Macro

In the next installment of our Webinar Wednesdays, we go live with Smartkarma Insight Provider, Thomas Schroeder as he will be sharing with us his insights into the Asian Market from a technical perspective and analysis. From the current trends in the market, to what’s coming next, join us in this installment as we hear more from Thomas.

The webinar will be hosted on Wednesday, 22 March 2023, 17:00 SGT/HKT.

Thomas Schroeder started using charts and trading in the FX markets in 1989 and entered the equities arena in 1992 with Deutsche Bank as a fundamental analyst, but found himself relying more on inter-market cycles and charts. In 1994, he became the Asian head of Technical Research for UBS Securities in Hong Kong and in 1997 he was charged with heading the Global Technical Research team for SG Securities. In July of 2003, Chart Partners Group Limited was formed, providing clients with timely and accurate progressive trading strategies in a truly global context.

• The Fed will hike by 25bps to try and regain control of the narrative
• The banking crisis is probably the final nail in the coffin for the otherwise germinating economic rebound
• 200 bps worth of cuts to arrive before 2024 as disinflation and banking turmoil will affect Fed’s decision making

• Monday market dynamics suggest more liquidity is needed to limit contagion risks.
• 5% is the magic level at which things start to break. The Fed needs time to make things whole again before resuming rate hikes.
• Recent events will profoundly impact consumer and business confidence and increase the odds of a recession. Just watch oil!

• 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 Berli Jucker in Thailand, as a beneficiary of tourism recovery plus on Supermax Corp, Halcyon Agri, and PT Trimegah Bangun Persada (Harita Nickel).
• There was also a macro insight on the Philippines, with exposure falling to record lows for active PMs, and a sector piece on S-REITS in light of rising interest rates.

• The Saudi-Iran deal brokered by Beijing is part of China’s strategy to reverse setbacks in its global strategic position inflicted by its prior self-isolation and foreign policy missteps.
• Beijing will look to the Russo-Ukrainian conflict for its next diplomatic win. A decisive peace deal is unlikely, but a smaller deal such as on grain shipping is possible.
• A recalibration of the Belt and Road Initiative and a softening of Beijing’s stance towards debt relief are also on the cards.

• Regional integration continues its slow but steady pace in Asia across various dimensions including flows of trade, investments, and labour, as well as institutional frameworks.  
• Further integration is expected to benefit from global trends such as the prevalence of trade agreements, the prominence of economic clusters, and improved connectivity.
• As the global economy faces the risk of fragmentation, stronger degrees of integration fortify Asian economies’ resilience if the risks are appropriately managed by policy.  

• The EUR/USD exchange rate has been moving upwards, as seen in Graph 1.
• There were four secondary movements throughout the considered time period.
• More specifically, after fluctuating the first days of the month, the currency pair showed an upward movement from January 6th up to January 12th.

• The banking crisis will continue to rage until the Fed and the ECB accept the underlying reason for the deposit flight
• Banks cannot cope with an über-inverted yield curve, why cuts are needed asap to contain the situation
• It will likely get worse before it gets better consequently

• Are EU banks more solid and protected from bank runs and instability in the banking system?
• Have the EU set up safe-guards that will keep the European Banks safe? 
• We take a closer look and are not overly convinced.

• The stock market has sustained considerable technical damage. Textbook technical analysis calls for a period of basing before stock prices can rise in a sustainable way.
• We would watch the regional banks, which have become an open wound for investors. The KBW Regional Bank Index needs to hold long-term support for the market to sustainably rally.
• In the short run, the direction of the greenback will depend on the market perception of Federal Reserve actions.

• Potential fragility in the US banking system raises the ante on the Fed to pause increasing its policy rate.  Easy money impaired banks’ ability to endure higher funding costs.
• Newly available access to the Fed’s balance sheet incurs consequences, including moral hazard, less competition and potentially easier financial conditions when inflation remains elevated.
• Markets are discounting that the Fed will ease policy settings to counter banking system events. The Fed faces difficult challenges in trying to quell inflation and preserve financial stability.

• Iran and Saudi Arabia are buddying up with the help of China
• Ukrainian is incredibly holding out while Bakhmut is being surrounded
• What to make of all this? Read your weekly geopolitical overview

• Funds / Regulators tighten grip on China’s $2.9 trillion private fund industry

• Fugitive / Fugitive billionaire Guo Wengui arrested in New York

• Yuan / HKEX applies to launch yuan counter for Hong Kong-listed shares

• A concise overview of the latest developments in the unfolding banking crisis and the surprise central bank intervention following them.
• Three key reasons equities markets did not collapse: 1) LIQUIDITY, 2) ECB, 3) The Outlier Narrative.
• Other Macro data not to be overlooked and our Fear & Frenzy Sentiment Index moved away(!) from Fear this week.

