Macro

• Breadth is improving.  Speaks for short-term momentum, but fundamentals haven’t yet turned. 
• It may be too soon to exit, but (soon) too late to board. Short-term momentum, yes, the next economic expansion, certainly not. 
• The market seems to be underestimating the ‘higher for longer’.

• The valuation of Global and US Tech stocks is at extreme levels and are, by some metrics, more expansive than during the height of the Dot Com Bubble.
• Earnings and sales growth are remarkably comparable to 1998 – April 2000, and investors are extrapolating these growth numbers too far.
• On the other hand, the price performance of technology stocks does not resemble the rapid ascent witnessed during the Dot Com period at all. Yet, the downside risks are substantial.

• The BoE hiked by 50bps in Jun-23, contrary to widespread expectations for a 25bp step. Moreover, most other economists initially saw no more hikes after the May decision.
• We didn’t see the macroeconomic news as worth this shock, and the minutes failed to explain the massive change. Public criticism appears to have blown the market and BoE.
• Further rate hikes in August and September remain likely. We expect those to be 25bps steps, but the BoE is losing its grip and encouraging hyperactive data dependence.

• CPI inflation failed to slow from 8.7% in May-23 as airfares surged belatedly. Yet the 14bps of upside news entirely disappears in our June forecast, so it is hardly hawkish.
• The so-called core over-weights airfares strength. Underlying UK pressures slowed closer to its peers by other measures. Slower food inflation should soon help too.
• In our view, winning the G10 ugly contest does not justify the extent of relative repricing. The BoE shouldn’t panic over the 0.2pp of upside we’re tracking to June CPI.

Alibaba /: Alibaba boss Daniel Zhang to step down with co-founders to take the reins

China-Germany /: Premier Li tells German businesses non-cooperation between China and Europe is the biggest risk

HKEX /: HKEX launches yuan counter for trading of Hong Kong-listed shares

• Most investors treat EM as a bundle trade on USD strength and liquidity, not appreciating the diversity in EM’s thus taken-in exposure unreflective of their thesis
• China and the US are the two giants who move markets with USD and trade respectively – both of which reflect the global cycle
• See how we are positioned below and access our entire live portfolio book right here

• Alibaba /In Depth: Alibaba has hurdles to overcome before its drastic restructuring pays off
• China-Germany /: Chinese premier and German chancellor agree on supply chain stability
• Collapse /: Inner Mongolia mine collapse claimed 53 lives, official report suggests

• Central banks in Asia have mostly called a pause to monetary tightening due to easing headline inflation, but sticky core inflation is a risk even as growth headwinds mount.
• Some central banks will continue to keep rates “higher for longer” to provide support for their respective currencies, or to minimize volatility in capital flows. 
• We discuss the trajectories for monetary policy in selected Asian economies, including how they may differ from theoretical Taylor-Rule prescriptions for policy rates.

• Our Fear & Frenzy Sentiment Index hit Frenzy for the first time during this rally.
• We marginally lower the weight of Developed Market Equities since we are already underweight risky assets, which, unlike 2022, has not paid off this year.
• In addition, we close our inflation-linked bond and Yen trade.

• The imminent pause by the US Fed and Asian central banks means that monetary policy and the resultant rate differentials will play less of a factor in currency performance. 
• Hoped-For upsides from China, however, are not forthcoming given the faltering recovery. This also manifests in softer commodity markets that compound a broader trade slump.   
• Asian markets have nonetheless been able to improve their currency fundamentals, notably via a replenishment of reserves and more substantial progress in disinflation.

• Sandstorms /: Cover Story: Sands of time ticking on China’s fight to hold back the desert
• China-U.S. /: China and U.S. move to ratchet down tensions
• Economy /: China’s cabinet proposes stronger measures to boost recovery momentum

• Gold and silver prices have been drifting lower as investors have shifted their focus to riskier assets.
• Earlier this year, the rise in gold prices was driven by stable yields, anxiety from regional bank stress, and a preference for real or liquid assets as reliable investment options.
• However, the current robustness of nominal and real yields, equities, and credit has left precious metals vulnerable.

• Sticky core inflation, bounce in housing and AI mayhem are all reasons for higher for longer rates
• Banks have no way of competing against the rates at money market funds, leading to a slow withdrawal of deposits
• Smaller banks are likely to suffer, as confidence will remain stronger at bigger banks

• 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 Puradelta Lestari (DMAS IJ), PT Metrodata Electronics (MTDL IJ), DBS (DBS SP), and Pertamina Geothermal Energy (PGEO IJ).
• There was also a thematic insight looking at Vietnamese banks, an insight looking at the SET50 rebalance which will see a benefit for financials and real estate.

