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Quant Insight: Credit > Inflation. Regime shift for US equities? (Sept 12)
In some quarters, there are arguments that the inflation debate is losing significance. The bigger macro theme is the unfolding tightening of credit conditions. That is partly right. The slow motion credit crunch is indeed critical but it is premature to argue inflation’s importance has dwindled in any way. Qi’s macro factor sensitivity data can provide a real-time demonstration of what matters most. Inflation and credit are both critical, and it is Technology that is most reliant on a Goldilocks mix of reflation plus easy credit.
MRB: Don’t yield to the bond temptation (September 8)
Many investors are tempted to buy bonds on the prospect of the Fed et al nearing the end of the monetary tightening cycle and cutting interest rates down the road. Such a view is mistaken given a global economy that will remain sturdy, write MRB in this asset allocation piece. They expect stocks to modestly outperform bonds. Cash remains comparatively appealing, and MRB continue to recommend an overweight stance within a multi-asset portfolio. They favor investment-grade corporate and emerging market local-currency bonds within fixed-income portfolios, while in equities valuation multiples will come under pressure as bond yields rise, especially in the expensive U.S. market. Euro area, emerging market and Japanese stocks should benefit from firming domestic economic growth and warrant overweighting within a global equity portfolio, offset by an underweight in the U.S.
Macro Risk Advisors: The Petrodollar and why higher energy prices may not be inflationary (Sept 12)
MRA say the US dollar is now effectively the petrodollar. Given it is now the swing producer, rising energy prices lead to a stronger US dollar. The point of this short 5 min video explainer, is that while investors may fear that rising energy prices could be inflationary, MRA say this ignores the the second-order effects, as a result of the US running large goods deficits, and energy surpluses, among other things.
Renaissance Macro Research: The Timing of BoJ Exit from Negative Rates; timelines may slide (Sept 13)
What is the appropriate timing for YCC exit? Obviously the market wants to know, and Ueda has indicated that exit will occur between now and year-end. RenMac’s Howard Mason delves into the nuances of timing in this piece. Waiting too long risks inflation due to a weakening yen, while acting too soon could hinder wage inflation for a 2% target, says Mason. Expectations of no significant US rate cuts have already depreciated the yen, and the tear is still on a tear. Mason reckons Ueda’s suggested year-end policy change, but it may not be realistic. Japanese investors are reducing US Treasury holdings due to hedging costs, but wholesale liquidation is unlikely. The BoJ is likely to maintain yield control and bond purchases post-negative rates due to sensitivity.
S&P Global: The credit cycle has well and truly turned; Defaults highest since 2009 (Sept 12)
The global corporate default tally jumped to 107 as of Aug. 31, 2023, with 16 defaults in August, the highest August monthly tally since 2009, according to S&P. They expect U.S. and European 12-month trailing speculative-grade default rates to continue to rise from current levels, to 4.5% and 3.75% respectively, by June 2024. Click here for that report. Also see ”Global Debt Growth Diverging By Credit Quality,” where S&P explain how global debt is diverging in credit quality, in that IG is growing and HYL is contracting.
Pennock Idea Hub: Investing in an Era of Fiscal Dominance (Sept 11)
The annual Fed symposium at Jackson Hole is meant for central bankers to consider Big Ideas which reflect the concerns of the day. The Big Idea in 2023 is fiscal dominance, or the problem of big government deficits and skyrocketing debt around the world. For investors, this creates an environment of greater cross-asset volatility, writes Cam Hui from the Pennock Idea Hub. Stormy weather is ahead, he says. While your location may be able to avoid the damage, price volatility will become more evident in other asset classes and in differing regions. Investors may want to re-think how they approach risk in portfolio construction. Risk estimates based on historical data may no longer be applicable in a Fiscal Dominance regime characterized by heightened cross-asset volatility in the next crisis, Hui explains. It will be time to recalibrate the effects of diversification and how possible crises may affect cross-asset volatility.
Simon Hunt Strategic Services: China’s copper demand and ambitions to corner the cathode market (Sept 13)
Copper markets expert Simon Hunt discusses a potential shift in the copper market in this note. He says fabricators are experiencing weak order books in Europe, America, and parts of Asia, except India. China has seen a decline in copper consumption due to a recovery in using scrap in wire rod and brass mills. Smelters focus on copper content rather than mine production data. The report suggests that global refined copper production should be sufficient to meet consumption from 2025 onwards. Furthermore, China may become an exporter of cathodes by 2026, creating challenges for the market. The commissioning of the Udokan mine in Russia adds to this shift, making China a major player in copper production by 2030.
PRC Macro: Restocking Key to Debt Reflation: Energy Transition, Affordable Housing and Steel Exports
Last week we sent you this note from PRC Macro that looked to explain what was behind the resilience of China steel prices amid the slump in China real estate markets. This seemed counterintuitive and PRC provided evidence of how China was exporting steel to other markets. We wanted to provide some further depth to this issue this week from PRC, and how this fits into a broader policy by policymakers, in what PRC Macro describe as ”Energy is the New Property” as a growth driver. See the back end of this July report and in more detail also see this presentation from August.
But to summarize, PRC Macro’s view is that Chinese companies are going out into the global south, and they are convinced this has been under the auspices of the BRI /new GDI, which itself is being revamped from large mega infrastructure projects to leaner, smaller more profitable, commercially run projects like the energy transition etc., which will help Chinese producers export excess manufacturing capacity despite the domestic slowdown.
The perfect example is steel this year, and PRC think it is wrong to treat steel and iron ore demand strictly as a function of property new starts in China. The combination of China’s manufacturing upgrading and outbound investment in infrastructure, driven by smelters’ attempts to de-risk from weaker domestic demand and rising geopolitical tensions, will dictate future steel and iron ore demand. PRC called it “China new demand”, and they expect export demand will account for at least 8% of China’s total steel output, largely offset slacks from steel demand by domestic property slowdown.
Sentiment Trader: A key time of year in two key ag markets; Trade idea: Long wheat and short soybeans (Sept 14)
Due to their planting and harvesting cycles, soybeans and wheat typically operate on different cycles, and one of the most pronounced periods of inverse behavior is starting now, writes Sentiment Trader. In this now they show how there’s a tendency for both commodities to trade inverse from one another. Soybeans tend to show significant weakness, while wheat tends to show strength. This creates an opportunity to trade an “Intermarket futures spread” involving selling short a November 2023 soybean futures contract and buying long a December 2023 wheat futures contract.