Macro

• The sell-off in government bonds could have further to go. US Treasury 10-year yields could test 5%
• This fall in the value of prized collateral threatens to undermine the entire financial system, hit Global Liquidity hard and damage equities
• Threat is most visible in very depressed levels of US bond term premia. Watch the slated step-up in Treasury coupon issuance and likely decline in foreign buying of US debt 

• Welcome to our weekly flagship editorial.
• The markets over the past week or two have made little sense as commodities (especially energy) have continued to outperform risk assets despite China apparently suffering from long-covid symptoms economically.
• Chinese money and credit trends look worse than US trends post Lehman, which means that either China rebounds or else it is the end of the Chinese economy as we know it! We have timed our rotation from high-beta tech/AI to Energy/Commodity proxies amazingly well, but we need to remain vigilant at this juncture.

• We have spent this Sunday evening trying to prepare ourselves for the opening given the turmoil expected in China after Country Gardens (the former largest developer) is to suspend trading of at least 10 onshore bonds after a week where they failed to pay coupons of a couple of international payments.
• The Hang Seng Property Index (HSP) is down 20% y-t-d but only lost 0.2% on Friday despite another landslide in the Country Garden stock.
• If the HSP Index drops over the coming days, it ought to be taken as a signal that Chinese RE credit will decline further due to a lack of confidence in the financial system.

• Hello everyone, and welcome to our China Week where we try to gather all forces to cover the ongoing economic situation in China, which is subject to substantial volatility and political turbulence currently.
• In this piece, we will look at Chinese deflationary trends and whether they will spread to the West and/or elsewhere on the globe.
• Through the Pandemic, China was “outprinted” / “outcredited” by the US, Europe and the UK for the first time in several decades.

• Politburo DisappointmentThe Chinese Politburo, executive committee of the CCP, gathered for their quarterly meeting on economic affairs on July 23rd.
• While the readout from the meeting suggested that the CPP remained confident that China would reach its relatively modest target of 5% GDP growth for 2023, the tone was markedly more pessimistic than April’s meeting.
• With sluggish domestic demand and youth unemployment surpassing 20%, last week’s readout was noticeable for admitting to “new challenges” for the Chinese economy.

• 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 South East Asia.
• The past week saw insights on Bukalapak, Adi Sarana Armada (ASSA IJ), Metro Pacific Investments Co (MPI PM), DBS (DBS SP), Indosat Tbk PT (ISAT IJ), and Mitra Adiperkasa.
• There was also a macro piece looking at Singapore’s future prospects and its need to improve its productivity plus company insights on Thai Union Group (TU TB) and Sunway REIT.

• Cocoa Market Started Collapsing Run-ups in commodity markets tend to be slow but steady but meltdowns on the other hand fast and sharp – a bit comparable with equity markets but definitely more volatile.
• Especially Parabolic advances, like the one in cocoa futures, often end with a sweeping reversal.
• Fortunately, the soybean complex is one we covered intensively during this year.

• Natural Asset Companies (NACs) are innovative financial structures that monetize natural capital (e.g., water, air, soil) by assigning economic value to ecosystem services and resources.
• NACs attract various investors, including institutional, retail, impact investors, and private equity.
• NACs represent a shift in finance, blending conservation and capitalism. Updated investment techniques consider risk, return, and environmental/social impact, promoting holistic decision-making.

• The case for equities have changed from TINA (There Are No Alternatives) during the low-interest era to TARA (There Are Reasonable Alternatives). One source of TARA risk comes from Japan.
• Japan has long been a supplier of liquidity to the global financial system. The BOJ’s tweak to its YCC policy poses a threat to that paradigm.
• Such a change would also threaten equity risk appetite. So far, any damage from the shift in BOJ policy has been minor.

• Hello everyone, and welcome back to our weekly Portfolio Watch.
• Here, we delve into the performance of our portfolio and take a close look at the ever-changing landscape of financial markets.
• Our decision to pivot towards energy and other traditional sectors seems to have been well-timed.

• Hope you’re enjoying the weekend out there! Weekends provide the perfect opportunity to review the market’s performance over the past week – and this week has again been full of volatility with the CPI report released this Thursday along with bonds remaining indecisive about the future market direction.
• The overall sentiment this week again has optimism written all over it with equity sentiment still hovering at 2021 highs on some of the short-term indicators, and GBP and EUR are continuing their positioning resilience, while commodity markets are starting to signal weaker demand again after a couple of weeks of strength.
• Follow along as we dissect market sentiment and positioning data below.