• The ECB will likely have to adjust inflation forecasts down again based on today’s information
• We find that data surprises are likely to tilt to the downside in Europe
• Will the positive European consensus narrative start to suffer over summer?

• El Nino is here (like we forecasted) S&P Global highlighted some facts regarding the effects of the weather phenomenon on crop yields.
• I found the following chart about soybean yields quite interesting and also important going forward.
• Makes one think how sustainable last week’s price surge in beans actually is!!! El Nino tends to be good for soybean yields in Argentina and Brazil but also in the US.

• The base forming thesis Since 16th May, yields have moved to a higher band, likely marking the end of the correction.
• Bond rallies have had shorter lifespans and have tended to retrace rallies.
• Plenty of data points to economic headwinds and the additional threat of a sharply slowing Chinese economy, keeping a lid on higher yields.

• The U.S. equity market is becoming very bifurcated. Leadership is composed of a handful of frothy growth names while value and cyclicals are laggards and signaling recessionary conditions.
• Investors who want to trade growth stocks can use the price momentum factor.
• Investors who are seeking value opportunity should consider Japan and Eurozone equities.

• Investors have become overly myopic about the nature of the latest economic cycle.
• This cycle should really be viewed as an elongated recovery from the 2020 pandemic .
• The best analogy of the current cycle is the double-dip recession in the manner of 1980–1982.

• The Fed’s decision not to raise the federal funds rate is not expected to presage a prolonged break, particularly if the real economy and inflation remain resilient.
• Guidance towards further increases in the Fed’s policy rate could reflect greater confidence by members about the outlook for the banking system and the availability of credit.
• Companies have preserved operating margins via higher selling prices. Lower inflation will necessitate a compression in profitability.  Housing stabilisation and buoyant US equity prices suggest Fed policy is not tight. 

• The dot plot may be yet a hawkish surprise but inflation is crashing
• “Pauses” tend to result in pivots but we see it more as FED prioritizing financial stability
• The May playbook is still intact when it comes to trading FFR futures

• Indian economy remains resilient and keeps expanding while clouds are gathering ROW
• Equities in India are rich for a reason and corporate balance sheets look solid
• We feel more comfortable being exposed to rates than cashflow due to outlook and valuation

• With core PCE and core CPI both rising more than 4.8%MoM annualised in recent months, and up 4.7%YoY and 5.3%YoY respectively, the pause could only be justified with forward hawkishness.  
• ISM manufacturing PMI below 50 for six months, manufacturing new orders below 50 for 9 months, and Services PMI at 50.3 now, suggest that the US is already in recession.
• We continue expecting the FedFunds rate to peak at 5.5%, with the Apr-Sep’23 recession and lagged impact of rate hikes enabling core PCE inflation to subside to 3%YoY by end-2023.

• For the first time in the current melt-up, our Fear & Frenzy Sentiment has touched ‘Frenzy’ territory, suggesting the rally has run its course, at least temporarily.
• China has cut rates and is contemplating more stimulus to bolster sectors like real estate and domestic demand. Meanwhile, the economy continues to slow.
• In a surprise move, Blackrock has filed for a spot Bitcoin ETF with Coinbase as a custodian!

• Pinduoduo /: China’s faltering recovery is good for business — at least if you’re Pinduoduo
• Palestine-Israel /: Xi proposes three-point resolution for Palestinian-Israeli conflict
• Jobless /: Chart of the Day: China’s youth unemployment breaks record as graduate influx looms

• The final EA HICP inflation print confirmed the 86bp slowing to 6.1% in May-23, while the ex-tobacco rate matched our 6.11% forecast.
• Slowing in the central tendency of price changes has continued, with the monthly impulse drifting towards the target and dipping marginally below it in Spain.
• Another couple of months like this should reassure the ECB that underlying inflation is under control, potentially allowing it to resist hiking in September.

• H’tip to the Bespoke folks for today’s title; they used it earlier this week and I thought let’s use that & so here we are.
• It’s a very useful exercise to think about where we were a year ago, where we are today and more importantly what the road ahead might look like.
• Our job is to keep up with and even surpass a forward looking discounting machine that incorporates all the thinking of all those participating, I mean the global financial markets. Talk about HI!

