Macro

• The investment community’s response to the historic rallies in HK and China markets over the last couple of weeks unsurprisingly continues to be pessimistic.
• China’s objective of changing market sentiment is beginning to bear fruit as mainland investors open stock accounts at a record pace.  Household wealth has increased by 20T yuan last month.
• Technical market indicators point to continued high volatility during this leg of the secular bull market.

• Huaqing Petroleum to set up plant worth US$1.39 billion in Hunan
• Linglong commences serial production at its Serbia plant 
• ZC Rubber Group cements network for supply to Nordic countries

• A correction was natural after the fast, strong move up
• Any detailed fiscal stimulus plan will come from the State Council or the MoF
• Capital market reforms moving in the right direction with continued focus on consumption.

• Despite strong jobs data, the yield curve has inverted once again. This inversion is driven by delay in rate cut expectations.
• Encouraging PCE data which showed inflation easing to 2.2% (lowest since 2021 & close to Fed’s target), the likelihood of a cumulative 50 bps cut has steadily risen.
• Soft landing reduces urgency for aggressive rate cuts, giving the Fed more flexibility to monitor the effects of previous rate hikes and to lower rates more gradually.

• Excessively dovish expectations have repriced recently, but 2025 rates require almost another 20bps increase in the US and Euro area to reverse August’s dysfunctional drop.
• Rate alignment across the US, UK, and EA limits FX opportunities. Previous contrarian views on USD strength no longer hold amid narrowing central bank policy differences.
• Equity outlooks remain bullish, supported by monetary easing. Like in 1998, shallower rate cuts would eventually become bearish, but it only requires opportunistic hedging.

• A few hours after the decently strong non-farm payrolls report, Goolsbee of the FOMC commented on inflation undershooting its target, suggesting it will take much more to convince the Fed to change its direction on policy rates.
• On a broader scale, it’s difficult to be overly concerned about a labor market rebound in the US economy right now.
• After some time to reflect on Friday’s labor report, a few thoughts emerge: while the report was solid, there are still lingering questions.

•  A chemical used in tire manufacture has been causing controversy since 2020.  
•  The United States Tire Manufacturers Association (USTMA) is investigating a series of potential alternatives, following new legislation from California that requires any company selling tires in California to either declare that they do not contain 6PPD, or demonstrate that they are seriously seeking alternatives.  
• As of now, no major fines have been imposed on tire manufacturers specifically for 6PPD use, but there is growing regulatory scrutiny, particularly in regions like the Pacific Northwest where environmental harm has been documented.

• US natural gas prices fell by 1.65% for the week ending 04/Oct, ending a streak of five straight weekly gains. The decline was due to expectations of softening demand.  
• Henry Hub Put/Call volume ratio fell to 0.98 (04/Oct) from 1.03 the previous week as put volumes fell by 20.2% WoW, while call volumes declined by 16.7%.
• Put OI increased for contracts expiring in October and November, while call OI rose for expiries in December, January, February, and March.

• WTI futures rose by 9.1% for the week ending 04/Oct, its strongest weekly gain since October 2022. The surge was led by escalating tensions between Israel and Iran.
• WTI options Put/Call volume ratio fell to 0.64 (04/Oct) from 0.76 (27/Sep) as call volume jumped by 120% WoW while put volume grew by 86.6%.
• WTI OI PCR fell to 0.76 for the week ending 04/Oct from 0.77 last week. Call OI rose by 11.4% WoW, while put OI grew by 10.4%.

• Bitcoin /: U.K. court accepts Chinese investor’s lawsuit linked to nearly $4 billion in laundered Bitcoin
• Stabbing /: Police arrest Chinese man suspected of stabbing three 5-year-olds in Switzerland
• Stimulus /In Depth: Stimulus drives China’s biggest stock surge since 2008, but analysts fear it might fizzle

• Although the tech sector in Hong Kong has surged over the last couple of weeks there appears to be minimal short covering in US-listed China tech names.
• The performance of the “Magnificent 5” China tech names has led the rally as we outlined in Hong Kong: The Glass Is Half Full, Time to BUY Beta .
• The combination of of large outstanding short positions and a significant underweight of HK/China in international funds will lead to further upside in the tech sector.

