先進国

特別レポート

Dear clients, This week we are sending you a Research Note on balance of payments across the G10, authored by my colleague Kelly Zhong. With unprecedented monetary and fiscal stimulus, balance-of-payment dynamics will become an even more important driver of currencies over the next few years. That said, while the US current account is in deficit, the short dollar narrative is beginning to capture investor imagination, suggesting the call is rapidly becoming consensus. We are in the consensus camp, but are going short GBP today, as a bet on a short-term reversal. As for cable, the recent rally has gotten ahead of potential volatility in the coming months, even though it is cheap. Finally, we are lowering our target on the short gold/silver trade to 65, but tightening the stop-loss to 75. I hope you find the report insightful. Chester Ntonifor, Vice President Foreign Exchange Strategy Highlights COVID-19 has turned the world upside down this year, and severely impaired global trade. Global trade values plunged by 5% quarter-on-quarter in the first quarter, and are forecasted to have slumped by 27% in the second quarter. Most countries have also seen negative foreign direct investment (FDI) growth in the first few months of 2020. Global FDI inflows are forecasted to fall by 40% this year and drop by an additional 5-10% next. While all countries have been hit by COVID-19, the economic damage appears particularly pronounced in countries heavily reliant on foreign funding. Feature COVID-19 has turned the world upside down in 2020. The global economy headed into recession following a decade-long expansion. While many economies are starting to ease restriction measures, the possibility of a second wave remains a big downside risk to the global economy. If history is any guide, the Spanish flu during the early 1900s came in three waves, the second of which brought the most severe damage. Undoubtedly, international trade has been under severe pressure this year. Global trade volumes plunged by 5% in the first quarter, and are expected to be down 27% in the second quarter from their levels in the final three months of 2019. Moreover, the path of recovery remains uncertain as the pandemic continues to disrupt global supply chains and weaken consumer confidence. According to the United Nations Conference on Trade and Development (UNCTAD), it may take until late 2021/early 2022 for global trade to recover to pre-pandemic levels (Chart 1). As reinvested earnings make up more than half of total FDI, squeezed earnings this year will have a direct impact on FDI in the aftermath of COVID-19.  Global FDI inflows rebounded in 2019, reaching a total of $1.5 trillion, as the effect of the 2017 US tax reforms waned and US repatriation declined. This year, however, most countries have seen negative FDI growth rates in the first few months in 2020. According to UNCTAD, global FDI inflows are forecast to plunge by 40%, bringing total FDI inflows below the US$1 trillion level for the first time since 2005 (Chart 2). Unfortunately, as reinvested earnings make up more than half of total FDI, squeezed earnings this year will have a direct impact on FDI in the aftermath of COVID-19. Typically, FDI flows bottom only six to 18 months after the end of a recession. FDI inflows are forecast to decline further by another 5-10% in 2021. Chart 1Steep Decline In Trade Volumes In 1H'20 Chart 2Global FDI Projected To Fall Through 2021 While all economies have been hit by COVID-19, the impact varies by region. Emerging market countries, particularly those linked to commodities and manufacturing-intensive industries, appear to be have been hit harder by the crisis. This makes sense, given trade is much more volatile than services or consumption. Chart 3 shows that while exports make up less than 30% of GDP in the US, they amount to over 130% of GDP in Thailand and Malaysia, and over 300% of GDP in Singapore and Hong Kong. Chart 3Reliance On Trade Differ Across Countries Going forward, the recoveries might be uneven as well. Prior to COVID-19, global trade flows were already facing many challenges, including trade disputes, geopolitical tensions and rising protectionism. COVID-19 may have just supercharged two megatrends: Technology and Innovation: The pool of investments concentrated on exploiting raw materials and cheap labor is shrinking, while those promoting technology and ESG are becoming crucial. De-globalization: Policymakers in many countries are promoting more regulation and intervention, especially in key industries related to national security and health care. This suggests COVID-19 might represent a tipping point, making balance of payments all the more important for currencies, as investors become more discerning between countries and sectors with a high return on capital and those without. The euro area, Switzerland, Australia and Sweden sport the best basic balance surpluses.  