Macro

• Merry Christmas and a happy new year to all of you from us here at Steno Research.
• What a year it has been, and we hope you have enjoyed the portfolio, trade alerts and our weekly portfolio updates, where we as always try to give you an edge and insight in what we are doing with our money.
• For those of you who have been listening to our ‘Macro Sunday’ podcast, it’s no secret that our trades are “sometimes maybe good sometimes maybe shit”, but our equal-weighted alpha overlay portfolio has since inception in May 2023 delivered a very decent return of around 5% with very little drawdowns of at max 3-4% (compared to 8-10% for S&P 500 as an example) and with a market beta of 0.15 (based on a simple linear regression).

• Amidst the prospect of a soft landing and lower interest rates, the European Council unanimously voted in favor of reinstating fiscal safeguards for EU member states after a 4-year pause during the pandemic.
• The Stability and Growth Pact – the formal name of the fiscal rulebook – gives the EU the ability to impose monetary fines on member states with debt-to-GDP ratios above 60% and/or budget deficits exceeding -3%.
• The pact was temporarily waived to allow states to undertake counter-cyclical investments and debt intake during the pandemic and subsequent energy crisis.

• BoJ stuck to its ultra-loose monetary policy at its policy meeting on 19/Dec. It continues to maintain an extremely dovish stance to encourage economic growth.
• Governor Ueda stated that the prospects of inflation declining sustainably to target and wages rising and propping up demand remain high.
• Yen initially weakened following continued easing however it has recovered losses and stands 1.7% stronger than its level before Fed’s dovish stance on 13/Dec.

• Into year-end we have noted a number of key shifts in what Central Bank language is actually telling us from a quantitative point of view.
• We regularly track and update our measure of positivity/negativity of Bank language contained in statements, outlooks and speeches on a scale of -1 to +1 in our DataHub for premium subscribers.
• There you can access full histories and dig deeper into the underlying drivers.

• After the latest data, our earnings bellwether is back to zero, suggesting company earnings may be off the hook for big declines. That would be different this time.
• Our Fair Value estimate of the 10-year US Treasury is dropping like a stone, yet the gap with the actual yield remains strikingly large. ‘term premium aficionados’ are likely wrong.
• We look at a bunch of US housing and consumer data and must conclude that the odds of an imminent recession are shrinking.

• Welcome to this year’s final EIA watch with a 2024 outlook plus your weekly updates from our EIA models.
• Before we start, we have some breaking news coming out of OPEC.
• Jornal de Angola reports that Angola will exit OPEC and we see this as the first cracks starting to show within the cartel.

• 2024 will bring an environment of a grand-scale rebalancing of multi-asset portfolios. And the latest headline-making remarks on US government debt from China confirm this.
• China wants to diversify its foreign reserves further. With relatively stable foreign currency reserves, this suggests the selling of US Treasuries, which would be different from what we have seen.
• A significant part of the diversification of foreign reserves will likely end up with gold. China has been, by far, the biggest buyer of gold over the last two years.

• Panama Canal and Suez Canal are critical corridors underpinning global trade. >50% of containers from Asia into America cross either through Panama or Suez.
• Affected by El Niño, Panama Canal’s capacity has shrunk to 25/day crossings & risks falling to 18/day by February next year from an average of 36/day given shrinking water levels.
• Given Europe’s higher sensitivity to geopolitics, European Natural Gas & Crude Oil prices have reacted more wildly and have jumped sharply relative to US Gas and Oil prices.

• While the Bank of Japan didn’t change monetary policy -it just delays the inevitable.
• Rate differentials have only one way to go and will benefit the JPY.
• Position now for a strong JPY as the market anticipates the change.

• The stock market is overbought and sentiment models are reaching bullish extremes. However, price momentum is strong, indicating long-term bullish outlooks.
• Similar overbought conditions have resolved with short-term pullbacks in the past.
• Investors who are under-invested should wait for weakness for a better long entry point.

• We’ll start today’s 5 things with a look at the central bank outlook for in 2024, then we’ll address the troubles for OPEC.
• We move over to talk about China and afterwards Ukraine for some geopolitics.
• Finally, we’ll end this year’s last 5 things with a crypto outlook.