• S&P 500 futures down 33 basis points, showing signs of exhaustion
• US dollar index up 67 basis points, driven by euro reversal
• China’s unexpected outperformance in equities may be linked to US stimulus actions and coordination

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• Just a few hours after the release of a much stronger-than-expected jobs report, Goolsbee of the FOMC highlighted the risk of undershooting inflation in the US.
• While Goolsbee is a dovish, soft-leaning member of the committee, it goes to show that you don’t turn around a supertanker like the Fed just because the NFP printed a bit better than expected.
• The Fed has set a direction, and it will take a lot to convince them not to continue cutting interest rates back toward neutral, around 3%.

• Overall, the warning from slow real credit growth on reduced credit supply and demand is the main lesson from the Asia crisis 1997-98.  
• China High FX reserves; low borrowing overseas and dominance of domestic investors in Yuan markets argues against a currency crisis. 
• Asia widespread banking crisis are also unlikely to repeat in China, though we see growing stress among rural banks that in the worst case could be a rural banking crisis.  

• Brent oil futures trading in line with fair value, with bullish bias in options, as volume of bullish calls hit record high
• Ongoing conflict between Israel and Iran raising concerns about further escalation, with recent attacks and strikes indicating potential for heightened tensions
• Global oil inventories are significantly lower than in previous years, potentially impacting market dynamics and prices as demand and inventory levels play a key role

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• US economic growth has shown exceptional resilience, with a strong payrolls report and other positive macroeconomic factors
• Higher US yields may put pressure on dollar shorts and lead to a potential capitulation in those positions
• Canadian dollar baskets may outperform in this environment, with higher US yields benefiting the CAD

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• Israel is likely to retaliate against Iran’s recent missile attack, potentially escalating the situation.
• Israel’s aim may be to fundamentally shift the regional balance of power.
• The threat to oil due to this conflict may be overstated.

• Option prices are a valuable tool for studying market trends and risk premium
• Gold’s unique properties make it a valuable asset for portfolio diversification and defense against government chaos
• The oil VIX index, OVX, provides insights into market risk and volatility in the oil market, with potential implications for broader market trends

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• The Federal Reserve’s aggressive easing is not in line with the resilient data.
• There is still a high level of underlying wage inflation.
• There are expectations of 25bp cuts at the upcoming ECB, BoE, and Fed meetings, but these cuts are likely to cease early in 2025, mirroring the events of 1998. Excessive easing at the start can lead to economic bubbles.

• NR prices surge over 33% YoY during April-August 2024
• In FY 2024-25 Q1, operating margin of top five tire firms falls ~200 basis points to 14%
• NR prices in downward trend in Oct amid a surge in supply

• The People’s Bank of China reduced its policy rate, lowered reserve requirements, and introduced a new lending facility to support the equity market.
• New fiscal policy measures were announced to help consumers,  but large stimulus programmes invariably incur legacy issues that can subsequently impede the capacity of governments to counter faltering economic activity.
• Improved Chinese equity prices need sustainment by higher corporate profits, courtesy of faster economic growth. Improved labour market conditions are essential for a recovery in consumer confidence and economic activity.

• Change in strategy by the Chinese authorities mean this is more than a trade
• Sentiment, valuations and positioning are still supportive despite the rally
• Overbought conditions in the very short-term and the technical picture is mixed 

• Part of investing is proper risk management and the pricing of risk.
• While war in the Middle East is not our base-case scenario, we believe the odds of an Israeli attack on Iran are higher than the market expects.
• The market is underpricing the risk of war and investors should be aware of this tail risk and position themselves accordingly.

