Macro

In today’s briefing:

A Mistaken Attempt at Sounding Dovish

A Mistaken Attempt at Sounding Dovish

By The Macro Compass

How do you assess whether the outcome of a Central Bank meeting was hawkish or dovish? Simple: you look at the delivered outcome against the probability distribution which was priced in before the meeting.
It’s not an absolute but a relative assessment.
Yesterday, the Fed delivered a 50 bps rate hike and a balance sheet run-off schedule which closely met expectations but the press conference turned to surprise expectations on the dovish side – and it was a mistaken attempt at sounding dovish, in my opinion.

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May 06

Macro: GEM Fund Performance. April Compounds Woes for Active Managers and more

In today’s briefing:

GEM Fund Performance. April Compounds Woes for Active Managers
BoE: Keeping Pace Until August
Asia Ex-Japan: MediaTek, Sea Ltd and China Banks Weigh on Performance
Treasury Shares as % of Total Outstanding Shares: Screening for Potential Activist Candidates
India’s “Surprise” Rate Hike Was Overdue
Local Governments Again Break Out the Coupons to Boost Consumer Spending
CX Daily: Five Things To Know About China’s Draft Rules On Local Financial Institutions
CX Daily: How the War in Ukraine Is Rattling China’s Energy Transition

GEM Fund Performance. April Compounds Woes for Active Managers

By Steven Holden

Average returns among GEM active managers came in at -7.02% for April, lower than the MSCI EM Index by -1.46% with 21.2% of funds outperforming.
This year’s underperformance of -3.69% ranks as the worst start to the year for over a decade, worse than the first 4 months of both 2009 (-2.70%) and 2015 (-2.71%).
Russian Financials (overweight) and Saudi Arabian Financials (underweight) accounted for nearly 1% of the performance deficit, with Singapore Comm’ Services, Taiwan Technology and Indian Utilities further dragging on relative returns.

BoE: Keeping Pace Until August

By Phil Rush

The BoE delivered another 25bps rate hike to 1.0%, as widely expected. Not only did all members vote for a hike, as we thought, but three dissented for 50bps.
Some MPC members were unhappy with maintaining hawkish guidance. However, most were, and with three already backing 1.25%, we now expect another hike on 16 June.
Forecasts appear inconsistent with maintaining this sequential pace. Forthcoming asset sales in September now make that likely to be the month gradualism slows the pace.

Asia Ex-Japan: MediaTek, Sea Ltd and China Banks Weigh on Performance

By Steven Holden

April was another tough month for active Asia Ex-Japan managers. Average returns of -6.18% lagged the MSCI Asia Ex-Japan index by -1.02%, with just 27.8% of funds beating the benchmark.
On the year so far, more than 80% of Asia Ex-Japan funds are underperforming the benchmark. Returns are largely correlated to Style, with Value outperforming Growth by +6.5%.
Overweights in both Mediatek Inc and Sea Ltd have been the most costly on the year, in addition to a number of underweights in the key state run China banks

Treasury Shares as % of Total Outstanding Shares: Screening for Potential Activist Candidates

By Douglas Kim

In this insight, we provide a ranking of all the KOSPI 200 stocks, in terms of their treasury shares as a percentage of total outstanding shares.
We highlight 29 companies whose treasury shares/outstanding shares are more than 10%. These companies’ values could be improved significantly if treasury shares are cancelled.
The potential implementation of compulsory tender offer in the next 2-3 years is likely to put increased focus on Korean companies with especially large levels of treasury shares/total outstanding shares.

India’s “Surprise” Rate Hike Was Overdue

By Gautam Jain, PhD, CFA

The Reserve Bank of India roiled the market yesterday with an unexpected inter-meeting policy rate increase, leading to rates moving higher across the curve.
I have been arguing for a few months that the RBI needs to start raising rates based on the high inflation and narrowing rate differential with the US.
Despite the move higher in rates in India, I continue to like paying rates in India, particularly against receivers in other countries to hedge against the volatile US rates.

