Cyril Ramaphosa has been elected president of the ruling African National Congress (ANC), though he did not gain full control of the party. The significance of this event cannot be underestimated as South Africa is at a crucial juncture as an investment destination. Rand Merchant Bank urge caution at this stage because, while Ramaphosa may bring reform, he will face many obstacles within the ANC. Fade the rally in the ZAR. US Home sales maybe in for a big year in the US, write PantheonMacro, as all the signs point to a nationwide recovery. The Riksbank bring central bank rate decisions to a close for 2018 tomorrow, and JP Morgan reckon they’ll be turning hawkish even against the backdrop of a shakey housing market. Meanwhile China bears, J Capital Research,argue China default avoidance measures are placing the economy in peril.
Substantive's Top Themes - Best of the Broker Notes
1. US New Home Sales and Construction Set to Rocket in 2018
Housing construction lags new home sales, and all the signs are that sales are set to rise strongly in 2018, writes Ian Sheperdson at PantheonMacro. Indeed, the the surge in homebuilders’ sentiment is not a post-hurricane story; gains recorded everywhere, he writes. The message from the December NAHB survey of homebuilders, released yesterday, is very supportive of Pantheon’s bullish take on the housing market. The headline index jumped to an 18-month high, propelled by an eight-point leap in prospective buyer traffic. Shepherdson is very encouraged to see that activity rose strongly across the whole country, so the jump at the national headline level is not just a post-hurricane story in the South. Indeed, the increase in the index for the South was the smallest of the four regional readings. This note can be purchased on RSRCHXchange, or alternatively contact the provider directly.
2. Default Avoidance Measures Put Chinese Financial System in Peril
As Chinese financial authorities hold their Economic Work Conference, anxiety is higher than we have yet seen, writes the China-specialist, J Capital Research. In this note they highlight imminent danger to the financial system. They argue that China’s usual end-of-year liquidity problems are coming at a time when many in the group of private financial aggregators, like HNA Group and Dalian Wanda, are obtaining emergency cash infusions to forestall defaults. The highlight problems with the concentration of bureaucratic authority, which impairs information flow and may make regulators slower to react. That reaction function will be tested by new policies that could reduce debt securitization by RMB 10 trn or so in 2018 and this could lead to widespread distress. Meantime in the real estate market, JCap observe that properties in central Beijing have posted prices as high as USD 4,000 per square foot, but the market is not transacting. The government wants the market frozen, but locking up money in property has its own negative consequences. Their final major point highlights raft of articles in the Chinese press that betray concern that social security funds are bankrupt and local governments cannot pay for basic services. Part of the reason Beijing and Shanghai have been expelling non-permanent residents is to save on fiscal expenditure and to focus on the residents who offer a higher tax yield. That is bad news for the small cities, say J Cap. This note can be purchased on RSRCHXchange, alternatively contact the provider directly.
3. SEK: Bullish Heading into the Riksbank Meeting
In the past week we’ve highlighted a few pieces of research that have looked at potential risks to the Swedish housing market, which has already had some impact on weakening the SEK. However ahead of tomorrow’s Riksbank rate announcement, JPMorgan is bullish. Analyst Meera Chandon thinks that the Riksbank will finally announce the end of QE after nearly three years of initiation. Beyond QE, her expectation is that the Riksbank will also maintain its forecast of a rate hike in July 2018. The case for a less dovish stance from the Riksbank has been intact for a long time, given the combination of strong growth, an output gap that is already at +2%,, and rising inflation, but this has intensified recently with the latest inflation data showing that CPIF is back at target and also 0.3%pt above the Riksbank’s forecast. Moreover, says Chandon, activity data is taking yet another leg up, as indicated by PMI data and our preferred smoother measure of EASI—the 6-week moving average—is the second highest in G10. As for the housing market, Chandon senses less concern from the central bank about the current correction in house prices and given the strong economic fundamentals, the fall out from this will be absorbed. Against this backdrop of firmer growth and inflation, cheap currency valuations and less emphasis by the Riksbank on housing, JPMorgan think that the risk reward favors holding long SEK exposure. The full note is available to JPM clients on Morgan Markets.
4. Could the VIX products cause a VIX-MAGEDDON?
We all know the story very well now. Millionaires made out of shorting volatility, the can’t lose trade. Macro Risk Advisors know the volatility market better than almost anyone, and have been warning their clients of the danger of this strategy throughout 2017. So in this interesting piece written by the excellent Pravit Chintawongvanich, MRA expose the inherent danger of such position in the VIX market. Chintawongvanich argues that VIX products could potentially buy 80 million vega on close on a +2 point move in VIX futures (a move from 11.3 to 13.3) and that the potential VIX rebalance size has doubled in 2017 (currently 80k, was previously only 20-40k). So for example, if this year’s Aug 10th move were to happen today, there would be $100mm vega to buy on close. In other words, VIX futures are experiencing larger point moves for relatively small moves in SPX, which could create some extremely large moves. While market participants may be well aware of this, what’s new here is the increased sensitivity and vulnerability of the VIX. We are in dangerous territory. MRA provide some good strategies here to hedge this risk. This note is essential reading. Click below to request access to the full note from MRA directly.
5. ZAR: Fade the Rally
Consider fading the rand rally, writes Rand Merchant Bank strategist John Cairns, in a note to clients this morning. Cairns says that most sharp market moves generally overshoot and while it could be argued that the pullback from 12.54 to the 12.70s already constitutes this adjustment, he says this is barely 10% of the R2.00 move seen since November. Furthermore, the market moves in the run up to the result may turn cautious, says Cairns, and that’s because a detailed look through press and expert political commentary shows that there are some reservations being expressed about the election results. For instance consider the Business Day headline “Ramaphosa wins a poisoned chalice” (or is some versions “Ramaphosa heads a house divided”). Or the subline from the Star “Bittersweet victory as Ramaphosa leads ANC”. The most widespread expressed concern by political analysts is that three of the Top Six are not considered natural allies of the new ANC president and that unless there is a realignment, then the new president will be constrained in carrying out his agenda. In all, the market is right to have rallied in anticipation of the result, but the election is only partly, not completely, positive. Click below if you would like access to this report or the latest podcast hosted by RMB that hosts some leading political analysts in South Africa.