Greg Weldon of Weldon Financial has to be one of the most colourful macro strategists in the market, his daily video briefings are high energy, and at times a little zaney. But don’t be fooled, he’s one of the most experienced and astute strategists out there, with a great track record to boot, across all asset classes. We highlight his special focus on Canada, where he argues that the Canadian economy is now at risk of tipping over. This comes in a week where the Bank of Canada revised down their outlook for 2019 and Governor Poloz said the rate normalization process would occur over time a longer period of time (Perhaps yet more evidence that global central banks are pressing the pause button). Weldon says it is clear Canada’s macro-economic growth is not only slowing, but dramatically by some measures, but it is also at risk of tipping over. He describes the housing-inflation/household debt bubble dynamic that has taken hold, which in combination with the slowdown in Chinese domestic demand and the move to an overtly tight monetary policy by the US Fed is now feeding into the Canadian macro-data stream, and the economy is increasingly at risk of a significant downturn. For instance, exports and imports are both down significantly in the past 4-6 months, the RBC PMI is down, employment growth is slowing, retail sales growth is collapsing and at risk of an outright contraction. And there’s more. Both the Industrial Price Index and the rate of consumer price inflation are plunging. Subsequently, thanks to the decline in the CPI inflation rate, Canadian monetary just TIGHTENED, without the BOC doing anything. The broader point Weldon makes here is that he envisions that this is happening everywhere, particularly in the US, where it will become increasingly obvious that the Fed has gone too far.
A week before Christmas, Saudi Arabia (KSA) released its 2019 budget. The headline: KSA will push domestic economic growth through the largest ever government expenditure – Saudi Riyal (SR) 1.1 trillion, writes Warren Pies, equity strategist at Ned Davis Research. This fiscal policy will be funded by revenues that exceed spending, and that’s where this gets really interesting for oil prices, say Pies. Some pretty outlandish assumptions are being made about oil revenues, and this oil prices. Assuming 10.2 million barrels per day of production (the output agreed to in the most recent OPEC agreement), Brent oil will have to average around $80 a barrel this year for the Kingdom to hit its revenue target. Even after the recent bounce in oil prices, it still sits 40% below the Saudi’s assumed average price for 2019, says Pies.For investors, that means there is little risk that the Saudis will abandon the OPEC quota system again or that it will “cheat” on its stated production quota. Instead, the Kingdom will act decisively when oil trades at these lower levels. The Saudi put is alive and well, he concludes.
Vincent Deluard from INTL FC Stone admits that he, like many other analysts and investors, was caught off guard by the 60 basis point drop in 10-year yields. In two notes published in October and November he argued strongly for a secular bear market for bonds, and the purpose of this note is to first explain the things had underestimated, and secondly to reassess his broader long-term thesis. It’s what any good analyst should do. Deluard says the drop in nominal yields is a reaction to an inflation surprise from oil prices and he probably understimated the one sided nature of positioning, and the power of that punch. However, this does not change Deluard’s glut/savings squeeze thesis, which was the subject of his October and November pieces, where he argued for higher rates because of 3 major savings gluts that are draining the system of global liquidity. He sticks with the view and argues that who bear markets can experience a short-term correction rally, and that’s what we’ve just experienced.
In their latest edition of Enodo Untangled, Enodo Economics answers a series of questions on the China economy, collected from clients in their annual “Your Questions Answered” round-up. These questions are grouped under four themes: growth, Beijing’s policy stimulus, its market impact, and whether China faces a Minsky moment. Enodo’s Chief Economist, Diana Choyleva, has a overall bearish view, and she writes that in 20 years of covering China’s economy and markets, this is the most worried she has ever been about the Communist Party’s ability to keep the show on the road. On growth, Choyleva’s estimates real growth was at 0.9% in Q3, the weakest quarterly annualised rate since they started producing estimates in 2004 – even lower than the trough of 1.9% during the global financial crisis. Annual growth slowed to 3.7% by her reckoning, compared with 5% in the crisis, and still has further to go, Choyleva argue. So what all this means is more stimulus in 2019 and bigger budget deficits to complement the looser monetary stance. Enodo expects the credit impulse to be larger in 2019 than in 2018, with authorities keen to provide further stimulus with a focus on bank lending to the private sector, in particular SMEs. But will it be enough? Choyleva suggests that it may just stave off the inevitable for a few years, and she warns that the fracturing of global supply chains set to usher in stagflationary era. China almost sure of facing a Minsky moment within five years, she concludes.
From time to time it is a useful exercise to take stock of what sellside macro consensus views are. The beginning of a new year where the sellside provides its outlook for the next 12-months is one of those times. Dario Perkins and the team at TS Lombard have done that job for us already in this note entitled ”Three Themes for 2019.” The way they put it, the sellside has struggled for creativity in recent years. According to the large number of 2019 publications they’ve reviewed, the consensus expects the next 12 months to look exactly like the last 12 months, which – they remind us – was exactly what they were also saying 12 months earlier. In other words, consensus forecasts are basically just a random walk, Perkins writes. To summarise, Perkins observes that most economists expect global growth to moderate (a little) further in 2019, with inflation (a little) higher and monetary policy (a little) tighter. Analysts expect risk assets to rise, but with low single-digit returns. They expect bond yields to remain broadly flat and the dollar to depreciate slightly. While some sellside strategists are prepared to use the ‘R’ word (recession) and plenty talk about ‘volatility’, most think the serious macro trouble will be deferred to 2020 (a year later than they previously assumed). Perkins suggest that if you are a contrarian, you should love this dull consensus because it suggests 2019 will be a year for big surprises. But in which direction? he asks. And that is the purpose of this report, which discusses three policy decisions that could swing the outlook either way, starting in the United States with the Federal Reserve, the global trade wars and Chinese policy stimulus, otherwise named in this report; Pause Patrol, War Off/On, and Cracked China.