Local Governments Again Break Out the Coupons to Boost Consumer Spending

China’s local governments have begun offering billions of yuan worth of coupons to boost consumer spending, in an effort to help businesses feeling the pain of China’s Covid-19 outbreaks over the past two months.
The measure comes as China’s economy faces some of the greatest strain it has experienced since the initial wave of outbreaks in early 2020 as strict lockdowns across the country have disrupted business and everyday life
This time, local governments have also chosen coupons or vouchers as the form of their demand-side stimulus policy. The coupons will be good for discounts on products like cars and electronics, as well as services such as admission into local tourist sites.

CX Daily: Five Things To Know About China’s Draft Rules On Local Financial Institutions

Five things to know about China’s draft rules on local financial institutions
Beijing shortens quarantines for inbound travelers, close contacts
Shrinking capital investment drags down Caixin New Economy Index

CX Daily: How the War in Ukraine Is Rattling China’s Energy Transition

In Depth: How the war in Ukraine is rattling China’s energy transition
Regional bank under corruption probe faces more trouble after online savings accounts frozen
China’s services sector slumps further as Covid battle intensifies, Caixin PMI shows

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May 05

Macro: EA: Activity Towards Gradual Exit and more

In today’s briefing:

EA: Activity Towards Gradual Exit
CX Daily: Global Food Crisis Stalks the Starving as War, Covid Choke Supplies

EA: Activity Towards Gradual Exit

By Phil Rush

Services activity remains relatively robust in the Euro area, consistent with ongoing expansion. The consumer confidence crash is likely to bind business pricing power.
Unemployment’s steep trend decline still suggests a tightening that exceeds the experience of many countries with far more hawkish policy outlooks.
The ECB remains likely to respond soon after finishing QE, with an initial hike in Sep-22. We still see a demand squeeze encouraging a more gradual cycle than markets price.

CX Daily: Global Food Crisis Stalks the Starving as War, Covid Choke Supplies

Food / Cover Story: Global food crisis stalks the starving as war, Covid choke supplies
Covid-19 / Shanghai eases restrictions in six districts
PMI / China manufacturing slump deepens as Covid curbs bite, Caixin PMI shows

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May 04

Macro: China: Mounting Challenges to Compel Far-Reaching Policy Changes and more

In today’s briefing:

China: Mounting Challenges to Compel Far-Reaching Policy Changes
Indonesia: Policy Twists and Turns Will Hurt Investment Climate
How Well Is Hedging EM Currencies with the Euro Working?
Singapore: Upside Risks to Inflation Imply Possible Further Policy Tightening in October

China: Mounting Challenges to Compel Far-Reaching Policy Changes

By Manu Bhaskaran

Near term: There has been a clear shift in favour of greater stimulus, with the focus not on maximizing growth but on ensuring stability.
There are four reasons why the announced measures lack potency. The changes do not go far enough to restore consumer confidence.
Longer term: China will place greater emphasis on securing its geo-strategic position rather than on prioritizing growth.

Indonesia: Policy Twists and Turns Will Hurt Investment Climate

By Nicholas Chia

Investment data show that Indonesia is progressing in its efforts to accelerate economic growth.
FDI has risen sharply in 1Q22, particularly in the mining downstream sector.
But policy flip-flops such as the ban on palm oil exports could undermine confidence in policy making.

How Well Is Hedging EM Currencies with the Euro Working?

By Gautam Jain, PhD, CFA

In line with my view of the dollar remains strong in the near term, one of the trading strategies that I have suggested hedging an EMFX portfolio with the euro.
I show that the hedge has performed well by breaking down and comparing the return of the hedged portfolio with the unhedged version.
For me to recommend taking off the euro hedge, we would need to see the volatility of US rates and the probability of recession falling.

Singapore: Upside Risks to Inflation Imply Possible Further Policy Tightening in October

By Nigel Chiang

Price pressures firmed in March after pausing in February; MAS more hawkish on inflation yet confident that growth fundamentals remain intact with Russia-Ukraine drag offset by earlier reopening of economy
We rule out an inter-meeting hike for now; MAS likely views the risk of a wage-price spiral as limited after the cumulative pre-emptive tightening moves since January.
The trajectory of inflation will be key to watch for the October monetary policy decision. Core CPI breaching 4.5% in July and/or a sluggish inflection afterward would make tightening probable.