• Foreign confidence remains a massive issue for investment and equity pricing.
• Efforts for diplomatic damage control seem to be a cheap option when contrasted to the domestic issues related to adding more leverage to the system as an alternative.
• Domestic confidence is arguably even lower with households seeing little light at the end of the tunnel. We can see why they won’t.

• UK CPI inflation crashed 0.5pp under the consensus to hit 3.94%, with the RPI at 5.3% (35bps and 26bps below our sub-consensus view). Such a large undershoot is historical.
• Unusually early discounting behaviour appears to be responsible for much of the miss. This frontloading makes the disinflationary shock unlikely to be sustained.
• Failure to extend sales further beyond norms would allow the median to rebound. Pressures from high wage increases continue to drive excessive hawkish pressures.

• Soybean futures maintained above USc 1,300/bushel indicating continued strong support at the level.
• Large export sales announcements continued over the last week, through November, net Soybean sales from the US were higher than their 5Y average. December pace remains strong too.
• CONAB cut production forecast for Soybean in Brazil due to unfavorable weather over November. Weather has improved recently with rains expected in key agricultural region.

• The installation of a corporate veteran as second finance minister is a welcome development to strengthen decision-making at the Malaysian treasury
• The return of experienced ministers from prior administrations also bodes well, while those perceived to be underperforming were demoted or removed
• Given the constraints of coalition government, Anwar had to maintain the balance of forces between the component parties. This was largely achieved

• The final EA HICP inflation print confirmed the surprisingly soft flash of 2.4% for Nov-23. Core inflation was also steady at 3.56%, while the HICPxT unsurprisingly hit 2.29%.
• The downtrend is still set to break in December on base effects from last year’s energy price subsidies in Germany. Underlying inflation mostly remains around 2% (annualised).
• Italy dipped low, which would warrant rate cuts in the unlikely event that it broadens and sustains. Wage pressures should pose resistance and discourage cuts until mid-24.

• We recently entered a long UK duration trade in anticipation of further disinflation in the UK, which so far has been a winning trade as the recent payroll data and waning price pressures has been in our favor.
• We see CPI headline -0.25% MoM, core -0.15% MoM and Services -0.15% MoM in rounded figures, well below consensus
• The path to 2% looks much more doable now than it did just 1 month ago in the UK given base effects

• Welcome to this week’s Great Game – your weekly geopolitics brief.
• This week, we take a closer look at the struggles of keeping up funding for the Ukraine War as well as the ongoing struggles in the Red Sea that we have predicted for several editions here.
• Let’s start in Washington: The recent Senate blockage of a vital funding bill, including aid for Ukraine, Israel, and Taiwan, alongside border security enhancements, has been a pivotal moment in U.S. politics.

• From the fresh IFO report details (on prices, orders and employment intentions), the majority of industries expect exports to decline in the months ahead.
• These include automakers, who had recently been assuming that exports would remain constant.
• Manufacturers of machinery and equipment are also expecting fewer orders from abroad, while energy-intensive industries such as the chemical, metal and construction industries are having a particularly tough time at the moment.

• US policy makers signal the peak in Fed Funds rates and to imply rates cut cuts as soon as March 2024
• Fed Liquidity has risen by a whopping US$534 billion or 16.6% since the start of 2023
• These moves are consistent with our long held view that the Global Liquidity cycle bottomed in October 2022 and is expanding towards a new peak in 2025.

• Hello everyone, and welcome back to our weekly positioning watch following the surprisingly dovish FOMC meeting last Wednesday, which smells of a slight policy mistake given what we have been writing about forward-looking price and wage indicators over the past weeks now starting to tick upwards again.
• Despite a couple of Fed members trying to retrace after the meeting, pushing back on rate-cut expectations, market positioning has turned VERY bullish over the past week, and oh boy has equity markets positioned themselves for a binary outcome.
• The USDs parked at money-market funds have taken the spotlight since the FOMC meeting, as inflows in MMFs have continued despite 3-month T-bill yields reaching what looks to be a top after Powell’s remarks Wednesday.

