Report cards are in vogue this time of the year, Goldman Sachs commodity strategists, Jeff Currie and Hui Shan just published theirs and it’s a poor one for the commodity sector. The asset class has returned -10% year-to-date, underperforming other asset classes. The negative influence in class has been supply, and has been the driving force behind the sell off. Key lessson learned? Currie and Shan reckon that trading beyond the current supply cycle is self-defeating because higher prices inevitably lead to higher supply. They therefore characterise their overall view as cyclically bullish, but structurally bearish. ”Lower for longer” New World Order. GS clients can read the detailed note on Goldman 360.
Standard Chartered not only provide breadth in the EM research space, but also depth, producing, on occasion, interesting studies on economic development initiatives across the EM space. In this excellent piece they delve into the economic value of girls education, which they say yields some of the highest returns of development investments. The two stand out regions are Sub-Saharan Africa and South Asia. The killer stat in this piece is that each additional year of girls’ schooling boost long-run growth by c0,6ppct per year. StanChart clients can get the full piece via the bank’s research portal by clicking the below link.
The issue of the narrow breath of the advancing US equity market, the overvaluation of US tech stocks and the magnitude of the inevitable pullback have been well covered. Less well covered is the China version of this same state. MRB’s Adam Wolfe has done an excellent job here in this report published last week. He writes that nearly all of China’s outperformance against the EM benchmark this year has been attributable to the technology sector. China’s technology sector is unique in that it is dominated by internet companies that largely derive their earnings domestically. In fact, three companies account for about 85% of the market value in China’s technology sector and more than 95% of the internet software & services industry – Baidu, Alibaba and Tencent (the BATs). US Tech stocks have provided a tailwind for Chinese stocks, so it’s not a big leap to assume that a correction is due also in Chinese tech stocks. But there’s some nuance here, writes Wolfe. While the correction, combined with an economic slowdown, are likely to halt the massive outperformance of China’s technology sector, robust earnings growth should mute the relative drawdown risk to these stocks. For access to the full note, click below to contact MRB directly.
Macro Risk Advisors continues to impress with its extensive body of research on volatility and risk management. In this piece, Pravit Chintawongvanich, MRA’s head of derivatives strategy, does a deep dive into the momentum strategy. This strategy has historically proved to be a great hedge against equities, and investors have done well from the trade in previous major market turning points (1987, Dot.com bust, 2008), because of its low correlation to equities. However, something seems to have fundamentally changed, writes Chintawongvanich. In fact, 2017 is on track to be worst year ever for trend following, which also coincides with continued growth in AUM of CTA’s – the key participants in trend following strategies – which has grown by 75% since the GFC. Thankfully, Chintawongvanich doesn’t leave the reader hanging, and he attempts to provide a explanation of what is happening here, arguing that the AUM growth of managed futures, central bank volatility suppression, low volatility environment could be contributing to poor trend following returns. Also see this related piece written by MRA founder, Dean Curnutt, where he says that amid the optically sanguine risk environment he worries that the Fed misunderstands how profoundly it impacts the decision-making of investors, forcing them into trades with a very low margin for error. If you would like access to the Chitawongvanich piece click below to request it from MRA directly.
In the latest edition of “Who is buying Treasuries, Mortgages, Credit, and Munis?” The Deutsche Bank US economics team have produced a series of fantastic charts that show foreigners have less appetite for US fixed income and more appetite for US equities. DB clients can get access to this report the research portal.
Callum Thomas, from Top Down Charts, produces a comprehensive weekly macro report, which consists of charts and data driven primary research with a global macro and multi-asset scope. In this week’s edition he covers several macro themes. Firstly, Global growth and the reflation, arguing in the context of a washout of reflation euphoria and a benign global growth outlook, risk assets are set to outperform bonds. Secondly, the US dollar, where Thomas’s charts indicate that it’s too early to call the end of the USD bull market. Thomas addresses the issue of whether equity markets are in a dot.com bubble. His analysis (Charting market cap weights against earnings weights) dismisses the idea that the current bull market is another dot com. Finally more broadly, he provides some excellent analysis on global equity valuations, and the increased importance of country/region selectivity in a market where valuation are expensive. Top Down Charts can be purchased on ERIC (2 mins to register), or on AlphaExchange (click below, 2 mins to register). Alternatively contact the provider directly.
