There’s a lot of event risk in the coming weeks for markets that has analysts and strategists weighing up alternate scenarios. With Fed hikes and and ECB easing almost priced to perfection, there is lots of scope for disappointment. Commodities is currently a key driver of risk, and the question of supply cuts from OPEC a key talking point. What’s the potential of a surprise and what does it mean for risk heading into year-end. The stakes are high for the USD trade as we head into year end.
Substantive's Top Themes - Best of the Broker Notes
1. Buy, hold, clip coupon… A trader’s nightmare
Suki Mann’s daily credit commentary was a staple read for investors during his 13-year career with Societe Generale. Mann now publishes Credit Market Daily, a similar format that covers credit macro and secondary and primary credit markets in Europe. In this piece, Mann writes about the growing concerns around secondary market liquidity in corporate bond markets, as more and more investors access the corporate credit markets in search of yield. With the ability of market makers (banks) to warehouse risk now severely curtailed by more stringent capital requirements, many investors are finding exiting positions a painful exercise. The key point that Mann is making here is that liquidity concerns are an everyday problem in today’s market, not just when markets trade idiosyncratically or when there are systemic issues, as we saw in the GFC. What happens in the event of a typical secular rotation where investors switch from credit to equities? To read the full piece, which is free to view, or sign up to receive it daily, click the below link
2. Commodity supercycle downswing: How much further?
Julian Jessop from Capital Economics followed up from his note yesterday here with another excellent one pager to assess where commodity price downswing in this cycle and judging it by historical standards. In the past a commodity bust has lasted for about 7-years, so given this current bust has been in place for 5-years, there could possibly be another 2-years to come. Of course Jessop caveats that because the outcomes vary across the 55-years of data, and prices have fallen much further in this cycle that they have in the past. But, at the end of the day Jessop suggests one must consider the particular drivers of this supercycle; China. And on their China view, they’re optimistic that commodities may well be near the bottom of the downswing. To request a copy of the full piece click on the link below.
3. Argentina: the complexity of dismantling controls
Medley’s Argentina analyst Ignacio Labaqui has written a useful note on the ''what's next for Argentina? This, after the nation elected the first right-leaning president in 12-years, Mauricio Macri. The dire state of the economy is the most pressing issue and he is expected to almost immediately discard currency controls and elimate taxes on the agricultural sector. The urgent need to remove currency controls is not straightforward though; There are a few hoops that need to be jumped through. Labaqui allocates a section of the piece to this: ‘’Dismantling the web of capital controls.’’ Firstly, Macri needs to take control of the Central Bank, and then there’s the thorny issue dealing with the NDF markets, which may require a huge injection of pesos when the contracts are settled by the end of Q1, especially given that a devaluation is a practical certainty. That has implications for interest rates, because any injection would need to be sterilized, writes Labaqui. Click on the link to request a full copy of the piece from Medley directly.
4. Switching the USD hedge
The style of Rareview Macro is to provide an edge to investors with its tightly written, and insightful daily commentary accompanied with actionable trade ideas. This is backed up with a model portfolio traded by the research team, and completely transparent to all subscribers. In Monday’s note, Rareview’s Neil Azous writes that he has replaced his USD hedge - long silver - with short USD/CNH. What’s the rationale? Essentially USDCNH is trading at the top-end of the band, whilst the spread between the onshore and offshore markets has widened out to more than 400 basis points. Historically a level where the PBoC intervenes to harmonize the two markets. This is important given that the announcement of SDR inclusion is expected next week. Azous gives the reader an actionable trade, using options, and then assesses the risk profile and payoff. There’s a lot of event risk in the coming week ECB, OPEC, and NFPs, and Azous addresses the risks and potential surprises from these events. Click on the link to read Rareview’s achive.
5. Can Canada's service sector offset its economic weakness
We highlighted a piece last week from BAML’s Ethan Harris that argued the markets weren’t fully appreciating the relative strength and importance of the services industry in the overall economic picture. The CIBC Economics team, led by Avery Shenfeld, have produced some great insight into how that applies in Canada, where its economy has been hammered by falling commodity prices and weak manufacturing. This comes at a time when the Canadian economy is in the late innings of a housing and consumer borrowing boom. The weakness may yet continue, writes Shenfeld. But the Canadian services sector is one bright spot, and it is very competitive in its cost of production relative to the US. There’s an excellent chart that reflects this across various sectors of the service industries. CIBC have kindly provided a free link to the full piece. Click below.