• The past week saw insights on Ace Hardware Indonesia (ACES IJ), AKR Corporindo (AKRA IJ), OUE Commercial REIT (OUECT SP), GoTo (GOTO IJ), and Sea (SE US).
• There was also a macro insight looking at Myanmar, an insight looking at Vietnam’s most recent index rebalance, and a credit insight on Lippo Malls Indonesia Retail Trust (LMRT SP). 
• The Week That Was in ASEAN@Smartkarma is filled with an eclectic mix of differentiated, substantive, and actionable insights, macro and equity bottom-up, from across Southeast Asia.

• Welcome to this week’s Energy Cable.
• We finally got stopped out of our crude oil trade at the beginning of last week, only to see crude rally at the end of the week on the back of the FOMC meeting and again today due to the supply chain.
• We also entered a long in utilities as advertised last week and we are already enjoying a healthy plus, also as a consequence of the FOMC.

• Japan endured years of economic stagnation due to an impaired banking system following the bursting its real estate bubble and some commentators currently fear a repeat experience in China.
• Despite the potential for debt swaps with local government, regional banks will bear the brunt of loan restructuring to local government financing vehicles via higher loan-loss provisions.
• The main of objective of central government in 2024 will be stabilising home sales in Tier-1 cities via easier policy measures. Bank lending to private property developers will remain tight.    

• We are making U.S. financials a high conviction buy idea for the following reasons
• Positive macro backdrop from falling yields and steepening yield curve.
• Sector shows strong technical strength and strong contrarian buy signals.

• The Fed’s decision to potentially cut interest rates in June instead of July may have significant implications for emerging markets (EM) assets.
• The shift in the Fed’s stance is proactive and not a response to a sudden downturn in data, suggesting a soft landing scenario for emerging markets.
• This change in the Fed’s policy may alter the recommendations and views for next year, potentially leading to a more bullish outlook for EM assets.

This podcast is sourced from an online content aggregator through publicly available sources and is displayed below for general informational purposes only.

• The U.S. stock market appears to be undergoing a seasonal rally into year-end and January. Warning signs of froth are starting to appear and traders should exercise caution.
• We believe stock prices may advance further into a possible blowoff top.
• In particular, the market may be poised for a Gamestop-style short-covering rally. Hedge funds were caught offside in a crowded short when low-quality names began to rally.

• Risk reward favours a shift in allocation between these markets.
• Hong Kong washed out from a sentiment, valuation and positioning perspective.
• Minimal investor expectations  and continual disappointment  have set the stage for a rally in 2024.

• US retail sales and inflation rates are retreating, and industrial activity is slowing.
• Europe’s economic decline is accelerating compared to the US.
• Oil prices are dipping in anticipation of weaker demand amidst a slowing economy signal.

• Powell invited for a yuuuge risk asset party this week by allowing the market to continue to chase the narrative of material rate cuts in 2024.
• This is (again) reminiscent of the 2006-2007 pause when the Fed allowed financial conditions to ease materially in the run-up to the recession.
• During a hiking cycle, loads and loads of USDs are parked in cash-like setups due to a sudden better relative yield premium in almost risk-free structures.

• In this insight, I review a fantastic book written by Morgan Housel called The Psychology of Money (published in 2020). 
• “The most important part of every plan is planning on your plan not going according to the plan.” 
• Three parts of the book were particularly outstanding including letter to author’s son, the story of Rick Guerin, and how mice helped the Russians to defeat the mighty German army. 

• European banks opted to hold rates steady and their statements were more dovish than the Fed. ECB and BoE statements suggested rates would need to stay elevated for some time. 
• EU and UK economies are slowing sharply which draws concerns over how long rates can stay elevated without their economies tilting into recession.
• UK and EU equities reacted negatively to the announcements while commodities rallied. Bond markets were largely unchanged. EUR and GBP outperformed JPY after the announcements while DXY fell further. 

• We have lifted the weight of Developed and Emerging Market Equities to Neutral and raise Bitcoin to Overweight.
• The catalyst for these portfolio decisions is the Federal Reserve, which strengthened the dominant market driver being the combination of Federal Reserve rate cuts, a soft landing, and ample liquidity.
• Bitcoin is also one of the beneficiaries of growing worries about the speed of debt accumulation. In addition, the impact of US spot Bitcoin ETFs may drive Bitcoin’s price higher.