In this report, we look at the balance-of-payment dynamics in the G10. The most important measure for us is the basic balance, which takes the sum of the current account and net long-term capital inflows. Our rationale is that these tend to measure the underlying competitiveness of a currency more accurately than other balance of payment measures. On this basis, the euro area, Switzerland, Australia and Sweden sport the best basic balance surpluses. The US is the worst (Chart 4). Below, we visit some of key drivers behind these trends. Chart 4Basic Balances Across G10 United States Chart 5US Balance Of Payments The US basic balance is deteriorating again (Chart 5). The key driver has been a decline in foreign direct investment. If this trend continues, this could further undermine the US currency. The US remains the world’s largest FDI recipient, attracting US$261 billion in 2019, which is almost double the size of FDI inflows into the second largest FDI recipient – China – with US$141 billion of inflows last year. However, cross-border flows have since fallen off a cliff after the waning effect of the one-time tax dividend introduced at the end of 2017. The lack of mega-M&A deals has also been a contributing factor. The trends in the trade balance have been flat, despite a push by the Trump Administration to reduce the US trade deficit and rejuvenate the US economy. The most recent second-quarter data show a deterioration from -2.3% of GDP to -2.8%. The trade deficit with China did drop by 21% to $345 billion in 2019, however, US companies quickly found alternatives from countries that are not affected by newly imposed tariffs, particularly from Southeast Asia: The US trade deficit with Vietnam jumped by 30%, or $16.3 billion, in 2019. More recently, exports have plunged much faster than imports, further widening the US trade deficit. On portfolio flows, the most recent TIC data show that US Treasurys continued to be shunned by foreigners in May. In short, the US balance-of-payment dynamics are consistent with our bearish dollar view. Euro Area Chart 6Euro Area Balance Of Payments A rising basic balance surplus has been one of the key pillars underpinning a bullish euro thesis. Of course, an apex in globalization will hurt this thesis, but the starting point for the euro area is much better than many of its trading partners. The trade surplus in the euro area was not spared from COVID-19 – it plunged to €9.4 billion in May from €20.7 billion the same month last year, as the pandemic hit global demand and disrupted supply chains. Exports tumbled by 29.5% year-on-year to €143.3 billion while imports declined by 26.7% to €133.9 billion. Even in this dire scenario, the trade surplus still remains a “healthy” 1.8% of GDP, buffeting the current account (Chart 6). Foreign direct investment inflows have regained some ground in recent years, with the improvement accelerating in recent months. FDI inflows surged by 18% in 2019, reaching US$429 billion. Outflows also rose by 13% in 2019, led by a large increase in investment by multinationals based in the Netherlands and Germany. Going forward, FDI is sure to drop, but this will not be a European-centric problem. Portfolio flows have started to reverse, but have not been the key driver of the basic balance. This is because ever since the European Central Bank introduced negative interest rates in 2014, portfolio outflows have been persisted. This also makes sense since Europeans need to recycle their excess savings abroad. In sum, despite the headwinds to global trade and investment, the basic balance remains at a healthy 2.9% of GDP, which bodes well for the euro. Japan Chart 7Japan Balance Of Payments A key pillar for the basic balance in Japan has been the current account balance, which has been buffeted over the years by income receipts from Japan’s large investment positions abroad. Going forward, this could make the yen very attractive in a world less reliant on global trade. Japanese exports tumbled by 26.2% year-on-year in June, led by lower sales in transport equipment, motor vehicles and manufactured goods. However, the slowing export trend was well in place before the pandemic. Exports had been declining for 18 consecutive months before COVID-19 dealt the final blow. Imports also fell by 14% year-on-year in June, led by lower energy prices. On the service side of the income equation, foreign visitors to Japan dropped by 99.9% from over 2.5 million in January to less than 2,000 in May. That equates to about 2% of the Japanese population. Despite all this, Japan still sports a healthy current account surplus, at 4% of GDP (Chart 7). In 2019, Japan remained the largest investor in the world, heavily recycling its current account surplus. FDI outflows from Japanese multinationals surged by 58% to a record US$227 billion, including US$104 billion in cross-border M&A deals. Notable mentions include Takeda acquiring Shire (Ireland) for US$60 billion, and SoftBank Group acquiring a stake in WeWork (the US) for US$6 billion. In terms of portfolio investments, foreign bond purchases have eased of late as global interest rates approach zero. Higher real rates are now being found in safe-haven currencies like the Swiss franc and the Japanese yen, which is supportive for the yen. Overall, the basic balance in Japan is at nil, in perfect balance between domestic savings and external investments. United Kingdom Chart 8UK Balance Of