Trump and Trade

The focus on tackling trade policy comes from presidential weakness – especially in areas of interaction with Congress, writes OM Research. As the Russia investigation further hampers the Republican legislative agenda we expect greater reliance on unilateral action by Trump. To maintain faith with key supporters in his base the president may be forced into more frequent and deeper trade interventions than even he wanted to. OM Research was founded by Jamie Davis and a number of other market experts – from all asset classes. They combine strong backgrounds in fundamental analysis, technical analysis and political science to investigate and question events from a differentiated perspective. Their research can be purchased on AlphaExchange (1 minute to sign up), or alternatively you can contact the provider directly.

Also Lower for Longer –Vix and Valuations

NDR Strategist Tim Hayes writes that consistent with NDR’s lower for longer market outlook, the VIX can maintain its unusually low levels for a much longer period. During the previous VIX upturn in May, NDR explained that rather than accelerating toward bear market warning levels, the VIX would be more likely to recede to the low levels that have gotten so much recent attention, as the upturn of fear had presented a buying opportunity. The spike in August 2015 notwithstanding, a VIX surge would be unusual from such low levels – the recent lows have been the lowest levels since 1993. When the VIX eventually does start entering a sustainable uptrend, NDR will be watching the 28.5 level, as a rise to that level would produce a bear market warning. Click below to request access to the full report.

China: Strong Growth Keep Deleveraging Window Open

China’s Q2 growth beat expectations (for a second consecutive quarter. In this note Standard Chartered argue that the near-term outlook looks benign, and as a result they have raised their annual forecast to 6.8% from 6.6%. They expect a moderate slowdown in H2, reflecting less accommodative monetary and fiscal policies. Bottom line is that with the growth target within reach, deleveraging should spread from the financial to the corporate sector. This is a more sanguine picture of the economy than the research we highlighted here yesterday. StanChart clients can view the full note on te bank’s research portal. Click below.

Why Wages Won’t Rise in Japan

Jeff Uscher from Japan Insider has put together an excellent note on Japan macro and policymakers failed attempts to boost inflation. The conclusion? It’s not their fault. No amount of easing can fix the core problem, Uscher says. The demographic dynamic is a much more powerful force. Wages and inflation cannot rise until the tsunami of baby boomer retirees subsides. Uscher’s prediction is that this won’t happen until 2o25 or thereabouts. Click below to request access to this detailed report.

Is the Dollar Doomed?

John Normand and his FX strategy team at JPMorgan have been at the top of their game in terms of the USD, making the call for a weaker USD back in November, partly based on their low expectations for Trumponomics. This has proceeded to play out, with the latest failure in health care reform providing further impetus for a weaker dollar. JPM aren’t lowering their forecast for an even weaker dollar, because their current forecasts have baked this in already (EURUSD 1.16 and USD/JPY 107.00 by end of 2017, and 1.18 and 105.00 by end of 2018). The purpose of this report is to assess whether a sufficient risk premium has already been priced in, and to do this Normand looks at a range of short-term and long-term valuation metrics to assess whether the USD is cheap or still overvalued. Longer-term metrics suggest the dollar is still somewhat overvalued. JPM clients can view the full note on Morgan Markets entitled: Too Little Inflation Plus Too Little Reform. 

DM Policy Normalisation – A Roadmap for EM

Quant Insight’s research is built on an analytical framework conceived by a group of macro hedge fund portfolio managers and Cambridge University academics. They developed a framework for understanding asset price movements and valuations. Their research distils signals from its quantitative tool that covers thousands of securities in real time. The secret sauce of their model is that they use algorithms to untangle and isolate which macro variables (typically correlated) that are driving asset prices. Another benefit is their ability to identify which assets will be most sensitive to changes in a particular macro factor. In this note QI looks at the sensitivity of EM assets to DM policy normalization. The QI sensitivity analysis assesses which EM equity index, EM currency and EM rates markets are most vulnerable if the Fed/ECB/BoE/BoJ start to unwind QE (using 1y5y rate vol in USD, EUR, GBP & JPY) and if DM yields move higher, both outright and relative to EM. All analysis is versus QI’s Long Term (12 month, 250 business day) model. If you’d like to learn more about this framework or take a trial, click below.

