Yemen: Saleh Death Deepens Conflict

The death of former Yemeni president Ali Abdullah Saleh yesterday at the hands of Houthi militiamen closes down already narrow prospects for a smooth exit from the Yemen war for allies Saudi Arabia and the UAE, writes Petroleum Policy Intelligence. By siding with Saleh against his former Houthi allies in recent days – a clear effort to find a pathway out of the near three-year conflict – the two Gulf Arab powers fatally exposed Saleh and left the army units loyal to him under pressure to come under Houthi leadership. PPI write that if the coopting of Saleh was intended to box in the Iran-backed Houthis, it has done the opposite and handed them a significant political gain. An imminent diplomatic breakthrough has been turned on its head, keeping energy risk elevated in the peninsula, with Houthis threatening shipping and land-based infrastructure.

Changing Media Industry Dynamics Impact Investment Research

Jamie Davis from OM Research continues to produce unique research, focussing on important themes that few other analysts bother to look at. He has just produced a two part series that looks at, by extension of the digitalisation of the media industry could impact the investment research market. Davis first describes how the change from print media to digital media has been much more profound than just varying information distribution methods. Different editorial standards and journalist operating practises have increased vulnerability to PR manipulation and fake news stories. When one puts this into the context of the research market and the structural changes coming from MIFID II, the new landscape has the potential for substantially increased equity mispricing, says Davis. He demonstrates that changes in banking research coverage have combined with moves in media and PR industries to skew the ratio of Professional Optimists to Professional Pessimists in favour of corporates. Indeed, healthy scepticism is in short supply and MIFID II could accentuate the situation. Banks’ business models are changing but not exclusively to the benefit of investors – reputation risk could be stored up on the buyside, OM Research conclude.

OPEC – Market Volatility Set for a Boring 2018

Arguing a steady state low volatility for the oil market next year, Chris Kettenmann, Chief Energy Strategist at Macro Risk Advisors, suggests long oil/energy and short oil market volatility into early December simply to not to fight backwardated market conditions. This actionable publication discusses the implications of the extension agreement in the outlook for oil futures market, equities and IG/HY energy credit markets in 2018.

From Block Chain to Daisy Chain and Beyond

Denying Bitcoin’s appeal is both near-sighted and infantile, writes Danielle DiMartino of MoneyStrong. Investors worldwide are justified in their anxieties about fiat currency degradation care of the quiet and corrosive currency wars being fought to sustain an impossible debt build, a race to the bottom with no precedent. In the context of bubbles, it’s the very global nature of Bitcoin that makes it so difficult to disavow, says DiMartino. And yet, bubble it undeniably is, she adds. Indeed, the more pressing question on investors’ minds should be what happens in the aftermath of Bitcoin’s bubble bursting? What will the contagion effects be? What other frothy asset classes will it take down with it? Or better framed, what asset classes will be spared? Pivoting to what the Fed might do in 2018 in terms of raising rates, DiMartino asks if the Bitcoin of today a mere technological dress rehearsal for Fedcoin and its central banking cryptocurrency brethren of the future? This idea she explores in this note.

Irish Stalemate Makes Sterling Rally Premature

The Irish question has often ambushed British leaders over the centuries, and history is now repeating itself in the Brexit process. Sterling is liable to be caught in this ambush in December, writes Chris Granville and Constantine Fraser from TS Lombard. Indeed, markets are mispricing the near-term impact of the Brexit-Irish border nexus, they say. The fact that the border issue is non-negotiable as far as the ROI is concerned threatens to scupper the prospect of a transitional deal with the EU, whilst unfavourable outcomes on both sides also threatens political stability, hence the greater risk of sterling downside that is perhaps under appreciated, the report says.

Brexit: The State of Financial Services Contingency Plans

Will the UK improve its exit offering and make “sufficient progress” by the December EU Summit? Nomura think it will, but in this piece they comment on what this will mean for financial firms in the UK if progress remains frustratingly difficult or if a transition deal is spoken about, but yet to be agreed by March 2018. For most firms a quick agreement to a transition deal would be welcomed and would delay their need to trigger contingency plans. The majority of firms in surveys say that March 2018 is the longest they can hold out to before applying their contingency plans. Something the ECB not the BoE and PRA says has not been conducted at pace just yet.

Japanese Economy Continues to Overheat

The Japan recovery story has Gaines a lot of traction in recent months, and indeed, some Japan watchers conclude it is becoming a consensus view. It’s sure to be a major investment theme in 2018. Japan Macro Advisors review the latest release from the Cabinet Office, which estimates that the output gap of the economy in the 2017 July-September to was 0.5% of Japan’s potential GDP. This means that the economy is operating beyond its sustainable capacity, although only by 0.5% for now. The labor shortage problem, a popular theme in Japan nowadays, is one evidence of the ongoing overheating, says JMA. As Japan continues to grow above its potential growth rate of 1%, it will escalate. As the BoJ governor Kuroda often stresses, the overheating is a necessary step for Japan to produce inflation. In JMA’s view, it is imperative for the Japanese policymakers to keep stimulating the growth in the next 2 years to raise the output gap even higher and faster, the JMA report argues. As the experience of 2008 shows, a negative shock in the economy can quickly cool down the output gap and the hope of reflating the Japanese economy, the report adds. For Japan to minimize the risk of falling back to a severe deflation, it needs to raise its inflation soon so that the country’s long-term inflationary expectation could be adjusted up. The chance of reflation is increasingly now or never and such sense of urgency are driving the policymakers in Japan to maintain their aggressive easing measures, despite the criticism for its side-effects, the report concludes. If you’d like to discuss this further with JMA, click below to contact them directly.

What Does the Yield Curve Really Tell Us?

The slope of the yield curve is a widely-used predictor of the future business cycle. Yet investors and economists are unclear about why this occurs and which specific slope measures work best. So in a two-part series Cross Border Capital seek to understand the curve better. In part 1 they focus on the risk-taking channel of monetary transmission and argue that bond term premia really matter: not just a single maturity combination. In part 2 they focus on two other prescient term structure measures to support their argument that the distribution of term premia matters: the size of the curvature hump and its lateral position along the maturity axis. CBC argue that these are alternative and often better predictors of the business cycle than the yield curve slope itself. These notes can be purchased on RSRCHXchange, or alternatively, contact the provider directly to discuss access.

A Closer Look at US2s10s Curve

At a time when a lot of market debate has focused on the dynamic between interest rate differentials and spot FX, and whether the regime is shifting, the two custom Qi models below attribute a large part of the recent yield curve flattening to increased short-dated US Treasury supply and a weaker USD. Quant Insight’s framework looks to understand asset price movements and valuations by distilling signals from its quant models that cover thousands of securities in real time. Their secret sauce is that they use algorithms to untangle and isolate which macro variables (typically correlated) are driving asset prices. Furthermore, their models can identify which assets will be most sensitive to changes in particular macro factors. The Quant Insight product is a unique and value for money offering, click below to contact them directly for a demo.

Greek Banks, Tragedy to Triumph?

RealVision TV is the Netflix of finance and features interviews with some of the world’s top investors and researchers. They recently produced a special feature on Greek banks. Mark Yusko, a regular contributor to RealVision, speaks to the analysts that know the Greek banks better than anyone to assess the risks for what could be the big trade for 2018. The feature includes interviews with Thanos Adamantopoulos, managing director of AXIA’s Equity Capital Markets group in Athens, and an expert on Greek banks, Michael Nicoletos, co-founder and CIO of ‎AppleTree Capital, Kyle Bass of Hayman Capital and Mark Hart of Corriente Advisors. If you subscribe to RealVision, or take a free trial to view the feature.