防御/リスク
Highlights Monetary policy remains accommodative in Japan, but will tighten on a relative basis if the Bank Of Japan (BoJ) stands pat. The BoJ’s margin of error is non-trivial, since a small external shock could well tip the economy back into deflation. Historically, the BoJ has needed an external shock to act, suggesting the path towards additional stimulus could be lined with a stronger yen. Our bias is that USD/JPY could weaken to 104 in the next three to six months, especially if market volatility spikes further. We are carefully monitoring any shift in the yen’s behavior, in particular its role as a counter-cyclical currency. If global growth eventually picks up, the yen will surely weaken on its crosses, but could still strengthen versus the dollar. Feature The powerful bounce in global markets since the December lows is sitting at a critical juncture. With the S&P 500 at its 200-day moving average, crude oil and Treasury yields plunging and the dollar taking a bid, it may only require a small shift in market prices to change sentiment sharply. The yen has strengthened in sympathy with these moves, but the balance of evidence suggests the possibility of a much bigger adjustment. Should the selloff in global risk assets persist, the yen will strengthen further. On the other hand, if global growth does eventually pick up, the yen could weaken on its crosses but strengthen vis-à-vis the dollar. This places short USD/JPY bets in an enviable “heads I win, tails I do not lose too much” position. BoJ: Out Of Policy Bullets For most of the 1990s, Japan was in a deflationary bust. In hindsight, the reason was simple: The structural growth rate of the economy was well below interest rates, which meant paying down debt was preferable to investing. Tight money also led to a structurally strong currency, reinforcing the negative feedback loop (Chart I-1). Chart I-1The Story Of Japan In One Chart Much farther down the road, the three arrows of ‘Abenomics’ arrived, ushering in a paradigm shift. Since 2012, Japan has enjoyed one of its longest economic expansions in recent history, having fine-tuned monetary policy each time private sector GDP growth has fallen close to interest rates. The result has been remarkable. The unemployment rate is close to a 26-year low, and the Nikkei index has tripled. But if the economy once again flirts with deflation, additional monetary policy options may be hard to come by, since there have been diminishing economic returns to additional stimulus. Chart I-2Stealth Tapering By ##br##The BoJ Chart I-32 Percent Inflation Equal Mission Impossible? The end of the Heisei era1 has brought forward the urgency of the above quandary. At its latest monetary policy meeting, the BoJ strengthened forward guidance, expanded collateral requirements for the provision of credit, and stated that it will continue to “conduct purchases of JGBs in a flexible manner so that their amount outstanding will increase at an annual pace of about 80 trillion yen.”2 But with the BoJ owning 46% of outstanding JGBs, about 75% of ETFs, and almost 5% of JREITs, this will be a tall order. The supply side obviously puts a serious limitation on how much more stimulus the central bank can provide. In recent years, the yen has become extremely sensitive to shifts in the relative balance sheets of the Federal Reserve and the BoJ. Total annual asset purchases by the BoJ are currently running at about ¥27 trillion, while JGBs purchases are running at ¥20 trillion. This is a far cry from the central bank’s soft target of ¥80 trillion, and is unlikely to change anytime soon. In recent years, the yen has become extremely sensitive to shifts in the relative balance sheets of the Federal Reserve and the BoJ. If the BoJ continues to purchase securities at its current pace, then the rate of expansion in its balance sheet will severely slow, and could trigger a knee-jerk rally in the yen (Chart I-2). The BoJ targets an inflation rate of 2%, but it is an open question as to whether it can actually achieve this. It pays attention to three main variables when looking at inflation: Core CPI, the GDP deflator, and the output gap. All indicators are pointing in the right direction, but the recent slowdown in the global economy could reverse this trend. It is always important to remember that the overarching theme for prices in Japan is a falling (and aging) population leading to deficient demand (Chart I-3). More importantly, almost 40% of the Japanese consumption basket is in tradeable goods, meaning domestic inflation is as much driven by the influence of the BoJ as it is by globalization. Even for prices within the BoJ’s control, an aging demographic that has a strong preference for falling prices is a powerful conflicting force. For example, over the years the government has been a thorn in the side of telecom companies, pushing them to keep cutting prices, given domestic pressures from its voting base. Transportation and telecommunications make up 17% of the core consumption basket in Japan, a non-negligible weight. This is and will remain a powerful drag on CPI (Chart I-4), making it difficult for the BoJ to re-anchor inflation expectations upward. On the other side of the coin, the importance of financial stability to the credit intermediation process has been a recurring theme among Japanese policymakers, with the health of the banking sector an important pillar. YCC and negative interest rates have been anathemas for Japanese net interest margins and share prices (Chart I-5). This, together with QE, has pushed banks to search for yield down the credit spectrum. Any policy shift that is increasingly negative for banks could easily tip them over. Chart I-4The Japanese Prefer Falling Prices Chart I-5Negative Rates Are Anathema To Banks Bottom Line: Inflation expectations are falling to rock-bottom levels in Japan, at a time when the BoJ may be running out of policy bullets. Meanwhile, the margin of error for the BoJ is non-trivial, since a small external shock could tip the economy back into deflation. The BoJ will eventually act, but it might first require a riot point. Go short USD/JPY. High Hurdle For Delaying Consumption Tax Since the late 1990s, every time Japan’s consumption tax has been hiked, the economy has slumped by an average of over 1.3% in subsequent quarters. For an economy with a potential growth rate of just 0.5-1%, this is a disastrous outcome. More importantly, similar to past episodes, the consumption tax is being hiked at a time when the economy is at the precipice of a major slowdown. Foreign and domestic machinery orders are slowing, employment growth has halved from 2% to 1%, and wages are inflecting lower (Chart I-6). This is especially worrisome since the labor market has been the poster child of the Japanese recovery.3 The consumption tax is being hiked at a time when the economy is at the precipice of a major slowdown. Why go ahead with the consumption tax then? The answer lies in the concept of Ricardian equivalence.4 Despite relatively robust economic conditions since the Fukushima disaster, Japanese consumption has remained tepid. By the same token, the savings ratio for workers has surged (Chart I-7). If consumers are caught in a Ricardian equivalence negative feedback loop, exiting deflation becomes a pipe dream. Chart I-6A Bad Omen Increased social security spending: This will be particularly geared towards child education. For example, preschool and tertiary education will be made free of charge. Promoting cashless transactions: Transactions made via cashless payments (for example, via mobile pay) will not be subject to the 2% tax increase for nine months. Cashless payments in Japan account for less than 25% of overall transactions – among the lowest of developed economies. This incentive should help lift the velocity of money. Chart I-7Strong Labor Market, Weak Consumption Construction spending: This will offset the natural disasters that afflicted Japan last year. Construction orders in Japan accelerated at a 66% pace in March. The Abe government’s strategy has so far been to offset the consumption tax hike with increased domestic spending. The thinking is that once in a liquidity trap, the fiscal multiplier tends to be much larger. Some of these outlays include: Chart I-8Japan Needs More Fiscal Stimulus The new immigration law will also help. Foreign workers were responsible for 30% of all new jobs filled in Japan in 2017. Assuming public aversion towards immigration remains benign, as is the case now (these are mostly lower-paying jobs in sectors with severe labor shortages), the government’s target to attract 350,000+ new workers by 2025 will be beneficial for consumption. To be sure, this may not be enough. The IMF still projects the fiscal drag in Japan to be 0.1% of GDP in 2019 and 0.6% in 2020 (Chart I-8). This puts the onus back on the BoJ to ease financial conditions. A combination of easier fiscal and monetary policy will be a headwind for the yen. This could happen if the U.S./China trade war escalates, and twists the arm of the finance ministry. But the hurdle is high for the government to roll back the consumption tax, given significant spending offsets. The Yen As A Safe Haven Correlations do shift from time to time, but one longstanding rule of thumb still holds for yen investors: Buy the currency on any market turbulence (Chart I-9). This is because with a net international investment position of almost 60% of GDP and net income receipts of almost 4% of GDP, volatility in markets tend to lead to powerful repatriation flows back to Japan. Real interest rates also tend to be higher in Japan in recessions as already-low inflation expectations fall further. Correlations do shift from time to time, but one longstanding rule of thumb still holds for yen investors: Buy the currency on any market turbulence. Some have suggested that the BoJ’s asset purchases are pushing investors out of Japan and weakening the safe-haven status of the yen. While plausible, our view is that other factors have been at play. First, tax changes led to repatriation of capital back to the U.S. in 2018. This unduly pressured foreign direct investment in Japan as well as other safe-haven countries like Switzerland. Second, Japan, by virtue of its current account surplus, runs a capital account deficit. This means that portfolio outflows are the norm. This is how it has managed to build the biggest net international investment position in the world. Only in times of severe flight to safety are those investments liquidated and brought home. More importantly, the time may now be very ripe for yen long positions, given rising suspicion towards the currency as a haven. To see why, one only has to return to late 2016. Back then, global growth was soft, the yen was very cheap and everyone was short the currency on the back of a dovish shift by the BoJ. Despite that backdrop, the yen strengthened by almost 10% from December 2016 to mid-2017, even as equity markets remained resilient. When the equity market drawdown finally arrived in early 2018, it carried the final legs of the yen rally. With U.S. interest rates having risen significantly versus almost all G10 countries in recent years, including Japan’s, the dollar has become a carry currency. It will be difficult for the dollar to act as both a safe-haven and carry currency, because the forces that drive both move in opposite directions. As markets become volatile and these trades get unwound, this will be a powerful undercurrent for the yen (Chart I-10). Chart I-9The Yen Remains A Safe Haven Chart I-10The Yen Has Financed Carry Trades Bottom Line: Every