A majority of analysts we read are neutral to bearish on China, but one research firm, Deep Macro sees signs of a recovery in China’s economic conditions. DeepChina, the firm’s big data-based snapshot of recent developments in the Chinese economy suggests the country’s critical housing sector is showing signs of strength. The information DeepMacro collects shows firming house prices and falling inventories, especially in the large Chinese cities. This is important for capital flows because money tends to seep, or gush, out of China when domestic growth is low and domestic assets – of which real estate is the primary one – decline. With real estate prices rising, it is hard to imagine a large capital outflow from China, according to DeepMacro, making the country potentially a positive contributor top global risk sentiment more broadly. Click to below to request access this report from Deep Macro directly.
Predata Research are among an interesting new breed of research providers harnessing big data and social media to provide insights to investors, particularly around geopolitical risk, elections and even data releases. This week they say nuclear developments in Iran and North Korea overwhelmingly occupied the attention of global audiences. In markets, amid shifting expectations of a BOE rate hike, Predata signals are anticipating that volatility in the British pound will rising. Predata shows how their model has had a good track record in recent time in predicting volatility spikes in the GBP around key events, which might be something worth keeping in mind. Click below to request more detail on Pre Data’s model and analysis around key events.
Investing in the cannabis industry became something of a crowded trade last year and at the beginning of this year in anticipation of the legalisation of the drug in Canada and in some states in the US, where tax revenues are potentially meaningful. As the research firm, Inferential Focus, points out last year the state of Colorado took in $247 million in taxes and fees from the legal sales of marijuana, not enough to solve the state’s education-budget shortfall but a sizable chunk of change. Medical marijuana and cannabis-derived non-psychotropic products have been gaining more and more acceptance in more and more states…and countries. What is the status of the legalization and assimilation of cannabis? In this report Inferential Focus examine the building out of a cannabis-industrial infrastructure, and where the investment opportunities lay. Click below to contact the provider for access to this report.
Looking beyond short term influences such as high frequency data and any comments to emerge from the US Federal Reserve meeting that concludes today, there are good grounds to believe both that growth in the rest of the world remains broadly on track, and that the current US dollar rally will prove relatively short-lived, writes Tan Kai Xian from Gavekal. The reason is that the US current account deficit is widening, and that this widening trend is likely to persist. Key drivers of that might be 1.) The rise in oil prices has prevented the US oil trade deficit from narrowing in nominal terms, 2.) The tax cuts passed into law in December will lift imports. 3.) 3. The US dollar is not yet undervalued. Click below if you’d like to contact provider for fill access to the analysis.
Real housing prices in Scandinavia and Australia/Canada, as well as HK, are dangerously above long-term trend and vulnerable to a global rate upside surprise into 2019, writes Sean Maher from Extext. A global credit squeeze – as US liquidity tightens -is a risk for HK housing/banks, but also, the most overvalued markets elsewhere i.e. Australia, Canada and Sweden, the report says. The Riksbank has been warning about risks in the Swedish housing market, but is in the unusual position of not having powers to limit lending – macro prudential rules are set by the government, Maher notes, also observing that one indicator of financial vulnerability developed by the Riksbank itself, is now higher than it was before the spectacular banking crisis that hit the country in the early 90s. Canada has in contrast repeatedly tightened rules on banks, only for borrowers to turn to the shadow sector. In Australia, Maher highlights AMP, which is in crisis after revelations of widespread abuses, uncovered by a Royal Commission set up in February to investigate banking misconduct. The same investigation has unearthed widespread mortgage application fraud (i.e. so called ‘liar loans’ where borrowers use fake income figures to secure a mortgage) and minimal due diligence across the sector, echoing the 2005-7 US experience, writes Maher, and he cites the latest BIS report, which highlights risks in Canada and HK where ‘the credit-to-GDP gap and the DSR are flashing red’. As with all of Maher’s weeklies, he covers a multitude of themes, and this week he has also covered; the broad USD strength and risks to EM, WeWork’s junk bond issue, how the Momentum equity factor has stopped working, and why defence stocks are still good value even on Trump’s Nobel Prize hopes. Click below to request access to the full report from Entext.
