Treasury Supply, Bond Yields and the Shape of the Curve

With sentiment volatile in the US Treasury market, RDQ Economics looks at the implications for supply, bond yields and the shape of the yield curve posed by the significant increase in the US fiscal deficit predicted over the next three years. Taking projections from the Congressional Budget Office and the White House’s Office of Budget and Management, it estimates the current issuance schedule does not raise sufficient new cash to fund upcoming deficits. Investors should therefore expect further increases to coupon sizes in upcoming refunding announcements, with 10-year yields rising to 3.25% at the end of 2018 and 4% at the end of 2019. Meanwhile, although short-term yields are likely to rise as the Fed normalises policy, RDQ’s model predicts rising 10-year yields will prevent a further significant flattening of the yield curve. Click below to request access to this piece or to trial the RDQ service.

Your Russia Sanctions Guide

Macro-Advisory’s expertise covers Eurasia, including Russia and the CIS region. Their analysts are based in the region, giving them a unique understanding of trends and the political dynamic. This combined with their extensive local contacts and information sources enables them to provide superior insights into what is driving events in the region. They have produced two reports on Russian sanctions. The first from September last year looked at how the Russian economy has positively adjusted to the overall sanctions regime, through greater flexibility and increased productivity. The second came out in recent weeks in the wake of the sanctions announced on April 6th. In this note they point out that there is now a clear matrix that the US Treasury is using to identify which individuals to sanction, and that investors should look closely at this to see if they are exposed. While this might limit damage to the market as a whole, nevertheless the US government has widened the door for what might trigger new sanctions. Contact the provider to request samples of this extensive report or to discuss the wider service.

Turkey: Snap Elections and Investment Opportunities

Mike Harris is the highest ranked Emerging Market research specialist in the history of the Institutional Investor survey with 22 number 1 rankings, 13 of which were for his coverage of Turkey, and .previously was head of EEMEA research and equity strategy at BAML and was Global Head of Research at Renaissance Capital. He now runs his own consultancy, Cribstone Strategic Macro, while also working as an IPO advisor. He is the guy to speak to on Turkey. Following the announcement last week by Turkish President Erdogan to call early elections in June, Harris says Turkey is super high risk pre the June 24th election date, but could potentially de-risk substantially post the result. He believes a very short window of uncertainty is helpful as it likely means the definitive end of the now 6 year political cycle. He adds that the calling of the election is not a sign that Erdogan knows he will win, it is rather driven by a fear he could actually lose and hence he thinks this is the most opportune time to call the election to maximize his potential to win. Harris can run investors through why that is the case, what the opposition needs to do to win, and what Erdogan might do, which could negatively impact markets if he fears he is losing as the actual vote approaches, and why the Central Bank will be a non-actor in the interim. Post the vote, Harris has constructed a series of scenarios that under an Erdogan win, an opposition win (post a 2nd round Presidential ballot), and the worst outcome: a declared but challenged win. Lastly, if markets do get the certainty of a clear outcome, Harris has some deep analysis on what the market needs to see to return Turkey to fuller invest-ability. Contact Harris directly to discuss.

Accelerating the Peak in Australia’s Economic Cycle

Looking on the surface the Australian economy is firing on all cylinders, with the best business and jobs conditions for 10-year, writes Craig Ferguson from Antipodean Capital. Therefore one shouldn’t be surprised that the RBA, in it’s most recent minutes, said that the next move in rates will be up not down. Ferguson tends to agree. So in this note, Ferguson looks to test this view by looking more closely at some of the recent attention being given to financial stability, banking regulation, and the linkages between housing, consumption and savings. Ferguson says if these policies designed to slow credit growth are effective they will accentuate a slowdown in the economy that is close to peaking. Contact the provider to request a sample of this report or take a trial.

Fed Policy Mistake; Misreading the Natural Rate of Interest

Alpine Macro, is a Montreal-based independent macro research firm which was founded in 2017 by a group of former BCA executives and strategists. Their chief strategist, Chen Zhao, recently published a very interesting in depth piece that looked at the neutral, or natural rate of interest. Zhao writes that in modern parlance, the neutral rate of interest is defined as the real rate at which GDP growth is maintained at its steady trend rate, while price inflation is kept at the central bank target, usually at 2% for most countries. Chen’s clear conclusion in this paper is that the real rate – though appearing to be low – is very close to the neutral rate, and therefore it would be reckless for the Fed to push rates significantly higher than current levels. A policy mistake could be a distinct possibility. Click below to request a sample of Alpine’s recent work, or request trial access.