SG Cross Asset Strategy Team write that on many occasions since 2012, market participants have heard that gold has ‘lost its glitter’. Now, as we head into the new year, they believe 2019 will be a turning point and they would recommend investors consider increasing the gold allocation in their portfolios. Why? SG say that gold fundamentals and positioning have not been supportive in recent years, while the fact that it remains a bond proxy has been a drag. The set up is different in 2018 they say. With US real yields and the US dollar to be capped, they expect gold to break free. The scarcity of safe-haven assets should allow gold to shine again. They also suggest a smart way to gear to a gold position in the derivatives space. As a by-product SG believe that the EUR, CHF, SGD and CNY would benefit from a higher gold price and equity volatility environment. Being long Asian currencies with a positive net IIP (International Investment Position) in the scenario of a rapidly rising gold price would also make sense, they say. In equities, SG make the case for a stronger co-movement between gold and gold miners where they believe that both could prove beneficial protection assets to navigate through the downward repricing of risky assets: the economic slowdown could prove relatively mild as per their central scenario, but the effect on asset valuations is not likely to be smooth after years of QE drip.
Despite last night’s defeat for the Government on the Finance Bill amendment that limits setting aside funds for No Deal contingencies, Parliament still needs to vote for an alternative. But there is no majority for anything else, writes Helen Thomas of Blonde Money, one of the few analysts here in the UK that really understands all of the moving parts of the complex Brexit process. In this note she sets out MPs’ first preferences for what they want from Brexit, and also the numbers once certain factions club together. Thomas draws some conclusions from yesterday’s vote. #1: Theresa May needs Labour MP votes (highly unlikely), #2: Labour hold an impossible position (In the battle of The Great Protestor Jeremy vs The Great Administrator Theresa, no one will lead. Both positions are passive). #3: Events will force their hands. Here, A crisis is needed to break the deadlock, and Thomas sets out 4 options could prevent No Deal: 1) Pragmatists of all parties fall into line and pass May’s Deal (with EU concessions?) 2) A new government emerges via a 14 day post-No Confidence period or an Elections. 3) A government of national unity (GNU) emerges as Labour MPs defy the whip. 4) Article 50 is extended to allow for either a Second Referendum or a General Election. The final conclusion is that a new era of political instability is upon us, writes Thomas, so expect maximum mayhem in Mid to late February and again in April.
This week is almost the half-way point through the 90-day process Presidents Trump and Xi agreed to in Buenos Aires. Mid-level US officials from Washington are in Beijing for the first time since Argentina, to make progress on the agenda for when senior Chinese officials head to Washington later this month to meet US counterparts. China specialists Rhodium Group have put together a useful note that describes the elements they think will, and will not, be in a deal if one can be fashioned. The note breaks these into the following areas where the US is seeking two sets of commitments (and two sets of conditions, safeguards and verification). The first commitment is for China to buy US products to reduce the trade imbalance an the second is on structural reform, which means permanently China changing impediments to fair competition that arise from state controls over resource allocation, subsidies, industrial policies that alter commercial outcomes and other interventions. This piece provides some educated guesses on the elements of a potential deal, and suggest the negotiators this week will only make broad comments on progress, not announce any detail. The problem with that is that it will be hard to tell whether we are on track to resolving a Trade War, says Rhodium, and with just 7 weeks to go, that doesn’t leave much time to sort out the real detail and hard issues, which is where all the real dealmaking happens. There is always the possibility that the leaders will “stop the clock” or extend the negotiating period at the last minute, says Rhodium, that probability has probably increased following the US equity market turmoil of the previous month.
Cam Hui from the Pennock Idea Hub has a knack for calling market turning points. In his latest pieces he highlights one indicator, that he describes as providing a “what’s the limit on my credit card” buy signal for investors. The indicator uses the Zweig Breadth Thrust (ZBT). For those of you not familiar with this measure, a “Breadth Thrust” occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A “Thrust” indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought. According to Dr. Zweig, the man who came up with this, there have only been 14 Breadth Thrusts since 1945. The average gain following these 14 Thrusts was 24.6% in an average timeframe of 11 months. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust. Hui cuts to the chase. ”Monday’s strong NYSE breadth has pushed the ZBT Indicator into buy signal territory. Call this a “what’s the limit on my credit card” buy signal for investors, though not necessarily traders. We believe the ZBT buy signal is a rare display of bullish positive momentum. While investors have to be prepared for some short-term setbacks, the odds favour higher stock prices in a 12-month timeframe.”
China’s growth trajectory and Federal Reserve monetary policy are the two key macro forces dominating global asset prices, particularly for EM. In 2018, EM equities suffered from both Fed tightening and a Chinese slowdown. Looking into the new year, conditions should improve on both fronts, setting a bullish backdrop, argues Alpine Macro. They say EM assets will benefit from continued Chinese reflation and a normalization process of the macro environment in developing countries as Fed policy shifts. There are early signs that China’s monetary cycle may soon begin to accelerate anew.