Japan: Fiscal Policy Heats Up as Election Looms

Jeff Uscher has spent 40-years working in Japanese markets, he speaks the language, catches the nuances, and covers everything from corporate Japan, to politics to the macro. For those investors who dip in and out of Japan, his daily coverage represents excellent value as your eyes and ears into what’s going on in Japan. Uscher follows fiscal policy closely, and he’s put together this note on some of the big fiscal drivers that are emerging in Japan in the coming years. Jeff says the big debate shaping up is how to fund free education for all. The most likely outcome is to use the increased tax revenue from raising the consumption tax from the current 8% to 10% on October 1, 2019, to fund education or education bonds. This idea is still in the very early stages, says Uscher, but,as he writes, it is a core element of the LDP’s platform for the Lower House election scheduled for October 22.  Uscher has also published an extensive paper on Japan’s pension system, which will have profound effects on Japan’s fiscal policy. Click below to request access to both notes.

The Fed’s Existential Crisis

Much of what has been taken for granted about the Fed is under threat, writes Russell Jones from Llewellyn Consulting, a London-based political and economic research firm. In this note Jones says that the Fed is essentially faced by three sets of overlapping challenges. Unfamiliar policy complexities, human resource issues and institutional uncertainties. Jones argues that challenges mean the Fed is now under threat, and at a time when the economic outlook is opaque. This brings with it the risk of policy error and short-term economic and financial turbulence, not just in the US, but globally. This note can be purchased on RSRCHXchange, or alternatively contact the provider directly.

The Fall Hurricane Season and Energy

For more than 40 years the Browning World Climate Bulletin has provided some of the most accurate regional climate information and forecasts. The bulletin’s popularity has largely been centered within the commodities space, but as we are seeing increasing volatility in weather patterns, their insight will naturally appeal to a broader audience. Their latest edition focuses on the Autumn hurricane season and energy. They show how Hurricane Harvey and the eruption of Alaskan volcano Bogoslof will impact the fall and winter energy outlook. They also provide an outlook for the harvest season, where they get an early picture of what 2017 agricultural production will be. For instance they observe that late plantings have delayed harvests in the corn-belt, highlighting that neutral ENSO and IOD mean regional weather trends have a greater influence on a country’s weather. They conclude that this year should show us what “normal” agriculture production will look like going forward. If you’d like access to this note, click below.

Reading the Commodity Rally

Rising commodity prices are running out of fundamentals to support the 18 month long rally, writes Konstantinos Venetis from TS Lombard. Much of the recent rally is a response to a robust economic growth in “locomotive economies” (US, China and Eastern Asia) coupled with a successful supply tightening policies in China, says Venetis. With sovereign bond yields trending downwards across the major global economies, in search for volatility investors have satisfied their risk appetite through extensive rallies in EM FX, EM Equities and industrial metals. But growing concerns about a potential forthcoming dollar stabilisation and a slow down in Chinese property investment in 2018 all highlight developing downside risks for commodity prices in the months to come, he concludes. Click below to access this piece via a free trial.

A Disparate Scene Behind Benign Bank Headlines


How healthy are China’s bank? Well there’s little in the numbers to suggests sustainability in profit or strength in earnings, writes Daniel Tabbush of The Tabbush Report, a specialist research firm focussed on Asian financials. Tabbush writes that a detailed examination of their disclosures invariably offers a dimmer picture of credit quality than headline figures suggest. He finds that the most objective view is to use the traditional cost measure because it lends more insights to credit quality and key banking practices, and these paint a poor picture. Bottom line, China banks’ income growth is not sustainable at current rates. Click below to request access to the full note.

China: The Window For RRR Cuts Has Yet to Open

Recent RMB appreciation against the USD may have raised market expectations of a reserve requirement ratio (RRR) cut. Caixin Insight Group write that the PBoC might lower its RRR for banks on principal, but in the short term, the window period for RRR cut has yet to approach. They highlight 3 key reasons here. 1.) Financial risk control, not FX depreciation potential, is holding the PBoC back from cutting. 2.) RRR cuts do not signal a “neutral” approach. 3) Economic fundamentals and real interest rates do not favor a RRR cut. Caixin Insight Group is one of China’s leading private economic and market platforms, focused on research, data and index business. Their research benefits from their local knowledge, and translates well to the page. Click here if you’d like to view samples of their research.

Are the Dynamics of Brexit Negotiations About to Change?

Keith Grindley is a veteran macro strategist who has established a consistent track record for making prescient market calls. For instance in early 2017 he recommended trades on shorting French bonds, long euro trades, and the rally in US yields. He also seems to have some edge in UK macro, beating market consensus on the last two CPI prints. So what he has to say on the economy. markets and Brexit is worth reading. In this note published last week, Grindley covers the UK economy, where he thinks inflation is peaking. and the economy is strengthening, while he argues that the changing economic fortunes of the UK (improving) and Europe (worsening, particularly German auto makers) could completely change the dynamics of the Brexit negotiations, putting the UK in a stronger position. This piece can be purchased on ResearchPool, alternatively contact the provider directly for access.

China: Focusing on the Right FX Metrics; REER

Diana Choyleva founded Enodo Economics last year after 16-years at Lombard Street Research, where she was chief economist and head of research. Enodo is primarily focused on China. This piece provides a slightly different angle to the recent surge in the CNY. Choyleva writes of how the rising CNY has had a positive economic impact, fueling China’s export machine, while at the same time muzzling President Trump’s threats to slap tariffs on Chinese exports. It might seem counter-intuitive to say that – given the CNY has strengthened – but Choyleva points out that it’s the real effective exchange rate that matters for exports, and Beijing has been able to push the yuan’s nominal and real effective exchange rate down significantly since it altered its exchange rate regime in August 2015. But there are risks on the horizon, Choyleva writes. To her mind, Beijing has managed to preserve the veneer of economic stability, while investors have continued to look at China through rose-tinted glasses. This perceived easing in the structural growth slowdown may have inverted the direction of causation, argues Choyleva. In other words, it could well be an eventual strengthening of the dollar that pulls the rug from under China and shatters the market’s belief in its stability. If you’d like to read the full report, or trial the Enodo research, click below.

How to Read the Rally in Industrial Metals

The summer surge in industrial metal prices goes beyond fundamentals, writes Konstantinos Venetis from TS Lombard. For example, Chinese capacity cuts have amplified the lift from a weak dollar. This report seeks to address some of the broader macro questions arising from this rally. Venetis argues that rising metal prices point to higher inflation breakevens and bond yields going forward. Click below to request access to this report from TS Lombard directly.

VIX: The Mullet Trade

For those of you old enough to remember, the mullet hairstyle (short at the front, long at the back) was all the rage back in the 1980s. Remember? Macro Risk Advisors, the vol and risk management specialists, have taken this infamous reference and applied it to their latest vol trading strategy. They observe that we are starting to see a pickup in longer dated vol, even though we have had only a small increase in realized vol and so favour the “Mullet Trade”: Long back end VIX, short front end VIX beta-adjusted MRA say that historically, the “Mullet Trade” works well when the curve is relatively stable with front end steeper than the back end. If you’d like access to this report, or trial their research, click below.