Global Macro APAC Morning Brief - The US cannot be serious about a trade deal

(Note that these are solely the views & opinions of KVP & do not constitute any trade or investment recommendations nor advice.)

Happy Macro Wed 9 Oct 2019

APAC Global Macro Morning Brief – The US cannot be serious about a trade deal

So the theme of headwinds into China coming from the white house continues to build up, from bans on certain Chinese companies to visa restrictions on officials – these are not the moves for setting the environment for a conciliatory meetings. 

The overnight sentiment only reinforces what we’ve talked about before on one of the biggest implications from the impeachment investigations being that Trump will run in 2020 on a Tariffs Campaign against China & other parts of the world. 

Added to that, took about a misplaced tweet… one executive from the Houston Rockets team tweeted out something on Hong Kong… an apology & erased tweet later… has done little to curb the backlash from Mainland China, not to mention pre-NBA season games not being broadcasted this wk in China (which has +500m fans).

I can just see the team owners & commissioner, “someone take that phone away from that guy”… it does highlight though, how interconnected the world has become – which I think over-time is going to work out for the greater good, i.e. its introduces an accountability that was never there. Again does not mean, that accountability is justified  - we just have never before had anything on this scale as a species, to rally around issues on a country-to-global scale.

This again is an exceptional media / consulting opportunity, the vast majority of companies & corporate executives are still at a loss at just how potent their social media views can be for their company (or in some cases industry) both negatively & positively.

Overnight econ data actually saw healthy beat in German industrial production +0.3%a vs. -0.20%e & upward revisions – bears watching. Canada saw big beats in housing numbers as we saw housing starts beat 221ka 217ke, yet more impressively building permits tick up by +6.1%a vs. 2.3%e… you have to keep in mind Poloz has still not started to cut rates… & that’s a question of when, not if… so KVP would keep CA rates & bonds very much on the macro radar. 

US PPI missed, as did the small business index.

Do take a look at the latest Macro Digest from Steen Jakobsen, resonates with what we touched on a few Macro Mondays back (especially if Joe Biden has to step down if there is evidence of corruption linked to his son). Bear in mind Steen got Trump & Brexit right, and whilst early days, here are some of his current views on the US's 2020 elections.

Macro Digest: The Next President of the USA, Elizabeth Warren

Cross-Assets Snapshot:

European equities were read across the board, with the likes of the DAX 11970, down -1.05%. This continued into the US where we saw the S&P deep below the 3,000 lvl at 2893 -1.6%. We have now ticked to over 20 on the VIX, with a +13.6% uplift to 20.28, +35.2% in the last one month

Still the pullback we have been getting in US equities feels very orderly, and its been a steady grind up on the VIX… this is where it gets interesting for vol players. The VIX’s ability to stay above 20, let alone poke through 25 or even 30 for extended periods of time has been muted in the past

Gold continues to struggle to sustainably break through this $1500 lvl after getting as low as $1487 at one point overnight, before finishing up +0.80%. Silver beat that with a +1.69% to 17.7330 lvl. Brent crude 58.02 saw a small pullback of -0.19%

US 2/10 is at c. +11bp, grinding higher. UST at 1.54% & we have bunds & JGBs at c. -59bp & -21bp

The Dollar index is back above 99.00 lvl for the DXY with a +0.17% uplift overnight. DollarYen was -0.16% yet still staying above the 107 lvls.

Reflections of an investment strategist:

• KVP continues to favour 4-6-12m downside expression on DollarYen (yen to strengthen plays) be it puts & put spreads from 105 / 103 or even 100 lvl, or one touch options

• These in addition to OTM calls on US bond futures, gold & silver, US government bond ETFs should make great tail-risk hedges over the next 1-2 quarters…

• …as we determine whether or not the Trump administration is serious on a trade deal and/or we see Bernie/ Warren become the lead contender for the Democratic nominee…

• …in which case US equities are likely to get -15% to -20% lower from these c. 2900 lvls… that could take us down to a 2300 to 2500 range..

• Just keep in mind, that the most important macro trend is still linked around the Fed… & at some point they are likely to move their cutting tool from nail clippers to a chainsaw… in which case we go back into the likely same old yield compression game of this cycle… all time new lows in bond yields “justifying” all time new highs in stocks
  • Take a step & think, if US10yr bond yields are trading around 1.50% to 1.80% now, where do they go in the next US recession? 
    • The answer is likely much lower & almost certainly sub 1.00% if not even sub 0.50%... folks seem to believe that negative yields are an occurrence that happens outside of the US... Think again... 

     

  • Net-net… from a Prime Conviction & long-term horizon, KVP’s views are unchanged (for better or worse): long duration, long gold & silver (miner etfs, single names, outright futures, GDX, GDXJ, SIL), long yen (preferably through options) & long steepners

• I am often asked the question from long only investors about if there is a recession coming what should folks do. Everyone needs to make their own decision given a combination of their 1. Risk appetite, 2. Cashflow needs in the future as well as their overall 3. Investment objectives (retirement, house, college, Vegas / Bangkok Charity Fund, start-up capital, a year travelling the world, etc).

• Yet if KVP was a long-only investor, then the view I would have is similar to Munger's & Buffet's – basically overtime history has shown that equities tend to move up & they are up year-in & year-out more often than they are down. A long-term investor needs to be able to withstand drawdowns of -50% or -60%... i.e. it will happen a few times over your life cycle as an investor. This may sound insane, yet bear in mind a long-term investor would over the course of this bulllmarket have made over +330% if they held an S&P 500 etf. If it was the Nasdaq100 that is over +600%, so you have to take that into account.

• Timing the markets is very challenging… there are professionals with hundreds of billions & all the resources that one can think of trying to do this, and for the most part the data shows them to be consistently wrong

• At the same time, psychology & emotions are really the holy grail of investing & trading – so to be able to “not care” that your equity portfolio may be in a cycle drawdown of -50% to -60%, one obviously should have enough cashflow outside of the equity portfolio that can carry one for preferably 2yrs, maybe even 3yrs

• Lastly, a truly diversified portfolio is not one that holds 50 stocks… but one that is diversified across asset classes. Hence I love the trajectory of my career path… started as an investment banker equity bottoms-up guy & ended doing global macro, which is asset-class & geographic agnostic, in addition to being top-down. Most importantly it resonates with my temperament  

Econ Data Today: Fairly light…

• JP: Machine Tool Orders

• US: Wholesale Inventories, JOLTS Job Openings, Crude Oil Inventories, US10yr bond auction, FOMC Minutes @ 02:00 SGT/HKT (14:00 ET)
  • Fed Chair Jerome Powell at 23:00 SGT/HKT (11:00 ET)
  • FOMC member George at 23:00 SGT/HKT (11:00 ET)

   

  4^th Quarter Outlook is out: Taking Down The Killer Dollar

• Please check out our latest quarterly which focuses on the key culprit that is sucking up all the oxygen in the global economy, the strong US dollar.

Other:

• To catch this wk’s Macro Monday Click here…  & replay of the call here

   

• Don’t forget to bookmark & check our Daily SaxoStrats calls from the European morning session c. 09:00 CET

   

• Looking for suggestions for a new name for the daily, any thoughts would be appreciated – pls drop a mail to macro@saxobank.com