Payments The key development in the UK’s balance-of-payment dynamics is that a cheap pound combined with the pandemic appear to have stemmed the decline in the trade balance. The UK has run a current account deficit each year since 1983. This has kept the basic balance mostly negative (Chart 8). That could change if the marginal improvement in trade is durable and meaningful. The current account deficit further widened to £21.1 billion, or 3.8% of GDP, in the first quarter, of which the goods trade balance was more volatile than usual. Since May, the goods trade balance has been slowly recovering to £2.8 billion, but has been offset by the services trade deficit. The primary income deficit also widened in the first quarter as offshore businesses rushed to preserve cash buffers. Foreign direct investment in the UK has been improving of late, currently sitting at 3.7% of GDP. This is encouraging, given the steep post-Brexit drop. Going forward, we continue to favor the British pound over the long term due to its cheap valuation. However, we are going short today, as a play on a tactical dollar bounce. More on this next week.       Canada Chart 9Canada Balance Of Payments The Canadian basic balance has been flat for over a decade, as the persistent current account deficit has continuously been financed by FDI inflows and portfolio investment (Chart 9). This is a vote of confidence by investors over longer-term returns on Canadian assets. Canada is one of the largest exporters of crude oil, meaning the fall in resource prices generated a big dent in export incomes. However, the country is slowly on a recovery path. Exports increased 6.7% month-on-month in May, helping narrow the trade deficit to C$0.7 billion. More importantly, a positive net international investment position means that positive income flows into Canada are buffeting the current account balance. In 2019, Canada was the 10th largest FDI recipient in the world, with FDI inflows increasing to US$50 billion. Today, the basic balance stands at a surplus of 1% of GDP.               Australia Chart 10Australia Balance Of Payments Australia’s trade balance has been rapidly improving since the 2016 bottom, and has been the primary driver of an improving basic balance. While exports fell as the pandemic hit a nadir, imports fell more deeply. This allowed the trade surplus to widen in the first six months of the year compared to last year. Australia has long had a current account deficit, as import requirements to help drive investment opportunities were not met by domestic savings. With those projects now bearing fruit, the funding requirement has greatly eased. This has buffeted the current account balance, which turned positive for the first time last year following a 35-year-long deficit, and continues to rocket higher (Chart 10). Going forward, Australia’s trade balance and current account balance are likely to continue increasing as Australia has a comparative advantage in exports of resources, especially LNG, which is consistent with the ESG megatrend. Australia is also introducing major reforms to its foreign investment framework to protect national interests and local assets from acquisitions. Meanwhile, net portfolio investment remains negative, suggesting the current account surplus is being recycled abroad. In short, we believe the Aussie dollar has a large amount of running room, based on its healthy basic balance surplus of 4% of GDP. New Zealand Chart 11New Zealand Balance Of Payments Compared to its antipodean neighbour, the New Zealand basic balance has been flat for many years, but has seen recent improvement (Chart 11). The trade balance was boosted by goods exports, which were up NZ$261 million, while imports were down NZ$352 million in the first quarter of this year. The rise in goods exports was led by an increase in fruit (mainly kiwifruit), milk, powder, butter and cheese. More recently, due to the ease of lockdown measures, exports increased by 2.2% year-on-year in June while imports marginally rose by 0.2%, further enhancing New Zealand’s trade balance. The primary income deficit widened to NZ$2.2 billion in the first quarter due to less earnings on foreign investment. Moreover, the secondary income deficit also widened, driven by a smaller inflow of non-resident withholding tax. Despite this, the current account deficit narrowed to NZ$1.6 billion in the first quarter, or 2% of GDP, the smallest deficit since 2016.  New Zealand received $5.4 billion in FDI flows in 2019, rising from only $2 billion in 2018. Most FDI inflows arrived from Canada, Australia, Hong Kong and Japan. Impressively, according to the World Bank’s 2020 Doing Business Report, New Zealand ranked first out of 190 countries due to its openness and business-friendly economy, low levels of corruption, good protection of property rights, political stability and favorable tax policies. Portfolio investment inflows also increased by NZ$11.8 billion.  