• The junta in Naypyidaw faces its most serious challenge from the ongoing Operation 1027, where a coalition of ethnic militias has inflicted major setbacks on the army.  
• Poor morale and defections are hampering the military’s response against the insurgents. Beijing also shows signs of hedging its bets, providing limited tacit support to the rebels. 
• Given the balance of power, our baseline case is that the fighting is prolonged throughout most of 2024. A collapse of the junta is plausible but should not be assumed.

• China is providing massive amounts of liquidity to finally solve its ongoing real estate recession. At a time when liquidity in other parts of the world is also rising.
• The UK economy has not grown in the past nine months, and France is saying ‘au revoir’ to its manufacturing sector.
• Our Fear & Frenzy Sentiment Index has never been so deep in Frenzy territory. Yet, the other key sentiment indicator – 200-day moving averages – looks prettier every day.

• Elections in Taiwan and the US will shape the dynamics of US-China competition. Anti-incumbent sentiment is currently strong in both contests.  
• In India and Indonesia, incumbent governments (or their proxies) will seek a further term. The results will determine whether status quo economic and foreign policy is maintained.  
• Other countries in the region such as Thailand, Singapore, and Japan may also see changes in leadership depending on local political dynamics.

• Capital / In Depth: What China’s new capital rules mean for banks

• China-France /: ‘We are willing to build a balanced relationship’ with China, France’s top diplomat says

• Bonds/: Local governments tap $29 billion special bonds to fund smaller banks

• As we wrap up the last Central Bank week of the year, it’s safe to say that the market hasn’t provided much incentive to conclude the celebratory spirit that started in November before the New Year.
• Powell’s press conference and the FOMC dot plot have continued to push interest rates lower and inject more USD liquidity into global markets.
• Risk assets have enthusiastically embraced this liquidity boost, even though John Williams’s recent attempts to temper the euphoria by clarifying that the Fed is not currently discussing rate cuts.

• China’s top policymakers emphasized economic growth and signaled stronger fiscal support when they met Monday and Tuesday to chalk out plans for the world’s second-largest economy in the coming year.
• Policymakers at the annual Central Economic Work Conference (CEWC) called for “efforts to pursue progress while ensuring stability” in 2024, according to a readout published by the state-run Xinhua News Agency.
• The conference took place in Beijing and was attended by top leaders, including President Xi Jinping and Premier Li Qiang.

• Although an unchanged meeting outcome was priced-in, the surprises were conditionally dovish  
• The presser, economic projections, dotplot and post-meeting statement collectively moved financial markets 
• My dove-hawk FOMC scale offers additional information on tracking the evolving Fed speak and policy expectations

• FOMC decided to hold rates steady and their statement suggested that members were not expecting further rate hikes. 
• FOMC’s economic projections suggest 3 rate cuts next year as well as a soft landing for the US economy, reaffirming market view.
• Equities surge while dollar falls and bond-yields fall to multi-month low. Gold and Silver rally sharply. EUR and GBP rally but underperform relative to JPY and AUD. 

• USD markets felt almost EM like for a couple of hours after Jay Powell and the committee allowed markets to chase the cutting narrative by communicating three expected cuts in the dot plot for 2024.
• I am not always convinced that the dot plot is a wise guidance tool as policy makers likely judge that a dot signaling three cuts relative to market pricing (ahead of the meeting) hinting of more than four cuts net/net should lead to a hawkish surprise.
• The opposite of course happened since narrative chasers in markets rather look at the sequential move than the nominal forecast.

• Most central banks held their rates in December, including the BoE. The MPC pushed back against dovish pricing with its forecasts and interpretation of the news.
• It also pointed to how the UK’s fundamentals are worse than in the US and Euro area, with excessive wages and underlying price inflation preventing a sustainable return to target.
• Three MPC members still favour hiking, and most have a hawkish bias. The BoE looks nowhere near a cut, and nor should it be. We see it holding through 2024.