• We are building our in-house proprietary China CPI Prediction Model, based on the paper “Forecasting China’s Consumer Price Index (CPI) Based on Combined ARIMA-LSTM Models”* by Yu Liu.
• This study aims to construct an efficient consumer price index (CPI) forecasting model to provide policymakers, investors, and businesses with more accurate forecasts of future price levels and inflation trends.
• In this study, a combined model that integrates autoregressive integrated moving average (ARIMA) with long short-term memory (LSTM) networks is introduced.

• With China’s slew of stimulus measures released last month, we are confident that copper prices will break 10,000 USD/ton soon. 
• The COMEX spread with LME has now started to build up to over 300 USD/ton, signaling that macro funds are getting bullish on copper.
• We continue to like the equity route to play copper with pure plays like Southern Copper (SCCO US) , Ivanhoe Mines (IVN CN), and Teck Resources (TECK US).

• A slew of policies announced by the Chinese government led to a short squeeze in the iron ore market, with prices moving up 20% from the lows to 108 USD/ton.
• Mill margins inflected into positive territory, and iron ore, after gapping below its band of 95-130 USD/ton for the last 3.5 years, is now back in its normalized range. 
• While the current move was unexpected, we expect the euphoria to last a while as more clarity on the stimulus emerges and ore prices tick up short-term.

• The combination of easier monetary policy by most global central banks and strong price momentum is equity bullish. 
• However, investors should be aware of the risks to the growth outlook.
• Global institutions are underweight risk and they may be forced to play catch-up. But fast money risk appetite is elevated, which makes stock prices vulnerable to short-term setbacks.

• The center of this week market is still the impact of PBOC’s serial interest rate cuts and $800billion fund into the stock market.
• Assuming the LTV ratio to be 0.6 and public-private fund ratio at 1:1, there will be RMB 4 trillion fund released to trade stock. 
• Divide this amount by 0.5 trillion transaction volume, all fund will dry up in about 8 trading days. After that, performance will depend on fundamentals and remnants of the euphoria.

• September’s non-farm payroll is well above consensus with a rise of 254k from 142k in August, above our in house forecast of 159K and the consensus of 150K.
• . Unemployment unexpectedly fell to 4.1% from 4.2% and average hourly earnings were above trend at 0.4% again with upward back revisions.
• This is clearly a strong report, even with a dip in the workweek to 34.2 from 34.3 hours.

• China has shifted sentiment in its stock markets which will translate into a virtuous cycle of increased wealth and consumption.
• China is now focusing on demand side monetary policies after nearly 2 years of supply side policies.
• China’s large household savings pool will now move into the real economy and help the country in its transition to increased domestic consumption as investment evolves into “High Quality Manufacturing”

• Macro backdrop evolving with upcoming US elections and Middle East tensions impacting EM assets
• Mixed bag on macro side with softer inflation in EM, better revisions in US growth but soft manufacturing PMIs
• China as tiebreaker with further policy support, rally in equities, and implications for Fed and commodities prices; geopolitical risks and US election as wild cards to watch

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• Welcome to this liquidity watch analysis, where we will address the current stress in USD funding markets and the potential impact on the Fed’s reaction function.
• Our best guess is that the current situation will serve as a reason for the Fed to alter the liquidity path significantly in the coming months.
• Here is a list of the key details you need to pay attention to.

• Joins hands with Bosch to develop intelligent tire tech for safe driving
• Gets validation from SBTi on zero emission target by 2040
• Gets over 500 approvals for cutting-edge Elect technology

• Powell resisted further cuts of 50bp, contrasting with Bailey’s willingness to take more aggressive action. This was in the context of low EA inflation, which was in line with our predictions, and the realization of significant payroll risk. Policy pricing adjustments continued.
• The focus for the upcoming week is on US inflation and the Fed minutes, along with some secondary monetary policy announcements.
• The most notable consensus is a 50bp cut by the RBNZ. Other key policy decisions are expected from Peru, Korea, Israel, and India.

• The USD market will be flooded with liquidity in Q4, accompanied by rate cuts, providing Chinese authorities with a window of opportunity to ease policy.
• However, there is one issue: CNY liquidity is tightening now.
• Welcome to our weekly China Watch, where we examine Chinese assets through the lens of Western investors and markets.

