Raoul Pal, the renowned global macro strategist and founder of RealVision TV, reckons oil could be going to $20. In this series of videos Pal outlines his analysis, talks with industry experts and recommends a range of trades to take advantage of this setup. The oil market is fundamentally oversupplied, the Saudis are propping up oil prices ahead of the Aramco IPO, and shale production costs are getting cheaper and cheaper. That suggests oil prices are on a one-way trip. This has big implications for the USD. We encourage you to take a look at this five-part series (No one video is longer than 30 minutes). RealVision have some fantastic content. Click here to take a trial and to watch these videos. Alternatively contact Pal directly.
The equity and credit strategy teams have just published an interesting piece on Europe markets where they argue that as the economic cycle improves, investors should be looking for upside convexity. They set out how the European equity market now offers higher yield than the European high yield credit market, and therefore amid a rising rates cycle, equities should outperform credit instruments. BAML clients can read the full note: ‘‘Equities are the New “High” Yield” on BAML Mercury.
SouthBay Research focuses delivering actionable data and insight on labor and capital goods markets, the core elements of business and economic activity. For capital goods, SouthBay tracks the semiconductor sector. During the industrial age oil and steel were the universal common denominators of economy, silicon is the equivalent in the digital age. Simply put, what happens in the semiconductor world typically foreshadows what is about to happen in the rest of the economy. In this report, SouthBay looks at state of the semiconductor industry after digesting a series of earnings calls from the major players in the sector. Across the board, semiconductor companies have been reporting growth in all regions and all verticals. Many also expect growth to accelerate a bit in the 2H. However, caution remains, the report says. Semiconductor companies seem to have pulled an OPEC. That is, they cut back on capacity expansion. As a result, there is now a supply shortage. Indeed, factory utilization rates are high and even rising. With demand now stable and supply under control, companies have a reason to expect strong margins and rising ASPs for several quarters. SouthBay produce some of the best work on the global supply chain we’ve seen. If you’d like to get access to these reports, click below to request them directly from SouthBay. They are happy to consider on a case-by-case basis.
President Trump will soon return to the problems he faces at home. It is worth remembering that a more business friendly environment that Trump promised on the campaign trail was the issue that swayed ‘’reasonable self-identifying conservatives’’ to vote for him in the election, writes Paul Brodsky from Macro Allocation. It is that support that seems to be fading fast. Look out if/when Wall Street turns on Donald Trump, he adds. This is a very real issue about which pragmatic investors should be wary, Brodsky argues. New trade, tax, fiscal and regulatory initiatives put forth by the White House or Congress cannot succeed without a modicum of political currency with which to bargain. Donald Trump’s political capital might just be negative already, and the majority leaders in congress are not far behind. Republicans may have won control over the three lawmaking bodies, but their pyrrhic win is starting to resemble rope necklaces for the 2018 mid-terms, Brodsky concludes. If you would like read this piece or other recent notes from Macro Allocation, Brodsky is happy to provide on a case by case basis.
Recent EM equity strength masks a dramatic difference in cross-sector performance, with financials doing poorly and tech surging. This helps explain the underperformance of Chinese stocks, particularly the Hang Seng China Enterprises Index (HSCEI), which has a 71% weighting towards financials, write BMI Research. Therefore, they see potential for EM financials to catch up with the broader market rally, which bodes well for the HSCEI. This valuation gap is much wider than is currently seen in the same sectors across developed markets, with Chinese financials going particularly cheap. While BMI don’t hold a positive outlook on the sector from a fundamental perspective – as excessive debt levels will continue to weigh on return on equity – the gradual normalisation of interest rates is at least a positive in terms of resource allocation. BMI also add that regardless of the fundamentals, it would be very rare for Chinese stocks to continue rallying without participation from the financials, suggesting there is room for financials outperformance one way or another. If you would like complimentary access to this report, click below to request.
