Macro

In today’s briefing:

Before You Call Artificial Intelligence a Bubble, Understand that Bubbles Are Rare!
Earnings Watch: Which Equity Markets Offer the Best Opportunities Across the Pacific?
Incorporating Climate Change into Economic Scenarios
EA: HICP Inflation Resumes Trend Lower
AFC Vietnam Fund May 2023 Report

Before You Call Artificial Intelligence a Bubble, Understand that Bubbles Are Rare!

A comprehensive empirical study by Goetzmann (2016) covering more than 3000 stock market-years in 21 stock markets between 1900 and 2014 reveals that bubbles are incredibly scarce.
The likelihood of the stock market declining by 50% (crash) within a year after a rise of 100% or more (boom) in the previous year is only just 4%.
Interestingly, stock prices rose by another 100% after a rise of 100% or more (boom) in over 8% of the cases. These findings will not resonate well with perpetual bears.

Earnings Watch: Which Equity Markets Offer the Best Opportunities Across the Pacific?

Expected earnings growth has broadly trended downwards along with the realization that a bill from the Covid-boom had to be paid. Even so, momentum has shifted.
In the current conditions characterized by high-interest rates, borrowing costs are higher, which, all else equal, reduce corporate profits and lead to lower forward earnings expectations
When observing broad market price-earnings Japan does not look cheap as much as the US looks expensive.

Incorporating Climate Change into Economic Scenarios

By Albert Maass

Climate change, a pressing concern in the socio-economic landscape, is shifting from environmental to economic challenge; integrating climate risks into economic forecasting and strategic planning is critical.
Approaches for incorporating climate risk into scenario analysis include bottom-up, top-down, and hybrid methodologies.
Scenario modelling provides insight into potential futures based on emission levels. Despite complexity, incorporating climate change into economic scenarios is doable with available resources, data, and expertise.

EA: HICP Inflation Resumes Trend Lower

Flash EA inflation fell by 86bp to 6.11% in May-23, undershooting forecasts by 0.2pp. The outcome still resumes the downward trend since the Oct-22 peak.
Germany was the primary geographic source of the downside news for us, but energy prices were the weakest area. Transport, housing, and food are driving inflation down.
We expect another fall for similar reasons in June, albeit slightly smaller. Excessive underlying inflationary pressures remain inconsistent with reaching 2% sustainably.

AFC Vietnam Fund May 2023 Report

By Asia Frontier Capital

In May the stock market exhibited a subdued demeanor, characterized by predominantly sideways movement and limited trading volume.
Nevertheless, the VN-index managed to increase by+2.48%, and the AFC Vietnam Fund recorded growth of +3.2% to an NAV of USD 3,118, according to internal estimates.
Despite a relatively quiet stock market environment in May, the index managed to gain 26.05 points and closed at 1,075.17, representing an increase of 2.48% and the AFC Vietnam Fund recorded another positive month, slightly outperforming the index with a 3.2% gain.

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Jun 01

Daily Brief Macro: Out of the Box #3 – Will the Hiring Cycle End Due to Falling Inflation? and more

In today’s briefing:

Out of the Box #3 – Will the Hiring Cycle End Due to Falling Inflation?
U.S Debt Countdown: Will a Deal Go Through Today?
UK-US Peak Pricing
CX Daily: China’s EV Industry Calls on Regulators to Curb the Back-Seat Driving
A Thaw in US-China Relations and What It Means for Asia
No Crisis in China Local Government Finances (Yet)
Germany Yield Curve

Out of the Box #3 – Will the Hiring Cycle End Due to Falling Inflation?

Soft indicators of inflation are falling off a cliff. There is little doubt left about the 6-month path for CPI prices
Wages remain stickier, which will lead to a remarked real wage growth in H2-2023 and early 2024
The demand for labour is driven by the price of wages adjusted for consumer inflation. A rapid increase in real wages is hence a negative for the hiring cycle

U.S Debt Countdown: Will a Deal Go Through Today?

By Mikkel Rosenvold

Does Biden and McCarthy have the necessary votes to suspend the debt ceiling and save the U.S from default?
We will find out TODAY when the House of Representatives will vote on the Biden-McCarthy compromise to suspend the debt ceiling until 2025. debt The short answer is YES.
My prediction is that the vote will carry, but that it will come at a cost to Speaker Kevin McCarthy.