• Hello everyone, and welcome back to our weekly positioning watch.
• The moves from last week continue with China still being super bid going into this week, and the flows that we are seeing into Chinese equity ETFs are becoming almost hilarious now, as everyone and their mother is piling into the China story at current junctures.
• The weekly inflow is at 3.5 bn USD on a weekly basis now, so we’re talking a 5-6 std.

• Israel will counteract Iran,  prompting a further missile attack by Iran.Our bias remains that Israel is to have a buffer zone in southern Lebanon and not fight a prolonged war.   
• This limits the economic fallout globally and on oil prices. The U.S. presidential election will move markets but not until the result after Nov 5.  The bigger issue remain rate cuts.  
• The market is underestimating cumulative BOE easing prospects however, while not discounting the 75bps of BOJ rate hikes we see by mid-2025. 

• Take aways: Risk premium in crude oil compressing due to Israel calling Iran’s game of chicken. Fade the strength in assets connected to the real economy.
• Supply is still the biggest risk in crude oil. Strike risk in the US means Mexico is an opportunity.
• Israel launched ground operations in southern Lebanon overnight, aiming to push Hezbollah away from areas near the border.

• Rising tensions in the Middle East increase focus on geopolitical risks, which are hard to hedge. The UAE’s neutrality has made it a natural safe harbour, and this remains true.
• Dubai property is an investible hedge, with price inflation correlated to the geopolitical risk level because it attracts sticky capital inflows whenever risks crystallise.
• Natural leverage through off-plan payment schedules lowers the capital intensity of this diversifying asset while also presenting families with an attractive political “plan B”.

• EU commission proposes longer phase-in time  
• Some tire makers are delaying EUDR rubber booking  
• EU’s faltering EV market is a concern  

• Introduction to new investment strategy: activism in Japan
• Potential for high returns with unique approach to investing
• Evolution of opportunity in Japan and potential for success due to increasing pro-shareholder culture

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• A monthly review of how the markets and our themes are currently performing
• Analysing what went wrong and what went right in stocks and sectors
• Highlighting positions added or removed from the thematic investment portfolio

• China’s markets may see upward movement, with economic recovery likely in the second half of 2025.
• September PMIs were soft across most of Asia, with Vietnam disrupted by a typhoon.
• Japan and Thailand face weak industrial production, prompting a recommendation to reduce exposure.

• For the week ending 27/Sep, US crude inventories rose by 3.9m barrels, contrasting expectations of a 1.5m barrel drawdown. Gasoline stockpiles also unexpectedly grew.
• US natural gas inventories rose 55 Bcf for the week ending 27/Sep, lower than analyst expectations of a 59 Bcf buildup. Inventories are 5.7% above the 5-year seasonal average.
• Chevron, Shell, Halliburton, and Schlumberger have all experienced target price downgrades, while Exxon Mobil received an upward revision to its target price. Notably, Goldman Sachs downgraded Occidental to Neutral.

• In this insight, we discuss numerous gap trade opportunities involving Korean preferred and common shares in 4Q 2024.
• Among the 27 major pair trades (prefs vs. common shares), 16 of the pref stocks outperformed their common shares counterparts so far this year. 
• The 27 Korean preferred stocks’ average prices increased by 8.3% from end of 2023 to 2 October 2024 (excluding dividends), outperforming their common counterparts which were up on average 5.4%.

• Price surge to continue until 2025
• 13% higher precipitation in Thailand in Jan-Aug 2024 vs 2023

• Political instability in France and Germany hampers Europe’s ability to act, making a second Trump term the most visible “grey rhino” that could force significant change.
• European complacency and fatalism could be shaken by Trump’s aggressive trade policy and executive actions, pressuring Europe to respond to disrupted global alliances.
• Uncertainty surrounds Ukraine aid post-election, with Trump likely to halt it and Harris facing gridlock, potentially forcing a temporary and uneasy end to the conflict.

