply just a 12.5% chance that the fear gauge will be above 20 out three months. 4) Return correlations, both among equities and between stocks and bonds will continue to be very low, serving to reduce overall portfolio risk. If you’d like to read samples of MRA’s coverage on risk management and vol markets, they are happy to provide. Click below.

Stay Tactically OW Equities

In this note the team at Longview Economics write that in bull markets, equities typically continue to trend higher (at least) until their own medium term models begin to generate clear SELL signals. Currently, there’s a distinct lack of SELL signals from their models with evidence that ‘sell-off risk’ is relatively low. Seasonality, and strong US economic momentum and earnings growth add to the case for further gains in equity markets, say Longview. This piece can be purchased on RSRCHXchange, alternatively contact the provider directly.

Three Questions Ahead of China’s Economic Work Conference

China’s 19th Party Congress in October laid out long-term objectives and policy directions for the country, but interpretations of its near term policy implication vary, writes UBS’s China economist, Tao Wang in this report. That’s why he thinks that the upcoming annual Economic Work Conference (EWC) should help shed some light, including on three questions high on investors’ list: 1) Will China significantly lower its annual growth target or abandoning it altogether? 2) Will the PBC raise interest rates in light of rising inflation? And 3) Will deleveraging lead to significant credit market volatility and serious credit event? Their key conclusions are that they expect a slightly lower growth target, the PBoC may raise interest rates in 2018 if inflation and US rates rise more than envisaged, that deleveraging will likely continue to tighten liquidity conditions, but that a serious market calamity is unlikely. UBS clients can view the full note on UBS Neo.

Brexit: How to Trade Deal or No Deal, From the Positive Side

Nomura strategists Andy Chaytor and Jordan Rochester published this interesting note on how to trade Brexit and the odds of ”deal or no deal.” They have previously recommended long GBP and curve steepeners, and argue that Brexit viewpoints in the City are too biased to allow rational analysis. The market seizes on negative headlines with positive developments largely ignored or pre-fixed with “despite Brexit” before explaining what the data actually say. In relation to the Irish question, it will be very difficult for the UK to resolve the border issue in a matter of days because of the political posturing likely to be involved, but we think there is enough political will so it is likely (70% probability). They did not expect a full and comprehensive answer to the border issue at this stage, so were  surprised by how much progress has been made in the draft agreement so far. However, they concede that they and the market underestimated how far the DUP would go with its demands and there now exists the risk of further delays. When it comes to the “political compromise” needed to move things along a wording in the agreement of “strong commitment to avoiding a hard border” was the compromise that Nomura expected before and still do now. For their long GBP and curve steepener trades to perform into year-end, progress does not necessarily need to be made, but will help. However, they say they need to be flexible and recognise if negotiations fall through, the market may attempt to price for tail risks of a Conservative leadership contest and/or another UK general election and with it a lower pound. Nomura clients can read the piece by clicking below.

U.S. Bank Stocks: Should Investors Heed A Flattening Yield Curve?

The recent sharp flattening of the U.S. yield curve has become a hotly debated topic among investors. The slope of the yield curve takes on added significance for banks, which have traditionally borrowed at the short end of the curve and lent at longer-term interest rates. In this report MRB examine the historical relationship between the yield curve and the relative performance of bank stocks. They also analyze what recent yield curve movements imply for net interest margins, and show how a change in the asset mix they hold and the duration of these assets means margins will be less impacted than they have been historically. Click below to request access to the full piece.

Q+A: What’s going on with Brexit and the Irish border?

As Brexit negotiations reach a critical juncture, the question of what to do about the border between Ireland and Northern Ireland – the only point where the UK will continue to meet the EU – has become critical. Here’s what you need to know. Click below.

Global PMIs: It Doesn’t Get Much Better Than This!

Alejandra Grindal from Ned Davis notes that in addition to the global manufacturing PMI climbing to its highest level in nearly seven years, the breadth of NDR’s own measures show some of the broadest trends in a decade. „NDR say that the current reading in the PMI is consistent with 4.9% annual industrial production growth in the coming months.  If achieved, it would be the fastest production growth in nearly four years.It doesn’t get much better than that. Within that, developed economies have outpaced the emerging world, with developed Europe taking the lead.

US Tax Repatriation Not a Big Deal

With the passage of US tax reform increasingly likely, Deutsche Bank’s George Saravelos makes four observations around the potential impact of the foreign profit repatriation provisions on the dollar. (1) There are $3.5trillion of US company earnings re-invested offshore according to BEA data. DB estimate that $1.5 trillion of these profits sits in cash or equivalents. (2) Of this $1.5 trillion they estimate that only around 10%, or $150bn sits in non-dollar holdings, based on a bottom up analysis of company disclosures accounting for around half of S&P 500 cash. (3) In contrast to the 2015 “Homeland Investment Act” the current tax proposals call for “deemed” repatriation which is equivalent to a mandatory payment on foreign earnings without an obligation to repatriate those earnings back in the US. Companies will only bring the cash back when they need it, there is no incentive to bring cash back immediately. (4) Even if a company decided to bring cash “back” to the US, our recent conversations with a number of large firms lead us to the conclusion that the dollar liquidity mostly already sits in US banks. Bringing the money back will merely involve an “accounting” shift rather than a withdrawal of offshore dollar liquidity. Conclusion: in contrast to 2015, the impact of US foreign company repatriation on the dollar and cross-currency basis should be small, if at all. DB clients can read the full note on the bank’s research portal.

ECB Wants a Steeper Curve; Will Markets Oblige?

Claus Vistesen of Pantheon Macro thinks Eurozone bond yields will increase slowly next year, but all eyes will be on the curve. Experience suggests that the curve flattens when monetary policy stimulus is removed, but Mr. Draghi and his colleagues will try to engineer a steeper curve in the euro area in 2018. The ECB will reduce its demand for long-term bonds, by halving the pace of QE to €30B per
month, starting January. It will run at this pace until September, and then likely wind the program down towards the end of the year. But it has also committed to keep its policy rates pinned to the floor until “well past the horizon of the net asset purchases”. If markets play along, the net result ought to be a steeper curve.