diversified currency portfolio should hold the yen as insurance against rising market volatility. What If Global Growth Picks Up? The eventual bottom in global growth is a key risk to our scenario. However, inflows into Japan could accelerate, given cheap equity valuations and improved corporate governance that has been raising the relative return on capital (Chart I-11). The propensity of investors to hedge these purchases will dictate the yen’s path. The traditional negative relationship between the yen and the Nikkei still holds, but it will be important to monitor if this correlation shifts during the next equity market rally. Over the past few years, an offshoring of industrial production has been marginally eroding the benefit of a weak yen/strong Nikkei. If a company’s labor costs are no longer incurred in yen, then the translation effect for profits is reduced on currency weakness. USD/JPY and the DXY tend to have a positive correlation because the dollar drives the yen most of the time. Our contention is that the yen will surely weaken at the crosses, but could strengthen versus the dollar. USD/JPY and the DXY tend to have a positive correlation because the dollar drives the yen most of the time. Meanwhile, large net short positioning in the yen versus the dollar makes it attractive from a contrarian standpoint (Chart I-12). Chart I-11Japan: Better Governance, Higher ROIC Chart I-12Short USD/JPY: A Contrarian Bet Bottom Line: Short USD/JPY trades have entered into an envious “heads I win, tails I do not lose too much” position. Should the selloff in global risk assets persist, the yen will strengthen further. On the other hand, if global growth does eventually pick up later this year, the yen could weaken on its crosses but may actually strengthen versus the dollar. Housekeeping We are closing our short EUR/CZK position with a 4.7% profit. Interest rate differentials between the Czech Republic and the euro area have widened significantly, at a time when growth and labor market tightness could be fraying at the edges. Meanwhile, possible weakness in the dollar will be a risk to this position. Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 The Heisei era refers to the period corresponding to the reign of Japanese Emperor Akihito from 1989 until 2019. 2 Please see “Minutes of the Monetary Policy Meeting,” Bank of Japan, dated May 8, 2019, p.27. 3 Sample changes last year make it more difficult to have an apples-to-apples comparison for wages. 4 Ricardian equivalence suggests in simple terms that public sector dissaving will encourage private sector savings. Currencies U.S. Dollar USD Technicals 1 USD Technicals 2 Recent data in the U.S. have been negative: Total durable goods orders decreased by 2.1% in April. On the housing front, FHFA house price growth fell to 0.1% month-on-month in March. MBA Mortgage applications fell by 3.3% in May. Conference Board consumer confidence index improved to 134.1 in May. Dallas Fed Manufacturing activity index fell to -5.3 in May. Annualized GDP came in at 3.1% quarter-on-quarter in Q1, revised from the previous 3.2% but higher than the consensus of 3%. Q1 headline and core PCE both fell to 0.4% and 1% quarter-on-quarter respectively. DXY index increased by 0.6% this week. In the long-term, we maintain a pro-cyclical stance, and continue to believe that the path of least resistance for the dollar in down. In the short-term however, there is more room for the trade-weighted dollar to rise before eventually reversing, amid global data weakness and political uncertainties. Report Links: President Trump And The Dollar - May 9, 2019 Take Out Some Insurance - May 3, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 The Euro EUR Technicals 1 EUR Technicals 2 Recent data in the euro area have shown improvement: Private loans increased by 3.4% year-on-year in April. Money supply (M3) increased by 4.7% year-on-year in April. Business climate indicator fell to 0.3 in May. Despite the weak business climate indicator, soft data in the euro area have generally improved in May: economic confidence rose to 104; industrial confidence increased to -2.9; services confidence climbed to 12.2. Lastly, the consumer confidence increased to -6.5. EUR/USD fell by 0.7% this week. During this weekend’s European Parliament election, the European People’s Party (EPP) won with 24% of the seats. However, 43 seats were lost compared with their last election result. The S&D party also lost 34 seats, together ending the 40-year majority of the center-right and center-left coalitions. Report Links: Take Out Some Insurance - May 3, 2019 Reading The Tea Leaves From China - April 12, 2019 Into A Transition Phase - March 8, 2019 The Yen JPY Technicals 1 JPY Technicals 2 Recent data in Japan have been negative: All industry activity index fell by 0.4% month-on-month in March. The leading index and coincident index both fell to 95.9 and 99.4 respectively in March. PPI services fell to 0.9% year-on-year in April, below the expected 1.1%. Labor market and CPI data will be released after we go to press today. USD/JPY rose by 0.3% this week. BoJ Governor Haruhiko Kuroda has given two speeches this week, warning about the high degree of uncertainty, and potential downside risks worldwide. On the positive side, Kuroda thinks that EM capital outflows are less at risk than during recent financial crises, given a better framework for risk management. In the meantime, uncertainties remain regarding the U.S.-Japan trade disputes, especially vis-à-vis Japanese auto exports. Report Links: Beware Of Diminishing Marginal Returns - April 19, 2019 Tug OF War, With Gold As Umpire - March 29, 2019 A Trader’s Guide To The Yen - March 15, 2019 British Pound GBP Technicals 1 GBP Technicals 2 Recent data in the U.K. continue to outperform: Total retail sales increased by 5.2% year-on-year in April, surprising to the upside. BBA mortgage a pprovals increased to 43 thousand in April. GBP/USD fell by 0.8% this week. The uncertainties of Brexit increased with the resignation of Prime Minister Theresa May last Friday. With a Brexit decision not due until October 31, 2019, the U.K. has participated in the recent EU election. The newly formed Brexit Party led by Nigel Farage, won with more than 31% of the votes. This reflects a growing dissatisfaction with traditional parties within U.K. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Take Out Some Insurance - May 3, 2019 Not Out Of The Woods Yet - April 5, 2019 Australian Dollar AUD Technicals 1 AUD Technicals 2 Recent data in Australia have been mostly negative: ANZ Roy Morgan weekly consumer confidence index increased to 118.6 this week. HIA new home sales fell by 11.8% month-on-month in April. Moreover, building permits decreased by 24.2% year-on-year. Private capital expenditure in Q1 fell by 1.7% quarter-on-quarter. Building approvals fell by 4.7% month-on-month in April. AUD/USD fell by 0.2% this week. As we argued in last week’s report, we favor the Aussie dollar from a contrarian point of view. Despite the negative data points on the surface, the recent election result and dovish shift by RBA all support the Australian economy in the long-term. Moreover, the robust job market, rising terms of trade, and Chinese stimulus will likely put a floor under AUD/USD. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns- April 19, 2019 Not Out Of The Woods Yet - April 5, 2019 New Zealand Dollar NZD Technicals 1 NZD Technicals 2 Recent data in New Zealand have been mixed: ANZ activity outlook increased by 8.5% in May, well above consensus. Building permits fell by 7.9% month-on-month in April. ANZ business confidence remained low at -32 in May. NZD/USD fell by 0.6% this week. The Financial Stability Report, released by RBNZ this week, highlighted the worrisome debt levels, particularly in the household and dairy sectors. Ongoing efforts are necessary to bolster system soundness and efficiency, according to RBNZ governor Adrian Orr. Report Links: Not Out Of The Woods Yet - April 5, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Canadian Dollar CAD Technicals 1 CAD Technicals 2 Recent data in Canada have been positive: Bloomberg Nanos confidence index improved to 55.7, from the previous 55.1. Current account deficit increased to C$17.35 billion from C$16.62 billion, but it is lower than the expected C$ 18 billion. USD/CAD increased by 0.4% this week. On Wednesday, the Bank of Canada (BoC) held interest rates steady at 1.75%, as widely expected. Despite the recent trade uncertainties, the BoC views the slowdown in late 2018 and early 2019 as temporary, and expects growth to pick up again in the second quarter this year, supported by recovering oil prices, stabilizing housing sector, robust job market and easy financial conditions. Report Links: Currency Complacency Amid A Global Dovish Shift - April 26, 2019 A Shifting Landscape For Petrocurrencies - March 22, 2019 Into A Transition Phase - March 8, 2019 Swiss Franc CHF Technicals 1 CHF Technicals 2 Recent data in Switzerland have been mixed: Q1 GDP came in higher-than-expected at 1.7% year-on-year, from the previous reading of 1.5%. Trade surplus reduced to 2.3 million CHF in April, mostly due to the decrease in exports. KOF leading indicator fell to 94.4 in May. ZEW expectations fell in May to -14.3. USD/CHF appreciated by 0.7% this week. We favor the Swiss franc as a safe haven when market volatility rises. In the longer term, the high domestic savings rate, rising productivity, and current account surplus should all underpin the franc. Report Links: What To Do About The Swiss Franc? - May 17, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Balance Of Payments Across The G10 - February 15, 2019 Norwegian Krone NOK Technicals 1 NOK Technicals 2 There is little data from Norway this week: Retail sales increased by 1.6% year-on-year in April. Credit expanded by 5.7% year-on-year in April USD/NOK increased by 0.9% this week. Our Commodity & Energy Strategy team believe that the energy market is underpricing the U.S. - Iran war risk, and overestimating the short-term effects of the trade war. In the long run, the Chinese stimulus, dollar weakness, and supply uncertainties should lift oil prices, which will support the Norwegian krone. Report Links: Currency Complacency Amid A Global Dovish Shift - April 26, 2019 A Shifting Landscape For Petrocurrencies - March 22, 2019 Balance Of Payments Across The G10 - February 15, 2019 Swedish Krona SEK Technicals 1 SEK Technicals 2 Recent data in Sweden have been mostly negative: Producer price inflation fell to 4.9% year-on-year in April from 6.3% in March. Consumer confidence fell to 91 in May. Moreover, manufacturing confidence fell to 103.7 in May. Trade surplus fell from 6.4 billion to 1.4 billion SEK in April. Q1 GDP came in at 2.1% year-on-year, outperforming expectations but lower than the previous 2.4%. USD/SEK has been flat this week. Swedish exports, a reliable barometer for global business confidence, fell from 133.4 billion SEK to 128 billion SEK in April, which is a total decrease of 5.4 billion SEK in exports, implying that the global growth remains in a volatile bottoming process. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Global Liquidity Trends Support The Dollar, But... - January 25, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades
