Fed Balance Sheet Wind Down Coming Sooner Than You Think

With rates normalization now being “well under way,” the prospect for the ending of the Fed’s balance sheet reinvestments is moving onto the radar of markets (Rate normalization being a stated precondition). John Ryding and Conrad DeQuadros of RDQ Economics expect that Yellen will probably discuss the topic at her press conference this week, but they also think this next step on balance sheet policy is likely to come sooner than many think (later this year rather than in 2018). In this note they discuss many of the key issues related the the Fed balance sheet. RDQ’s work is available on SmartKarma, or for purchase on RSRCHXchange, ResearchPool and AlphaExchange.

Hard Data is Perky but Unsustainable

In their monthly roundup, Julian Brigden and the team at MI2 Partners note that there have been continued upside surprises in both growth and inflation data. Although the growth indicators have been heavily skewed to ISM and other sentiment based indicators, the reality is that the so called “hard” data is also finally starting to perk up. This isn’t sustainable, say MI2. The global economy is steadily approaching a natural peak in terms of some of the key cyclical data. This is one factor, together with a significant tightening of financial conditions courtesy of higher rates, that suggests we are approaching a tipping point, concludes Brigden. The other emerging headwind is the apparent newfound hawkishness of the central banks, which is now threatening the reflation trades, he adds. This piece can be purchased on ResearchPool and RSRCHXchange. Alternatively contact the provider directly.

The Growing Importance of Social Media on Political Sentiment

If the Brexit and US presidential votes have taught us anything, it is that one should be suspicious of models that draw conclusions about voting-box behavior from (even very good) polling data, writes Jeff Young, co-founder and chief strategist at DeepMacro, a research firm that places big data and social media analysis at the heart of its process.  Voter turnout on the day, and willingness to “hold the nose” and swing support to a different candidate, are matters of emotion as much as reason, says Young.  When markets miscalculate the importance of the emotional dialogue between candidates and voters (as measured by their message intensity, viral influence, and sentiment), one should not be surprised by the realization of “shockingly improbable” election results. DeepMacro have just initiated their coverage of the France presidential elections. As a single source, Twitter is far from a microcosm of the general voting population, says Young, given that it skews the young, and is negative in sentiment.  So DeepMacro seeks to measure the twitter discussion around each candidate, such as message rate, virality, and sentiment/tone, that shed light on how effectively these candidates are communicating and how their followers react to real world events such as rallies, scandals, and press bombshells.  We want to know: can they get voters’ attention, and can they hold it?  If you would like to look at this product in more detail, click below to contact the provider directly.

Overdrive – Global Future Mobility Primer

As part of BAML’s work on their ”A Transforming World,” series, the thematic investing research team have just published a primer on investing in a new Innovation-focused theme – Future Mobility. These pieces are always hugely informative and very well researched. The vehicle transport industry is a $7 trillion market, and as BAML point out is highly inefficient and unsustainable. It’s in need of a fundamental rethink with change set to be catalysed disruptive technologies and business models, rapidly evolving consumer preferences, and regulatory pressures. BAML identify 4 game-changers: electric, autonomous, connected, shared. BAML clients can view the full note on the Mercury platform.

Brexit – On Your Marks

With Article 50 soon to be triggered, only now will many people come to appreciate fully what is at stake, writes John Llewellyn and Russell Jones from Llewellyn Consulting. Llewellyn and Jones have become increasingly of the opinion that the proponents of Brexit underestimate – or unwarrantedly dismiss – the negative effects that leaving the Single Market will have on trade and investment; and they exhibit undue optimism about the scope for replacing lost exports by means of quick new comprehensive deals with countries elsewhere. Even more importantly, they take far too lightly the potential for political fallout. Hence in our judgement they seriously underestimate the damage that Brexit stands to do in the coming five to ten years. It is against this background that, in the face of the imminent triggering of Article 50, they interpret recent events and prospects in this note. Purchase this piece in RSRCHXchange, alternatively contact provider directly.

US Immigration Policy as Nation Edges Towards Demographic Cliff

Dent Research are specialists in understanding the power of demographic trends and purchasing power, and how that can help identify economic and market boom and busts. In this piece they focus on US immigration policy, and what its economic impact could be under Trump’s proposed plans. In short, they say the US is facing an economic cliff and the only thing that can save it now is an intelligent approach to immigration that recognizes the real economic benefits derived from America’s immigrant population. Dent backs his arguments with the most up-to-date immigration dataset from the Pew Institute. IF you would like access to this report, contact the provider directly.

What’s bothering US Energy Stocks?

It has also been widely believed that energy stocks would be among the biggest beneficiaries of President Trump’s deregulation agenda. But in 2017 they have underperformed. This is unusual given that they normally track WTI prices, and that correlation seems to have broken down. MRB seek to explain this disconnect, and provide their outlook for US energy stocks. For access to this report, contact the provider directly.

The Argentinian peso – a ~20% return, Non-Correlated Trade

Too good to be true? Not according to Des Supple from Event Horizon Research. He has a very high conviction idea here for investors to be short-USD/ARS. This trade is a direct beneficiary of the Argentinian government implementing – outside the auspices of the IMF – a classic stabilisation plan, one that requires monetary policy to be tightened such that it stabilises and strengthens an exchange rate following the ending of an unsustainable FX peg.  He explains that the long history of EM financial crisis suggests that when a country implements this policy framework, and as long as there is sufficient political will to absorb the hit to economic growth – which there is in Argentina – then investors can harvest the outsized risk premia that is usually embedded in FX forward curves. They can also often expect capital gains from currency appreciation. The market’s scepticism towards the ARS is fading and the currency is experiencing growing investor focus. While Supple concedes that the attractiveness of entry positions has already been reduced , a short-USD/ARS position still has the potential to deliver 15-20% returns over the coming 12 months. This note can be purchased on both RSRCHXchange and Alpha Exchange. Alternatively contact EHR directly.

Fed Funds Less Sensitive to Balance Sheet Normalisation

Goldman Sachs Chief Economist Jan Hatzius has just published a fairly hawkish note on US monetary policy where he brings forward (Expect March hike) his forecasts for further hikes to June and September (versus September and December previously). In addition, he has changed his forecast for the start of balance sheet normalization: he now expects the committee to announce an end to full reinvestment in Q4 2017, instead of mid-2018. While that may sound presumptive, given that the discussion has barely gotten underway – and it is possible that the current Fed leadership will leave this decision to their successors –  Hatzius reckons establishing an early “baseline” of gradual runoff might reduce uncertainty and stabilize financial conditions during the 2018 handover. One of the key takeaways from Hatzuis here that US rates are unlikely to be as sensitive to the balance sheet normalisation process as they were during the ‘taper tantrum,’  as such he is fairly hawkish on the medium term funds rate to the forwards. Goldman clients can view the full note on Goldman 360.


Presaging a Tightening of China’s Monetary Conditions

Sean Darby, Chief global equity strategist at Jefferies has just published a two-part series of pieces on China entitled; ”China: The Road Not Taken,” the second part released following last week’s NPC, this also comes in the wake of a red hot PPI number. The key takeaway from Darby here is that monetary (real loan rate) and fiscal policy was the loosest before any NPC in twenty years. Benchmark real rates are negative on most measures while market sensitive interest rates are rising along the yield curve.  He expects the markets to be surprised by a shift in monetary policy over the coming months, but this must be seen in the context of the economy hitting its inflation limits. He remains very positive on China A shares. Darby says what was almost missed by the markets during the NPC, was the subtle change in language towards the yuan, which he explains in this noteJefferies clients can read the full note via the Jefferies research portal.