UK-US Peak Pricing

A substantial repricing of the monetary policy outlook embraces our “tighter for longer” theme. However, pricing may have overextended the UK relative to the US.
The US cycle is proving even more resilient than the UK, albeit without the worryingly excessive inflation expectations in wage settlements.
With 25bp BoE hikes almost entirely priced at the following four meetings, while the Fed grinds to one, further frontend repricing seems likely to shrink the BoE-Fed spread.

CX Daily: China’s EV Industry Calls on Regulators to Curb the Back-Seat Driving

Electric cars /: China’s EV industry calls on regulators to curb the back-seat driving
Spacecraft /: China sends first crew into orbit since space station’s completion
Education /: Strengthen China’s education system to drive innovation, Xi says

A Thaw in US-China Relations and What It Means for Asia

After a period of deteriorating ties, Washington and Beijing are making tentative moves to patch up relations and to form guardrails against inadvertent escalation.
Barring a freak accident, we expect the imminent resumption of high-level ministerial dialogues, followed by modest agreements where common ground can be found.
The rest of Asia stands to benefit from the efforts by both Washington and Beijing to rally support for their respective camps. Expect action in the economic and security arenas.

No Crisis in China Local Government Finances (Yet)

Credit risks in local government finance vehicles have caused jitters among markets and the government. Recent financial turmoil in Guizhou may be a harbinger of more to come.
Given their size and interconnectedness, even a modest deterioration of asset quality linked with local government finance may lead to outsized macro-financial effects.
While the central government is maintaining a hawkish stance against providing backstops, but is unlikely to stand aside if there is a material risk of a major meltdown.

Germany Yield Curve

On Monday, the European Yield Curve exhibited a significant flattening trend in low trading volume due to the holidays.
This trend was also observed in France.
Those curious about the underlying cause can gain valuable insights from the China PMI, a leading indicator by two months, and PPI, a lagging indicator by two months.

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May 31

Daily Brief Macro: Cross-Asset Volatility: Flashing Red for Equities and more

In today’s briefing:

Cross-Asset Volatility: Flashing Red for Equities

Cross-Asset Volatility: Flashing Red for Equities

The MOVE/VIX ratio has spiked again, surging to above 8, close to a level two standard deviations above average.
Equities have underperformed Treasuries most of the time when the MOVE/VIX ratio exceeds 7.0.
Should the VIX Index rise above 20 from here, the outlook for equities becomes even more unfavorable relative to Treasuries.

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May 30

Daily Brief Macro: Substance of Debt Ceiling Deal Has Implications for Banking System and Sovereign Backstop and more

In today’s briefing:

Substance of Debt Ceiling Deal Has Implications for Banking System and Sovereign Backstop
The Week That Was in ASEAN@Smartkarma – GoTo’s Initiatives, Berli Jucker & Big C IPO, and Indocement
Make or break time for Gold // Goldman Sachs has no feeling for timing oil trades
CX Daily: China’s Tobacco Monopoly Is Swept Up in Corruption Probes

Substance of Debt Ceiling Deal Has Implications for Banking System and Sovereign Backstop

By Said Desaque

Since 1995, US equity prices have displayed a remarkable resilience to political impasses in raising the debt ceiling. Dysfunctional fiscal policy can have unintended consequences, such as sovereign debt downgrades.
Elevated levels of bond holdings in the US banking system mean that profligate US fiscal policy could raise issues about the quality of the sovereign backstop.
US banks are still losing deposits to money market funds as banks struggle to adjust to a higher cost of funding environment. Commercial real estate lending has softened since March.

The Week That Was in ASEAN@Smartkarma – GoTo’s Initiatives, Berli Jucker & Big C IPO, and Indocement

By Angus Mackintosh

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 GoTo‘s Ongoing Initiatives towards profitability, Berli Jucker‘s moves towards a Big C Retail IPO, Inducement’s strong bulk performance, and Indo Tambangraya Megah (ITMG IJ).
There were also insights on Thai Foods Group, CP FOODS, Mitra Keluarga Karyasehat, Singapore-listed Tourism& Hospitality, and a credit insight on Medco Energi (MEDC IJ).

