What Bothers Me About Europe

With Italy facing a constitutional crisis and likely fresh elections within months, attention is set to again focus on Europe’s single currency system. One effect of the euro is that it distorts self-correcting price adjustments, which regulate normal market-based economies. Understanding this dynamic is crucial, argues Charles Gave from Gavekal, if equity investors are not to be pulled into value-traps, of the type which are now presenting themselves.

How Significant is the Swedish Debt Office’s SEK Long.

JPMorgan put out a note late Friday following the announcement by the Swedish Debt Office that it will take a long position in SEK against the euro up to the tune of SEK 7 billion. The note goes through various issues related to this announcement in turn, but the bottom line is that the SNDO announcement by itself should not enough to change the macro narrative for SEK, that soft growth momentum in the region and the Riksbank’s reaction function is likely to prevent SEK cheapness from correcting materially. JPM clients can read the full note of MorganMarkets.

Assessing the EM risks; Governance rewards

Rising dollar yields and a dollar surge, changing investor risk appetite and overloaded position in EM assets have all been cited as reasons behind the recent rise in EM local bond yields and slide in EM currencies, according to Oxford Economics, who have published some excellent work of EM debt markets in the past few weeks. Their analysis has attempted to eliminate the short-term noise, and focus on the real drivers of differentiation across EM markets, with the help of their in-house Sovereign Risk indicators, which rank countries across a range of key variables.  Oxford Economics finds this analysis explains the current sell-off and provides a useful guide as to which markets would be hit the most – and which the least – in the latest bout of EM turbulence. Click below if you’d like to read samples of OE’s work on EM, and look at their broader service.

US and China trade; an uneasy truce

Rhodium Group has urged investors not to get carried away by the recent rapprochement between Beijing and Washington and that the prospect of further escalation in the trade war between the US and China remains alive and well.  They warn that while the slew of constructive bilateral gestures between the US and China in recent weeks are unequivocally positive, the balance of risks still points toward headline noise later in the year and the potential for renewed tariff threats and even their implementation, rather than a lasting peace. This note provides a detailed analysis of the two countries positions and the timelines and dates investors need to watch. Click below to contact Rhodium directly to request trial access to this piece.

Abe’s woes deepen as his lies exposed

Shigenori Okazaki has known the Abe family for decades and in Japan is one of the most outspoken critics of Abe, arguing that Abenomics has weakened the fundamental economy rather than strengthened it, and has argued since last year that 2018 could be the year the edifice falls apart. It was while working as a journalist at The Mainichi newspaper that he met Shintaro Abe, Shinzo Abe’s father, who also worked for the same newspaper. He later joined UBS, where he worked as an analyst for 16 years, before becoming an academic in international politics. In his latest piece he writes that PM Abe’s hope of putting an end to the political mess is now in tatters. This comes after his former aide unwittingly testified Abe’s nepotism to his “bosom” friend in the vet school project. Simultaneously, hundreds of pages of “abandoned” documents on the Moritomo land deal were “discovered.” Then, to make matters worse, the Ehime Pref. governor made a bombshell revelation which may deliver a final blow to Abe before the current Diet session closes. Okazaki now thinks Abe may try to resort to a snap election to break through the deadlock, but his chance of survival appears getting smaller, he says. If you’d like to read the full note, please contact Okazaki-san directly, he is very happy to be of assistance.

EM: The Good, The Bad and the Ugly

TS Lombard provide as broad a coverage of EM than anyone and in this note they take a very top down look at the complex and individual The good news is that a broader downturn in EM markets does not appear likely in the near term, says TS Lombard. The bad news is that EM markets are increasingly volatile due to still excess global liquidity, while the ugly is that the risks of a US- China economic war are rising. TSL have put out a note analysing the state of play in EM in light of the recent turbulence, noting that one consequence of the past 10 years of quantitative easing is that it created a “yield-seeking” mentality in markets that inevitably encouraged investment flows into EMs but without pricing the risks associated with an eventual reversal of quantitative easing. Importantly, it should be recognised that markets will react based on expectations of tighter global liquidity well ahead of when it does, in fact occur – if it ever does. TS Lombard says the economic turmoil evident in Argentina and Turkey over the past month provides a foretaste of what could be in store for some other EMs. Individual countries, it says, could be punished because their economic situations are considered unviable in a scenario of a marked reduction in global liquidity, whether that squeeze is happening or not. TSL also produce a monthly publication on EM asset allocation, called the GRID. Click below to enquire about both this and the note we have featured here.

Geopolitics and Fundamentals Collide in Oil Price Discovery Process

Diapason Currencies & Commodities publish an excellent monthly report entitled ”The CapitalObserver.” They specialize in macro-economic analysis and its impact on currencies and commodities (using multi-asset diffusion and flow models), with a focus on cross-asset rotation and market timing. Within their May edition they provide some extensive fundamental analysis on the oil market that assesses the supply and demand balances and market positioning (Now at the highest extremes in history). They have a very high conviction view that oil prices will turn, and this report attempts to identify that turning point. They show some very interesting data points that show how supply is being ramped up, and as the ”late cycle” matures, demand should drop off. In the short term however, expect oil to remain elevated as geopolitics outweighs fundamentals. Click below to request access to this piece.

The Resurgence of Political Risk

Political risk is now the main driving force of financial markets, writes Anatole Kaletsky from Gavekal. In 2017 investors learned—or thought they had learned—that political upheavals just create noise, with no lasting effect on market trends that are set by economic fundamentals. But in 2018 this relationship has been reversed, Kaletsky writes. Italy is clearly at the forefront of this, and Kaletsky thinks that it may have to suffer a Greek-style crisis to force a U-turn in populist politics similar to the one inflicted on Greece’s Syriza government by the markets and the European Union. Click below to request access to this piece or request a trial.

The Dollar is a Powder Keg

Raoul Pal from Global Macro Investor lays out a very bearish, but persuasive argument, for global markets in the latest edition of his monthly Global Macro Investor letter, arguing that the dollar is a potential powder keg for the next major financial markets crisis. Pal tells his narrative with the aid of an extensive series of charts, which are compelling, if not a little scary. You may have seen some of these before, but one cannot help but think that the day of reckoning has got closer, as the dollar continues to climb. As Pal writes: ‘’We currently have record speculative positioning in most major markets; we have low liquidity being run by untested algos; a massive concentration in equity markets and into ETFs, and all held together by the largest short volatility position the world has ever seen. I mean what could possibly go wrong? Well cast you mind back to 2000, and the answer becomes clear. The dollar. If we distill all of these reflation bets down to their pure essence macro, each one relies on a weak dollar. The dollar is a potential powder keg.” Click below to request access to the full piece from GMI directly.

Strong Oil, Strong Dollar; How Sustainable

Numerous factors are pushing up oil prices, offsetting the negative impact of dollar strength, say Alpine Macro. It is rare, though not unheard of, for oil prices and the dollar to move up together, but Alpine see the dollar move as a counter trend. that will reverse once the Fed acknowledges that inflation upside risk is limited, which would in turn reduce the need for monetary restraint. Oil prices will likely remain elevated, and the reasons are detailed in this report. Click below to request access to the full note from Alpine directly.