• The final EA HICP inflation print confirmed a slight slowing to 8.5% in Feb-23. The ex-tobacco rate hit 8.61%, only 2bps above our forecast amid marginal news in the details.
• Resilience was also confirmed in the core measures, which do not appear to be converging towards target-consistent rates. Excesses haven’t broken yet.
• March may undershoot the consensus amid less seasonal space to rebound from January, but we see inflation trending above the ECB’s forecast, encouraging more rate hikes.

• Recent market action is just like the weather outside, which brings to mind the old proverb in the title.
• Research indicates the origin of the proverb goes back to astronomy and how Leo, the Lion constellation, rises in the East early this month while Aries, the Lamb constellation, sets in the West towards the end of the month. 
• It was adapted for agricultural purposes to describe March’s transitional weather back in the 1700s with the first noted reference in 1732, almost 300 years ago.

• FDIC’s decision to put Svb Financial (SIVB US) and Signature Bank (SBNY US) under receivership created the worldwide market panic.
• We believe the contagion will be limited to US regional banks which could see rising funding costs and a deposit flight to larger US banks.
• The Fed’s multiple rate hikes in 2022 have finally broken the US regional banks and we expect this event to slow down the rate hikes even further.

• In general over a 1 year time frame short DXY looks good once the curve is steep
• Especially commodity heavy currencies have a high beta to the dollar scrambles.
• Tech/Consumer Discretionary is probably where you should place your chips, if you are a long only manager given this backdrop.

• Unemployment / In Depth: Solving China’s soaring youth unemployment

• Politics / Communist Party rejigs human resources body leadership

• Fine / Bohai Bank slapped with $2.5 million fine for 12 violations

• The ECB delivered another 50bps rate hike, as promised in February and expected. It is not allowing Silicon Valley Bank’s broadly irrelevant failure to break its focus.
• Higher core inflation forecasts extend the problem and necessitate a tight monetary setting to break excessive pressures. ECB policy will rightly be data-dependent.
• We forecast 25bp deposit rate hikes in May and June, with risks skewed towards further steps if resilience outlives the current financial stability issues.

• Philippines ownership falls to record lows among active Asia Ex-Japan managers.
• Only 58% of Asia Ex-Japan managers now have exposure, with most holding less than a 3% portfolio weight.
• Shrinking benchmark weights and a dwindling active investor base means it is becoming ever easier to avoid Philippines exposure entirely.  

• On Friday, Silicon Valley Bank – the then 16th largest bank in the US – came to feel the ramifications of hazardous (if even existing) risk management 
• The Fed has posed the option of a discount window for banks in distress to mitigate contagion risks. Banks with large holdings of HTM-portfolios may be better off than others
• We find reasons to worry about the banks with a large exposure to Commercial Real Estate in these times of funding stress – due to contagious effects from the crisis.

• The 3-month annualized inflation rate increased for every inflation measure included in the US Inflation Monitor.
• The closely watched Core Services ex Housing/Shelter CPI numbers have barely come down in recent months and remain above both Headline and Core CPI.
• Based on the latest CPI report the Federal Reserve will have no other option than to continue hiking rates. But banking contagions risks may become the dominant policy driver soon.

• We seem to be playing to the Oscar-winning movie title “Everything Everywhere All at Once” in the financial markets.
• Two bank failures in the US, and we go from No Landing to Crash Landing.
• The three days move in 2-year yields was the most significant drop since 1987 and a $ 485 billion loss in banks’ market cap.

• The UK Budget cancelled energy price hikes, as expected. Investment and pension allowance reforms neutralise borrowing changes between 2024 and 2026.
• Residual fiscal space beyond that is politically desirable to keep for a pre-election giveaway. However, it may not exist outside of the OBR’s imagination.
• Sustained brisk potential growth creates excess supply in the OBR view of 1Q23. Without that, GDP and revenues will underperform, further prolonging high debt issuance.

• China’s spectacular growth window is closing and their demographics aren’t looking good. 
• The prime candidates for becoming “the Next China” are to be found in Africa.
• Looking at a number of quantifiable variables such as dependency rate, education, infastructure and much more, we narrow down the contenders to a couple of really intriguing African countries.

• QT is effectively dead. We have believed this since the US gilt crisis in 2022, but the SVB issue now confirms it. Game over. QE is back
• 2023 will still be volatile. The major markets will range trade, but unlike 2022, investors will enjoy large absolute gains in areas like commodities, EM and cyclicals
• Other Central Banks will follow the US Fed. The US Fed is de facto following a bifurcated monetary policy: high rates for inflation and the Fed B/S for financial stability

• The failure of the US-based Silicon Valley Bank is unlikely to degenerate into a major financial crisis. 
• Asian markets are set, though, to continue suffering asset price corrections and currency depreciations in the near term. 
• Nevertheless, the metrics of Asian resilience such as strong bank capitalisation and external accounts will ensure that these spillovers will be limited in scale and duration.