• Markets are pricing in heavy cuts for next year as inflation keeps coming in soft, making a soft landing the base case for the bulls, but everything comes at a price.
• But how are assets likely to perform if the market narrative is correct and yields will indeed come down in a continued bull-steepening fashion, which in our view is the most likely scenario in H1 2024?
• We have pulled out some of our cross-asset beta studies from our data-library to provide you with an overview of how assets perform during various yield curve regimes.

• Welcome to our short- and sweet data nugget based on the weekly EIA numbers on the implied energy demand in the US economy.
• We use the EIA data but adjust it for seasonality and data issues to give a better picture of the underlying trends in the US economy.
• The demand for transportation fuel spiked again in the first week of December and there are no signs of seasonal weakness in our congestion tracker.

• Hydrogen / In Depth: In China, hydrogen’s star rises

• China-Vietnam /: China, Vietnam leaders agree to strengthen ties as Xi makes official visit

• Meeting /: China’s top leadership pledges strong focus on growth next year

• On 13 December, the FSS announced that foreign investors will be allowed to start purchasing Korean stocks without prior authorization starting this week. 
• The revised Capital Market Act will start to be implemented on 14 December repealing the time consuming and inconvenient pre-registration system for foreign investors.  
• As a result of the Korean government making this change regulatory change, one of the beneficiaries is likely to be Interactive Brokers Group, Inc (IBKR US).

• It’s central bank week once again, and that of course calls for us to share our thoughts ahead of the biggest meeting over the next week with Powell being the first to take the stage on Wednesday, expecting to hawk up the rhetoric a bit whilst keeping the Fed funds upper band steady at 5.5%.
• The ECB has recently claimed the title as the most dovish central bank in G10 after markets have added roughly 20 bps of cuts in 2024 to market pricing, and markets now price in approx.
• 115 bps of cuts in 2024.

• Research shows that El Niño results in milder weather leading to higher precipitation and consequently ~3.5% higher yield leading to depressed bean prices.
• Bean prices have outperformed seasonal trends in November and December. It is surprising given surplus inventory outlook and El Niño effect on production.
• Notifications of large export sales have driven much of the bullishness in prices over the past week. Prices are up 1.7% from last Friday’s settlement prices.

• As we move beyond the final Fed decision of the year, we can speculate on how the EM space may respond to Powell’s press conference tonight.
• Before diving into that, let’s discuss some recent developments that have occurred in China since our last update on the situation in Beijing.
• While the market and all the mainstream news outlets have been awaiting the third plenum to take place in vain,  China’s Central Economic Work Conference was held the past two days.

• AI / In Depth: How the AI race has spread from the cloud to the palm of your hand
• Carbon /: China climate envoy reaffirms 2030 target for peaking carbon emissions
• Standard Chartered /: Standard Chartered China unit gets securities business license

• In November, CPI rose 0.1% Month-on-Month. CPI cooled to annual rate of 3.1%, in-line with expectations. Core inflation unchanged at 4%, double the Fed target.
• 2.3% MoM decline in energy prices kept inflation low while core inflation rose 0.3% MoM. Rent remains concern, shelter costs rose 0.4% MoM. Early indicators point to declining rent. 
• Equities markets stronger following release. Other markets looking for further signals from FOMC meeting.

• UK GDP disappointed by falling 0.3% m-o-m in Oct-23 rather than stalling. This drop reverses the surprising strength in Sep-23 and keeps GDP’s 2023 level broadly flat.
• Payback infected industries in the private sector in both directions while funds kept pouring into the public sector. The PMI-comparable sectors have remained flat.
• We now track no GDP growth in Q4, with the productivity lost to ongoing employment growth stoking unit labour costs. The inflation outlook is inconsistent with rate cuts.

• The COP28 in Dubai is coming to a close with COP28-president Sultan al-Jaber presenting the final resolution just this morning.
• Nearly 200 countries voted in favor of the deal which urges states to ‘move away from fossil fuel’ – a first in COP history.
• Stakeholders had been working overtime to finalize an agreement as a dispute over whether the deal should call for the phasing out or phasing down of fossil fuels was threatening to undermine the entirety of the COP28 agreement.