• Klein (2022)* found that prediction quality varies across economists and rejected the hypothesis of equal predictive ability. It is worth building our proprietary model on monthly changes of nonfarm payroll.
• We follow Bhatia (2020)# and add improvement on our own to arrive at our proprietary nonfarm payroll prediction model. The growth in payrolls is surprisingly stationary.
• Public impressions fall prey to the recency bias that assumes the most recent experience is a signal of the future that is distinct from the past.

• The latest speech given by Fed Chairman Powell to the NABE was not dovish, suggesting the labor market is  where the Fed wants and easing is designed to keep it.
• In the Q+A he went on to see GDP revisions as having reduced downside risk, and suggested the Fed is not in a hurry to cut quickly.
• Powell saw labor market conditions as solid, having cooled from a previously overheated state, and noted that job openings still exceed the number seeking work, something rare prior to 2019.

• Happy Monday, let’s dive into the most critical stuff we are on the look out for this week.
• Morning moves: It seems like physical commodities markets are catching up to the China stimulus story from last week, in tandem with the Hang Seng.
• Over the end of last, Japan’s elections pushed USD/JPY lower, leading investors to sell the Nikkei rather aggressively due to a clear hawkish expected lean from the new PM Ishiba.

• Economic policy in the US and China, the two most important economic partners for emerging Asia,  is turning more supportive of global growth.
• Oil prices are also entering a period of “lower for longer”; Saudi Arabia’s signal of reversing its production cuts will exert downward pressure on oil prices, largely to Asia’s benefit.
• The overall result of these developments is to open up more scope for policy loosening, strengthen export demand and encourage more investments, to emerging Asia’s benefit. 

• Recent policy changes in China have sparked a surge in commodity prices and stock markets
• China’s focus on stimulating the real economy over asset prices sets them apart from Western policies
• Chinese government has implemented measures such as interest rate cuts and lower bank reserve requirements to boost liquidity and investment

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• HK/China stock markets are re-rating quickly sentiment became overly pessimistic.
• A stock market bottom precedes a property market bottom by years.
• China’s markets have languished due to the government’s focus on supply-side solutions.  That focus has now shifted to include demand-side stimulus efforts as the PBOC Put accelerates.

• Our earlier articles state the natures and description of several monetary actions by PBOC last week, highlighting a possibility of stock rallly
• This article on the other hand dicussess the economic benefits of the monetary policies, which are more relevant from the authority’s point of view.
• For stock market still, we believe the RMB 800 billion fund, given a RMB 2-3 trillions daily transaction volume and 60% LTV leverage , has long been dumped into market.

• Stimulus / Cover Story: China’s stimulus bomb sparks optimism, but economy may still struggle
• Asia New Vision Forum /Asia New Vision Forum: China expected to be world’s biggest economy by 2050, Thornton says
• Political /: Ex-local lawmaker becomes latest official punished for his reading material

• Headline EA inflation disappointed consensus expectations by dropping another 0.4pp to 1.77% amid lower energy prices and stagnant industrial goods prices.
• Although the outcome was within 1bps of our forecast, it has been grinding lower in recent weeks. The likely rebound above 2% looks increasingly small and fleeting.
• The expected rebound restrained the ECB, so its diminishment while demand disappoints now makes an October rate cut likely in addition to the December move.

• Core PCE inflation was 2.7%YoY in Aug’24, too high to allow another 50bp cut in Nov’24, despite the fourth consecutive MoM (annualized) gain in core PCE of less than 2%.
• The Jul’23-Feb’24 acceleration in base money (10.2%YoY in Feb’24) contributed crucially to the Jan-Apr’24 spike in core PCE. Slower base money, and steadily accelerating M2, made things better since May’24. 
• Mild, steady acceleration in M2 (i.e., small rate cuts every 6 weeks) should allow core inflation to keep receding. Faster rate cuts are possible once inflation is genuinely at 2%YoY. 