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May 03

Macro: Alert: Do Bears Hunt in Packs? (Part 3) The Coming Turmoil in Currency and Commodity Markets and more

In today’s briefing:

Alert: Do Bears Hunt in Packs? (Part 3) The Coming Turmoil in Currency and Commodity Markets
The Week That Was in ASEAN@Smartkarma – Astra International, Bluebird Taxi, and Keppel Restructuring

Alert: Do Bears Hunt in Packs? (Part 3) The Coming Turmoil in Currency and Commodity Markets

By Michael J. Howell

Global Liquidity seeing significant collapse and World Central Bank Liquidity slated to contract by 10-20% over 2 years
US Dollar set to make further gains. US dollar swap-lines become important
World commodity prices to skid lower as World economy hits recession

The Week That Was in ASEAN@Smartkarma – Astra International, Bluebird Taxi, and Keppel Restructuring

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 Bank Negara Indonesia (BBNI IJ), Astra International (ASII IJ), Bukalapak (BUKA IJ), AKR Corporindo (AKRA IJ), and Arwana Citramulia (ARNA IJ)
We also saw a an insight on Blue Bird (BIRD IJ) together with significant commentary on the ongoing Keppel Group restructuring plus an ESG angle on Carsome that may IPO.

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May 02

Macro: FOMC Meeting = Rally Catalyst? and more

In today’s briefing:

FOMC Meeting = Rally Catalyst?
Peak Hawkishness = Risk-On?

FOMC Meeting = Rally Catalyst?

By Cam Hui

Extremes in bearish sentiment in both stocks and bonds are setting up for tactical rallies in both asset classes.
Our base-case scenario calls for better intermediate upside potential from the bond market.
The upcoming FOMC meeting is a potential catalyst for the rally.

Peak Hawkishness = Risk-On?

By Cam Hui

As the world holds its collective breath for the FOMC decision next week, market expectations may have become overly hawkish, which begs a number of important questions.
How far beyond the curve is the Fed and what are the policy implications?
Is this a case of peak hawkish expectations for the market and what does that mean for asset prices?

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May 01

Macro: Alert: Do Bears Hunt in Packs? (Part 1) and more

In today’s briefing:

Alert: Do Bears Hunt in Packs? (Part 1)
Alert: Do Bears Hunt in Packs? (Part 2)
Sri Lanka’s Sovereign Default: Painful Structural Reform Needed
Rush to Normalise Fed Policy Settings Raises Questions Over US Corporate Profits Outlook

Alert: Do Bears Hunt in Packs? (Part 1)

By Michael J. Howell

Global Liquidity, the main driver of World asset markets, is heading much lower. Bear market is here
Recession coming: some economies may even already be in recession
Investor exposure to stocks too high and out-of-line with deteriorating economies

Alert: Do Bears Hunt in Packs? (Part 2)

By Michael J. Howell

Global Liquidity, the main driver of World asset markets, will head much lower
World Central Bank Liquidity slated to contract by 10-20% over next 2 years
Bond markets are already screaming a warning with ‘death-cross’ formation

Sri Lanka’s Sovereign Default: Painful Structural Reform Needed

By Prasenjit K. Basu

With foreign reserves down to US$1.939bn in Mar’22 (less than a month’s import cover), Sri Lanka announced a default on its US$7bn of external debt payments this year.
External debt (US$51bn) is 424% of exports, with a debt service ratio of 39.3%. Public debt (119% of GDP) is unsustainable too, with the primary balance 8%ofGDP away from sustainability.
Painful structural reform is needed, reforming the labour market, privatizing government companies and widening the basket of exportable goods and services, possible only after a change of government.

Rush to Normalise Fed Policy Settings Raises Questions Over US Corporate Profits Outlook

By Said Desaque

The Fed’s urgency to return the federal funds rate to neutrality by year-end has recently risen. Further upside risks depend on whether inflation risks have receded sufficiently by 2023 Q1.
The current strength of US labour demand seems inconsistent with the imminent onset of recession. Companies may feel comfortable about labour hoarding if they are able to raise selling prices.
Analysts are optimistic about higher operating margins in 2023, but equity investors are reluctant to pay richer valuations due to greater economic risks, courtesy of more hawkish Fed policy.