• The weakness of large-cap NASDAQ growth stocks, which comprise over 40% of S&P 500, is a drag on the S&P 500.
• However, the market appears undergoing a rolling correction, which should limit severe downside risk for stock prices.
• Even though the market appears oversold in the short run, the corrective period is probably incomplete and investors face further downside risk.

• The upside performance of the US economy in 2023 H1 suggests rising short-term interest rates are having a lower impact on activity compared to historic norms.
• Since the global financial crisis (GFC), corporate access to credit has risen due to another wave of disintermediation, while rising profits have significantly reduced interest coverage ratios and increased liquidity.
• The debt boom since the GFC may have lowered the efficacy of the yield curve as a predictor of recessions due to the reduced role of the banking system.

• Recently the MOVE and 10 year yield 3m rolling correlation went back to its 2022 levels, so is it time for a cocktail of a rates volatility wrecking ball ala summer 2022 again?
• Then just short the long end of the curve given the resilient US economy, BoJ’s YCC hikes and a procyclical fiscal policy in the US.
• We see this scenario as one in which high duration generation Y & Z assets get hammered and the boomer trade is en vogue.

• Transition periods are usually tricky and that’s certainly the case in today’s macro investment  landscape.
• The transition from a fixation on inflation and monetary policy to a focus on fiscal policy and a global manufacturing recovery is a sudden shift of gears that have left many scratching their heads.
• Yet that’s where True North, the correct direction of travel, lies – at least from our armchair here at TPW Advisory.

• Climate change is hurting agricultural yields due to irregular weather conditions or natural disasters, raising the salience of food security everywhere including in Asia. 
• India’s recent export ban on white rice is merely the tip of the iceberg of economic nationalism to secure domestic food supply that could undermine food security for others. 
• These beggar-thy-neighbour decisions will also reverse hard-won efficiencies in the global food supply chain, and potentially stoke domestic political tensions. 

• Feeble annualized total factor productivity growth of 0.008% in the post-2008 decade cannot be explained just by Singapore’s status as a developed market. 
• Lagging innovation in SMEs, inconducive social attitudes to entrepreneurialism, government-induced barriers to entry, and weak research-industry links are also possible culprits for the productivity slump.
• “Business-As-Usual” solutions of tax breaks and skills training are no longer sufficient.  

• Activity data have kept skewing towards surprising resilience. Price and wage inflation drive current policy decisions, but activity is critical to the outlook. 
• The resilience of GDP growing near its potential pace means the current effective policy setting doesn’t look that tight. Neutral rates may be near pre-GFC norms.
• Policymakers can wait for evidence that cyclical excesses have gone before turning to relatively small and late cuts. Policy hysteresis only compounds this pressure.

• The latest US CPI report again offered inflation bulls ample room to push equity markets higher.
• Yet, unlike previous CPI reports, the S&P 500 Index could not hold on to its gains.
• Recent developments provide the first evidence that the inflation-market dynamics are changing as Powell took away Federal Reserve hopium.

• We have been trying to trade the EURUSD on the short side a few times over the past 1-2 months with mixed results.
• Our fundamental story has been proven right but we have struggled to make money trading the relative weakness in Europe compared to the US in FX space.
• The bet has paid off in various other proxies such as the US equity superiority but not in FX.

• The CPI report has just been released, and it’s kind of a nothing burger on the headline indices with headline and core coming in at 3.2% vs 3.3% expected for headline and 4.7% vs 4.7% expected.
• As we have told you before, the increase in headline compared to last month was expected due to basis effects, while core continues the disinflationary trend.
• Both headline and core increase 0.2% MoM, which is close to the golden number, 0.17%, which compounded rounds to 2% annually.

• When China lifted Covid controls in Dec. 2022 the world welcomed the move. However Covid infections continued right across the world.
• Covid, is here to stay, but the worse news is the after- effects of Covid, Long Covid (LC ), are only now being addressed as countries have stopped gathering infection statistcs.
• LC must impact economic performance as it affects millions of people of all ages, not by fatal infections, but by a series of debilitating symptoms with no cures for now. 

• The EUR/USD exchange rate ended up moving upwards in June 2023 despite the various fluctuations occurring during the month.
• During the first ten trading days of the period under consideration, the pair was fluctuating along a narrow range, i.e. 1.07-1.08.
• From June 13th – 21st, the exchange rate increased significantly whereas in the following trading sessions, the pair faced some ups and downs, finally closing with a slight rise on monthly basis, i.e.compared to end of May.