Make or break time for Gold // Goldman Sachs has no feeling for timing oil trades

By The Commodity Report

While the Flash Manufacturing PMI came in lower than expected at 48,5 (50,0 expected), the Flash Service PMI came in once again higher than expected at 55,1 (52,6 expected)
Prometheus Research shared this overview with us that highlights that the Service sector continues to hold this economy up.
The majority of service businesses continue to stay in the growing territory – this needs to change before we actually see a recession in the service sector as well. Keep in mind that the Manufacturing sector in the US accounts for “only” 11% of GDP!

CX Daily: China’s Tobacco Monopoly Is Swept Up in Corruption Probes

Tobacco / Cover Story: China’s tobacco monopoly is swept up in corruption probes
Workers / Eastern province eases upper age limit for construction workers amid labor shortage
Moon / China plans first crewed moon landing by 2030

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May 29

Daily Brief Macro: US Debt Ceiling Raise Tells Us Gold Is Going Up… It Must Be Part Of Every Portfolio and more

In today’s briefing:

US Debt Ceiling Raise Tells Us Gold Is Going Up… It Must Be Part Of Every Portfolio
Back to a Focus on Technicals
Macro Watch – Here Is Why a Debt Ceiling Deal May Be NEGATIVE for Equities
China Recovery – Households

US Debt Ceiling Raise Tells Us Gold Is Going Up… It Must Be Part Of Every Portfolio

By Michael J. Howell

US debt ceiling agreement warns again about upcoming monetary inflation. Gold (and crypto) is a great hedge against monetary inflation, but less good against cost inflation
US debt problem demands near double-digit annual growth in Fed balance sheet over next decade… QE is not dead!
Gold could easily test US$3000/ oz. Bitcoin could do even better! Buy into any near-term weakness

Back to a Focus on Technicals

By Cam Hui

The debt ceiling drama has been too much of a distraction for U.S. equity investors. It’s time to focus again on the technicals.
A review of the market’s technical structure reveals serious negative divergences characterized by bubbly narrow leadership and weakening cyclical indicators.
While this doesn’t mean that the stock market is about to crash, it does indicate that investors should be prepared for reduced long-term return expectations from U.S. equities.

Macro Watch – Here Is Why a Debt Ceiling Deal May Be NEGATIVE for Equities

The debt ceiling deal marks the end of USD liquidity increases
The US Treasury will issue bills and bonds again soon withdrawing liquidity
Will the USD continue to surge while risk assets will suffer?

China Recovery – Households

This is the second of three notes on China’s recovery.
Most, if not all, bullish consumer recovery scenarios have been based on the revenge spending model that analysts witnessed in other parts of the world.
There is no question that it is human to do things like recreation, shopping, and travel after three years of lockdowns.

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May 27

Daily Brief Macro: Weekly Market Monitor – Week 21 – Embracing the AI Boom and more

In today’s briefing:

Weekly Market Monitor – Week 21 – Embracing the AI Boom
UK: Return to Flattened Trend in Apr-23
CX Daily: China’s Holiday Spending Boom Masks Patchy Recovery
US 2-Year Futures
TPW Advisory Friday Musings: Patience

Weekly Market Monitor – Week 21 – Embracing the AI Boom

NVIDIA’s recent earnings report confirms the reality and arrival of the AI boom, with projected sales far exceeding estimates.
Commodity prices have dropped, suggesting a high likelihood of a recession in the US.
Market breadth indicates weakness, with AI hype overshadowing other indicators. Big Tech companies’ market capitalization has surged, while other stocks have seen declines, raising valuation concerns.

UK: Return to Flattened Trend in Apr-23

UK retail sales in April 2023 showed an unexpected rebound with 0.5% m-o-m growth, outperforming the previous month’s -1.2% contraction and beating the 0.3% consensus.
This rise represents the highest growth rate since February 2023 and positions April’s sales performance above the 1-year and long-run averages.
It reinforces recent signs of recovery in the UK retail sector, breaking the downward trend and providing crucial insights into the economic landscape.