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Apr 30

Macro: US Continues to Overheat and more

In today’s briefing:

US Continues to Overheat, Reflected in a Seemingly-Weak GDP Print
CX Daily: Will Wind Go Out of SPACs’ Sails in Singapore and Hong Kong?
EA: Core Inflation Burns-Off Energy Fall

US Continues to Overheat, Reflected in a Seemingly-Weak GDP Print

By Prasenjit K. Basu

Nominal GDP increased 6.5%QoQsaar, but the GDP deflator was up 8%, so real GDP declined 1.4% in Q1CY22. With core PCE inflation at 5.4%, brace for 50bp hike next week.
With M2 growing faster in Apr’20-Mar’21 than any time in the past 150 years, the recent surge in inflation is precisely as we’d predicted. The overheating economy needs monetary tightening.
Imports (+17.7% in Q1CY22) subtracted 2.5% from GDP and inventory-destocking subtracted 0.84%. These will be less negative as monetary policy tightens, with FF rate rising to 2.75% by end-2022.

CX Daily: Will Wind Go Out of SPACs’ Sails in Singapore and Hong Kong?

In Depth: Will wind go out of SPACs’ sails in Singapore and Hong Kong?
China’s cabinet vows stronger policy to boost jobs amid Covid upsurge
Yuan losses have room to run as Covid puts economy under siege

EA: Core Inflation Burns-Off Energy Fall

By Phil Rush

EA inflation increased again in Apr-22 to 7.5%, extending the trend to a fresh high. Surprisingly intense core pressures offset energy price declines.
Upside news was relatively broad-based for our forecast, albeit with Spain far weaker than the consensus expected amid deep energy price declines.
The Q2 inflation outlook has eased with energy, but it is still on track to beat the ECB’s forecast by almost 2pp. We still expect it to hike in Sep-22.

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Apr 29

Macro: Yields in Asia Are Far from the Peak and more

In today’s briefing:

Yields in Asia Are Far from the Peak
The Name Is Spread. Credit Spread.

Yields in Asia Are Far from the Peak

By Gautam Jain, PhD, CFA

Rates in Asia are among the worst performers this year, but they remain expensive – relative to the US and to their own history – and should continue to underperform.
Other reasons for rates in Asia to sell off include: a marked increase in inflation, low projected real rates, currencies turning volatile, and deteriorating debt profiles.
I like paying rates in Asia by pairing them with receivers in countries in other regions. China is an exception in the region as it remains in an easing mode.

The Name Is Spread. Credit Spread.

By The Macro Compass

The main point behind the Financial Instability Hypothesis developed by Minsky was that artificial stability and low volatility generate complacency amongst economic agents and ultimately lead to suboptimal decisions: the seeds of the next crisis are sown in the good time.
Once economic agents are confident nothing can ever go wrong, borrowing happens on more and more relaxed terms until anybody qualifies for leverage without credible possibilities to produce enough cash flows to service their liabilities.
And at some point, something breaks.
Credit spreads are an incredibly important variable to monitor if one wants to grasp at which stage of the leverage cycle we’re in: very narrow credit spreads imply borrowers have easy and abundant access to leverage while widening credit spreads are generally the canary in the coal mine for things to get worse for the private sector.

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Apr 28

Macro: Potential Inclusions and Exclusions of KOSPI200 Rebalance in June As Highlighted by Locals and more

In today’s briefing:

Potential Inclusions and Exclusions of KOSPI200 Rebalance in June As Highlighted by Locals
CX Daily: Why Easing Policies Might Not Revive China’s Property Market Any Time Soon

Potential Inclusions and Exclusions of KOSPI200 Rebalance in June As Highlighted by Locals

By Douglas Kim

This article discusses the potential inclusions and exclusions of KOSPI200 rebalance in June 2022 (especially those that are highlighted by the locals).
The potential inclusions include Meritz F&M Insurance, Hana Tour, SD Biosensor, Hanil Cement, K Car, F&F, and Iljin Hysolus.
The potential exclusions include CJ CGV, SK Discovery, Nexen Tire, SNT Motiv, Cuckoo Holdings, Bukwang Pharm, and Youngjin Pharm.

CX Daily: Why Easing Policies Might Not Revive China’s Property Market Any Time Soon

In Depth: Why easing policies might not revive China’s property market any time soon
Beijing calls for justice in bombing that killed three Chinese in Pakistan
China puts its foot on the gas to spur a faltering economy

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