At the risk of ever-so-slight exaggeration, in macro terms the country might as well not exist, writes Jonathan Anderson from Emerging Advisors Group. The conventional thinking is that being the world’s third-largest economy there must be a flow on effect to the emerging universe from the weak yen, zero interest rates, super-expansionary monetary policy and export competitiveness. However, according to analysis from EMA, it turns out that in the context of neighbouring Asia, Japan has become almost irrelevant as a macro theme. This is sure to surprise many investors, but EMA’s analysis focussed on five areas: trade links, asset flows, FX influence, interest rates and profits and competitiveness. They found it surprisingly hard to find a single sphere where it had a meaningful impact. This piece is essential reading.
The FX strategy team at Royal Bank of Canada have just introduced a new barometer for measuring Euro area market conditions after creating their Euro area Conditions Gauge (ECG). Using the gauge they hope to quantify something that seems intuitively plausible; That a very rapid rise in yields and/or EUR will tend to be self-correcting, particularly if the rise is not fully justified by better economic prospects. But if the ECB is showing no signs of concern over market developments, so it is fair to ask, should RBC care? Well they argue that it is something to monitor as rapid rises in this ECG tend to come ahead of softening survey/business sentiment data. This might prove to be useful, and the report takes the reader through its construction and historical price action to provide context on how the index is behaving currently.
While equity markets have by-and-large avoided the fall out from the sell-off in global bond markets, rotation within the equity market may be just about to begin, writes Sean Darby from Jefferies. This comes amid new lows for implied stock correlations, some poor equity positioning (large US equities outflows in 2015), and non-uniform economic performance across regions in the US. Meanwhile, the implied volatility of the VIX has fallen while US bond volatility has climbed sharply. Watch this space, says Darby. This report has an extensive screening of US equity names that exhibit good forecast dividend pay out growth as well as positive momentum in target prices and earnings.
In Erik Nielson’s Sunday comment, he focuses in on the increasingly troublesome world of EM – which he says is increasingly getting the attention of investors – and where there are multiple factors that provide a fairly negative picture for the asset class. Firstly, he points out the results of Unicredit’s latest proprietary Global Leading Indicators and last week’s EM fund outflows and then his reasoning behind his bearish outlook, which is that this is no cyclical downturn but something much more structural. It will be much harder to turn this around. There’s also a breakdown of what this means for China, Brazil, Turkey and Russia. Finally there is some recommendations for EM investors, the European corporate sector, and some solace for the Euro area and US economies.
The prospect of a Greek default no longer poses a serious threat to the rest of Europe, writes Anatole Kaletsky from GavekalDragonomics. The sad thing from a Greek perspective is that Prime Minister Alexis Tsipras does not seem to understand this, given his belligerence in the ongoing negotiations, and belief that Europe needs Greece as desperately as Greece needs Europe. This now risks catastrophe for his country and humiliation for his Syriza party, or both, says Kaletsky. There is a very sound basis for this view, and Kaletsky lays the ECB’s quantitative easing program at the core of his argument because it has now effectively created fire-breaks at each point in the contagion process. This is a great read, and if you’re a Gavekal subscriber there is some other interesting comments from fellow subscribers to follow up from this piece that offer some useful insight too.
This week’s FOMC meeting is technically a ‘’live’’ meeting but the chances of raising interest rates are effectively zero, writes JPMorgan’s chief economist Michael Feroli. Investors should be instead focused on what is signaled in the interest rate forecasts, or “dots,” of the Committee participants, with the most immediate issue being what the 2015 dots say about the timing of liftoff, says Feroli. In this piece he discusses a few possible scenarios if there is an increase in those who forecast less-than-two hikes in 2015, as well as JPM’s own prediction on how many of the committee will lower their dots, from two hikes in 2015. How the dots are rearranged will be crucial to the market’s understanding of whether the Fed still believes September lift-off is viable. There’s also some interesting discussion on lower 2016-17 dots, lower longer-run rates, the merits for raising rates at ‘’off’’ meetings and whether that raising them in increments of 12.5 basis points would ever be possible option for the Fed.
The euro is now about 8-big figures higher from its mid-March lows and could threaten to undermine the euro zone’s exporter competitiveness potentially curbing the economic recovery. We need not worry, writes Credit Suisse, because recovery, which is beginning to emerge in Europe is being driven by domestic factors; the exchange rate and external demand may matter at the margin. Instead, the recovery rests with the euro area firms and households react to the improving sentiment that is emerging. The revival in consumer and corporate spending, as well as the end of fiscal tightening, is what matters. If domestic demand falters, so will the recovery, the report’s authors say. Credit Suisse provide plenty of detail and charts on pages 4-5 that look at measures of consumer spending, nominal incomes, and corporate profits, for useful context and then round out the piece by outlining the positives for the euro area versus the US economy, from an employment and corporate margin perspective.
The fallout in commodity prices is mostly over, but the contagion in commodity economies is just getting started, says MRB Partners, who have produced this timely piece on Canada, coming the same day that the Bank of Canada released their semi-annual review of Canada’s financial system and where Governor Poloz admitted the BOC still doesn’t have a full reading on the oil price shock yet. MRB has been bearish on Canada since 2011, when it first highlighted some its imbalances and excesses, and while that wasn’t a popular view at the time, they note that investors are now becoming increasingly aware of the risks within the Canadian economy and related markets. This is mostly being driven by the recent collapse in energy prices. In this extensive report MRB points to the broadening contagion of lower energy prices and how this is likely to play out in the context of the Canadian economy, along with their strategic recommendations on how to position for this.
To segue from Credit Suisse’s observations about corporate Europe, Deutsche Bank’s Jim Reid has just published this piece on the European high-yield market, where his team reviews the recent performance in the wake of the sell-off in the government bond markets and discuss the relative value of US high-yield versus European high-yield. This is an extension to work Deutsche Bank has already done in looking at relative value in US, GBP and Euro investment grade names, which highlights the point that while optically USD high-yield credits appear to offer better value from a yield perspective, in spread terms this is not always the case, and there is some great analysis from Reid and his team across the high-yield spectrum in this piece. It’s also worth noting the results of a poll conducted at DB’s 19th annual European Leveraged Finance conference in London last week, where participants were asked a set of market related questions. Always interesting to get a gauge on what the market is thinking.
As we highlighted above, the euro has made a substantial recovery from its March lows, which runs against the medium-term view of many forecasters who have been calling for the euro to fall to parity. One of these such forecasters, Citi, has published this piece which attempts to answer the question: Why isn’t the euro falling? The bank’s Global Macro Strategy team put this down to, in the short term, positioning and liquidity factors in addition to Bund price action. They include some fine analysis on this short positioning, the various waves of it over the past 12 months, and what investors need to be looking out for in terms of the unwinding of publically available euro positioning data, in order to create cleaner positioning that might result in a turn in the short-term euro trend. Very useful analysis.