CX Daily: China’s Holiday Spending Boom Masks Patchy Recovery

Consumption /Analysis: China’s holiday spending boom masks patchy recovery
LGFVs /: Kunming scrambles to pay off $170 million of financing vehicle debt
China-U.S. /: Top trade officials from China and U.S. to meet at APEC

US 2-Year Futures

The two-year futures broke a bear flag pattern and stopped at the Monthly Pivot S2.
We will likely see a temporary pause and a verification of the broken flag.
The 2-year HLC Bar chart is difficult to read due to spikes in the data.

TPW Advisory Friday Musings: Patience

By TPW Advisory

Patience is a virtue, patience is a virtue – that’s the mantra running through our head as debt ceiling talks drone on and the Curtain of FUD (Fear, Uncertainty & Doubt) continues to obscure the prospects for the brighter future we envision.
The oscillating nature of economic data and cross asset market pricing has tried the patience of bull and bear alike.
The bulls have had to be content with roughly 10% gains ytd for global equities while the media drumbeat continues to hammer recession, rate hikes and the utility of cash – notwithstanding its weak relative performance YTD.

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May 26

Daily Brief Macro: Industrial Metal Prices Melt as Global Recession Fears Heat Up and more

In today’s briefing:

Industrial Metal Prices Melt as Global Recession Fears Heat Up
EU Watch: At the End of the Day It Is All About Domestic Politics…
European Deposits: US Turmoil on Tour?
CX Daily: Five Things to Know About Chinese Trust Firms’ Scramble to Offload Risky Assets
US Long-End Yields Pause not Reversal

Industrial Metal Prices Melt as Global Recession Fears Heat Up

The Bloomberg Industrial Metals Index has plunged by 14% during the last month, casting an ominous cloud over the much-anticipated soft landing that investors have been hoping for.
The ongoing decline in commodity prices, down 26% from their peak, now suggests an implied US recession probability of 68%.
And in our updated US Recession Scoreboard, the recent dip in copper mirrors a somewhat elevated, yet increasing, chance of a US recession.

EU Watch: At the End of the Day It Is All About Domestic Politics…

Watch out for political fragmentation in the EZ as the economy looks weaker and weaker
Germany must make the hard choice of lending a helping hand to the peripheral EZ countries or to Herr Müller in Lower Saxony
Policy measures such as friend shoring and green transition are all welcomed by most as long as the above-mentioned Herr Müller does not get poorer.

European Deposits: US Turmoil on Tour?

Most analysts seem to conclude that the US banking stress will not spill-over to Europe
In this analysis we pull back the curtains on movements in both corporate and household deposits in Europe
And we find worrying trends in European banks which could intensify issues in coming months

CX Daily: Five Things to Know About Chinese Trust Firms’ Scramble to Offload Risky Assets

Trust /: Five things to know about Chinese trust firms’ scramble to offload risky assets
Personnel /: China appoints vice foreign minister as ambassador to U.S.
Corruption /: Jilin Province Trust’s former chairman sentenced to 14 years in prison

US Long-End Yields Pause not Reversal

The long-end bond price rallied on Tuesday and early Wednesday, indicating a potential fall pause at the critical support.
Additionally, AUSDUD followed NZDUSD’s decline, was impulsive, and the AUDUSD broke the H&S neckline.
It’s uncommon for higher US long-end yields and lower AUDUSD to go in different directions unless it’s due to pure short-end yield differential, which is unlikely.

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May 25

Daily Brief Macro: Euro Watch: A Conflict of Interest Emerging Between ECB and Italy and more

In today’s briefing:

Euro Watch: A Conflict of Interest Emerging Between ECB and Italy
Global Earnings on the Edge: A Concise Analysis of Key EPS Indicators
UK: The Exceptional Inflation Nation
US Default Unlikely, but This Is Just Round1 of Prolonged Debt-Reducing Negotiations
Germany 2 and 10-year Yields Show Signs of Breakout

Euro Watch: A Conflict of Interest Emerging Between ECB and Italy

A conflict of interest is emerging between Italy and ECB, as Italy needs funding in the middle of a hiking cycle
Italy needs to refinance roughly 650 bn. EUR within the next year
Will the central bank scoop up the debt, or will banks and households have to step in?