Don’t Fight the Fed’ but ‘Don’t Ignore the PBoC’. That’s the mantra at CrossBorderCapital, the specialists in liquidity analysis and its application in tactical asset allocation. In their latest note they set the record straight. The PBoC isn’t tightening. In fact it’s just boosted the medium-term lending facility to the major banks. The second part of the report asks another question: Is capital flowing back to China (and other countries) from the US? Unequivocal answer: Yes. This has significant implications for the US dollar while the PBoC’s actions has implications for global bonds and EM. Click below to request access to this piece from CBC.
Third-Year’s process revolves around an understanding of both country-specific cycles and global interlinkages, framed within a cycle-based approach (Typically three-years). We thought you might find the presentation of their models interesting. Martin Rossner, the founder of Third-Year, has been well ahead of the curve on China, warning his clients of the rollover in China data, and the potential for a hard landing. In this report he updates his defensive asset allocation strategy, that favors bonds over equities, and an exit from commodities. This piece is available for purchase on RSRCHXchange, or alternatively contact the provider directly.
With factor investing becoming widely-accepted, there is now a resurgence of interest in style timing, writes Andrew Lapthorne, SG’s top-ranked equity quant strategist, in this report. A static approach – while strong in relative long-run performance – often suffers from severe short-term drawdown, with late last year being a classic example, says Lapthorne. So the question becomes: Can an investor add value through tactical dynamic factor rotation? This has been debated by quant strategists for years and presents a formidable challenge that requires a high degree of timing skill, says Lapthorne. A successful rotation scheme needs then to be multi-faceted in diversity of signals and approaches, canvassing both bottom-up and top-down as well as regime (business/market cycle) information and methodologies. This note starts this process by introducing a bottom-up approach to factor timing. SG clients can view the full note on the bank’s research portal.
While the intensification of US political stress, has eased in recent day, it hasn’t gone away. Last week’s initial price action served to further undermine US interest rates following the worrying loss of inflation momentum evident in CPI the week before, which has seen UST yields drop to close to the lows for 2017. For good measure the spike on the VIX index (The biggest since Brexit) signals a broader increase in investor anxiety, or at least a reduction in investor complacency. All of these developments will weigh on the dollar more broadly, and so in conjunction with the ongoing theme of European economic and FX reflation, JPMorgan recommend opening a short position in USD/CHF. It’s probable that USD/JPY would outperform USD/CHF if political risk became the dominant factor and ushered in a material correction in US stocks, but that’s not JPM’s central scenario, writes Paul Meggyesi, from JPM’s FX strategy team. Therefore, they prefer to lean short USD against a core European currency where the domestic economic and policy fundamentals are more favourable than they currently are for the yen (the BoJ is likely to be the last major central bank to taper and exit QE) and where currency performance is therefore not a binary result of how the US political situation unfolds. The report doesn’t ignore the fact that the dollar index is currently undervalued, and they’ve done some interesting regressions with swap rate differentials with the rest of the world to illustrate the extent of the undervaluation, however they do not believe this is extreme enough to prevent further weakening should political tensions continue to ratchet higher. Finally, there’s a couple of other reasons why they prefer the Swissy to the Euro. Firstly, USD/CHF is marginally less mispriced than EUR/USD (the dollar is 2% cheap vs CHF compared to 3% cheap vs EUR) and secondly, positioning in CHF is still moderately short whereas specs have swung to a net long position in EUR for the first time in two years. JPM clients can view the full piece on Morgan Markets.
Until late last year INTL FC Stone’s Vincent Deluard was a secular bull on the equity market, but then gravity defying multiples, a doubling of US yields and the disruptive tide of global populism convinced him of the risks to a significant correction in equity markets, versus the risk reward of chasing the final leg in equity markets higher. This might imply being positioned defensively, but that doesn’t need to be the case, argues Deluard. In this note he firstly identifies all of existing signs of this market top before going onto examine the performance of value stocks in 24 market corrections where the Dow Jones Index fell by more than 15%. On average, value stocks have NOT underperformed, according to Deluard’s analysis. Indeed, recent market price action suggests that aggressive sectors may indeed be the best defence in the event of a correction. For instance in the ‘’downside capture’’ of gold miners, European banks and U.S. value stocks, which have fallen below 1.0. Click below to request access to the full report.