Highlights Portfolio Strategy The risk/reward equity market tradeoff is to the downside and we remain tactically cautious. The trade war re-escalation risks pushing out the global growth recovery to early-2020 and has shaken our confidence in our cyclically constructive equity market view. An enticing safe-haven macro backdrop, firming industry operating metrics and rock-bottom profit expectations and valuations all signal that it no longer pays to be underweight the S&P telecom services index. Waning residential investment, the recent flare up in the U.S./China trade tussle, crumbling lumber prices and adverse supply/demand dynamics warn that the S&P home improvement retail (HIR) index has ample downside. Recent Changes Lift the S&P telecom services index to neutral for a gain of 6% since inception. Early last week we got stopped out of our S&P homebuilding overweight recommendation, which is now back to neutral, and booked profits of 10% since inception relative to the SPX. Table 1 Feature Equities continued to whipsaw last week and lacked clear direction as the dust from President Trump’s May 5 tariff tweet has still not settled. While the trade talks could go either way, we are reluctant to take a stance and would rather err on the side of caution. Clearly the SPX wants to spring higher and craves a U.S./China trade deal, but our geopolitical strategists believe the trade talks have taken a turn for the worse and the odds of a positive trade resolution are falling quickly. We remain cautious on the short-term equity market outlook and are now increasingly worried that our sanguine cyclical posture is in jeopardy. Worrisomely, the stock-to-bond (S/B) ratio is sounding the alarm and is now part of the slew of indicators we track that have rolled over decisively (Chart 1). The S/B ratio has formed a bearish head and shoulders trading pattern and suggests that the SPX is at risk of a further pullback. While up to very recently falling bond yields were an undoubtedly equity market recovery pillar, any further melting in the 10-year Treasury yield would exert downward pull on the equity market. There are other signs that the U.S. equity market may be hanging by a thread. The average stock has failed to make new all-time highs using the Value Line Arithmetic Index as a gauge. The median U.S. stock is also suffering the same fate, again according to the Value Line Geometric Index (middle & bottom panels, Chart 2). Chart 1Tread Carefully Chart 2More Non-Confirming Indicators The trade-weighted U.S. dollar is also sending a deflationary impulse signal and likely reflects a continued global growth deceleration (top panel, Chart 2). This is a net negative for EPS especially for internationally exposed SPX constituents. Thus, this week we are further de-risking our portfolio by crystalizing gains in a defensive high-yielding communications services sub-index and lifting exposure to neutral from underweight. In addition, we update our bearish view on an early-cyclical subgroup and continue to protect the portfolio by adding trailing stops. Meanwhile, taking the pulse of global bourses is disconcerting. With the exception of the S&P 500 and the NASDAQ, no other stock market (in USD terms) confirms the SPX’s breakout to all-time highs. Highs were either hit in 2006-2007 or in early 2018. Now a big gulf has opened up, reminiscent of last year’s late-summer dichotomies when the SPX vaulted to fresh highs, but none of the other major global bourses confirmed the September highs (Charts 3 & 4). There are rising odds that a repeat may be unfolding. Chart 3I Know What You Did Last Summer Chart 4I Still Know What You Did Last Summer In our view, what explains the reversal of fortunes that led to a U.S. market dominating outperformance since early 2017 has been the massive fiscal injection the Trump administration undertook (Chart 5), with rising fiscal deficits three years running (an unprecedented backdrop during expansions). Chart 6 puts this easing in fiscal policy in a global perspective and shows the average fiscal balance from 2017-2020 using the IMF’s WEO April 2019 dataset that includes projections. The delta in the U.S.’s fiscal largess is quite significant. Our worry is that this is unsustainable and, similar to last fall/winter, the rest of the world may pull down the U.S. stock market until at least there are clear signs of a positive resolution in the U.S./China trade dispute. Adding it all up, the equity market’s risk/reward tradeoff is poor and we remain tactically cautious. The trade war re-escalation risks pushing out the global growth recovery to early-2020 and has shaken our confidence in our cyclically constructive equity market view. Thus, this week we are further de-risking our portfolio by crystalizing gains in a defensive high-yielding communications services sub-index and lifting exposure to neutral from underweight. In addition, we update our bearish view on an early-cyclical subgroup and continue to protect the portfolio by adding trailing stops. Chart 5Explaining U.S. Outperformance Dialing Up Profits In the context of a further de-risking of the portfolio, we are monetizing our gains of 6% since inception in our underweight recommendation in the S&P telecom services index and are upgrading this high yielding sector to neutral (bottom panel, Chart 7). Not only have bond yields plunged of late, raising the allure of fixed income equity proxies, but the recent escalation of the trade spat has caused U.S. manufacturers to pull in their horns. Markit’s flash manufacturing PMI survey that took place post the May 5 Trump tweet fell to 50.6 the lowest level since the history of the data. It is surprising that this latest reading near the 50 boom/bust line is below the late-2015/early 2016 level when global trade came to an abrupt halt. Historically, relative share price momentum has moved inversely with the annual change in this series and the current message is to expect a sustained rebound in the former (middle panel, Chart 7). Beyond this enticing macro backdrop for defensive equities, firming operating metrics also suggest that it no longer pays to be bearish telecom services stocks. Industry CEOs have shown labor restraint of late, at a time when selling prices are on the verge of expanding (middle & bottom panels, Chart 8). While the dust has yet to settle on the T-Mobile/Sprint saga, any reduction in supply should prove positive at the margin for industry selling prices. Chart 7Macro Headwinds Beneficiary Chart 8Firming Operating Metrics Tack on a tick up in consumer outlays on telecom services and this likely troughing in demand will also boost the sector’s revenue growth prospects (top panel, Chart 8). In sum, an enticing safe-haven macro backdrop, firming industry operating metrics and rock-bottom profits expectations and valuations all signal that it no longer pays to be underweight the S&P telecom services index. Meanwhile, bombed out profit expectations, suggest that the bar is set extremely low for incumbents and is likely a precursor of positive surprises. In fact, the five year out profit bearishness is unprecedented: telecom carriers are expected to trail the broad market by 13 percentage points (third panel, Chart 9). Despite this downbeat EPS message, relative share prices have fallen even faster, pushing the 12-month forward P/E multiple to multi-decade lows (bottom panel, Chart 9). Nevertheless, we refrain from bumping this niche safe haven index to overweight given some structural negative balance sheet issues. Chart 10 shows that telecom services debt burden is deteriorating. Net debt-to-EBITDA is pushing 3x versus below 2x for the broad market, and the interest coverage ratio is sinking steadily. Chart 9Bombed Out EPS Prospects And Valuations Chart 10Balance Sheet Trouble In sum, an enticing safe-haven macro backdrop, firming industry operating metrics and rock-bottom profits expectations and valuations all signal that it no longer pays to be underweight the S&P telecom services index. Bottom Line: Lift the S&P telecom services index to neutral and lock in gains of 6% since inception. The ticker symbols for the stocks in this index are: BLBG: S5TELSX – VZ, T, CTL. Home Improvement Retailers: Timber Alert While our high-conviction underweight call in the S&P home improvement retail index is slightly in the red, our confidence has increased that these hard line retailers are about to get chopped. Netting it all out, waning residential investment, the recent flare up in the U.S./China trade tussle, crumbling lumber prices and adverse supply/demand dynamics warn that the S&P home improvement retailing index has ample downside. First, the latest GDP release as it pertains to housing made for grim reading: residential fixed investment is in retreat. Big Box DIY retailers are highly levered to this type of housing activity and the prognosis is negative. Residential fixed investment has subtracted from real GDP growth for five consecutive quarters, which is unprecedented outside of a recession (top panel, Chart 11). Chart 11Time To Converge Lower... Residential investment is on the verge of contracting in absolute terms, a feat already achieved compared to GDP growth (bottom panel, Chart 11). The direct link to HIR typically comes via existing home sales. In other words, when a home changes ownership, typically some renovation activity goes into that newly purchased home (second panel, Chart 12). Thus, any sustained softness in existing home sales especially given heightened competition from the newly built housing stock, will weigh on residential investment. Against such a backdrop, top line growth for building & supply stores will likely remain subdued (third panel, Chart 12). Second, the recently announced tariffs and the specter of additional tariffs on the remaining U.S./China trade balance will also weigh on home improvement retailers' margins and profits. While management teams have yet to pencil in the direct input cost increase hit to future profitability, as revealed in recent HD and LOW conference calls, if all of the cost is passed on to the consumer then sales will suffer the most. Put simply, at the margin, some remodeling projects would have to get trimmed or get postponed, warning that HIR same-store sales will remain under pressure (second panel, Chart 13). Chart 12...To Falling Residential Investment Chart 13Lumber Price Blues Third, lumber prices continue to crumble and, given that HIR makes a set margin on lumber sales, HIR profits will likely underwhelm (third panel, Chart 13). Finally, a buildup in industry inventories at a time when demand is easing has pummeled the sales-to-inventories ratio, warning that the path of least resistance for HIR profitability remains lower (bottom panel, Chart 13). Our HIR model does an excellent job in capturing most of these macro and operating headwinds, and suggests that a felling in the relative share price ratio looms (Chart 14). What is disquieting is that there is no real valuation cushion for these priced-to-perfection retailers to absorb any future profit hiccups that we anticipate in the coming quarters. Our sense is that the de-rating phase that commenced in early 2019 will gain steam in the back half of the year and a premium-to-discount valuation reversal would not surprise us at all (bottom panel, Chart 12). Netting it all out, waning residential investment, the recent flare up in the U.S./China trade tussle, crumbling lumber prices and adverse supply/demand dynamics warn that the S&P home improvement retailing index has ample downside. Bottom Line: We reiterate our high-conviction underweight status in the S&P HIR index. The ticker symbols for the stocks in this index are: BLBG: S5HOMI – HD, LOW. Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com Chart 14Model Says Shy Away Housekeeping Early last week we obeyed our stop and booked profits in the S&P homebuilding index of 10% versus the S&P 500 since inception; we also downgraded this niche consumer discretionary index from previously overweight to currently neutral. We are taking this opportunity of de-risking our portfolio to add another trailing stop at 10% to a related market-neutral trade: long S&P homebuilding/short S&P HIR that has recently cleared the 13% return mark since inception. Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps
Highlights Falling Yields: There have been three main drivers of the latest decline in global bond yields: slower global growth, softer inflation expectations and increased safe-haven demand for bonds given the intensifying U.S.-China trade conflict. The first two are more than fully discounted in current yield levels, but the latter is likely to persist in the near-term with no resolution of the trade conflict in sight. Model Portfolio Adjustments: We are tactically reducing the sizes of the overall strategic tilts in our model bond portfolio – below-benchmark duration exposure and overweight global corporates vs. governments. There is a growing risk of deeper selloffs in global equity and credit markets if the June G-20 meeting produces no positive signals on ending the trade dispute. We do not yet see a case to position more defensively on a medium-term horizon, however, given the pickup in “early” global leading economic indicators. Feature Chart of the WeekYields Discount A Lot Of Bad News The investment backdrop at the moment – slowing global growth momentum, softening inflation expectations, an increasingly prolonged U.S.-China trade dispute with no immediate sign of resolution, and a strengthening U.S. dollar– is fairly bond bullish. Unsurprisingly, government bond yields in the developed markets have fallen to levels more consistent with a less certain macro environment. At one point last week, the 10-year U.S. Treasury yield dipped as low as 2.30%, while the 10-year German Bund fell deeper into negative territory at -0.13%. There are now expectations of easier monetary policy discounted in yield curves of several countries, most notably the U.S. where markets are priced for 50bps of Fed rate cuts over the next year – despite no indication from the Fed that cuts are coming anytime soon. From a valuation perspective, bond yields are starting to look a bit stretched to the downside (Chart of the Week). The term premium component of yields has fallen to near post-crisis lows in the majority of countries, while the U.S. dollar has surged despite lower U.S. interest rate expectations – both indications of investors driving up the value of traditional safe-havens at a time of uncertainty. Looking purely at the growth side of the equation, the downward momentum in bond yields should start to fade with the global leading economic indicator now in the process of bottoming out. That does not mean, however, that yields could not fall further in the near-term if the trade headlines get worse and risk assets sell off more meaningfully – an outcome that grows increasingly likely as the two sides in the trade war seem to be digging in for a longer battle. The State Of The World Since The “TTT” Our colleagues at BCA Geopolitical Strategy now believe that there is only a 40% chance of a U.S.-China trade deal by the end of June. This could trigger a deeper selloff in global equity and credit markets if investors begin to price in a larger and more prolonged hit to economic growth and corporate profits from the U.S. tariffs. This would trigger even greater safe-haven flows into government bonds, pushing yields lower through a more negative term premium. The much lower level of U.S. Treasury yields has helped limit the hit to risk asset prices from the elevated uncertainty over global trade. Since the “Trump Tariff Tweet” (TTT) of May 5, when the new round of tariffs on U.S. imports from China was announced which sparked the new leg of the trade war, the fall in benchmark 10-year government bond yields across the developed world can be fully explained by the fall in the term premium (Table 1). For example, the 10-year U.S. Treasury yield has fallen -14bps since the TTT, while our estimate of the term premium on the 10-year Treasury as decreased by -20bps. Over the same time period, 10-year U.S. inflation expectations have also fallen -11bps, but the market has only priced in an additional -5bps of Fed rate cuts over the next year according to our Fed Discounter. Table 1Decomposing 10-Year Government Bond Yield Changes Since The "Trump Tariff Tweet" The big difference between last December and today is the much lower level of U.S. Treasury yields. Lower yields have helped mute the hit to risk asset prices from the elevated uncertainty over global trade since the TTT (Chart 2). The Fed’s more dovish pivot in the early months of 2019 has helped push Treasury yields lower as investors have moved from pricing in rate hikes to discounting rate cuts. Even traditional “risk-off” measures like the VIX, U.S. TED spreads, the price of gold and the Japanese yen have only risen modestly since the TTT compared to the big moves seen back in December when investors feared that the Fed would tighten right into a U.S. recession (Chart 3). Chart 2Risk Assets Remain Relatively Calm Chart 3Falling Bond Yields Helping Keep Vol Subdued Easier monetary policy, if delivered, can help underwrite a rebound in equity and credit markets. When looking across the array of financial market returns since the TTT (Table 2), the only developed economies that have seen equities appreciate are Australia and New Zealand – countries where rate cuts are being signaled by policymakers (or already delivered, in the case of New Zealand). Table 2Asset Returns By Country Since The "Trump Tariff Tweet" In the case of the U.S., however, numerous Fed officials have stated recently that no changes to U.S. monetary policy are likely without decisive evidence that the new round of China tariffs and trade uncertainty was having a major negative impact on U.S. growth. On that front, forward-looking measures of U.S. economic activity, like the Conference Board leading economic indicator or our models for U.S. employment and capital spending, are not pointing to an imminent sharp slowing of U.S. growth (Chart 4). At the same time, leading indicators like our global LEI diffusion index and the China credit impulse are both signaling that global growth momentum may soon start surprising to the upside (Chart 5). Chart 4No U.S. Recession Signal Yet From These Indicators Chart 5Some Reasons For Optimism On Global Growth If the Fed does not see a case to deliver the rate cuts that are now discounted, or even to just signal to the markets that easier policy is coming soon, then there is a greater chance of a deeper pullback in U.S. equity and credit markets from any new negative news on trade. This suggests that the risk-aversion bid for U.S. Treasuries will result in an even more deeply negative U.S. term premium and lower bond yields. Easier monetary policy, if delivered, can help underwrite a rebound in equity and credit markets. Already, we are seeing such increasingly negative correlations between returns on equities and government bonds across the major developed markets. In Charts 6 & 7, we show the rolling 52-week correlation between local government bond and equity returns for the U.S., euro area, Japan, U.K., Canada and Australia. For each country, we also plot that correlation versus our estimate of the term premium on 10-year government bond yields. Chart 6Safe Haven Demand For Bonds ... Chart 7... Helping Drive Down Term Premia It is clear that there is a significant “risk-aversion bid” for government bonds right now, given the increasingly negative stock/bond correlations and falling term premia. One possible interpretation is that falling bond yields are being driven more by fears of a risk-off selloff in global equity and credit markets rather than rational pricing of future monetary policy or inflation expectations because of slowing growth. Interestingly, Australia – where the central bank has been signaling that rate cuts are imminent – is the only exception in this list of countries where the stock/bond correlation is not negative. There, the deeply negative term premium is more about weakening growth and low inflation expectations, which is forcing a dovish response from the Reserve Bank of Australia, rather than a risk aversion bid for safe assets from investors. It is clear that there is a significant “risk-aversion bid” for government bonds right now, given the increasingly negative stock/bond correlations and falling term premia. Net-net, while bond yields discount a lot of bad news and now look too low compared to tentative signs of improving global growth, it is hard to build a case for an imminent rebound in global bond yields without signs that U.S. and China are getting closer to a trade deal. Bottom Line: There have been three main drivers of the latest decline in global bond yields: slower global growth, softer inflation expectations and increased safe-haven demand for bonds given the intensifying U.S.-China trade conflict. The first two are more than fully discounted in current yield levels, but the latter is likely to persist in the near-term with no resolution of the trade conflict in sight. Tactical Risk-Reduction Adjustments To Our Model Bond Portfolio Chart 8Easier Monetary Policy Required In Europe & Australia Given the growing potential for a larger selloff in global risk assets if no U.S.-China trade deal comes out of next month’s G-20 meeting (where Presidents Trump and Xi will both be in attendance), we think it is prudent to make some tactical adjustments to the recommended weightings within our model bond portfolio. These moves will provide a partial hedge against any near-term widening of global credit spreads or further reduction in government bond yields in the event of a complete breakdown of the trade talks. Specifically, we are making the following changes: Duration Exposure: We are increasing the overall duration of the model bond portfolio by 0.5 years, which still leaves a duration position that is 0.5 years below the custom benchmark index of the portfolio. We are doing this by increasing allocations to the longer maturity buckets in the U.S., Japan and France. Credit Exposure: We are cutting the sizes of our recommended overweight tilts for U.S. corporates in half for both investment grade and high-yield. This is a combined reduction of nearly 4% of the portfolio that will be used to fund the increase in duration on the government bond side. We are making no other changes to our government bond country allocations, staying overweight in core Europe (Germany plus France), Japan and Australia where our Central Bank Monitors are calling for a need for easier monetary policy (Chart 8). We are also staying overweight U.K. Gilts, where yields continue to trade more off Brexit uncertainty than domestic economic growth or inflation pressures. We are not making any changes to the model bond portfolio exposure to euro area corporate debt or Italian governments, riskier spread products where we are already underweight. We are, however, maintaining our weightings for U.S. dollar denominated EM sovereign and corporate debt at neutral. EM debt has performed relatively well versus developed market equivalents since the May 5 “Trump Tariff Tweet” (TTT). We understand that not downgrading EM seems counterintuitive when we are trying to position more defensively in the model portfolio. We prefer to reduce exposure to U.S. credit, however, given that EM debt has performed relatively well versus developed market equivalents since the May 5 TTT (Table 3), and with EM spreads now at more attractive levels relative to U.S. investment grade (Chart 9). In addition, EM credit tends to perform better during periods when Chinese credit growth is accelerating, as is currently the case (bottom panel) – and which may continue if China’s policymakers eventually turn to more domestic stimulus measures to combat the effects of U.S. tariffs, as seems likely. Table 3Credit Market Performance Since The "Trump Tariff Tweet" Chart 9EM Credit Offers Value Versus U.S. Corporates Importantly, these are all only tactical changes to our model portfolio to partially protect against the risk of U.S. credit spread widening in the event of more negative news on the U.S.-China trade front. We still have not changed our strategic (6-12 month) views on global bond yields (higher) and global corporates (outperforming government bonds) given the tentative signs of improving global growth from the leading indicators. Bottom Line: We are tactically reducing the sizes of the overall strategic tilts in our model bond portfolio – below-benchmark duration exposure and overweight global corporates vs. governments. There is a growing risk of deeper selloffs in global equity and credit markets if the June G20 meeting produces no positive signals on ending the trade dispute. We do not yet see a case to position more defensively on a medium-term horizon, however, given the pickup in “early” global leading economic indicators. Robert Robis, CFA, Chief Fixed Income Strategist rrobis@bcaresearch.com Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns
Highlights In the second half of 2019, economic growth will stop accelerating… …but an underpinning of equity valuations will limit sell-off magnitudes to around 10 percent or so, rather than deeper sustained plunges. The equity market will end up in a sideways channel… …but defensives, such as healthcare, will outperform economically-sensitive sectors. Overweight Euro Stoxx 50 versus Shanghai Composite. Overweight the JPY. Bitcoin is due another technical correction. Feature The 2019 playbook for economies and markets is playing out exactly as we predicted. In our first report of this year we wrote that 2019 would be the economic and investment opposite of 2018. Opposite to 2018 because the first half of 2019 would see inflation fade, and growth accelerate. And opposite to 2018 because the second half of 2019 would see inflation stop fading, and growth stop accelerating (Chart of the Week). Chart of the WeekIn The First Half Of 2019, Inflation Faded, Growth Accelerated Inflation Faded, Growth Accelerated Back in early January, we wrote: “Inflation is set to disappoint as the recent near-halving of the crude oil price feeds into both headline and core consumer price indexes. With central banks now promising even greater ‘dependence on the incoming data’, this unfolding dynamic will force them to temper any hawkish intentions and rhetoric, limiting the extent of upside in bond yields.” This was a controversial view at the time. Yet within a month of writing, the Federal Reserve had stopped hiking interest rates, while the ECB and other major central banks had also pivoted to more dovish. We also wrote: “Germany should benefit from another support to growth. Last year, the auto sector – a major engine of the German economy – spluttered as it absorbed the new WLTP emissions testing standard. Through the middle of 2018 German motor vehicle exports suffered a €20 billion hit which shaved 0.6 percent from Germany’s €3.4 trillion economy (Chart I-2). Now, if auto exports stabilize, this drag will disappear. And if auto exports recover to the pre-WLTP level after this one-off and temporary shock, Germany will receive a 0.6% mirror-image boost to growth.” 1 2019 is the economic and investment opposite of 2018. We now know that the German economy accelerated to a close-to-trend 1.7% clip in the second quarter, up from a -0.8 percent rate of contraction in the third quarter of 2018 (Chart I-3). This is not just due to relief in the auto sector. Growth in other European economies has also rebounded, so the acceleration in growth has a broader foundation, and is now beyond doubt. Given the openness of the European economy, it is also inconceivable that this growth pick-up does not reflect a more generalized acceleration in global activity.2 Chart I-2The WTLP Drag On German Auto Exports Is Over Chart I-3German GDP Growth Accelerated To A 1.7 Percent Clip To repeat, the 2019 playbook for economies and financial markets is playing out exactly as expected; in the first half of the year, inflation faded while growth accelerated. The question is: what happens next? Growth Will Struggle To Accelerate Further Clients ask us an important theoretical question: what is the most important driver for the economy and financial markets; is it the change in the bond yield (or interest rate) or is it the level of the bond yield? The answer is that both the change and the level of the bond yield are important in their different ways. The German economy accelerated to a close-to-trend 1.7% clip in the second quarter. When it comes to accelerations and decelerations in credit creation, it is the change in the bond yield that is the most important. Remember, GDP is a flow statistic, which means that GDP growth is a change of flow statistic receiving contributions from the change of flow of credit. As changes in the flow of credit result from the change in the bond yield – all else being equal – it is the change in the bond yield that drives GDP growth. If all of this sounds somewhat confusing, then Chart I-4 should make the point crystal clear. Chart I-4The Change In The Bond Yield Drives GDP Growth Since last November, high-quality 10-year bond yields have plunged 70 bps, and this collapse in yields helped to provide a strong impulse to growth in the first half of 2019. To receive the same impulse again in the second half, bond yields would have to plunge another 70 bps. But with the German 10-year bund yield already at -0.1 percent, the same rate of decline seems highly unlikely, if not mathematically impossible. The upshot is that the growth impulse from declining bond yields can only fade in the second half of this year. However, when it comes to valuations and solvencies in the financial markets, it is the level of the bond yield that is the most important. Essentially, at a tipping point, higher bond yields can suddenly and viciously undermine the valuation support of equities, triggering a plunge in the stock market and other risk-assets which threatens a disinflationary impulse on the economy. The growth impulse from declining bond yields can only fade in the second half of this year. How can we sense this tipping point? It broadly equates to when the sum of the 10-year yields on the T-bond, German bund, and JGB is at 4 percent, the ‘rule of 4’ (Chart I-5). Conversely, when the sum is below 3 percent, the ‘rule of 3’, – as it is now – the seemingly rich valuation of equities versus bonds is broadly justified (Chart I-6).3 Chart I-5When The Sum Of 10-Year Yields On The T-Bond, Bund, And JGB Equals 4 Percent, The Global 10-Year Yield Equals 2 Percent Chart I-6The Rule Of 4, And The Rule Of 3 The upshot is that in the second half of 2019, economic growth will stop accelerating, but the support to equity valuations will limit sell-off magnitudes to around 10 percent or so, rather than deeper sustained plunges (Chart I-7). In aggregate, the equity market will end up in a sideways channel, but defensives, such as healthcare, will outperform economically-sensitive sectors. Chart I-7The Low Expected Return On Equities Is Justified When Bond Yields Are Ultra-Low How Did We Do? In our first report of the year, we also made (or reiterated) five investment recommendations. Today, we will review whether they worked or not, and what to do with them now. 1. Own a 25:75 combination of European banks relative to market, plus U.S. T-bonds. Chart I-8Banks Didn’t Outperform, But Bonds Did! Did it work? Yes. Although European banks underperformed the market, this was more than offset by the huge rally in T-bonds that resulted from the Fed going on hold (Chart I-8). Hence, the position is up 1 percent this year and 3.5 percent since its inception last November with the added advantage of negligible volatility. What to do now. Take profits. 2. Overweight EM versus DM. Did it work? No. EM has underperformed DM this year, though the position is broadly flat since its inception in November. What to do now. Close this position and switch into overweight Euro Stoxx 50 versus Shanghai Composite. 3. Overweight European versus U.S. equities. Did it work? The position is flat this year, though modestly up since its inception in November. What to do now. Maintain the position for a little while longer, as an expected short-term underperformance of the tech sector should benefit the tech-lite European equity market. 4. Overweight Italian assets versus European assets. Did it work? The position is broadly flat this year for both Italian equities and bonds relative to their European benchmarks. What to do now. Close any cyclical exposure to Italy, but maintain a structural exposure to Italian BTPs either in absolute or relative terms. 5. Overweight the JPY. Chart I-9In Japan And Europe, The Expected Interest Rate Cannot Go Much Lower Did it work? Yes. The broad trade-weighted JPY has outperformed this year, and especially so the JPY/EUR cross. What to do now. Maintain the position. When the expected interest rate is at its lower bound, then it is difficult for the central bank to hurt its currency. In technical terms, the currency possesses a highly attractive payoff profile called positive skew (Chart I-9). Of course, there are plenty of currencies whose interest rates are near the technical lower bound, but we like the JPY because it has less political risk than the others. So for the moment, remain overweight the JPY. Fractal Trading System* This week we note that after a 100 percent rally in a near straight line, bitcoin’s 65-day fractal dimension is at the lower bound that has reliably signaled previous technical corrections. On that basis, this week’s recommended trade is short bitcoin, setting the profit target and symmetrical stop-loss at 27 percent. Also, we are very pleased to report that short tech versus healthcare quickly achieved its 6.5 percent profit target and is now closed. This leaves four open positions. For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. Chart I-10 The post-June 9, 2016 fractal trading model rules are: 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. Use the position size multiple to control risk. The position size will be smaller for more risky positions. * 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 Footnotes 1 German auto net exports and GDP are quoted at annualized rates. The Worldwide Harmonized Light Vehicle test Procedure (WLTP) is a new standard for auto emissions that took effect on September 1 2018. 2 Quarter-on-quarter real GDP growth at annualized rates. 3 Please see the European Investment Strategy Weekly Report “The Rule of 4 Becomes the Rule of 3” dated March 21, 2019 available at eis.bcaresearch.com. Fractal Trading System Recommendations Asset Allocation Equity Regional and Country Allocation Equity Sector Allocation Bond and Interest Rate Allocation Currency and Other Allocation 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
