BoE: No Hikes Until August

Ahead of tomorrow’s Bank of England rate decision Phil Rush from Heteronomics provides an update on UK’s economy, his expectations for monetary policy and his projections for Brexit. Rush argues that the recent discouraging output data was due to bad weather and crash in the construction industry while expecting inflation to fall further, albeit with a mid-year rise. He also anticipates BoE postponing hike until August, given disappointing activity data. And from a Brexit perspective, Rush believes a smooth transition to a ‘hard’ Brexit remains likely. Click below to request access to Rush’s expanded chart book which you’ll find a useful read ahead of tomorrow.


Is the Tide on Global Risk Assets Heading Out?

Nomura’s Bilal Hafeez channels the famous Warren Buffett quote ‘’you only find out who is swimming naked when the tide goes out”, to make the point that global economic conditions and risk sentiment exhibiting an array of signals that suggest the tide maybe about to go out on global risk assets, and these need to be watched closely. At the heart of this is of course is interest rates, which are on the rise (One could easily forget the fact that 10-year US Treasury yields have more than doubled in the past 2-years, he says), and global growth momentum is fading. Hafeez outlines a whole host of risks for markets that are potential belweathers; 1) Oil prices up 50% in a year 2) Italian spreads widening 3) EM currency plunge (the Argentinian peso has fallen 10% over the past month, while the Mexican peso and Turkish lira are down 5%) 4) US LIBOR-OIS spreads at close to widest level since financial crisis 5) VIX shock in early February 6) US (and world stocks) down 7% from late-January peaks; US P/E ratios down 12% over same period 7) Weak credit markets: euro-area high-yield spreads 50bp wider; EM Asia credit spreads back to 2016 levels. Nomura clients can read the full note via the bank’s research portal. Click below.

 

 


China: Trade Wars/Q1 GDP/Rebalancing/PBoC’s RRR Cut, Consumer-led Demand

Diana Choyleva from Enodo Economics recently recorded an excellent and informative audio cast that covers much of the recent work Enodo has been doing on China. The topics covered include: The prospects for the Chinese economy in the light trade disputes between Beijing and Washington and its long-term effects on China’s economy and current growth prospects. In Choyleva’s view the current trade war was inevitable given the mid-term elections in the US, and that concessions from China won’t be enough to appease the US. More fundamentally, she thinks such trade skirmishes are a reflection of the geopolitical clash between the two economies, and how China is determined to go its own way and eschew the traditional path of free-market Western economics. This leads nicely on to her thoughts on the potential long-term effects on the Chinese economy and current growth prospects, where she says the consumer is now powering growth. There’s also an interesting section on demographics where Choyleva discusses Click how demographics increase the bargaining power of China’s labour force and a concerted effort to unleash untapped spending in rural areas is undertaken


Assessing the Fallout From Trump’s Decision to Leave JCPOA

Cliff Kupchan was out with a note last night to encapsulates the over all ramifications and risks form President Trump’s decision to  withdraw from from JCPOA yesterday. Clearly the decision increases risk across the board, and the Iranian premium is already reflected in currently high oil prices, though markets will now be especially sensitive to regional risk and to how the US implements oil sanctions, writes Kupchan. Iran is likely to increase its nuclear activity too, although Kupchan thinks Iran will generally react with restraint, so as to not alienate its European partners still in the agreement, but market forces will probably lead to failure, as ultimately CEOs and firms will face the prospect of losing access to the US market if they stay in Iran, the report says. Kupchan also says that proxy wars will flare up in the region and US relations with Germany and France will suffer. He discusses these two points in detail. If you would like to have access to this report or see other work from their extensive coverage of the Middle East, click below to request directly from Eurasia Group.


Hardly a Game Changer for Oil

It is far from clear whether Iran’s oil exports will be reduced sufficiently to affect the global supply and demand balance, writes Anatole Kaletsky from Gavekal. As he notes, even though Iran’s exports have almost doubled since the sanctions were lifted from 1.5 mnb/d in 2015 to 2.5-2.7mnb/d, the bulk of this oil has been sold to China, India and Turkey, all of which are likely to ignore or circumvent any US sanctions. He then looks at the Europe, Japan and US allies and finds that the disruption to supply would be smaller than the loss of exports caused by Venezuela’s economic implosion, increased output from US shale fields or the likely reduction in global demand caused by oil prices almost jumping to US$75/bbl from US$45 last June. In short, the Iran sanctions are unlikely to have a decisive impact on the global balance of supply and demand, Kaletsky concludes. For full access to this note, click to below to request it directly from Gavekal.