• Most Asian economies have regained their pre-pandemic GDP levels, but substantial gaps remain relative to pre-pandemic growth trajectories. Richer economies experienced a smaller gap due to policy and structural advantages. 
• Long-Run scars may manifest via diminished labour market, human capital, and investment prospects. Post-COVID turbulence makes things worse. 
• With a more turbulent global environment risking a higher occurrence of economic shocks, resilience-enhancing reforms are a top priority for Asian policymakers.

• Based on the stellar rise in the 30-year US mortgage rate, US home prices look extremely expensive relative to history.
• We provide a regression model using the 30-year fixed mortgage rate and months of supply of new one-family homes to estimate the change in home prices 12 months from now.
• This regression model suggests home prices will drop by as much as 15% from the latest-known level. iShares U.S. Real Estate ETF (IYR US) 

• The UK unemployment rate remained at 3.7% again in Jan-23. Ongoing resilience amid high vacancies indicates it may resist rising in Q1, extending cyclical excesses.
• Inflated pay settlements continue to drift higher, with over 70% exceeding 4% in January and signs of anchoring around 5%. Such pressures remain far too high.
• Silicon Valley Bank’s smooth failure is unlikely to break UK excesses, so the BoE still has more work to do, with another two 25bp rate hikes in our unchanged view.

• Cover Story: China’s financial industry regulators to get reshuffle of responsibilities

• China’s new premier vows to support private enterprises

• China’s Health Commission invites expert opinions on egg freezing

• The (equity) risk premium for banks (SPDR S&P Bank ETF (KBE US)) will go up while bank profitability will go down. There will be questions about smaller bank regulations.
• Startups and smaller tech funds will struggle, potentially resulting in a lower valuation of the entire technology space (iShares US Technology ETF (IYW US)).
• Unless the Bank Term Funding Program does not solve the liquidity issues, the Federal Reserve must continue raising rates, forcing another standoff with markets (SPDR S&P 500 (SPY US)) .

• 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 Sea Ltd (SE US) post spectacular results, and PT Nippon Indosari Corpindo (ROTI IJ), which also beat considerably, and on Prodia (PRDA IJ). 
• Last week also saw insights on Olam Group (OLG SP), Sabana Industrial REIT (SSREIT SP), Halcyon Agri (HACL SP), Oishi Group PCL (OISHI TB), and the Singapore Healthcare Sector. 

• According to S&P Global, the renewable output by the grid operator MISO averaged 333,012 GWh in Q4.
• Despite Bonneville Power Administration’s (BPA) renewable output slipping 12% in Q4, it remained the footprint with the most renewable market share at 75.6% of its total fuel mix for Q4.
• The latest ACP data shows that the total installed solar capacity in the US grew by 17% year on year, reaching 74.126 GW in Q4.

• Silicon Valley Bank is nothing but a symptom of years of excess money growth and it is now time to figure out who else is swimming naked. 
• Money growth is negative, and idiots only survive in times of excess liquidity.
• Here is what we know and what to expect for the week ahead

• The stock and bond market is in disagreement again. While cyclical industries are in relative uptrends, indicating expansion, the 2s10s yield curve is deeply inverted, indicating recession.
• We believe the current equity market expectations of a cyclical recovery is simply unrealistic in light of the Fed’s focus on 2% inflation.
• The current situation is highly reminiscent of the double-dip recession of 1980–1982. Investors are advised to be prepared to revise their risk profile as conditions may change later this year.

• The S&P 500 has been consolidating sideways since it staged an upside breakout through a falling trend line in January.
• The upside breakout was constructive for stock prices, but until the consolidation period resolves itself either to the upside or the downside, it’s difficult to be definitive about direction.
• While we are constructive on stock prices, some caution needs to be warranted here.

• The reaction of central banks to the global financial crisis (GFC) was a boon for passive investment funds after 2008 and, consequently, bubbles in equity and fixed income investment benchmarks.
• Easy money and passive investment turned long-standing relative financial asset returns on their head: value stocks no longer outperformed growth counterparts. Small-cap stocks also began underperforming their larger brethren. 
• Higher economic and inflation volatility in the future means that the nature of post-GFC investment returns will not return, thereby implying a much bigger opportunity for active fund management.

• Having been the poster child of the 2023 rally, the banks are back in the doghouse as fears grow about their credit quality.
• This may be exaggerated, but over the years you come to realise there is no smoke without fire.
• Silicon Valley Bank (SVB) has been funding the technology and life sciences sectors. 

• Positioning and flows were very volatile last week due to the stress around SVB
• Bond buyers were back, while USD selling was seen, but neither in any big size
• Equity flows were actually positive until Friday and positioning remains short