Highlights Portfolio Strategy Macro headwinds, deficient demand along with rising chemicals stockpiles that have dealt a blow to industry pricing power warn that chemicals stocks are on the verge of a breakdown. Downgrade to a below benchmark allocation. At the margin deteriorating domestic conditions, along with a sustained softness in global growth indicators that are prone to an additional setback given the rising trade policy uncertainty suggest that it is prudent to move to the sidelines on the long materials/short utilities pair trade. Recent Changes Downgrade the S&P chemicals index to underweight, today. This also pushes the S&P materials sector’s weight back down to neutral. Close the long S&P materials/short S&P utilities pair trade, today. Table 1 Feature The SPX suffered its first 5% pullback for the year early last week, and now that President Trump has opened Pandora’s Box, there are high odds that equities will continue to seesaw, at least, until the late-June G20 meeting when the heads of states meet again. Since early-March we have been, and remain, cautious on the short-term equity market outlook as a slew of our tactical indicators have soured. Chart 1 shows three additional non-confirming equity market breakout indicators that are exerting downward pull on the SPX. Stock correlations have increased (shown inverted, top panel, Chart 1), junk spreads have widened (shown inverted, middle panel, Chart 1) and the NYSE’s FANG+ Index has run out of steam (bottom panel, Chart 1). Now the risk is, as we first highlighted in the middle of last week, that the back half of the year global growth reacceleration phase goes on hiatus as this trade policy uncertainty further shatters CEO confidence and global exports remain downbeat (Chart 2). Chart 1Non-Confirming Indicators Chart 2Stalled Export Engine Worrisomely, a number of our cyclical indicators are also firing warning shots. Not only did the ISM’s manufacturing new orders-to-inventories ratio breach parity, but also BCA’s boom/bust indicator took a turn for the worse (Chart 3). Importantly, while a lot of ink is spent on how the U.S. economy is beyond full employment, labor markets are tight and the output gap has closed, resource utilization has petered out – interestingly at a lower high compared with the previous two peaks. This backdrop points to more stock market turmoil in the coming months, similar to the mid-2015 message (Chart 4). Chart 3Cyclical Trouble Brewing Chart 4No Tightness Here Tack on China’s cresting credit impulse and factors are falling into place for a tumultuous back half of the year (bottom panel, Chart 3). Keep in mind that the two ultimate “risk off” indicators we track remain tame and underscore that investor complacency remains elevated: the TED spread is at 16bps and the Japanese yen has barely budged of late. This is worrying and suggests that investors expect a positive U.S./China trade resolution (USD/JPY shown inverted, Chart 5). Chart 5No Real Risk Off Phase Yet Were the equity markets to spin out of control however, the “Fed put” remains in place and would save the day. While the Fed has taken down the median dots and projects no hikes for the rest of the year and a single hike next year, the message from the bond market is diametrically opposite. Thus, we are de-risking our portfolio and this week we are downgrading a deep cyclical sector to neutral and also closing an explicit cyclical/defensive pair trade. Chart 6 shows that over 40bps of cuts are priced in by May 2020, according to the OIS curve. Historically, this has been an excellent leading indicator of the annual delta in the fed funds rate. Our takeaway is that the Fed remains the only game in town and were another mini-riot point to occur, then the Fed would not hesitate to step in and put a floor under the equity market. Chart 6The Bond Market Has The Stock Market’s Back In sum, the risks are rising for a prolonged consolidation phase in equities on the back of a trade war escalation that pushes out the global growth recovery to early-2020. Thus, we are de-risking our portfolio and this week we are downgrading a deep cyclical sector to neutral and also closing an explicit cyclical/defensive pair trade. Chemical Reaction We have been on the sidelines on the heavyweight S&P chemicals index of late (it comprises 74% of the S&P materials sector), but factors have now fallen into place and warrant a below benchmark allocation. First, global macro headwinds will continue to weigh on this deep cyclical index as the risk of a full blown trade war will likely take a bite out of final demand. Chemical producers garner 60% of their revenues from abroad (a full 20 percentage points higher than the SPX) and thus are extremely sensitive to the ebbs and flows of emerging markets economic growth in general and China in particular. Adding it all up, macro headwinds, deficient demand along with rising chemicals stockpiles that have dealt a blow to industry pricing power warn that chemicals stocks are on the verge of a breakdown. Chart 7 shows that U.S. chemical products exports are contracting and if the greenback sustains its recent upward trajectory given heightened global trade policy uncertainty, further global market share losses are likely at a time when the overall chemicals market will be shrinking. With regard to China specifically, the recent drop in the credit impulse is far from reassuring (bottom panel, Chart 3) and, assuming that the Chinese authorities will await a riot point prior to really opening up the credit spigots, more pain lies ahead for U.S. chemical exports. Second, the picture is not brighter on the domestic front. Importantly, the American Chemical Council’s Chemical Activity Barometer is nil, warning that domestic end-demand is also ailing (Chart 8). Chart 7Hazard Warning Chart 8Toxic Profit Prospects Tack on a surprisingly persistent jump in industry headcount (bottom panel, Chart 9), and the implication is that waning productivity will slash chemicals profits (bottom panel, Chart 8). Finally, a number of other operating metrics are languishing. Chemicals railcar loads are outright contracting and the softening ISM manufacturing survey points to further downside in the coming months (middle panel, Chart 9). The chemicals shipments-to-inventories ratio is also in contraction territory as this downbeat demand has been met with a buildup in inventories both at the wholesale and manufacturing levels. As a result, a liquidation phase has ensued and chemicals selling prices have sunk into the deflation zone (middle & bottom panels, Chart 10). Chart 9Deficient Demand Chart 10Liquidation Phase Adding it all up, macro headwinds, deficient demand along with rising chemicals stockpiles that have dealt a blow to industry pricing power warn that chemicals stocks are on the verge of a breakdown. Bottom Line: Trim the S&P chemicals index to underweight. Given the 74% weight chemicals stock have in the S&P materials sector, this move also pushes the S&P materials sector’s (Chart 11) weight to neutral from overweight, and we crystalize modest losses of 5.2% in this niche deep cyclical sector. The ticker symbols for the stocks in the S&P chemicals index are: BLBG: S5CHEM – DWDP, ECL, SHW, PPG, IFF, CE, ALB, LIN, APD, DOW, LYB, FMC, CF, MOS, EMN. Chart 11Trim Materials Back Down To Neutral Materials/Utilities: Move To The Sidelines While we were early in identifying a reflationary impulse from the Chinese authorities and put on an explicit cyclicals/defensives pair trade to capitalize on this opportunity at the end of January, the long materials/short utilities pair trade has failed to live up to its expectations, and today we recommend moving to the sidelines. Such a move is part of our de-risking of the portfolio given the rising global macro headwinds on the horizon we identified earlier. More specifically on the domestic front, our Economic Impulse Indicator (EII) suggests that beneath the surface some cracks are appearing in the U.S. economy. The EII encapsulates six parts of the U.S. economy and on a second derivative basis, softness is apparent (top panel, Chart 12). The ISM manufacturing survey corroborates this message and is also flirting with the boom/bust 50 line, signaling that it is prudent to take some risk off the table (bottom panel, Chart 12). The bond market is sniffing out this deteriorating domestic backdrop and the recent 25bs drop in the 10-year Treasury yield has breathed life into utilities and sucked the oxygen out of materials. Fixed income proxies are also benefiting from the drubbing in Citi’s Economic Surprise Index to the detriment of growth-sensitive deep cyclicals. The melting stock-to-bond ratio reflects all these domestic forces and warns against preferring materials to utilities stocks (Chart 13). Chart 12Move To The Sidelines Chart 13Mushrooming Domestic… The specter of a re-escalation in the trade war will not only continue to weigh on some domestic indicators, but gauges monitoring the health of the global economy will also suffer a setback. Already, our Global Activity Indicator has lost its spark, underscoring that global export volumes will continue to contract. King Dollar is also flexing its muscles, especially versus vulnerable twin deficit emerging market countries which saps economic growth. Tack on the derivative deflationary effect the appreciating greenback has on the commodity complex and materials stocks are at a great disadvantage versus domestic focused utilities (Chart 14). A number of additional global growth indicators are waning and signal that relative profitability will move in favor of utilities and at the expense of materials in the coming months. BCA’s global synchronicity indicator, which gauges the number of countries with a PMI above versus below 50 is sinking like a stone. In fact, the overall global manufacturing PMI is just barely above the expansion/contraction line and global industrial production is decelerating. All of this is a net negative for the deep cyclical materials sector, but a net positive for defensive utilities stocks that sport nil foreign sales exposure (Chart 15). Chart 14…And Global Growth… Chart 15…Worries But before getting outright bearish on this pair, there is a powerful offset. Likely, most of the bad news is reflected in bombed out relative valuations and oversold technicals. This actually also prevents us from fully reversing the trade and buying utilities at the expense of materials. A move to the sidelines is more appropriate (Chart 16). At the margin deteriorating domestic conditions, along with a sustained softness in global growth indicators that are prone to an additional setback given the rising trade policy uncertainty suggest that it is prudent to move to the sidelines on the long materials/short utilities pair trade. Bottom Line: Book losses of 5.3% in the long S&P materials/short S&P utilities pair trade and move to the sidelines. Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com Chart 16Saving Grace Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps
While we remain bullish on global equities and other risk assets over 12 months, we went tactically short the S&P 500 last Friday following the market’s complacent reaction to the Trump Administration’s further tariffs increases on Chinese imports. While a moderate trade war would still produce more economic damage than standard economic models imply, this would be greatly mitigated by significant Chinese economic stimulus and a Fed that is in no hurry to raise rates and could even cut rates. Barring any further major developments, we recommend investors start increasing risk exposure if the S&P 500 falls to 2711. A dip in global bourses would also create an opportunity to go overweight EM/European equities. Favor gold over government bonds as a low-cost hedge against trade war risks for now.