• As we engage a pivotal juncture between DM rates approaching peak and China on the verge of descending into deflation, EM Macro is subject to converging pressures.
• It is essential to embrace the diversity in the EM space here.
• I have been advocating throughout the early spring that EM’s were ahead and would be the first rate-cutters in this cycle and the LatAm carry trade will likely take in water in the aftermath – while the rate cuts have largely aligned with my expectations (which preceded market pricing I might add), the punishment in foreign exchange has been harsher and quicker than I anticipated.

• Mortgages /In Depth: Chinese banks balk at regulatory support for rate cuts to existing mortgages
• Floods /: Beijing floods’ death toll rises to 33
• Wanda /Exclusive: Three Wanda executives under police investigation

• Welcome back to our Wednesday series where we take you through the world of global macro and what to look out for going forward.
• With US CPI being released tomorrow – where we as always will cover the most important take-aways post-release – there is room for market movements as the disinflation narrative continues amidst the possibility of a positive surprise in headline CPI due to base effects.
• We’ll as always be short and concise and let you into our thinking regarding asset allocation and positioning ahead of the data/events mentioned.

• Lately, our attention has been directed towards analyzing the rate of inflation change on both sides of the Atlantic.
• However, a significant aspect that has been somewhat overlooked pertains to the composition of the inflation measures employed within the pertinent inflation indices.
• It’s worth noting that inflation indices aren’t an entirely objective construct; rather it is subject to discretionary weightings regarding measurement and the assignment of weights to various components.

• Asian frontier markets had another solid month led by gains in Pakistan and Sri Lanka.
• The ongoing upward re-rating in Asian frontier markets does not surprise us as we have been communicating since the end of 2022 that this would happen as inflation and interest rates are peaking and our universe will rally strongly given that our markets entered 2023 at significantly discounted valuations.
• Year-to-date, many Asian frontier markets have significantly outperformed the region. 

• As highlighted in our data dive yesterday on the curve we see the steepener case as increasingly compelling.
• From our portfolio, you will also know that we have been moving towards a boomer composition and in the following short note we’ll try to support that thesis.
•  Why would the curve slope back our boomer position?

• Assuming rating agencies assume some (implicit) limit to fiscal deficits and debt-to-GDP ratios, even the world’s deepest, liquid, and vital bond market is vulnerable to rating downgrades.
• Soaring interest costs, putting the US on a trajectory of a 10% budget deficit, have prompted Fitch to take its AAA-rating.
• While discussion focus on the unique status of the US Treasury Market, this downgrade touched the underlying issue, debt sustainability.

• Welcome to our Yield Curve Watch series.
• Over the next few days, we will assess all asset classes in relation to the yield curve dynamics and back-test what works and what doesn’t work in various curve regimes.
• As most of you have probably noticed by now, we see the steepening case as increasingly compelling from a macro perspective as (What a great day to write that with material bull-flattening across the board)1) The issuance profile will move towards longer durations2) The Manufacturing rebound was driven by an input cost decline (see chart 1)3) The BoJ decision has decreased Japanese incentives to buy USTs (see chart 2)4) Positioning is already loaded with duration5) Headline inflation will likely increase (bull market in commodities) paired with declining core inflation in annual termsThe flattener case will only continue to work if central banks re-accelerate the tightening cycle amidst falling core inflation, which we find unlikely given the recent signal sent by the Fed and the ECB.

• Flood /Cover Story: How a 140-year flood caught Beijing and nearby cities off guard
• FDI /Chart of the Day: Foreign investment in China tumbles on overseas headwinds
• Economy /Chinese economic officials at pains to tout efficacy of recovery stimulus

• We’ve talked a lot about “back to the 70’s” over the past year or two.
• The increased focus on energy, security and old school production bring memories back to decades of past.
• However, we may also have to go “back to the 1700’s” as wheat production and prices are very much back in the picture! That’s what we’ll dive into in this edition of the Great Game, where we weigh different potential market shocks caused by political developments and why developments in India are actually more important to the wheat prices than Ukraine and Russia.

• Global Liquidity has been a key driver of risk assets, but it is starting to skid lower
• Problem is NOT tightening of liquidity by Central Banks, rather Collateral pools are wobbling in wake of Japan’s YCC change
• US Treasury markets face growing challenge from domestic coupon calendar, Fitch downgrade and threat from proposed gold-backed BRICS currency

• “Money grows on the tree of persistence.” – Japanese Proverb. Either you do Japan, or Japan will do you! We have been covering Japan extensively throughout the year and it saved us from being run over by a steepener-bus in markets over the past week.
• The Bank of Japan is still active in the JGB markets after having moved the needle on the YCC-cap, but they are much less interventionist than just 3 months ago.
• Japanese 2yr yields are now trading above 0% and the BoJ has not really been active in the 1-3yr space lately. This could be a signal that Governor Ueda now plans on guiding markets instead of buying them to keep volatility low.

