Macro

• This chart said stocks would fall at the start of this year
• It now says we should step back from being too bearish
• I am not going to ignore it at this juncture. Here we look at possible reasons why the stock market may see some relief

• Technical and valuation conditions are consistent with past major panic lows
• The key risk is a lack of earnings downgrades in the face of growing recession risk.
• Our base case scenario calls for a double or multiple bottoms in stock prices and a possible a double-dip recession.

• There is certainly an action-reaction dynamic underway that, if poorly managed, could lead to unintended military incidents.
• By threatening to cross red lines such as Taiwan for China and freedom of navigation for the US, frictions could worsen.
• While provocative moves by each side are a concern, they are part of a bigger picture in which both sides are keen to avoid a clash.

• 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 on news of lay-offs, Thai Life IPO, Erajaya Swasembada, Thomson Medica, PT Surya Citra Media, and Kiatnakin Bank (KKP TB).
• We also saw a list of top ASEAN Picks from Dr Andrew Stotz highlighting his top 14 picks and an update on Carabao Group as a recovery proxy. 

• President Jokowi replaced two members of his cabinet, a move that is spurred mainly by political considerations.
• The agriculture and trade ministers were replaced by a former TNI chief as well as the chairman of a political party that has joined the ruling coalition in parliament.
• Going by the retention of certain ministers, the latest reshuffle has broader political implications for the 2024 presidential elections.

• Global managers are at their lowest ever allocation in Asian equities.  From a peak of over 17% in 2018, average exposure has fallen to just 12.94%.
• Declines were led by China & HK Consumer Discretionary and Communication Services, whilst investors also scaled back exposure to Japan Communication Services, Industrials, Health Care and Consumer Staples
• Among Global investors, overweight the benchmark in Asia is by far the non-consensus trade.

• The Fed appears intent on tightening policy to fight inflation. . It’s difficult to see how the U.S. economy can sidestep a recession.
• The good news is the S&P 500 is at or near fair value, as long as earnings don’t significantly deteriorate.
• Renewed insider buying as the market reached its recent lows is another sign that downside risk may be low.

• The surprise SNB decision to raise rates by 50 bp last week sparked a disorderly VAR-driven unwind that rattled global markets.
• We are seeing numerous signs of capitulation by traders and investors.
• This volatility too shall pass. Hopefully, the markets can return to a more normal state next week.

Bond market volatility continues to lead all markets lower, triggering a further round of deleveraging.

Cryotos have been crushed and Credit markets appear to have hit capitulation, even if equities have not.

FX volatility, especially in the Yen, is also causing, as well as reflecting, distress in terms of forced buying/distressed selling and is being exaggerated by the (VaR) volatility based risk management models that trigger further deleveraging of balance sheets.

• Bear market results from sharp monetary squeeze as Central Bank liquidity withdrawn, led by Fed. More pain to come. Recession is here
• US Federal Reserve is driving markets lower and USD up. QT has officially started, but Fed has in fact been secretly tightening liquidity for months
• Effective Fed balance sheet likely to contract by US$2 trillion under QT plans, but policy error could easily force a bigger US$3 trillion correction. Wall Street at risk.

• In Depth: Why relocating mainlanders see Singapore as a safe haven for their businesses and property

• Caixin Explains: Who controls China’s health code app

• Developers face mounting debt payments in coming months

• EA HICP inflation was unrevised from 8.05% in the final print for May-22, and the HICPxT rose to 8.2% y-o-y, in line with our forecast.
• Unlike the current consensus, we still expect the headline rate to rise again in June. However, the upside in our forecast is relatively small, with the peak still looking flat.
• The underlying inflation impulse may have softened in May. Nonetheless, it remains too high and is raising the annual rates of most statistical measures we track.

• Four things to know about China’s plan to go ‘all-out’ on infrastructure

• Did Henan authorities abuse virus controls to stymie swindled bank depositors?

• Chart of the Day: China’s record high youth unemployment rate

• Heading into yesterday’s Fed meeting, the bond market asked a tough question to Powell: do you mean business?
• Powell took a ‘’Bad Cop, Good Cop’’ stance: he answered with a firm ‘’Yes’’ at first, and then tried to soften the message during the press conference.
• This spurred a relief rally in risk assets, but it won’t last.
  Bond markets hate half-hearted stances, and they will keep testing the Fed and risk assets until they get what they want: clarity.