Highlights Solid credit growth numbers from China last week suggest an emerging window for pro-cylical currency trades. However, since 2009, these currency pairs have tended to work in real time rather than with a lag. Continued muted currency action over the next few weeks will be cause for concern. Our favorite currency pairs to play U.S. dollar downside for now are the SEK, NOK and GBP. With the Aussie dollar close to the epicenter of Chinese stimulus, data down under is increasingly stabilizing. Place a limit buy on AUD/USD at 0.70. Improving global growth will eventually put downward pressure on the broad trade-weighted U.S. dollar. Meanwhile, the risk-reward profile for safe-haven currencies has been greatly augmented in this low-volatility environment. Rising net short positioning on the yen and swiss franc is making them attractive from a contrarian standpoint. Feature The unambiguous message from incoming data is that we are entering a reflationary window. Our report last week highlighted the fact that the Chinese economy is in a bottoming process.1 Since then, data out of China has come out much stronger than expected. Export growth in March surged from -21% to 14%, new yuan-denominated loans came in at 1.7 trillion RMB versus 886 billion RMB the previous month, and industrial production in March grew at 8.5% on an annual basis – the strongest print since July 2014. Retail sales were also stronger and house prices are re-inflating, suggesting construction activity will pick up steam. Historically, March data is a cleaner print compared to prior months since it evades nuances from the Chinese lunar new year. As such, these numbers are consistent with a re-acceleration in domestic demand in the Chinese economy in the coming months. As we embrace confirmation that the Chinese economy has bottomed, it will be important to monitor if this cycle plays out like those in the past. Since 2009, the evolution of the Chinese credit cycle has been an important driver of pro-cyclical currency trades. However, in recent years there appears to have been diminishing returns to these trades. Continued lack of more pronounced strength in the Australian, New Zealand, and Canadian dollar exchange rates in light of solid hard data out of China will be genuine reason for concern. Our general assessment is that while the credit impulse in China has clearly bottomed, the magnitude of the rise is unlikely to be what we saw in 2015-2016. Given this backdrop, not all pro-cyclical currency pairs are going to benefit equally. We are long the SEK, NOK, and GBP and recommend adding AUD to the list of pro-cyclical favorites. Paradoxically, the risk-reward profile for safe-haven currencies has also been greatly augmented in this low-volatility environment, but it is still too early to begin putting on currency hedges. Pro-Cyclical Trades Need Broad Dollar Weakness Chart I-1 highlights the fact that pro-cyclical currencies have had diverging performances over the evolution of the business cycle since 2009. The aftermath of the global financial crisis was most bullish for commodity currencies, with the AUD, CAD, NOK, and NZD rising around 20%-30% versus the U.S. dollar. The DXY index was roughly flat during this period, but the broad trade-weighted dollar did weaken. The biggest driver back then was rising commodity prices, driven by Chinese demand and a revaluation of these currency pairs from deeply oversold levels. The weakest currencies were the euro and yen. Chart I-2New Lows In Currency Volatility The second phase of the business cycle upswing occurred from July 2012 to February 2014, using the global Purchasing Managers’ Index from J.P. Morgan. During this phase, the best-performing currency pairs were the euro and swiss franc, and the worst was the Japanese yen. Commodity currencies fared poorly back then. The driver then was monetary policy, with European Central Bank Governor Mario Draghi’s “whatever it takes” put and the launch of “Abenomics.” Notably, the 4% weakness in the DXY did not help pro-cyclical currencies much, given commodity prices had peaked. From February 2016 to December 2017, the upswing was driven again by Chinese stimulus. Commodity prices rallied and the dollar did weaken significantly, which helped pro-cyclical currencies. However, the returns were modest compared to 2009-2010 episode. The yen was flat during the period. Finally, NOK, SEK and NZD have been winners throughout all three business cycle upswings. This time around, more evidence will need to emerge that the broad trade-weighted U.S. dollar has peaked for pro-cyclical currencies to outperform. For now, the calm in developed currency markets seems very eerie, given the flow of incoming economic data. We have highlighted in recent bulletins that most currency pairs have been narrowly trading towards the apex of very tight wedge formations, which has severely dampened volatility (Chart I-2). In the post-Bretton Woods world, it has been very rare for periods of extended currency stability to persist. We eventually expect the U.S. dollar to weaken, but we will need to closely monitor the forces that have so far been keeping a bid under it. Liquidity, Global Growth And The Dollar Most measures of relative trends still favor the dollar. The April Markit manufacturing PMI releases this week showed that while both Japan and the euro area remain in contraction territory, the U.S. reading of 52.4 puts it solidly above the rest of the world. It is true that the momentum of this leadership has been rolling over recently, but historically such growth divergences between the U.S. and the rest of the world have generated anywhere from 10%-15% rallies in the greenback over a period of six months (Chart I-3). So far, the DXY dollar index is up 1% for the year. Repatriation flows have had a non-neglible influence on the broad trade-weighted dollar. Meanwhile, even though the Federal Reserve has paused hiking interest rates, relative policy trends still favor the greenback. The interest rate gap between the U.S. and the rest of the world pins the broad trade-weighted dollar index at 128, or 7% above current levels (Chart I-4). And even today, unless the Fed moves toward outright rate cuts, the dovish shift by other central banks around the world remains an immediate tailwind for the U.S. dollar. It will be important for yield curves to steepen globally as confirmation that other central banks are getting ahead of the curve, which should be a headwind for the dollar. Chart I-3U.S. Growth Leadership ##br##Is Rolling Over Chart I-4Interest Rate Differentials Still Favor The Dollar Internationally, dollar liquidity will need to increase significantly for the greenback to meaningfully weaken. The Fed’s tapering of asset purchases has been a net drain on dollar liquidity, despite a widening U.S. current account deficit. This is expected to end by September, but has already triggered a severe contraction in the U.S. monetary base. Our preferred measure of international liquidity is foreign central bank reserves deposited at the Fed, and this is still contracting at its worst pace in over 40 years (Chart I-5). At a minimum, an end to the balance sheet runoff will steer growth in the U.S. monetary base from deeply negative to zero. A rising external profit environment will be needed for an increase in foreign central bank reserves. Finally, data from the U.S. Treasury International Capital (TIC) system show that on a rolling 12-month basis, the U.S. continues to repatriate back a net of about $400 billion in assets, or close to 2% of GDP. Repatriation flows have had a non-neglible influence on the broad trade-weighted dollar (Chart I-6). Unless these flows roll over and begin to weaken, it will make it very difficult for the greenback to depreciate. Chart I-5International Dollar Liquidity Remains Tight Chart I-6Repatriation Flows Still Favor The Dollar Chart I-7Watch The Gold-To-Bond Ratio The bottom line is that pro-cyclical currencies will need broad dollar weakness to outperform. Our favorite indicator for gauging ultimate downside in the dollar is the gold-to-bond ratio (Chart I-7). Any sign that the balance of forces are moving away from the U.S. dollar will favor a breakout in the gold-to-bond ratio. For now, our favorite currency pairs to play U.S. dollar downside are the SEK, NOK, and GBP. What About Safe Havens? During bull markets, countries that have negative interest rates are subject to powerful outflows from carry trades. The impact of these outflows are difficult to measure, but it is fair to assume that periods of low hedging costs (which tend to correspond to periods of lower volatility) can be powerful catalysts. As markets get volatile and these trades get unwound, unhedged trades become victim to short-covering flows. With many yield curves around the world flattening, the danger is that the frequency of this short-covering implicitly rises, since long bond returns are falling short of spot rates. One winner as volatility starts to rise is the yen (Chart I-8). Investors should consider initiating small short USD/JPY and USD/CHF positions in the coming weeks as a portfolio hedge. Back in late 2016, global growth was soft, the yen was very cheap and everyone was short the currency on the back of a dovish shift by the Bank of Japan. Having recently introduced yield curve control (YCC), the market was grappling with the dovish implications for the currency, arguably the most significant change in monetary policy by any central bank at the time in several years. Given that backdrop, the yen strengthened by circa 10% from December 2016 to mid-2017, even as equity markets remained resilient. When the equity market drawdown finally arrived in early 2018, it carried the final legs of the yen rally. Dollar weakness was a significant reason for yen strength given global growth was accelerating, a negative for the counter-cyclical dollar. But with a net international investment position of almost 60% of GDP, and yearly income receipts of almost 4% of GDP, any volatility in markets could lead to powerful repatriation flows back to Japan. Chart I-9The Consumption Tax Hike Will Hurt Japanese Growth We expect the BoJ to remain on hold at next week’s policy meeting, but the incentive for the central bank to act preemptively