Alpine Macro, is a Montreal-based independent macro research firm which was founded in 2017 by a group of former BCA executives and strategists. We highlight the first edition of their Emerging Markets & China Strategy, which was published recently and authored by their Chief Emerging Markets & China Strategist, Yan Wang, who left BCA last October after 15 years as Managing Editor of China Investment Strategy. Alpine expect that the ongoing EM relative bull market has further to run, as all three main driving forces (1. EM economic growth will continue to outpace DM growth, 2. Emerging countries are still undercapitalized, EM equities valuations are far less demanding ) are supportive. Furthermore, from a broader macro perspective, 3) Alpine believe that the bear market in the U.S. dollar is incomplete, and China is set to enter a period of renewed reforms and accelerating growth and capital flows to EM are just beginning to pick up after a multi-year decline. Finally, global institutional investor sentiment on EM has become more positive, but there is no sense of euphoria, as relative valuations are still decisively in favor of the developing bourses. All of this points to a strong case for an overweight position in EM within managed global portfolios. Alpine Macro’s chief strategist, Chen Zhao, will be hosting a breakfast briefing in London on May 17th where he will present his most recent analysis on global investment trends and the broad macro forces driving the world economy. Click below to request access to Yan Wang’s EM piece, or to express interest in attending the Alpine breakfast briefing.
While the markets outlook is not free from risks, the cyclical environment for EM assets remains attractive, writes Johnny Goulden from JPMorgan. At the start of 2018 Goulden and his colleagues positioned themselves in EM local debt markets with a bullish bias based on the view that global growth was forecast to have a coordinated business cycle uplift, with EM growth set to increase versus DM growth. With a weak USD outlook and 2018 EM local bond return forecasts of 8% looking very attractive versus the alternatives of DM bonds, the year began well, but there were sure to be blips along the way, and this of course played out in the first quarter. JPMorgan saw the opportunity to take some risk off and move from overweight to marketweight in March, but now as US 10-year yields have popped through 3% and EMFX has sold off some 5%, Goulden now sees that as the opportunity to move overweight again. JPM clients can read the full note on Morgan Markets.
The global oil markets are facing a shaky few months, as political flashpoints around the world—U.S.-Saudi relations, potential Israel/Iran conflict, a potential OPEC+ crackup, the future of the Iran deal, and a U.S./China trade war—all inject considerable uncertainty into the oil markets, write Andrew Taylor from Political Alpha, a Washington DC based policy and macro research firm. With all of these issues are up in the air, if one or more of them were to go pear-shaped, a spike to $100 isn’t an impossibility, particularly with the lack of slack supply currently in the market. In this report Taylor delves into each individual factors to examine the risks. If you would like access to this note, click below to contact Political Alpha directly.
Last week as most of the analysts we were speaking to were losing faith in a strong euro, BAML’s credit strategists ut out an interesting piece making the case that the euros time as a ‘safe haven currency’ has come (Yes we know this is not a new argument, but timing is everything). BAML say the dollar’s haven tag is being undermined while the euro is set to benefit as investors seek safety. They believe that as the world seeks “safe haven” assets more than ever and better sponsorship for euro-denominated debt will emerge. While this will help elongate the credit cycle in Europe, it also risks a faster appreciation in the euro, they say. BAML says there are a number of channels through which the increased haven status of euro-denominated bonds plays out. First, they see demand from Asia, particularly Japanese insurance companies, which had previously been reluctant to invest due to eurozone break-up fears. Similarly, they believe the structural EUR underweight position of the world’s reserve managers will also be corrected. BAML clients can read the full note on BAML Mercury, entitled: ‘’What is the safest asset of them all.’’
Quant Insight’s sensitivity analysis can empirically demonstrate the independent impact of one macro factor, holding all other variables constant, which produces some interesting results when looking at last week’s moves in US Treasury yields and their influence on equities and the USD. QI screened S&P500’s sensitivity to real rates, while in FX they have assessed the significance of interest rate differentials as a driver for any currency pair. Their results show that the SPX cares more about GDP Nowcasting than rates and in FX, EURUSD remains completely insensitive to interest rate differentials. Bottom line, this weeks moves appear to be driven by positioning and sentiment rather than macro. Click below to request access to the full note, or to take a demo of the Qi platform.