US-CHINA: Staring into the abyss

Macro Digest: A crucial 48 hours for risk

Macro
Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

The macro backdrop story is this:

The 'credit cake', or the credit impulse plus nominal debt issuance, is collapsing. Since the financial crisis, the world's monetary growth (main debt) has risen more than nominal growth, i.e. World Monetary Growth / World Nominal Growth > 1 (8-10%/4-6%) 

Now, however, world monetary growth is 2-2.5% against 5-6% world growth, so significantly below 1!
We have, along with Saxo Bank macro head Christopher Dembik, exhaustively documented the collapse in the credit impulse (the change of change in credit), which leads the world by nine-12 months.

The question is, where do we go from here?

The Federal Reserve is insisting on normalising policy rates, meaning that the rest of the world (read: emerging markets) are getting less credit at much higher prices. In the US, meanwhile, this liquidity shortfall has been neutralised by tax reforms that see US firms bringing money back home... and thus increasing liquidity foronshore US markets.

Add to this the most aggressive buy-back, dividend, and M&A period in history (to the tune of around $1.2 billion) and you have the reason why the US market has outperformed, and why it could continue to outperform in the short term.

Is contagion happening? It's too early to tell, but with today’s likely announce of an additional $200 billion in tariffs and the market breakdown shown below, the risk is rising.

The action plan

We are still net looking to buy EM risk, but post-today’s announcement. Failure to take out recent EM lows will make us dip our toes; if not, we wait.

The next two trading days will be critical for the overall risk climate, and we will keep you posted as to how we view things playing out.

Now, onto four charts that illustrate the market's present pain:

Tencent

Tencent is the most widely owned stock and maintains the biggest weight in global EM funds. The trend been down since March but now it has broken both its recent low plus the low end of the channel.
 
Tencent
Source: Bloomberg
Alibaba

Alibaba's latest earnings release was reasonably strong, but the company's shares just broke lower. Is this a bad omen for China's tech sector?
Alibaba
Source: Bloomberg
Tesla

Tesla is having a tough time, both in markets and on social media. The TSLA junk bond is now trading at 8% and the default risk is rising fast. Elon Musk's personal life is increasingly becoming a risk to the company itself

The Musk + Trump show is not pretty and I don’t see any good exits/solutions for either of them.
Tesla
Source: Bloomberg
USDINR

Finally, India and its currency are spinning out of control as high energy prices increase its deficit.
USDINR
Source: Bloomberg

Quarterly Outlook

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992