Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Central banks, tech pressure, and the Chinese panic
Steen Jakobsen
Chief Investment Officer
Welcome back to the madhouse, where we are in for an extremely active week...
• The Bank of Japan, the Federal Reserve and the Bank of England all meet this week.
• Technology shares are trading nervously (and the FAANGS have become 'MAGA').
• China is near-desperately activating both easier monetary policy and more fiscal spending to counter the deleveraging process hailed by President Xi.
• Did USD peak with the GDP number last week? We think so.
Tomorrow's Bank of Japan meeting could be the most important central bank meeting of the year. The consensus holds that the BoJ may tweak its yield curve control policy to accept a higher 10-year Japanese government bond yield of 10 basis points (versus a narrow band around 0% at present) and fix five-year yields at 0% from tomorrow.
The problem is that a flat yield (and negative short yield) hurts financial sector earnings and banks' ability to lend.
See my recent tweet for more on this, as well as a chart.
Inflation numbers continue to erode despite the Japanese central bank's best efforts. The risk here is that the bank will weight the short-term negative of banking sector losses higher than the elusive long-term goal of >2% inflation. If so, USDJPY could come off dramatically, a move that would likely signal a top for the overall dollar trade as last Friday's US GDP number was probably a cycle high based on tax credits from April and agricultural exports ahead of the trade war.
The BoE, meanwhile, is 90% likely to hike interest rates on August 2 while the Federal Open Market Committee is “in between meetings”.
In a similar fashion to what we saw in 2007, China has started an aggressive countercyclical loosening of monetary policy along with increased fiscal spending. This will change the dynamics of global growth and dollar direction – don’t forget that USD is the global reserve currency so its direction will be driven by the ever-changing dynamics between growth in the US and growth in the rest of the world. More on this later...
In equities, the technology sector has taken centre stage of late led by misses at Facebook and Twitter. Is this a buy opportunity, or is the world of engagement moving away from “in your face” marketing ploys and data selection? It's possible that the recent acronym shift from FAANGS to MAGA (no, not President Trump's 'Make America Great Again', but Microsoft, Apple, Google, and Amazon) reflects a peak in investor appetite for “user-driven technology”.
This week's central bank calendar:
Investor sentiment in the tech sector is showing signs of nervousness...
Meanwhile, a clear sign that China is ramping up capacity across the board...
Is China going to save the commodities sector... again?
If you have any doubts that China is easing, look at the three-month SHIBOR...
Finally, a list of key reading from over this past weekend:
• Select group of hedge funds doing so well they don’t take customers (WSJ)
• Iran about to implode? Rial reaches 111.500 to the dollar! (Jerusalem Post)
• Turkish-US relationship strained over case of US pastor (Arab News)
• US mid-terms: more and more likely that Democrats take the House? (The Cook Political Report)
• Why Washington insiders think Democrats will take back the house (Washington Post, paywall)
• Four takeaways from the long-term GDP revision (New York Times)
• US considers military options to keep Strait of Hormuz open (Jerusalem Post)
• Wall Street seizes on another front to bet against Tesla (Financial Times, paywall)
Looking towards Germany, this article is an absolute must-read (Financial Times, paywall) as the country's increasingly bold nationalists spark a new culture war. This article is key to understanding how the dynamics of democracy and populism are changing both German and other European societies away from pluralism and towards a "with us or against us"-type vision.
As far as the increasingly jittery tech sector goes, this article on the US chip industry (Financial Times, paywall) is another incredibly important analysis; chip power sits at the root of every technological step forward, and falling returns on research and development will significantly slow AI and technological progress.
Finally, expect Saxo Bank Head of Commodity Strategy Ole Hansen to come out with a new report on the grains sector and the impact of the current hot weather, while Saxo Bank Head of Equity Strategy Peter Garnry will be out with a note on FAANGS versus MAGA. Saxo bank Head of Forex Strategy John Hardy will touch on the BoJ as well as the falling CNY (and why isn’t yet impacting risk).
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