• Everything is about the ongoing rally in Chinese equities at the moment, with China now being the best yielding country in the world in equity space after both the PBoC and the Politburo coming through with stimulus proposals, which has caught all China bears on the wrong side of the trade.
• We learned today that the PBoC is cutting the standing lending facility rates by 20 bps, a move not seen since the pandemic broke out.
• They have normally cut the interest rates in the lending facility by 10 bps at a time, so this is likely a sign that they’re truly willing to do something about the slump in growth / real estate.

• Commodity markets are down despite stimulatory measures from China, with oil prices falling due to increased supply from Libya and OPEC plus alliance
• China’s demand outlook for oil remains steady, with forecasts for oil demand growth unchanged despite stimulus measures
• Base metals, particularly copper, have seen a price increase due to stronger demand impulses from China, with bullish outlook and potential upside risks for the first half of 2025

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• Happy Weekend from Copenhagen! China made a 5-6 standard deviation move, happening just ahead of a significant influx of liquidity in both USD and CNY markets.
• Despite global softness in labor market data trends, this influx is noteworthy, and the Fed is considering rolling out 1-2 liquidity tricks to bolster the outlook.
• Before we head into Q4, the looming risk of a strike at East Coast ports in the U.S. adds a layer of concern.

• Did China Just Trigger Commodity Markets?
• China’s central bank last week announced a new stimulus package to the economy to curb the growth decline that is still going on.
• Chinese stocks jumped and also “Chinese-linked commodity prices” like soy, copper and steel gained momentum as Governor Pan Gongsheng announced plans to lower borrowing costs and inject more funds into the economy, as well as to ease households’ mortgage repayment burden.

• In the first quarter of 2024, Japan’s economy grew by 0.18% (QoQ).
• This growth is mainly attributed to real fixed capital formation, but also to real private final consumption expenditure to a lesser extent.
• These figures increased by about 2.53% and 0.43% (QoQ) respectively. 

• US rig count declined by one to 587 for the week ending 27/Sep, marking the sixth drop in seven weeks. Despite this, the rig count increased by six in Q3.
• The US oil rig count fell by four to 484 after staying flat last week. Gas rigs rose by three to 99, marking its second increase in six weeks.
• For the week ending 27/Sep, US energy producers added one rig in Texas and cut two in New Mexico and one in Louisiana.  

• Benchmark revisions in the UK’s quarterly national accounts data for Q3 cut business investment to bumble around pre-pandemic levels, offset by higher consumption.
• Households are still managing to raise their saving ratio to double their 2019 levels. Income has risen on their assets by a similar amount to gross savings.
• All shifts appear consistent with the intertemporal demand substitution channel of monetary policy. Deferred demand should support the hysteresis of high neutral rates.

• US natural gas prices jumped 19.2% for the week ending 27/Sept, marking the largest weekly increase since November 2023, driven by strong demand and concerns over supply cuts.
• Henry Hub Put/Call volume ratio fell to 1.03 (27/Sep) from 1.69 the previous week as put volumes fell by 45.5% WoW, while call volumes declined by 10.1%.
• Put OI increased for contracts expiring in October and November, while call OI rose for expiries in December, January, February, and March.

• China has implemented monetary and fiscal support measures to boost growth, including rate cuts and policies to stimulate real estate market.
• Market interprets these measures as more potent and impactful than previous rounds of stimulus, potentially driving asset prices and economic activity in emerging markets.
• Impact of Chinese measures on EM assets may also depend on sentiment, real economic activity, and commodity price channels, in the context of US rates and upcoming election.

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• SGX Iron Ore futures surged by $10.24/ton to $102.09/ton last week, hitting the highest level since July, driven by China’s stimulus announcement.
• A bullish technical signal emerged as the 9-day moving average crossed over the 21-day, yet RSI overbought levels (72.35) suggest a potential correction.
• Trading volume spiked mid-week but thinned near $105/ton, indicating waning volume above $100/ton and setting up volatility for a short-term price drop.