The improvement in the backdrop of New Zealand’s basic balance will allow it to outperform the US dollar. As a tactical trade, however, we are short the kiwi versus the CAD. The basis is that relative terms of trade favor the CAD for now. Switzerland Chart 12Switzerland Balance Of Payments Switzerland’s basic balance is almost always in surplus, driven by a structural uptrend in the trade balance (Chart 12). This has allowed the trade-weighted Swiss franc to outperform on a structural basis. We expect this trend to continue. As a country consistently running high surpluses, Switzerland also tends to invest more in foreign assets. Over the years, these smart investments have helped buffet the current account. Overall, in the first three months of this year, the current account balance stood at CHF 17.4 billion, or 11.2% of GDP. In terms of the net international investment position, both stocks of assets and liabilities fell by CHF 110 billion and CHF 42 billion, respectively in the first quarter, due to falling equity prices globally. The net international investment position fell by CHF 67 billion to CHF 745 billion in the January-March period. That said, Switzerland continued to deploy capital abroad in the first quarter, which should help buffet the current account going forward. The positive balance-of-payment backdrop has created a headache for the Swiss National Bank. As such, the SNB will likely continue to intervene in the foreign exchange markets to calm appreciation in the franc. We believe the franc will continue to outperform the USD in the near term, but underperform the euro.  Norway Chart 13Norway Balance Of Payments Norway has a very open economy, with trade representing over 70% of GDP, and it has been hit quite hard by COVID-19 this year. The trade surplus started to plunge sharply due to falling energy prices at the beginning of the lockdown (Chart 13). More recently, Norway posted its first trade deficit in May since last September, which carried over to June, as exports fell more than imports. Thanks to increases in income receipts from abroad, the current account balance remained flat at NOK 66.1 billion in the first quarter. With persistent current account surpluses, Norway has long been a capital exporter. However, the FDI outflow and inflow gap is gradually closing. In 2019, net FDI was -3.5% of GDP. In the first quarter of this year, it was -3.3%. Portfolio outflows have also softened over the years, as the current account balance has narrowed. There was, however, a trend change in the first three months of this year - Norway’s purchases of foreign bonds, surged as investors switched to safer assets. Ultimately, we remain NOK bulls due to its cheap valuation. As economies gradually reopen and ease lockdown measures, the recovery in energy prices will push the Norwegian krone back toward its fair value.     Sweden Chart 14Sweden Balance Of Payments Sweden maintained its trade surplus with the rest of the world throughout the first few months of 2020 (Chart 14). Imports fell more than exports amid the pandemic. The goods trade balance almost doubled from the fourth quarter of 2019 to SEK 68.8 billion in the first quarter of 2020. The primary income surplus also increased by SEK 10 billion to SEK 42.2, further strengthening the current account and bringing the total current account surplus to SEK 80.6 billion, or 4% of GDP. Both FDI inflows and outflows have been increasing in Sweden, but the net number was slightly negative. In the first quarter of 2020, FDI inflows rose by SEK 51.6 billion while FDI outflows increased by SEK 100.6 billion. In terms of portfolio investment, Swedish investors reduced their portfolio investment abroad by SEK 141 billion in the first quarter, while foreigners decreased their portfolio investment in Sweden by SEK 45.8 billion. In conclusion, the Swedish krona remains one of our favorite longs due to its increasing basic balance surplus (4% of GDP) and its cheap valuation. We are long the Nordic basket (NOK and SEK) against both the euro and the US dollar. Kelly Zhong Research Analyst kellyz@bcaresearch.com Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes   Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Today we continue to highlight another reason we outlined in this Monday’s Special Report on why investors should favor cyclical over defensive equities on a 12-18 month time horizon.  The latest GDP report made for grim reading. US capex collapsed 27% last quarter in line with the fall it suffered in Q1/2009. Not even bulletproof software investment escaped unscathed and contracted for the first time in seven years, albeit modestly. However, if the looming recovery resembles the GFC episode when real non-residential investment soared 40 percentage points from that nadir in the subsequent five quarters, then a slingshot rebound will ensue by the end of 2021. Importantly, our US capex indicator has an excellent track record in leading the relative share price ratio and confirms that a capex trough is already in store, tracing out the bottom hit during the Great Recession (top panel). Regional Fed surveys and CEOs also signal that a capex boom looms in the coming quarters (middle and bottom panels). Bottom Line: The conditions are ripe for a cyclicals outperformance phase at the expense of defensives, especially after the election uncertainty lifts toward the end of the year.    

