Is China the source of the global market’s ills? Risk aversion seems to be seeping into markets after Friday’s weak China GDP numbers. Consensus on China is unequivocally bearish, so today we highlight the research of Simon Hunt of Simon Hunt Strategic Services, who is one of the few analysts out there with a positive outlook on China. Hunt reckons there’s something of a lag effect working here, and the benefits of all of the stimulus that has been put in place will start to work as we head into year end and 2019. Meantime, Alpine Macro shared with their clients a fascinating conversation with a senior Chinese public servant, which highlights many of the difficult choices facing policy makers there. We also look at the oil theme with Rapidan Energy and oil and Saudi with MRB Partners, while Gavekal explain why the Yen remains an attractive long, and not just for safe haven attributes.
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1. An Insiders View on China’s Policy Conundrums
Alpine Macro’s Chen Zhao is one of the more politically-connected China analysts. He recently published the transcript of his lengthy conversation with a recently retired senior Chinese bureaucrat, which we think adds some great context to the thinking inside China. Because lets admit it, we have no idea really when looking from the outside in. Chen’s source told him that monetary easing so far has been far too modest, and companies and consumers remain crippled by extraordinarily high borrowing costs. Interest rates (the rates applied to corporates and consumers) needs to drop much further so that liquidity injected into the banking system which will translate into credit creation that makes a difference, the source told Chen. The former official said expects rate cuts this year, but not big ones, due to the constraint of a fear of a run on the yuan. Chinese policymakers, Alpine Macro were told, may have underestimated the downward momentum that has developed in the economy. The source expected that once the U.S. mid-term elections were over, Trump could be under less political pressure to attack China over trade. But nobody in Beijing knows how to deal with him. a fascinating discussion. Click below to request a copy of this interview from Alpine directly.
2. OIl; Price Targets on WTI and Brent
Worsening economic conditions, especially in emerging markets, are set to push Brent down to $65 next spring, Rapidan Energy argues in research published last week. The IMF’s cut to its global growth forecasts to 3.7% from 3.9% for 2018 and 2019 prompts Rapidan to lower its global demand growth projections down by 0.1 mb/d for both years. Rapidan have had a high-conviction bearish view for a while now, but last week they highlighted how this view is gaining much wider appeal with all three agencies materially loosening both 2018 and 2019 global oil balances. As early as May of this year, Rapidan proved to be on the money in predicting that a market refocusing on fundamentals would drive prices down towards $65. Saudi threats to retaliate against possible US sanctions over the suspected murder of journalist Jamal Khashoggi in Istanbul on October 2 by causing an oil price spike can be disregarded, Rapidan argues in a separate report. The Saudis will stop short of antagonizing Trump and isolating themselves internationally. But the odds on NOPEC, or a No Oil Producing and Exporting Cartels Act, being passed in the US are increasing. NOPEC would also expose the 24 other members of the Vienna Group to antitrust lawsuits under the Sherman Antitrust Act. The implications are bullish for WTI versus Brent, as countries accounting for 43% of US crude imports would face fines. NOPEC would also jeopardize heavy crude imports from Mexico and Venezuela, benefiting Canadian crude. Click below to request sample any of the reports referenced above.
3. Time to Revisit JPY as a Safe Haven?
USDJPY has chopped a lot of wood between 112 and 113 in the past week and we’ve read of host of bearish pieces on USDJPY and reasons why the Yen should strengthen. It has yet to break down. Udith Sikand from Gavekal was one of those calling for lower USDJPY back in July. He was way too early he concedes, while foreign investors have failed to be lured back into Japanese equities, despite the most attractive valuations in years. In fact, Japan has actually seen outflows, Sikand, in the form of Japanese bond investors buying USTs, and probably unhedged, he says. It’s for this very reason that he remains optimistic that the bearish USDJPY view still has legs. a shift in sentiment as a safe haven could very well trigger a significant repatriation from Japanese bond investors and really set off a move lower. For access to this piece click below to contact Gavekal directly.
4. Finding a Rare China Bull
There’s no shortage of research that’s bearish on China, while the media have jumped on the bandwagon as China equity markets tank. Finding a bull among these bears is no easy task. Veteran China analyst Simon Hunt is one of those rare bulls. He has published extensively in recent weeks, following multiple trips to the country and its industrial heartlands. Sure there have been some serious problems in credit transmission to the real economy, concedes Hunt, but many of these bottlenecks have been cleared and things are flowing again, he says. Hunt has also done his own research on the ground, and the evidence he sees is a high level of activity which suggests a broader based recovery is beginning to set in, with the negative sentiment due to the trade and credit issues acting as a cloud over the market. The foundations are being laid for a robust recovery in the fourth quarter and in 2019. Lastly, following Friday's GDP print, Hunt provided an update to his earlier reports, which was essentially was unchanged. He saw no surprises in the data issued for September. Growth has slowed but the economy is still growing, he says, with monetary aggregates recovering, bottlenecks within the credit transmission system easing and infrastructure spending recovering. Meantime, tax cuts for both households and businesses will come to the rescue of struggling consumers. If you’d like to discuss China with Hunt, feel free to reach out to his team arrange a call.
5. Saudis Oil Weapon has no Cutting Edge; No Shortage of Supply
It's still unclear what measures will be taken by the international community against Saudi Arabia following the admission that Jamal Khashoggi was murdered in Istanbul on October 2. There's also the question of how Saudi might retaliate via actions in the oil markets, and whether they might use oil as a weapon. Mehran Nakhjavani from MRB Partners addressed this question in a recent webcast, where he argued that use of any “oil weapon” will be either ineffective, or counterproductive, because raising prices would do nothing to hurt the US economy, a net oil exporter, but would damage demand in the Saudi Arabia’s most important markets in China and India. Oil prices are too high for reasons that cannot be justified by likely supply and demand outcomes. Only a major conflict in the Persian Gulf would be enough to trigger a fundamental shortage of supply. Demand remains in good enough shape to avoid a clearly bearish scenario, though demand forecasts will be reduced at the margin. OECD demand is forecast to resume its gradual trend decline. Click below to request access to the webcast from MRB directly.