The Move Into Cash May Be Just Beginning

The rare combination of higher bond yields and lower equity prices across developed markets is becoming increasingly likely as risk perceptions change amid extreme market valuations, says BMI Research. Indeed, cash is likely to become increasingly attractive due to its safety as central banks move to normalise monetary policy and asset values fall creating the appearance that money has simply disappeared, the report says. Click here to request access to this report directly from BMI.

Three Reasons To Be Long Value Over Growth Here

Deutsche Bank’s Binky Chadha and his team have just published their latest asset allocation piece where they look at the three reasons to be long Value over Growth currently. The context for this piece is that the post-election equity market rally has been characterized by large rotations, first into Value (15pp relative outperformance) then into Growth (15pp), according to the research. Chadha adds that these rotations ran deeper than just differing sector compositions, with sector neutral baskets displaying similar performance. DB clients can read the full note on the bank’s research portal.

Real Growth, Not Inflation should set Fed Policy

 The Fed, along with many market participants, appears almost obsessively focused on core inflation sitting below 2%, as if this is the sole measure of economic success, writes Steve Blitz from TS Lombard. Blitz argues that the Fed and others should now have realised that the inflation forces are not with them -and are unlikely to appear. They shouldn’t be too disappointed. There is, in truth, no magic inflation rate to make an economy work better. The Fed should drop the inflation mantra and choose what matters, real leveraged capital expenditure, as the signal to raise real policy rates above zero. Click below to request access from provider directly.

Global Liquidity After-QE: The Great Unwind or the Great Rewind?

Central Bank Balance Sheets could fall by as much as one-third over the next few years. Some have labelled this the ‘Great Unwind’. Cross Border Capital, the experts on global liquidity, expect there to be a significant fall-out as Central Banks withdraw their previous QE support. The impact may not be immediate, but in the US it will adversely affect both the US dollar and the US credit markets, say CBC in this report. For instance, they say US Treasuries already look expensive and prevailing negative values of ‘real’ term premia suggest they too may suffer. Equities will be an indirect casualty of negative QE via its effect on the other markets, particularly credits, which appear unambiguously at risk, CBC also add. Overall the report concludes that systemic risks are rising and another major policy error may be brewing. This research can be purchased on RSRCHXchange. Alternatively contact the provider.

Underestimating Risk of Another Hike

Consternation about the Fed pushing ahead with policy normalization appears mostly centered around the recent pull back in core inflation. RDQ Economics’s own view is that policy is still behind the curve. They think the Fed is unlikely to follow through with another rate hike in September unless core consumer inflation measures start to edge higher again. However, RDQ believe that core inflation will move higher again in the coming months (see report) and given a labor market that has overshot the Fed’s objective, markets are underestimating the odds of another rate hike this year. Furthermore, the start of balance sheet normalization may be less sensitive to the latest data as long as deflation risks remain low (and Yellen’s view that recent readings on inflation have been idiosyncratic, suggests she believes this is the case). This research can be purchased on RSRCHXchange and ResearchPool. Alternatively contact provider directly.

Oil; Tale of the Tourists

Royal Bank of Canada oil strategist Michael Tran has written an interesting piece here on the behavioural aspects of oil markets that we think merits some attention. Tran argues that we’ve entered a new era in the oil market. This time, participants aren’t focusing on new drilling techniques, innovations in technology, or improving efficiency gains. Instead, we have entered a period in which oil prices can dislocate from oil market fundamentals for longer periods of time than historically has been the case. Current market sentiment is extremely binary and the herd mentality is wickedly strong. Put simply, says Tran, the sheer volume of paper contracts being traded is occurring at a higher notional level, turning over at a faster pace by a growing number of traders who are less informed on the inner workings of the crude market than previously was the case. This report takes the reader through how energy markets have evolved over recent years and highlights how outsized changes have impacted oil prices and volatility.  He highlights several key examples of data releases that are frequently misinterpreted by “tourist traders” RBC clients can view the full note on RBC Insight.

Re-issuance Risk in China’s Bond Market

CreditSights’s Matthew Phan takes a pretty granular look at China’s corporate bond market focussing on upcoming maturity profiles of Chinese corporations. This is useful given that there’s RMB 1.4 billion of commercial paper due to mature in the remaining months of 2017, with the largest issuance from the manufacturing, utilities and mining sectors. Issuers of longer­-dated bonds might not face a big increase in refinancing costs but they could instead face the risk of being entirely unable to issue. The real estate sector in particular has a sizable amount of bonds coming due or turning putable in the remaining months of 2017 but gross issuance has been negligible in the last few months due to regulatory restrictions, say CreditSights. Other sectors with large amounts of issuance coming due include manufacturing, conglomerates, construction and mining. Phan also looks at what the broader macro impact this might on the China economy. Click below to request access to this excellent note from the provider directly.

The European Banking Job; Italian Style

David Hendler from Viola Risk Advisors continues to produce some of the best research on the European banking system and the risks it poses to the wider economy. He’s followed the Italian banking system in some detail and so we highlight his latest piece that looks at the weekend bailout of Veneto Banca and Banca Popolare di Vicenza. Hendler writes that rather than the Basel III and bail-inable capital rules standing as firm guidelines for European and non-European investors, bank intervention is proving to be specific to each troubled bank situation on its own conditions. This creates it’s own set of problems for the sector, he adds. That’s because it makes it very confusing, not uniform, and difficult to predict. Thus, it will increase the cost of debt and equity capital for all European banks whether large banks or small banks. Click below to request access to Viola’s latest insights on European banks and take a free trial.

Emerging Market Risk Elevated but Stable

CrossBorderCapital is a London-based independent research firm with an expertise on Central Bank and public market liquidity. In this month’s EM Market Risk edition, CrossBorder analyzes their Emerging Market Composite Risk Index, a forward-looking indicator, based both on the quality and quantity of liquidity and credit flowing into national financial markets and on how ‘crowded’ investors are in risk assets. Looking into country-specific risk warnings, Russia and Poland show positive signs while an exposure in South Africa or Turkey should be hedged.

The Fed’s Dual Dilemma

Eight years into the US economic expansion, the unemployment rate has fallen below the Fed’s estimate of the structural rate, yet inflation remains well below target. These conflicting signals about the health of the business cycle have persisted for some time, but have become ever-more glaring following a third consecutive disappointment in inflation. In the latest edition of Goldman Sachs Top of Mind series, the Goldman Research team ask two experts if the Fed should stay the course on policy normalization despite weak inflation: former Minneapolis Fed President Narayana Kocherlakota (no) and GS Chief Economist Jan Hatzius (yes). Goldman assess the risk of inflation expectations destabilizing (low), the outlook for key components of core inflation (mixed), and what might drive inflation higher (wages). They then dig into the possible deflationary effects of online competition and price transparency with Roberto Rigobon, MIT professor, and express their own skepticism that these and other factors are keeping inflation structurally lower. GS clients can view the full note of Goldman 360.