US Equities: Overweight Financials & Energy

Being overweight Energy is one of Strategas Securities’ highest conviction ideas along with financials, but it is also a controversial one. They make the case that the current gap between the performance of commodities and stocks (such as WTI crude oil vs energy sector relative S&P500) gives investors some margin of safety. Given the long-term correlation, they expect energy to outperform. Capital expenditures for the sector have fallen dramatically in the past three years and global demand, led by the US, should remain firm. Add geopolitical tensions and the current rally may prove durable, they say. Contact the provider to request trial access to the Strategas service.

Inflation; The Unruly Mutt

‘We never cease to be amazed by inflation forecasts that stop at 2 per cent, as if the guardians of monetary policy had an instant braking mechanism for inflationary pressures. We find no evidence to suggest that 2 per cent is a barrier that will be reached but not surpassed,” writes Tom Traill from Economic Perspectives, an independent research firm that places inflation and credit markets at the heart of its analysis. In a US context, there is every indication that core (ex-food and energy) CPI inflation will breeze straight through the Fed’s objective, says Traill in this blog post. This is a follow up to their recently published Global Inflation Perspectives, where they make the point that US central bank orthodoxy is that inflation isn’t inflation unless it is US led and driven by wages. The current uptick in inflation (up 150 bps since 2016) has been led by Europe and Asia not the US. Added to together they’re very much of the view that inflation pressures are building faster than markets currently believe. Economic Perspectives will be hosting a breakfast seminar this Wednesday, April 25th in London, entitled: ”The Little Inflation With The Big Bite.” Institutional investors are welcome to attend, see here for details to register. Their quarterly Global Economic Perspectives can be purchased on RSRCHXchange, or alternatively contact the provider directly. 

Equities, Favouring Selective UK and European Equities

Simon Goodfellow at Harlyn Research likes Europe and the UK equity markets on a relative basis against the US and Emerging markets. While Harlyn’s asset allocation models still suggest European equities are comparatively unattractive compared to other asset classes, they think that European equities (and UK equities in particular) should move to a neutral stance from underweight. In the case of the UK this could move to an overweight stance. The reason for this is that the uncertainty over Brexit has waned to a large extent, which removes a big overhang from not just UK equities but also European equities. With that removed, the low volatility of both asset classes looks very attractive, especially to investors with exposure to much higher volatility US equities. Moreover, on a currency basis, the trade weighted dollar index has stabilized and weak survey data from Germany means the ECB will be in no hurry to normalize its operations and end ultra-easy money. This should weaken the Euro and thus help European large cap exporters. The report is available on RSRCHXchange. Alternatively contact the provider directly.

Equities; Who Performs Best in a Fixed Income Bear Market

Quant Insight’s research is built on an analytical framework conceived by a group of macro hedge fund portfolio managers and Cambridge University academics. Their framework looks to understand asset price movements and valuations, and distils signals from its quant models that cover thousands of securities in real time. Their secret sauce is that they use algorithms to untangle and isolate which macro variables (typically correlated) are driving asset prices. Last week they put out a note looking at which individual US equities perform well during a fixed income bear market. They’ve put together a basket of 40 stocks that perform well when both real yields and inflation expectations are moving higher. They did this by looking for stocks across the S&P 500 that moved positively against 10Y TIP yields and 10Y Zero Coupon inflation swaps. They found that over the period of September 2017 to February 2018, when 10Y real yields rose 58bps, this equity long/short basket rose 65%. You can purchase this piece on RSRCHXchange. Alternatively contact the provider directly to find out more about Qi’s unique model.

Beware of FX Volatility Complacency

4X Global Research are warning that markets have become complacent over a return of rising FX volatility. They note that realised volatility in most USD crosses remains below their long-term averages despite obvious geopolitical tensions and country specific risks such as Brexit. This stands in stark contrast to elevated levels of equity market volatility. Possible reasons for this relative stability in currencies are manifold: ultra-low policy rates and quantitative easing, commercial banks reduced reliance on wholesale funding, central banks’ use of USD swaps, plus tight management of FX by central banks, particularly in Asia. In addition predictable central bank policy rates may be helping induce currency stability, with the Federal Reserve’s hiking path broadly matching expectations so far in 2017 and 2018, in contrast to 2015 and 2016 when it under-delivered on its projections. Also, the fact that there have been no major currency shocks in the past 21 months – 2015 saw the Swiss National Bank and renminbi revaluations, and 2016 Brexit – may also be calming the FX market.  Indeed, while volatility remains highest in high-beta emerging market currencies, like the South African rand, Turkish lira and Russian rouble, with the exception of USDRUB, current volatility is in line with or lower than the volatility recorded in the past 12 months. For 4X Global Research that suggests the threshold for FX volatility to materially rise is potentially quite high. It also suggests that complacent markets may not be prepared or positioned for any spike in higher in FX volatility if it comes.