Please note that we will be on our summer holidays next week. Our next report will come out on August 20. Highlights The 30-year bond yield is the puppet master pulling the strings of all other investments. Where 30-year bond yields are still far from the lower bound, they will ultimately get a lot closer. Continue to overweight 30-year bonds in the US and periphery Europe versus 30-year bonds in core Europe. Continue to overweight the US stock market versus the European stock market. An expected near-term setback to stocks versus bonds will briefly pause the European currency rally. The gold rally is also due a pause, given that it is overstretched relative to the decline in the real bond yield. Fractal trade: Long USD/PLN. Feature Chart I-1AThe Collapsed 30-Year Bond Yield Explains The Collapse Of Banks... Chart I-1B...And The Collapsed Earnings Yield (Surging Valuation) Of Tech And Healthcare   The abiding mantra of this publication is that investment is complex, but it is not complicated. By complex, we mean that the financial markets are not fully predictable or analysable. By not complicated, we mean that the relative prices of everything are inextricably connected, rather like the movements of a puppet. All you need to do is find the puppet master pulling the strings. Right now, the puppet master is the 30-year bond. The Real Action Is In 30-Year Bonds While most people are focussing on the 10-year bond yield, the real action has been at the ultra-long 30-year maturity. In the US and periphery Europe, 30-year yields are within a whisker of all-time lows. Yet these ultra-long bond yields are still well above those in core Europe which are much closer to the lower bound. The upshot is that while all yields have equal scope to rise, yields have more scope to fall further in the US and periphery Europe than in core Europe (Chart I-2 and Chart I-3). Chart I-230-Year Yields In The US And Periphery Europe... Chart I-3...Are Still Well Above Those In ##br##Core Europe This simple asymmetry has created a winning relative value strategy that will keep on winning. Overweight 30-year bonds in the US and periphery Europe versus 30-year bonds in core Europe. Our preferred expression is to overweight 30-year bonds in the US and Spain versus Germany and France. Bond yields have more scope to fall further in the US and periphery Europe than in core Europe. Remarkably, in the US, the 10-year real yield is also tightly tracking the 30-year nominal yield (minus a constant 2.2 percent) (Chart I-4). Using a little algebra, this means that the market’s 10-year inflation expectation is just a steady-state value of 2.2 percent minus a shortfall equalling the shortfall in the 10-year nominal yield versus the 30-year nominal yield (Chart I-5). Chart I-4The 10-Year Real Yield Is Just ##br##Tracking The 30-Year Nominal ##br##Yield Chart I-5The 10-Year Inflation Expectation Can Be Derived From The 30-Year And 10-Year Nominal Yields 10-year inflation expectation = 2.2 – (30-year nominal yield – 10-year nominal yield) The reason that this is remarkable is we can explain the trend in inflation expectations from just the 30-year and 10-year nominal yields, and nothing more. In turn, gold is tightly tracking the inverted real yield, as it theoretically should. Gold, which generates no yield, becomes relatively more valuable as the real yield on other assets diminishes (Chart I-6). Having said that, the most recent surge in the gold price is stretched relative to its relationship with the real bond yield, suggesting that the strong rally in gold is due a pause (Chart I-7). Chart I-6Gold Is Just Tracking The (Inverted) Real Yield... Chart I-7...But Gold's Most Recent Surge Is ##br##Stretched The 30-Year Bond Is Driving Stock Markets Moving to the stock market, bank relative performance has closely tracked the collapse in the 30-year yield, because the collapsed bond yield signals both weaker bank credit growth and a likely increase in banks’ non-performing loans (Chart of the Week, left panel). Banks and other ‘value cyclicals’ whose cashflows are in terminal decline are highly sensitive to the prospects for near-term cashflows, which are under severe pressure in the pandemic era. At the same time, as the distant cashflows are small, the banks’ share prices are less sensitive to the uplifted net present values of these distant cashflows that come from lower bond yields. In contrast, technology, healthcare and other ‘growth defensives’ generate a growing stream of cashflows. Making their net present values highly sensitive to a change in the bond yield used to discount those large distant cashflows. The profits of the tech and healthcare sectors are proving to be highly resilient in the pandemic era. Through 2018, the 30-year yield went up by 1 percent, so the forward earnings yield of growth defensives went up by 1 percent (their valuations fell). Subsequently, the 30-year yield has collapsed by 2 percent, so unsurprisingly the forward earnings yield of growth defensives has also collapsed by 2 percent (their valuations have surged). To repeat, financial markets are not complicated (Chart of the Week, right panel). Moreover, the profits of the growth defensives are proving to be highly resilient in the pandemic era, holding up well in the worst shock to demand since the Great Depression. The combination of resilient profits with higher valuations explains why the