Global Earnings on the Edge: A Concise Analysis of Key EPS Indicators

Our aggregate bellwether earnings indicator point to a 20% decline in global earnings-per-share.
This contrasts sharply with market expectations, which continue to project earnings growth in all major regions.
Combining our earnings estimate with current global equity market valuation also results in significant downside.

UK: The Exceptional Inflation Nation

Inflation slowed by much less than expected again in Apr-23 to 8.7% on the CPI (RPI 11.4%). That 0.4pp CPI surprise extends a worrying trend in the UK.
Broad strength across core goods and services means underlying inflation increased again while other countries slowly converged toward their targets.
State-Sponsored second-round effects are creating painful inflationary exceptionalism in the UK. We now expect a 25bp rate hike in August beyond our existing June call.

US Default Unlikely, but This Is Just Round1 of Prolonged Debt-Reducing Negotiations

By Prasenjit K. Basu

The Gramm-Rudman-Hollings process was initiated in 1987 when US public debt was just 50% of GDP. It is now 123% of GDP. Serious, protracted deficit-reduction negotiations are therefore imperative.
Biden and McCarthy know the chaos that any hint of default will sow. They will take these talks to the brink, but the debt-ceiling will be lifted by mid-June.
Medium-Term spending cuts should bring annual deficits down to 3% of GDP by FY2024 (30Sep’24). Despite near-term messy uncertainty, lower deficits will reduce bond yields and be positive for markets.

Germany 2 and 10-year Yields Show Signs of Breakout

Yesterday, the yields closed almost unchanged despite two consecutive higher highs.
However, if the breakout with the Ichimoku baseline as a stop is sustained, the main part of the uptrend is yet to begin.
Yesterday, the yields remained almost the same at closing despite two consecutive higher highs.

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May 24

Daily Brief Macro: The Great Game – 7 Takeaways from G7 and more

In today’s briefing:

The Great Game – 7 Takeaways from G7
Taiwan’s 2024 Poll Takes Shape as Parties Complete Nominations
China Needs to Call in the Cavalry to Bolster Faltering Growth
Federal Reserve: Skipping the Pause and Pivot
Services Requesting Rate Hikes
CX Daily: China’s Effort to Move Mountain of ‘Hidden Debt’ Faces Uphill Climb
CX Daily: Chinese Fast Fashion Platforms Could Be Next U.S. Target

The Great Game – 7 Takeaways from G7

By Mikkel Rosenvold

Steno Research reporting live from Japan where the G7 meeting in Hiroshima just concluded yesterday.
Here’s our 7 main takeaways – both geopolitical and financial
What will G7 do about China, world peace and AI?

Taiwan’s 2024 Poll Takes Shape as Parties Complete Nominations

Taiwan’s political parties have concluded their nominations for the 2024 presidential polls. Despite voter approval for Tsai’s leadership, victory for her party is not guaranteed.
China would tone down its hawkishness in the run-up to the polls to avoid spooking voters towards voting for the Beijing-skeptic DPP.
Taiwan’s internal political dynamics are also shifting; a strong showing by the new Taiwan People’s Party may show appetite for a middle ground in cross-strait relations.

China Needs to Call in the Cavalry to Bolster Faltering Growth

China is paying the price for the excessive investment and leverage of the past 20 years, while headwinds are building to current components of demand.
Beijing appears to be focused on long-term political and economic challenges. It is downplaying the current downside risks in the belief that these can be sorted out with relative ease.
The short-term recovery is thus at risk of losing momentum. Expect more episodes of economic distress in the public and private sectors.

Federal Reserve: Skipping the Pause and Pivot

There can’t be a Pivot. Before the Fed can cut rates to a less restrictive level of unemployment must rise.
There can’t be a Skip and Hike. US Macro Momentum is fading, and investors are underestimating the impact of tighter lending standards.
Eventually, the Fed will be forced to cut. Markets expect this, but for the wrong reason.

Services Requesting Rate Hikes

The Flash PMIs diverge between manufacturing’s depression and rudely resilient services activity. It’s a similar story for the UK, EA, and US as they resist recession.
Their unemployment rates are lower than a year ago, except in the UK, where there has been a slight rise of questionable statistical significance.
Persistent excess demand is inconsistent with ending the inflation problem. We still expect another BoE hike and two from the ECB. Further Fed steps could extend that.