The global bond sell-off has completed its second week, and while the moves so far remain trivial by the standards of 2013 and 2015 tantrums, the frequency of such back-ups has risen, writes JPMorgan’s John Normand. When global investors first began discussing the beginning of the end of easy money four years ago, a rise in US Treasury yields of 20 to 50 basis points (about 15 to 40bp on global rates as measured by the JPM Global Bond Index) occurred about once a year. Since 2016, such pullbacks are coming about every six months, Normand shows in this report. He goes onto highlight a few consistencies around these episodes, particularly for volatility, the carry trade and the gold price. Even if such moves remain just a semi-annual event, the risk is that they become more intense if inflation rises. Hence the tactical bent to almost all of Normand’s trade recommendations he took into mid-year, which combine token exposure to carry with opportunistic longs in rates/FX/commodity volatility and in the dollar. The most obvious consistencies have been the declines in gold and in high-yield currencies. Gold’s depreciation has been textbook since it is a zero-yield asset, which cautions against owning it as a hedge against geopolitical risk (like Korea) if a concurrent macro theme is global rate normalization. Bullion’s sensitivity to rate shocks that began outside the US (spring 2015, summer 2017) highlight the contagiousness of non-US events too, even if US-driven moves tend to generate much larger declines in the gold price per basis point move in yields. Meanwhile, high-yield currencies continue to exhibit little immunity to global rates selloffs, despite an improvement in many fundamentals. JPM have been cognizant of this pattern for some time, which explains our reluctance to be long high-yield currencies outright when G3 money market curves looked unusually flat. Relatedly, volatility has almost always risen in response to monetary policy rethinks. For currency volatility – as measured by JPM’s VXY index of 3-month implieds – trough-to-peak vol rallies during previous bond market sell-offs have ranged from 1% to 3.3%, and usually corrected the extreme cheapness signaled on our fair value models. JPM clients can view the full note on Morgan Markets, entitled: ”What’s worth learning from increasingly-frequent bond market sell-offs.”
Neil Azous explores the new opportunities developing in currencies and European fixed income in this note. Firstly he looks at the recalibration of funding currencies in the face of a change in tone from central banks of late and then which currencies to trade on crosses versus the sole funding currency, the Yen. Azous makes an interesting argument in favour of Euro strength, putting the recent rally into perspective.
The real problem is Europe where irresponsible ECB policies have created what could be the biggest bond bubble in history, writes Julian Brigden from MI2 Partners . A bubble that is finally being challenged by the post Sintra self-congratulatory comments of Poloz, Carney, but most importantly, Draghi. All of whom, in a move entirely consistent with the group think that has dominated markets since the GFC, appear to believe they’re now on the cusp of cracking both their growth and inflation conundrum, the MI2 report says. In normal circumstances, this would be great news for markets, says Brigden, but unfortunately, after such an extreme manipulation of asset prices, there’s a fear that the process of normalisation will be extremely volatile. Indeed, while it’s taken a few days for the bond bears to react. MI2 think that a tailwind of solid growth and especially European inflation data, which their models suggest is set to materially accelerate and will stiffen their resolve. MI2 re-initiates shorts in Bund and Buxl with some ambitious targets, a good 75 bps above current levels. Purchase this report on RSRCHXchange, alternatively contact provider directly.
MTS was this year’s winner of Best Specialist Research at the Technical Analyst 2017 Awards and has a strong following among many large buy side firms. Their analysis points a turning point in the relative performance of US equities over the RoW equities. One key catalyst is the Nasdaq, where the recent correction have arrived on queue, and their signals point to one last rally to take it back to 6,125 (the last phase of a 15-year bull market), before a move down to 4,000. This would almost certainly see the S&P500 drop back to 1,800, the first leg of a bear market. Click below to request access to this piece.