technology and healthcare sectors are reaching new highs, while the rest of the stock market is going nowhere (Chart I-8). Chart I-8Tech And Healthcare At New Highs While The Rest Of The Market Languishes Meanwhile, the relative performance of stock markets is also uncomplicated. It just stems from the relative exposure to the high-flying growth defensive sectors. Compared with Europe, the US has a 20 percent larger exposure to technology and healthcare (Chart I-9). Which is all you need to explain the consistent outperformance of the US versus Europe (Chart I-10). Chart I-9The US Is 20 Percent Over-Exposed To Tech And Healthcare... Chart I-10...Which Explains Its Consistent Outperformance Versus Europe A Quick Comment On European Currencies And The Dollar Turning to the foreign exchange market, the recent rally in European currencies can at least partly be explained as a sell-off in the dollar. Begging the question, what is behind the dollar’s recent weakness? The dollar has moved as a mirror-image of the global stock market. For the broad dollar index, the explanation is quite straightforward. True to its traditional role as a haven currency, the dollar has moved as a mirror-image of the global stock market, measured by the MSCI All Country World Index (in local currencies). Simply put, as the stock market has shaken off its year-to-date losses, the dollar has shaken off its year-to-date gains (Chart I-11). Chart I-11The Dollar Has Just Tracked The (Inverted) Stock Market Looking ahead, we can link the prospects of currencies to the outlook for 30-year bond yields. A further compression in yields will weaken the dollar, and help European currencies, in two ways. First, as already mentioned, yields have more scope to decline in the US than in core Europe, and a fading US yield premium will weigh on the dollar. Second, to the extent that the lower yields can prevent a protracted bear market in stocks and other risk-assets, non-haven currencies can perform well versus the haven dollar.  Having said that, an expected near-term setback to stocks versus bonds will briefly pause the European currency rally. Concluding Remarks The charts in this report should leave you in no doubt that the 30-year bond yield – particularly in the US – is the puppet master pulling the strings of all investments: bond market relative performance, real bond yields, gold, banks, growth defensives, equity market relative performance, and major currencies. Which raises the crucial question, can the downtrend in 30-year bond yields continue? Yes, absent an imminent vaccine or treatment for Covid-19, the downtrend in yields can continue. As we explained last week in An Economy Without Mouths And Noses Will Lose 10 Percent Of Jobs, the spectre of mass unemployment is looming large. Specifically, the major threat to the jobs market lies in the coming months when government lifelines to employers – such as state-subsidised furlough schemes – are cut or weakened. Where 30-year bond yields are still far from the lower bound, they will ultimately get a lot closer. Hence, it is inevitable that those central banks that can become more dovish will become more dovish. Given the political difficulties of using fiscal policy bullets, the lessons from Japan and Europe are that the monetary policy bullets get fully expended first. In practical terms, this means that where 30-year bond yields are still far from the lower bound, they will ultimately get a lot closer. The upshot is that core European bonds will continue to underperform US bonds, and that the European stock market will continue to underperform the US stock market. European currencies will trend higher versus the dollar, albeit a setback to stocks versus bonds is a near-term risk to the European currency uptrend. Fractal Trading System* This week’s recommended trade is to play a potential countertrend move in the dollar via long USD/PLN. The profit target and symmetrical stop-loss is set at 4 percent. The rolling 1-year win ratio now stands at 57 percent. Chart I-12USD/PLN When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated  December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European Investment Strategist dhaval@bcaresearch.com Fractal Trading System   Cyclical Recommendations Structural Recommendations Closed Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

In this Monday’s Special Report we outlined 10 reasons why investors should favor cyclical over defensive equities on a 12-18 month time horizon. Not only does the debasing of the US dollar bode well for Income Statement (I/S) relative translation gains, but also serves as a tonic to global growth. In other words, a final demand recovery is in the works on the back of a pending virtuous cycle: a depreciating dollar lifts global growth, and an increase in trade brings more US dollars in circulation further weakening the greenback (top panel). Our Global Trade Activity Indicator also corroborates the USD message and underscores a global growth recovery into 2021 (second panel). Tack on the meteoric rise in the G10 economic surprise index (third panel) and factors are falling into place for a synchronized global economic recovery including a V-shaped US rebound from the depths of the recession in Q2 (ISM manufacturing survey shown advanced, bottom panel). Bottom Line: Favor cyclical equities at the expense of defensives over the next 12-18 months.