US: The Iran Announcement; Trump will Withdraw from JCPOA

Political Alpha an an extremely well-connected Washington DC policy and macro research firm. They’ve just put this note out on the imminent announcement ay 2 pm ET from President Trump on the JCPOA. They expect that Trump to withdraw from the JCPOA. However, not all sanctions are likely to kick in today, and there is no reason the administration can’t grant exemptions down the road.  Think: steel tariffs, the report says. Political Alpha say that while the markets have focused their attention on the risk to oil markets, the real risk might come from how the Iranians respond to sanctions by ratcheting up regional tensions. Click below to contact Political Alpha directly if you would like to trial their offering to access the latest developments on Iran and the Middle East. The firm has also been very close to the work being down on regrading of the 301 tariffs on China /232 tariffs on Europe that will soon be announced.

 


Artisanal Investment Research – The Next Frontier, as Systematic and Passive evolves into ”Group think”

Numerous threats are appearing for active managers in an investing world where passive and systematic investing has become almost omnipresent. As a result of cost and margin pressures, many believe that the industry is headed a significant consolidation, dominated by a few heavyweights. However, as Cam Hui from the Pennock Idea Hub argues in this note, the conventional Big Data and quantitative techniques thesis need not be seen as a major threat, because quant investing is actually engaged in a game of groupthink. As Hui writes, ”Today, anyone with a $250K data budget and a FactSet subscription could become a quantitative equity manager. Everyone is looking at the same data sets, such as Compustat, First Call/IBES, BARRA and so on. In other words, it has become a crowded trade.” Hui believes the investment process has gone full circle, back to old-fashioned “artisanal research”. Regulatory changes, such as MIFID II, have made the price of information more costly. Consequently, competitive advantage will not just come from size and scale, but to the specialty asset managers willing to pay for relevant and insightful research. If you would like to read the full note, the Pennock Idea Hub, would be happy to share – on a case-by-case basis. Click below to contact them directly.


3% Treasury Yield – What Next?

MRB Partners believe that investors have dramatically underestimated the magnitude and duration of the US rate cycle, and that the reappearance of inflation is catching bond investors on the wrong foot. Rising 10-year Treasury yields could, they say, be a catalyst for a stock market correction and a spike higher in implied equity volatility. MRB believes the bond bear market is likely to continue, with risks remaining skewed towards higher yields given that many investors still have sizable long fixed-income positions at a point when inflation will rise more than most expect. They explain why the rise in yields could be lethal for certain weak links in the global economy, how the dynamics between bonds and stocks have changed, and why equity investors will need to be more selective in sector allocation and expect a persistent increase in volatility


Iran Deal, Gulf Tensions Will Keep Oil Prices Underpinned

Predata is one of a new breed of alternative research providers leveraging off data science to provide real-time intelligence to the investment community. They use anonymized online metadata to predict geopolitical, security, and market-moving events ( Here’s a dashboard summary). In this report they say they have observed signals, monitoring debate and discussion around the Joint Comprehensive Plan of Action in both the United States and within Iran, which point to uncertainty and pessimism around the so-called Iran Deal, and which are bullish for the oil market. They present 3 data points. 1) Online debate in the US around the Iran deal (Optimistic, due to Macron’s views that the US should stay in). 2) Iranian online debate (Pessimistic as they think the US will pull out). 3) Iran-Saudi Tensions (The likelihood of a significant diplomatic escalation between Iran and Saudi Arabia Iran has increased dramatically). Click below to request access to this report directly from Predata.


Global Equities: US Equities Still a Buy, Europe and UK a Different Story

ECU Research produces a monthly report entitled, Global Investment Roadmap, where they analyse markets through trend following techniques (model based on Joseph Schumpeter), the identification of secular and cyclical trends – within the business cycle – using a growth, value and technical framework. In teh latest edition published last week, ECU write that world equity markets were well undue a correction and as history shows, bull runs often have set backs of 10-15% within such a cycle. The fact that we’ve just had the longest period in history without a 5% pullback merely illustrates the overbought nature of the market, both in terms of price and time, the report says. So where are we now? ECU Research say that after the euphoric highs of January, most equity markets have fallen back to their 200-day moving averages, but that this is not yet a sign of a bear market. ECU show that the price action represents nothing more than an overdue correction in 58% of global indices. What about the other 42%? Here the indices have broken below the 200-day MA – and to compound this – the 50-day MA has broken below the 200MA, creating a so-called ”Dead Cross.” This is a negative development that probably indicates that the cycle’s highs of these markets has been reached, ECU say. These markets include UK and European equity indices. As for those still in a bull market, and incorporating their top-down macro analysis, ECU argue that a recession won’t come to 2020, therefore these markets, such as the US, probably have upside for another 6-9 months. Click here for the full piece.