Even More Bullish on Global Trade

The CPB dataset has emerged in recent years as most analysts’ preferred measure of world trade. However there is a less heralded, equally reliable but more timely data series that is frequently ignored, writes Richard Iley, a macro economist who specialises in Asia EM, and former economist with BNP Paribas. That’s the RWI/ISL container throughput index, which is based on data continuously collected by the Institute of Shipping Economics & Logistics (ISL) from 82 ports which cover around 60% of global freight container traffic. This data comes out almost a full month ahead of the CPB, and the latest data is even more upbeat than last year. The full note can be accessed on the SmartKarma platform.

RunDown on the Runoff

In the latest edition of Goldman Sachs Top of Mind the focus is on the shrinking of the Fed’s $4.5tn balance sheet, where the market is in uncharted territory/ What will this mean for policy, assets, and the banking system is Top of Mind. They feature perspectives from the D.E. Shaw group’s Brian Sack, who helped oversee QE while at the New York Fed, and GS Chief Economist Jan Hatzius. Both expect runoff to be orderly and manageable, ultimately leaving the Fed with a relatively large “terminal” balance sheet size. And both believe that QE will remain a viable option in the Fed’s policy toolkit. GS strategists then outline potential asset implications: a gradual rise in bond yields and contained effects on other markets—even those that were hard-hit during the “taper tantrum” (think MBS and EMs). However, changes to the macro backdrop or to Fed leadership are risks to watch. Beyond the Fed, GS chief economists for Europe and Japan discuss the drivers influencing ECB and BOJ balance sheet policies. GS clients can read the full note on GS 360.

Debt Ceiling Trades

Following today’s passing by the House of a package of $15.25 billion in relief for victims of Hurricanes Harvey and Irma as well as a three-month extension of the government’s funding and borrowing limit, we thought we’d highlight this report published yesterday by TD Securities. They write that would mean a significant pick up in bill issuance, which should put upward pressure on GC and GC-OIS. A wider GC–OIS spread should help tighten 2yr swap spreads. So they recommend entering 2yr swap spread tighteners at 23.9bp with a target of 18bp and stop of 26bp. They also initiate a short duration position via a 3m5y payer spread. TD say that the market is spooked with geopolitical risk, potential damage from hurricane Irma as well as signs of political dysfunction in Washington. They believe that a lot of bad news is priced in and recommend to short duration, but given all the risks ahead, they prefer a limited downside short. TD clients can view this piece on the bank’s research portal.

2018: Will the US be the Comeback Kid?

Numerous political experts think America will run aground, but could this be a replay of 1968? Asks ECR Research in their latest edition of Global Political Risk Monitor. With the growth potential of the US economy in doubt, and most recent job creation figures being a disappointment, not to mention the chaos in Washington, is fuelling pessimism. All signs seem to be pointing towards a depression. But perhaps, as ECR argue here, America is not being assessed on its true merits. On the other hand, optimism regarding the Eurozone has increased since the start of the year, however, the possibility of additional electoral obstacles on the EU’s path, could weaken its current situation, the report says. With a non-consensus view the report’s author, Andy Langenkamp, points out why America may be better placed to withstand any upcoming storms in the medium term. ECR’s research can be purchased on the ERIC platform (2 mins to register for access) or alternatively you can contact the provider directly.

Macro Regime Watch; Summing up all Variables

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 a note published late last week, QI recap on many of the notes they have published this year focused on the overall ‘’macro regime.’’ QI reckon that there are a multitude of macro forces with the potential to influence asset prices, yet investors all too often focus on a small number of these thematic drivers. If you’d like to trial this research, click below to speak to a member of their sales team.

RMB Sentiment Indicators: Inflows Turning to Positive

DeepMacro was founded by macro strategist Jeff Young and data scientist James Cowie. Their process is a merger of their two disciplines, and the offering is unique. Their China-focused product – DeepChina –  launched in July, assesses how China will affect markets, on a daily basis, and before information becomes widely available via official releases. DeepChina incorporates new “Big Data” and processes the data with machine learning techniques. This unique product includes daily updates of the following indicators: Industrial production and manufacturing PMI forecasts, Real estate pricing and sales, and Capital flows pressure. They produce a heatmap that provides an at-a-glance view of the key features of China that affect markets. You might find their RMB sentiment indicator most interesting. Click below to request a trial, or gain access to this note.