China Triggers and Signals

Diana Choyleva, founder of Enodo Economics has been one of the most bearish analysts on China in 2017, despite signs that Chinese authorities are making a real effort to push through reforms and reduce leverage. She observes that while Beijing is keen on containing currency and equity market volatility, China’s painful adjustment after the financial crisis and Beijing’s recent deleveraging efforts have taken a toll on the economy. As a result, interbank market stress, defaults and labour market unrest are likely to be the main triggers of China risk leading to rising global risk aversion In this report, she also outlines some of the key data she is watching for signals. If you’d like access to this report, click below to contact Enodo directly.

The Fed Blinks; Three Summer Trades

The inflation backdrop means that last week’s Humphrey-Hawkins testimony by Janet Yellen was not the inflection point the summer bears were hoping for, writes BAML in the latest edition of the Thundering Word. The absence of inflation means the Fed is clearly fearful of raising short term interest rates too quickly, and boosting the value of the US dollar. On the contrary, the Fed seems quite willing to tolerate a weaker US dollar in short term in the hope of encouraging higher inflation expectations, the report says. BAML think this monetary policy setting implies three summer trades. Firstly, the Icarus trade can continue for a little while longer; “greed” takes longer to kill than “fear”, the signals for a “Big Top” in risk assets (rising rates and peak profits) are still not visible, and with so many investors wanting and needing a correction in equity and bond markets, a correction becomes much less likely. Secondly, barbell portfolios often work well towards the end of a bull market, and the best way to play further summer upside is via a barbell of tech (“growth” leaders) on one side and banks (“value” laggards) on the other. The belly of the beast for the tech rally, the Nasdaq Internet Index (QNET) and the Emerging Markets Internet Index (EMQQITR), are both at or close to all-time highs; and note the recent rally in Chinese financials. Thirdly, the Fed stance implies a weaker dollar, which should be good for commodities and resources. Often the last phase of a big rally features chasing after laggards, and energy is no doubt the greatest laggard of 2017. BAML clients can view the full piece on BAML Mercury.

Why Rate Hikes and Unwinding QE is Inflationary

The Website, Epsilon Theory, authored by Ben Hunt, chief risk officer of Houston-based asset manager Salient Partners, examines the markets through the lenses of game theory, history, and behavioural analysis. In this note, Hunt focuses on jobs and inflation in the context of a Fed tightening cycle. He argues that in the same way that QE was deflationary in practice, when it was inflationary in theory, so will the end of QE be inflationary in practice when it is deflationary in theory. Click below for the full note.  

The Lowdown on Low Vol

In the latest edition of Goldman Sachs’s Top of Mind Podcast entitled ‘’The Lowdown on Low Vol’’ Marina Grushin, editor of Top of Mind, interviews John Marshall, head of derivatives research at Goldman. Marshall says that the low volatility experienced over the last year looks extreme, whether you’re comparing it to the last decade or even the last 90 years. Is this low level of volatility is justified by macro fundamentals? GS studies show that volatility tracks the economic environment even better than the equity market does. So strong growth means low volatility, and weak growth means high volatility. The variables Marshall and his team find most useful are things like ISM New Orders, Personal Consumption Expenditure, and unemployment. While these variables are at strong levels, GS models will still only say that volatility should be at about 11. Volatility is a few points below GS estimates, so there are definitely other factors at play here, argues Marshall in the interview. While Marshall concurs that options-selling strategies have an impact, he thinks the impact is probably too small to explain the gap between the 11 vol GS analysis would predict and the 8 vol that markets are realizing currently. To understand delta hedging and how options-selling strategies could dampen volatility see another Goldman paper: “Are Volatility Selling Strategies Crowded?” Marshall names two additional factors he thinks are likely dampening volatility: low equity volumes and quant strategies. Volumes and volatility are positively correlated: Stocks make bigger moves when there’s huge volume flowing through the market. Equity volume is down about 12% over the past year. So that will definitely put some downward pressure on volatility. In relation to quant strategies, Marshall says many of these strategies aim to profit from noise in the market with mean reversion or value strategies. This leads them to buy laggards and sell leaders in a systematic way. While it’s a smaller direct impact than delta hedging – given the flows into these products – it’s worth watching. Goldman clients can listen to the podcast, or get a the full transcription of the broadcast on Goldman 360.