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.

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.

China Steel Survey; A Slow Slide From Here

J Capital Research last week released their latest China steel survey on current demand and outlook. It sheds light on current demand and outlook for steel from construction and manufacturing end users. The main findings here relate to destocking, with most steel traders expecting a demand decline, Murray shows the demand and forecasted sales per city. Purchase the note on RSRCHXchange, alternatively contact the provider directly.

Trump’s Tax Plan is far From Being Priced into the Dollar

Greg Gibbs of Amplifying Global FX Capital is a veteran macro strategist, with a strong focus on FX markets. In this report he writes that the Trump tax plan is potentially very positive for the USD, generating a significant incentive for capital inflow and business investment.  The market response so far is muted, but may well continue to build. In other words the market is far from pricing this into the current prices. AMPFX represents great value for money, and has two subscription options. Click below to take a trial. The content is also available on the SmartKarma platform.

Striking a Tough Balance on the CNY

In light of the recent surge in the RMB, ANZ set out the tough balancing act that Chinese authorities have in order to keep the major objectives on the road. While rapid currency movements and higher volatility seem to be in line with the People’s Bank of China’s (PBoC) market driven FX reforms, they contradict the PBoC’s long-standing argument for maintaining the currency’s relative stability around an equilibrium level. ANZ think there are two reasons for the PBoC’s apparently contradictory behaviour: 1) Attempts to strike a balance between near-term financial stability and the long-term interests of the economy, and 2) PBoC more focused on the stability of the CNY CFETS basket than on USD/CNY. Balancing this flexible exchange rate regime against the goal of maintaining stability is still a ‘difficult drive,’ the report says. As long as China wants a flexible exchange rate regime, the government can only be hands-off to some extent, ANZ conclude. Click below to request access to this report.

US Tax Reform; Don’t Hold Your Breath

Prior to the blueprint tax released by the Big Six, Chris Krueger from the Cowen Washington Research Group published this insightful report on market participants’ low expectations. With four macro topics likely to receive more attention, Krueger explains the possibilities for foreign-earning repatriation and shift to a territorial system, GOP expensing, Senate reconciliation rules around running deficits and rates. Cowen believes nothing will pass on taxes this year or next. To access this report, or view other samples of Cowen’s excellent DC coverage, click below.

China Credit Impulse Rolls Over

Tom Pierce from the DB equity strategy team has been producing some excellent analysis on the global credit impulse. He expects the China credit impulse to fall to -6% of GDP by mid-Q4 (-3% of GDP on average for the rest of the year). This forecast for the credit impulse is consistent with the move suggested by the moves in SHIBOR. As a result, he expects a China manufacturing PMIs to fall over the coming months, on the back of a renewed fade in the China credit impulse and the recent RMB strength. DB clients can access the full note via the bank’s research portal.

Has the Sterling Rally Run its Course?

Sterling has jumped on expectations of an imminent rise in Bank Rate and a transition deal with the EU, but Pantheon Macro now think the rally may have run its course for the time being. In this note they argue that swift progress in the Brexit talks is not assured and the MPC has strong incentives to dither. For full access to this note and other reports on Brexit (where they argue that there will eventually be a soft Brexit) click below to contact Pantheon directly.

China’s Cooper Love Affair to Continue

The consensus view on copper, and more generally on industrial commodities, is that prices are tippy. Simon Hunt Strategic Services take the opposite view. China’s copper demand will continue to increase as country’s lower tiered cities keep growing and products in the New Economy become a bigger driver, writes Simon Hunt. By focusing on the development of the consumption drivers, such as the aircon sector production increase, semiconductor industry growth, and rapid development of electric vehicles; Hunt holds an optimistic view on China’s increasing copper demand. While previously revising China’s economy in the first part of his visit, this note sheds light on copper consumption patterns in different industries and confirms his positive outlook on the country’s economy. Hunt is a veteran China analyst with a focus on the changing geopolitical and financial structures, while also being a specialist in copper demand in China. His work can be purchased on ResearchPool, or alternatively contact the provider directly.

Last Hurrah for the RMB

Ann Stevenson lived in China for 25 years from where she built J Capital Research, a China macro research firm that provides an honest, and sometimes, unvarnished critique of China’s corporate, political and economic life, with a macro overlay. And, they’re not afraid to get their hands dirty. They frequently run investor trips into the provinces to understand what’s really going on the ground. Their commodities coverage is also very strong and their surveys on select commodities adds useful insight. In this piece, Ann admits she got the direction of RMB completely wrong in August, but puts some of this down to the Trump factor, which has made it an unpredictable year for macro investors. However, starting now, depreciation pressure should be back, she writes. Indeed the 6.54 high on September 17 should be the strongest level the currency we will see for a very long time, the report says. It’s a fundamental argument, the currency should reflect the fundamentals, and they all peaked in August, the report says. By no coincidence, just in time for the Beidaihe political meetings that informally select the new slate of leaders. Therefore the RMB should now decline, concludes Stevenson. This not can be purchased on RSRCHXchange, or alternatively contact the provider directly.