• Yesterday, the market consensus expected the Federal Reserve to pause raising interest rates.
• This expectation was widely publicized, with initial reaction to selling bonds.
• However, the market subsequently recovered some of its losses before declining again.

• The common narrative today is how the deteriorating demographics in China will have a negative impact on the housing demand
• The official aggregate figures indicate the same with the population aging, birth, and marriage data
• The twist to this narrative is that in the near term, the situation for the non-rural population growth looks quite different from the overall figures

• We believe the most recent FOMC decisions and forward guidance on US monetary policy should be interpreted as ‘hawkish.’
• Bullish case: Why ‘skip’ with just 4 meetings remaining, inflation down to 3.5% leaves monetary policy very tight, and the Fed didn’t hike in 2006 after a 425 bps increase.
• Bearish case: Dec 2024 Fed Fund future at 3.85%, rates are (very) restrictive in any case, this is no environment for growth stocks, look what happened after 2006.

• With EUR QT now increasing in speed we look at the ramifications
• EUR liquidity matters for EUR markets and FX/Rates in particular
• QT and TLTROs will now lead to declining liquidity in EUR 

• Data /: In Depth: How China is tightening controls over cross-border data transfers
• China-U.S. /: Blinken heads to China on mission to stabilize ties
• Saudi Arabia /: Saudi Arabia wants more Chinese investment

• The ECB unsurprisingly raised its policy rates by 25bps again in June. It still sees more ground to cover, with another hike signalled for July, absent material change.
• President Lagarde resisted guidance beyond that and did not pointedly over-emphasise the plural like in May. We see upside risks to decisions beyond July’s 25bp hike.
• Those upside risks and the Fed’s indicated hikes mean we now forecast a September BoE hike. The MPC is unlikely to support as much extra relative tightening as priced.

• Global Liquidity is a crucial driver of investment markets, and US Fed liquidity refuses to slow down despite fears that policy interest rates will stay high
• The key turning-point was last year’s British gilt crisis. This was reinforced by the SVB and CSFB banking problem and prompted US banks’ reserves to start rising
• This US ‘Stealth’ QE will be underscored by greater Treasury bill issuance, which historically has led the Global Liquidity by six months

• Markets are currently pricing a 97.6% probability of a pause (or rather a skip) from the Fed today.
• Basically everything performs in the immediate aftermath of a pause
• The USD does not weaken on average as everyone and their mother anticipates

• The sales of new homes over the 1999-2022 period appear to be not out of sync with the increase in the number of urban households 
• The fact that ‘modern housing’ in China only started at the end of 1990s, gives the sector unique long-term characteristics, harder to gauge using typical models
• Hence the practical demand-supply balance may be better than typically thought, keeping in mind the affordability and wealth distribution issues, variation by region and city

• Why did the Russians blow up the Nova Kakhovka Dam?
• Where are the Ukrainians attacking and what are the prospects?
• What will happen next? Who will win and sustain the initative?

• The ISM Manufacturing Index scenarios call for a long US Treasuries, short (US) Equities strategy in each scenario.
• Financial conditions paint a rosier picture for equities than the ISM Manufacturing, yet downside prevails. 
• Despite the uptick in US Macro surprises, global economic surprises are dropping. As a result, a massive gap has opened between the MSCI World Index performance and macro surprises. 

• The market was taken aback by the news that the People’s Bank of China (PBOC) cut the 7-day reverse repurchase rate by 10 basis points to 1.90% on Tuesday, 13th June 2023.
• This was the first cut in the reverse repo rate since August 2022.
• The cut was unexpected as most analysts had expected the PBOC to keep rates on hold until later this month and cut by 5 bps.

• The ISM Manufacturing Index scenarios call for a long US Treasuries, short (US) Equities strategy in each scenario.
• Financial conditions paint a rosier picture for equities than the ISM Manufacturing, yet downside prevails. 
• Despite the uptick in US Macro surprises, global economic surprises are dropping. As a result, a massive gap has opened between the MSCI World Index performance and macro surprises. 

• The UK unemployment rate reversed its previous 0.1pp rise, which the ONS had spuriously upscaled into existence, by returning to 3.8% in April.
• Vacancies show labour market demand remains stable despite rapidly rising salaries. Firms still see space to pass their costs onto UK consumers as second-round effects.
• Higher pay settlements and lower unemployment indicate worrying heat that is not yet burning out the cycle. Further 25bp rate hikes are needed to break the excesses.