CX Daily: China’s Effort to Move Mountain of ‘Hidden Debt’ Faces Uphill Climb

Debt /: Cover Story: China’s effort to move mountain of ‘hidden debt’ faces uphill climb
G7 /: China protests G7 communique, saying it interferes in domestic affairs
Covid-19 /: China’s post-reopening second Covid wave could peak in late June, expert says

CX Daily: Chinese Fast Fashion Platforms Could Be Next U.S. Target

E-commerce /In Depth: Chinese fast fashion platforms could be next U.S. target
Sentiment /: British firms ‘conditionally optimistic’ about their China operations in 2023
AIDS /: HIV/AIDS cases in China fell 13% during pandemic, expert says

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May 23

Daily Brief Macro: Macro Watch – Everything Related to the Deposit Crisis Keeps Worsening Beneath the Hood and more

In today’s briefing:

Macro Watch – Everything Related to the Deposit Crisis Keeps Worsening Beneath the Hood
FSC to Reduce CFD Derivatives Transactions in Korea
The Week That Was in ASEAN@Smartkarma – Sea Ltd Buoyant, Grab Delivering, and DXN IPO
China Recovery – Real Estate
Comment on Exchange Rate EUR/USD – March 31, 2023
Significant Looming Gyrations in US Banking Liquidity as Reserves Approach Key Threshold
CX Daily: Court Ruling Sets Off Debate About Bond Fraud Compensation

Macro Watch – Everything Related to the Deposit Crisis Keeps Worsening Beneath the Hood

Given a lack of an imminent economic crash risk, bond bears have been back in the driver’s seat.
No news is bond bearish news, which in turn is likely to exacerbate the already worsening root cause of the deposit/bank crisis.
We are on high alert for the ramifications of the price action in the USD.

FSC to Reduce CFD Derivatives Transactions in Korea

By Douglas Kim

Due to the recent crash in numerous Korean stocks related to the CFDs, FSC announced that it plans to restrict the amount of leverage related to CFD products.
CFDs will be considered as personal credit extensions and thus should be included in the credit limit of securities companies.
Given the propensity of retail investors to be net-long, the greater restriction on the credit limit of securities limit could add to further selling pressures on the Korean stock market.

The Week That Was in ASEAN@Smartkarma – Sea Ltd Buoyant, Grab Delivering, and DXN IPO

By Angus Mackintosh

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 so insights on Sea Ltd (SE US) and Grab Holdings (GRAB US) post results plus insights on Golden Energy & Resources, Penguin International, and DXN Holdings IPO.
There was also a macro Insight looking at post-election Thailand from Manu Bhaskaran plus an insight looking at the Vietnamese construction sector.

China Recovery – Real Estate

By VRS (Valuation & Research Specialists)

Until April, China A shares saw sustained Northbound Inflows.
In January 2023, foreign investors invested a record $100 billion in China A shares.
This was more than 2022, which was $90 billion. We have started to see some outflows in May, but this is yet to be a trend.

Comment on Exchange Rate EUR/USD – March 31, 2023

The EUR/USD exchange rate has moved upwards with significant fluctuations over the course of March 2023.
As it can be observed in the main graph (Graph 1), there was a period of fluctuations in the exchange rate but with a steady upward trend.
The exchange rate fluctuated significantly over the course of the month reaching a high of 1.0901 on March 30th.

Significant Looming Gyrations in US Banking Liquidity as Reserves Approach Key Threshold

By Said Desaque

Bank reserves have fallen since December 2021 towards the lowest comfortable threshold deemed by the Fed. Renewed Treasury borrowing will intensify the downward pressure in the coming months.
Lower debt issuance by Federal Home Loan Banks in the coming months will help to boost money market funds’ participation in the Reverse Repo Programme, thereby reducing bank reserves.
Rising stress in the repo market in September 2019 prompted the Fed to buy T-bills. The Fed could repeat its 2019 response, but this action would not constitute quantitative easing.

CX Daily: Court Ruling Sets Off Debate About Bond Fraud Compensation