Emerging Markets
China will neither propose nor support any coordinated initiatives among central banks on the RMB issue in G20 meetings this year. RMB bonds will prove attractive to foreign investors, given their higher yields and lower exchange rate volatility.
We are introducing a new set of fair value models for currencies. On a cyclical basis, the dollar is expensive. However, this is not enough of a reason to expect an imminent fall in the greenback. The yen is extremely cheap, and its fair value is rising on the back of a positive terms-of-trade shock. The yuan is fairly valued. Most commodity currencies are not yet cheap.
The remarkable admission by OPEC's secretary-general, Salem el-Badri, earlier this week that with "any increase in (oil's) price, shale will come immediately and cover any reduction" in output only hints at the larger impact of light-tight-oil (LTO) going forward.
The Chinese authorities are stepping up coordinated efforts to boost the economy. There has been a clear shift of policy focus from the "supply side" reforms to "demand side" management. Quickening credit creation bodes well for industrial activity, the hardest hit sector in the ongoing growth slowdown.
Credit growth acceleration in China is a bearish development in the long run. Potential non-performing loans at Chinese banks could wipe out 40-55% of their equity capital. "Muddling through" for China, from its own internal standpoint, is possible. However, Chinese stocks and China-related equities worldwide will remain in a bear market. From the perspective of the rest of the world, China is now in recession.
The recovery in global risk assets and currencies is a temporary oversold bounce. It is not supported by signs that global growth is on the mend. Consequently, we are not willing to embrace more risk in our currency strategy just yet.
Markets see long-term global growth prospects as having deteriorated materially, with policymakers unwilling or unable to do much about it. Meanwhile, recent economic data - U.S. notably - hasn't been that bad. A divergence between what matters to Wall Street versus Main Street explains the disconnect. Accelerating wage growth, lower commodity prices, and cheaper rates are positives for households - but not for many Wall Street sectors. Stay neutral global equities. T-bonds are a "hold" for now. The dollar's selloff is overdone.
Indonesia has been fighting the Impossible Trinity, a battle that cannot be won. The central bank will continue printing rupiahs and the currency will depreciate further. Eventually rupiah depreciation will push up interbank rates, and Indonesia's credit cycle and economic growth will stumble. Continue shorting the rupiah, underweighting Indonesian stocks and sovereign credit, and shorting long-term (5-year) local government bonds.
While the oil market looked right through the Russian-Saudi production-freeze announcement earlier this week, we believe these states may be attempting to put lipstick on the proverbial pig, to provide a plausible narrative to explain the physical reality of lower oil production in a sub-$30/bbl world.
