Economic Perspectives is an independent research firm that places inflation and credit markets at the heart of its analysis. In their most recent inflation perspectives report they say the recent violent correction in crude oil prices is still washing through global headline CPI data, but the seepage into core inflation will likely be mild and brief. While cyclical inflation pressures are softening, structural pressures emanating from capacity depletion, oligopoly pricing, skill shortages and government regulation are strengthening.
Macro Risk Advisors do a great job at tracking positioning across all asset classes and their derivatives.In their weekly Cross Asset Positioning Map report published this week MRA say positioning across asset classes does not depict a very clear cut sentiment with short covering in HY credit (risk-on), stalled longs in Cyclical Equities, and increasing longs in Defensive Equities and US Bonds (risk-off). Defensive equities have the momentum of late and offer further upside potential in a risk-off scenario, particularly if rates remain low. In terms of rates positioning, the ‘Powell pause’ has driven TLT short interest to three-year lows and CTA bond longs to two-year highs, while in credit, short interest in credit ETFs (e.g. HYG, EMB) continued to fall, a positive sign for the credit complex. In currencies, the implied FX skew indicates net long dollar positioning, with the exception of GBP due to ongoing Brexit negotiations. Finally, on EM, positioning presents a neutral picture as EM futures indicate less longs, whereas short interest in EM Equity/Bond ETFs has decreased substantially.
Ned Davis Research introduce several new charts to help investors navigate the tricky world of leveraged loans. Loans became overvalued in December but are showing stability versus high yield at this time, but they would be wary of loans when loan spreads start widening relative to Libor.
”We had the junkiest mortgage market ever back in 2007, and twelve years hence we have the junkiest corporate bond market on record. Not to mention an epic $7 trillion of this debt will be refinanced in the coming half-decade, bumping against the competition from massive gross new Treasury borrowings,” says Dave Rosenberg of Gluskin Sheff. That’s the backdrop to his key theme of the year; A capex-led recession. In this short note Rosenberg nails down why the corporate bond market is in the firing line for a recession. Put simply, in order to avoid fallen angel status at all costs, BBB rated companies are rolling back capital spending plans aggressively, with Rosenberg citing hard orders data and a broad array of survey evidence.
Viola Risk Advisors are specialists in analysing global financials, in both equity and credit. They have developed some unique metrics in partnership with the NYU Volatility Lab to monitor global systemic risk. Their key concern in Europe is the Very High systemic risk of the French Banks centered on BNP Paribas and Société Générale (also Natixis and comments on Credit Agricole). They believe BNP, SocGen are highly systemic and pose inordinate risk to the European and Global Bank Systems with their speculative use of equity derivatives and hedging them with structured notes. Also, the French banks have over-concentrations to structured notes debt funding (medium to long term), and this makes their funding and liquidity profiles very unstable. This also adds to their highly systemic natures. Other banks around Europe that they have concerns related to equity derivatives and structured notes include: Barclays and UBS. They are also looking into ING, Unicredit, and other banks that seem to be active but on smaller scales. To put this into a perspective of wider systemic instability in European banks, they believe that the French banks systemic instability is on the order of at least a half of a Deutsche Bank problem for the system, and possibly could be higher as information is divulged. Click below to arrange a call with Viola, they have put together an extensive presentation outlining their ideas.
The Australian dollar was hit last week when Westpac’s Bill Evans came out with a note predicting that the on RBA will cut the cash rate by 25 basis points in both August and November, which was given further impetus on reports of China limiting imports of Australian coal imports. That’s not say that Westpac are negative of AUD. In a separate piece published Last week, they point to supportive factors for the Australian currency. Chinese currency strength on prospects for a US-China trade agreement is seen as very helpful background for the Aussie dollar, as is the resilience of commodity prices such as iron ore and coking coal. The Australian dollar is expected to probe the upper end of this month’s ranges against the greenback, they argue. That’s perhaps a more shorter-term view. Domestically, the Australian consumer is headed for tougher times and that will eventually hit growth. Evans says that as the housing downturn deepens, the pressure on the highly indebted consumer will grow, while the fall in residential construction is likely to be deeper than previously thought. Therefore Westpac has cut its growth forecast to 2.2% in 2019 and 2020. The decision by the Reserve Bank Board to accept the possibility that interest rates could fall further, despite the current record low levels, is “profoundly important,” Westpac says.
Shane Lee of Macro Strategy Advisors Pty Ltd is an Australian-based independent research analyst, specialising on Australian equities, the Australian economy, and global asset allocation issues. He’s written a series of pieces this year assessing the performance of Australian equities, the recent earnings season, stocks most exposed to the housing downturn, which stocks are showing resilience amid the rising headwinds, as well as looking at sectors, which may not be getting the attention they deserve, such as the IT sector where there has been outperformance compared to global peers. Australia is more than just a mining and banking play for investors.
Back in mid January, Capital Economics became one of first firms to call for rate cuts in Australia. In a note published on January 17th, their Australian economists wrote that 2019 would be the year in which previous excesses in Australia’s housing market would catch up with the economy, and that housing downturn will, as the year progresses, become a far bigger drag on Australia’s GDP growth than most market participants anticipate. A week later they followed it up with another research note where they argued that the housing downturn would become by far the deepest and longest on record and which by curbing dwellings investment, consumption and bank lending, will slash GDP from close to 3% last year to 2% this year and next, which would see the RBA lowering policy rates by the end of the year. What’s their latest thinking? While they note the rise in auction clearing rates in early February, they think it’s probably just temporary. Housing remains overvalued and other leading indicators point to a continued decline in house prices.
Peter Redward of Redward Associates has been early in calling for rate cuts from the RBA, well ahead of Westpac’s Bill Evans. He reckons Australian policymakers are complacent and don’t understand the challenges they face, in a piece published February 12. If the economy were to experience a hard landing – not currently Redward’s central scenario – the deterioration in the fiscal balance and rising net debt/GDP ratio would raise issues about the sovereign rating. Fiscal policy has limited scope to support the economy, Redward says. The central bank needs to err on the dovish side, with Redward predicting cuts of 25 basis points in June and August, while suggesting that a rapid string of four such cuts is in fact needed.
House price weakness, poor levels of building approvals and low hiring intentions are all combining together to set the Australian economy on the path towards recession. That’s the base case of Gerard Minack, one of Australia’s most respected macro strategists, in a note he published on February 8th. Minack says all the leading indicators for the property market have downside momentum, which will eventually start to impact wealth effect. As wealth increases, consumers feel confident in reducing their rate of saving. When the value of the main household asset – property – goes down, then that effect goes into reverse. That’s the set up in Australia now, with Sydney the most exposed city, says Minack. Indeed, if Australia’s savings rates follow the pattern established in other countries after their housing booms ended (GFC), then the economy is “toast”, Minack says. Please reach out to Gerard if you would like to read the full note, or discuss his views.