• Happy Monday and welcome to our 11 charts on US CPI.
• US inflation will prove to be a mixed bag of goods in the coming months.
• Base effects in headline will be tough to beat, while core inflation is much more likely to dwindle in yearly terms over the next 2-3 months.

• Due to conflicting factors, it has been a volatile week in the Australian and Japanese bonds and currencies.
• This week, the decisions and guidance from the ECB and BOJ have caused disruptions as they were out of consensus.
• The yield curve for Europe and Asia-Pacific 5-30 has begun to steepen.

• US Oil Inventories Log Biggest Ever Weekly Decline US weekly oil inventories (ex SPR) fell by over 17 million barrels, as last weeks EIA data showed.
• This draw marked the largest weekly drop in history and shows that the US demand for oil remains strong – this fits an (at least in the mid-term) improving economic momentum picture that we painted in our latest macro outlook.
• Meanwhile, the divergence between the price of crude (reversed line in red) and the inventory data (black line) remains quite large.

• 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 South East Asia.
• The past week saw insights on Cisarua Mountain Dairy (CMRY IJ), Sheng Siong (SSG SP), and  Cinema XXI IPO.  
• There were also insights on SCG Decor IPO, Charoen Pokphand Indonesia, Malindo Feedmill, Halodoc and Astra International (ASII IJ), plus a sector insight on South-East Asia Plantations.

• Contrary to expectations following turbulent regional banking events in March, the US economy has surprised to the upside with GDP growth above its potential rate.
• The loosening of yield curve control could impact future Japanese participation, but other factors, including US fiscal and monetary policy conduct and exchange rate movements, will also play important roles. 
• The US Treasury has announced ambitious borrowing plans for 2023 H2, thereby raising concerns about the financial system’s ability to easily absorb high debt issuance. 

• As always, we are here to take you through the relevant positioning data that we have gathered throughout the week.
• This week marked the first brutal decline in markets after a prolonged period of continuous rally, triggered by the BoJ decision.
• The sudden pullback in UST duration has had a spill-over effect on all markets.

• Investors are faced with another situation where the technical and macro indicators disagree.
• The price charts screaming “cyclical recovery and new bull” while macro indicators are calling for caution.
• Investors are advised to trust the bull, but verify there’s no potential credit event or recession ahead.

• The U.S.  stock market had been undergoing an unsustainable advance and a corrective period has probably started.
• We believe this is just a pullback within the context of an intermediate uptrend.
• We offer several clues on how to spot the corrective bottom.

• What a week in global fixed income! We thankfully rotated out of bonds and into cyclical exposures in steepeners, commodities, energy and materials ahead of the worst storm and the big question is now whether this is just a “hump” or the start of a broad steepening trend.
• In last week’s Portfolio Watch we declared that we anticipated a steepening curve:”Many are urgently discussing the ramifications of the BoJ move to push the band on the YCC.
• With equities already looking frothy and volatility being low we may see some reversal near term – or perhaps stonks just carry on their insufferable streak and shorts keep getting wiped out as shares are sold to buy cheap calls.

• Sovereigns are getting killed across the board this week and it is indeed difficult to find much optimism in that many assets as of this week.
• We take some encouragement from being long the least worse of a bad bunch and those few areas that have actually performed.
• With that in mind its probably a rather provocative proposition to suggest an event-driven sovereign EM sovereign credit play on a serial default criminal that may offer some decent risk/reward in the short term.

Schools /In Depth: Why some kids in China can’t play during recess

Yuan /: Argentina taps China currency swap line to help repay IMF loan

PMI /: China’s services sector maintains recovery, Caixin PMI shows

• Unlike many suggest, the downgrade of the US credit rating by Fitch, resulting in the US losing its Triple-A status, will have significant impact on markets.
• The disappointing ISM Manufacturing Index comes with massive downside for Equities in all regions.
• While the Big Tech earnings dream get to live another day, the risks of a further and more significant slowdown in company earnings remain abundant.

• We view AI’s emergence coupled with the acceleration of EV adoption as suggesting two firsts – the first competition of the Tri Polar World (TPW) and the first competition of the AI age.
• Both suggest those regions able to integrate semi and EV supply chains at speed will be the winners.
• All three TPW poles (Europe, Asia & the Americas) are highly motivated to compete, arguably there is no future without success and so we foresee a public – private investment period akin to the post WW 2 rebuild of Europe & Asia but focused on Climate & AI – a perspective which underpins our positive LT global growth outlook. See Chart 20.