The CNY Move: Unwinding the ‘FX Hoard’

Jens Nordvig made his name at Goldman Sachs and Nomura as an economist and FX strategist and was ranked the #1 FX strategist by Institutional Investor from 2010-2015. In 2015 he established Exante Data, a data-driven macro strategy firm. Exante’s China analysis includes proprietary real-time modeling of PBOC intervention, as well as leading indicators of trade flows taken from logistics/cargo companies with a large market share in China. Their framework seeks to interpret capital flows and the fundamental picture holistically, adding a qualitative human interpretation on top of their data analytics. On Friday, they published their latest piece in which Nordvig and David Fritz say that from a flow perspective, they are observing important changes in psychology. Along various dimensions there is evidence of increasing private sector demand for CNY. Since ‘excess demand’ for FX by Chinese residents was the key source of BoP tension previously, this psychology shift is important, the report says. If the FX hoard (defined as past excess FX accumulation) is truly unwinding, then one would expect more persistent CNY demand. Given the positive feedback loop between price and flow, this is now the path CNY is on, the report says. Looking ahead, it will be crucial to observe if the PBOC is starting to step in again (with FX buying for the first time since 2014), and/or if the PBOC will also set the CNY fixes higher than standard models (as occurred on Friday). Bottom line, all this stuff matters, and not just for the CNY (and CNH), it is also a key force for $/Asia. If you’d like access to this piece, click below to contact Exante directly.

Measuring China’s Changing Economy

In an effort to increase transparency on the structural changes underway in China’s economy, the MasterCard Caixin BBD China New Economy Index (NEI) was established in 2016. Caixin Insight have just published this note that looks at the latest reading, which shows services are making a greater contribution to economic growth. The NEI uses big data analysis to track changes in contribution to overall economic activity in China’s New Economy including 1) Energy Conservation & Environmental Protection, 2) New IT & Information Services, 3) Biotech, 4) Advanced Equipment Manufacturing, 5) Renewable Energy, 6) Advanced Materials, 7) New Energy Vehicles, 8) High-tech Services/Research and Development, 9) Financial & Legal Services, and 10) Culture, Sports & Entertainment. In addition to providing a high level view of ongoing structural changes in the balance between the Old Economy and New Economy, the NEI dives deeper into the capital, labor and technological inputs driving change across the New Economy and within new economy sectors and industries. Well worth adding this measure into your framework. Click below to request access to Caixin Insight’s report.

South Korea – Significant Market Moves Brewing

Given the gravity of the risks on the Korean peninsula amid the North Korean leadership’s increasingly belligerent stance, it is difficult to have any concrete views on South Korean assets at present. That said, in this report BMI Research show that there are some interesting trends developing, and the technical picture on both the KOSPI and the KRW may offer some guidelines as to the markets’ future direction. BMI produce an impressive array of EM research, with a particular strength in Asia. Click here to request access to this report.

German Elections: Coalition Scenarios

Ricardo Garcia from UBS’s Chief Investment Office writes that volatility of the polls in the upcoming German elections will increase – where most notably he expects that coalition scenarios will put Finance Minister’s position at stake. Even though Angela Merkel was regarded as the winner of last weekend’s TV debate, Martin Schulz performance exceeded viewer’s expectations, says Garcia. He expects polls to exhibit greater volatility going forward as the TV debate flows into the polls and as the German school holidays end this week. Multiple coalition scenarios imply different economic consequences for Germany as well as partly opposing consequences for European integration, the report says. Potential coalition partners may seek the finance minister’s post, which could affect the stance on the Eurozone periphery as well as the choice of the ECB president in 2019, argues Garcia here. In addition, CDU/CSU’s future coalition partner(s) may influence the euro, equities and Eurozone bond yields. For the full note, UBS clients can access on UBS Neo.