• As widely expected, the BoE delivered a fifth consecutive rate hike to 1.25% in June. Three members dissented for a 50bp move again, despite disappointing activity data.
• Aggressive action elsewhere is hitting GBP, raising UK inflation pressure and pushing the BoE to get more hawkish, albeit less than some market participants expected.
• It no longer looks like the MPC will want to skip a September hike, so we now see the policy rate 25bps higher by Nov-22 at 2%.

• EM Fund managers continue to add to MENA allocations, yet underweights have increased to near record levels.
• Saudi Arabia has been the driver of the recent allocation spike, with the average GEM fund allocation now at 1%
• Fund activity over the last 6-months has favoured Qatar National Bank and Saudi Tadawul Group, with both seeing the percentage of funds invested increase.

• Cover Story: The disarray in China’s vocational training system

• China will go to war if ‘anyone dares’ aid Taiwan independence, defense minister warns

• North China city launches flash campaign to curb gang violence amid national outcry

• With US rates reaching the highest levels in a decade, it is not a surprise that the volatility is spilling over to emerging markets.
• While South African local bonds had weathered the volatility in 2021 well, this time around, they have gone from outperforming against the rest of EM to underperforming.
• Besides external drivers, domestic factors have turned negative as well – particularly rising inflation and worsening debt profile – indicating that rates in South Africa should continue to underperform.

• With major central banks ramping up rate hikes, slow action by emerging Asian central banks could produce financial stresses. 
• Asian central banks have started raising rates and will step up the pace in 2H22.
• A key caveat, is that Asian policy tightening can be less aggressive than in the US since most countries still have slack in their economies except South Korea & Singapore. 

• A shock spike in the UK unemployment rate broke its resilient trend. Less depressed labour force levels matter less than data about price-relevant gaps, like the UR.
• The UR rise appears to be a genuine shift, despite the high demand for workers helping to drive higher wages. The wage trend appears comfortably above 4%.
• The peak cyclical pressure in the UK labour market may have passed, with the UR trend turning and wage growth not rising as much. A burn-out phase may be starting.

• 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 Bank Mandiri (BMRI IJ), Thai Life pre-IPO, Saratoga Investama Sedaya, Frasers Hospitality Trust (FHT SP), and Hwa Hong Corp (HWAH SP).
• We also saw insights on First Media, as the XL Axiata/ Link Net deal is voted through, and Mapletree North Asia Commercial Trust on delisting and GoTo post results.

• UK GDP declined again in April, meaning output has only grown in one of the past five months. High consumption around Easter and recovering car trade were overwhelmed.
• Health output crashed as covid-related trade ended, professional services fell from their highs, and industrial production continued retreating.
• GDP probably contracted in Q2, but high inflation is currently more concerning to the BoE. It should help encourage more gradualism beyond August, though.

• Bear market caused by sharp monetary squeeze as Central Bank liquidity withdrawn. More pain to come US Federal Reserve is now leading the charge. 
• QT is slated to begin in June, but Fed has already been secretly tightening liquidity for months
• Effective Fed balance sheet is set to contract by US$2 trillion under QT plans, but policy error could easily force a bigger US$3 trillion correction and crater stock prices

• The U.S. equity market is currently suffering from a non-recessionary slump. 
• Valuations are slightly above fair value and bottom-up EPS estimates are rising. 
• In order for prices to advance, either earnings need to continue growing or the cost of capital, otherwise known as interest rates, needs to fall.

• After surging off a test off the lows in late May, the S&P 500 decisively broke down through a narrow trading range after a brief consolidation.
• Despite the recent technical breakdown, our survey of sentiment and technical indicators is mostly bullish or neutral.
• We interpret this as crash risk is low and downside potential is limited.

• Coal / In Depth: China’s never-ending coal price woes

• Rains / Unending torrential rain leaves at least 24 dead across China. At least 24 people have died and six more are missing as torrential rain continues to batter parts of China, according to state media reports and official statements.

• Inflows / Foreign capital roars back into China’s stock market