this time around is getting stronger. The starting point is that the consumption tax hike, scheduled for October this year, will be disastrous for the economy. Since the late 1990s, every time the consumption tax has been hiked, the economy has slumped by an average of over 1.3% in subsequent quarters. For an economy with a potential growth rate of just 0.5-1%, this is a highly unpalatable outcome (Chart I-9). More importantly, similar to past episodes, the consumption tax is being hiked at a time when the economy is slowing. This week’s data show that exports continued to contract for the month of March. Machine tool orders, a good proxy for Japanese machinery sales, are still falling by almost 30% year-on-year. The Japanese PMI remains below the 50 boom/bust line, even though it has ticked marginally higher in April. Both household and business confidence are falling. The Economy Watcher’s Survey is currently at 44.8, well below the 50 boom/bust line and the lowest reading since 2016. In its April regional outlook, the BoJ downgraded most of the prefectures in Japan, with only Hokkaido receiving an upgrade in the aftermath of the earthquake. As domestic deflationary pressures intensify, this should nudge the BoJ towards more stimulus. This also raises the probability that the government defers the consumption tax hike. However, the yen could benefit from any short-covering rallies in the interim. We expect the BoJ to remain on hold at next week’s policy meeting, but the incentive for the central bank to act preemptively this time around is getting stronger. Bottom Line: The risk-reward profile for safe-haven currencies has been greatly augmented in this low-volatility environment. The rise in net short positioning on the yen and Swiss franc is becoming attractive from a contrarian standpoint. Investors should consider initiating short USD/JPY and short USD/CHF positions in the coming weeks as a hedge. Place A Limit-Buy On AUD/USD At 0.70 Data out of Australia are showing tentative signs of a bottom. This week’s important jobs report showed that the economy added 25,700 jobs, more than double the consensus forecast. Importantly, this was driven by full-time jobs, with a net gain of 48,300. And despite the participation rate ticking higher, unemployment stayed near a six-year low at 5%. Admittedly, the most recent Reserve Bank of Australia minutes showed there was discussion about rate cuts, but this could change if the economy begins to benefit from an acceleration in Chinese growth. Outright short AUD bets are at risk from either upside surprises in global growth or simply the forces of mean reversion. For more than two decades, the Australian dollar has tended to be mostly driven by external conditions, especially the commodity cycle. But for the first time in several years, domestic factors have joined in to exert powerful downward pressure on the currency. The Australian Prudential Regulation Authority (APRA) succeeded in its mission to deflate the overvalued housing market, and with house prices deflating by over 5% year-on-year, Australia may already be far along its adjustment path, especially vis-à-vis its antipodean counterpart (Chart I-10). In terms of currency performance, a lot of the bad news already appears priced in to the Australian dollar, which is down 12% from its 2018 peak and 35% from its 2011 peak. This suggests outright short AUD bets are at risk from either upside surprises in global growth or simply the forces of mean reversion (Chart I-11). We are already long the Aussie dollar versus the kiwi and suggest placing a limit-buy on AUD/USD at 0.7. Chart I-10The Aussie Housing Market Has Already Adjusted Chart I-11Chinese Growth Will Benefit The Aussie Dollar Chart I-12LNG Exports Will Benefit The Aussie Dollar Finally, the AUD/USD cross will benefit from rising terms-of-trade. Iron ore prices are already surging, reflecting supply-related issues but also rising demand in China. Meanwhile, Beijing’s clear environmental push has lifted the share of liquefied natural gas in Australia’s export mix (Chart I-12). Given that eliminating pollution is a strategic goal in China, this will be a multi-year tailwind. As the market becomes more liberalized and long-term contracts are revised to reflect higher spot prices, the Aussie dollar will get a boost. Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Weekly Report, titled “Reading The Tea Leaves From China,” dated April 12, 2019, available at fes.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the U.S. suggest a slower pace of growth: The preliminary U. of Mich. consumer sentiment index fell to 96.9 in April. The NY empire state manufacturing index surprised to the upside, coming in at 10.1 in April. Industrial production contracted by 0.1% month-on-month in March. Trade balance came in at a lower-than-expected deficit of $49.4B in February. Retail sales increased by 1.6% month-on-month in March. Preliminary April Markit composite PMI fell to 52.8; manufacturing component and services component fell to 52.4 and 52.9, respectively. DXY index edged up by 0.35% this week. The Fed’s Beige Book was released on Wednesday, summarizing that economic activity expanded at a slight-to-moderate pace in March and early April, with some states showing more signs of relative strength. The Book suggests that going forward, a similarly muted pace of growth should be anticipated for the coming months. Report Links: Not Out Of The Woods Yet - April 5, 2019 Tug OF War, With Gold As Umpire - March 29, 2019 Into A Transition Phase - March 8, 2019 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area remain soft: Industrial production came in at -0.3% year-on-year in February, outperforming expectations. April ZEW economic sentiment index improved to 4.5 in euro area. The German ZEW current conditions component fell to 5.5, while sentiment improved to 3.1 nonetheless. The current account balance fell to €26.8B, while trade balance increased to €19.5B in February. March headline inflation and core inflation were unchanged at 1.4% and 0.8% year-on-year, respectively. The euro area April composite PMI fell to 51.3; the services component fell to 52.5; the manufacturing component increased to 47.5. German composite PMI increased to 52.1; manufacturing and services components increased to 44.5 and 55.6, respectively. French composite PMI increased to 50; manufacturing component fell to 49.6; services component increased to 50.5. EUR/USD fell by 0.34% this week. As the Chinese economy bottoms, this should benefit European exports and the euro. Report Links: Reading The Tea Leaves From China - April 12, 2019 Into A Transition Phase - March 8, 2019 A Contrarian Bet On The Euro - March 1, 2019 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been neutral: The adjusted trade balance decreased, coming in at a ¥177.8 billion deficit in March. Exports contracted by 2.4% year-on-year, while imports grew by 1.1% year-on-year. Industrial production fell by 1.1% year-on-year in February. The preliminary Nikkei manufacturing PMI improved to 49.5 in April. USD/JPY has been trading flat this week. During the most recent IMF meeting, global finance chiefs have warned that global growth uncertainties remain at a high level. With currency volatility at record lows, any flight to safety could support safe-haven currencies like the yen. Report Links: Tug OF War, With Gold As Umpire - March 29, 2019 A Trader’s Guide To The Yen - March 15, 2019 Balance Of Payments Across The G10 - February 15, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the U.K. have been mostly positive: Rightmove house price index slightly improved to -0.1% year-on-year in April. On the labor market front, 179K jobs were created in February; ILO unemployment rate was unchanged at 3.9%; average weekly earnings came in line at 3.5% year-on-year. On the inflation front, headline inflation and core inflation were unchanged at 1.9% and 1.8% year-on-year, respectively, underperforming expectations. Retail sales came in at 6.7% year-on-year in March, surprising to the upside. GBP/USD fell by 0.5% this week. With Brexit being kicked down the road, the volatility of sterling has dropped, and attention is moving towards U.K. fundamentals. Economic surprises in the U.K. relative to both the U.S. and euro area are soaring. This will put a bid under sterling. Report Links: Not Out Of The Woods Yet - April 5, 2019 A Trader’s Guide To The Yen - March 15, 2019 Balance Of Payments Across The G10 - February 15, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 The labor market in Australia remains robust: Westpac leading index increased by 0.19% month-on-month in March. 25.7K jobs were created in total in March, with 48.3K new full-time jobs and a loss of 22.6K part-time jobs. The participation rate increased to 65.7% in March, slightly higher than expected which nudged the unemployment rate to 5%, in line with expectations. AUD/USD appreciated by 0.7% this week, now approaching 0.72. The RBA published its meeting minutes on Tuesday. The minutes stated that the Australian dollar is still near its recent lower end. However, the strength in commodity prices and improving trade terms are supporting the currency. Report Links: Not Out Of The Woods Yet - April 5, 2019 Into A Transition Phase - March 8, 2019 Balance Of Payments Across The G10 - February 15, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand are slowing: Q1 inflation fell to 1.5% year-on-year, underperforming expectations. NZD/USD fell by 0.8% this week. The relative underperformance of New Zealand growth could further weaken the Kiwi on a cyclical basis. Our long AUD/NZD position is now 1.6% in the money. Report Links: Not Out Of The Woods Yet - April 5, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been mostly positive: The Teranet/National Bank HPI fell to 1.5% year-on-year in March. Existing home sales in March grew by 0.9% month-on-month, higher than the previous reading of -9.1% while still lower than the expected 2%. Trade balance came in at a smaller deficit of 2.9 billion CAD. Headline inflation and core inflation climbed to 1.9% and 1.6% year-on-year respectively. The ADP number of new jobs created fell to 13.2K in March. Retail sales increased by 0.8% month-on-month in February, outperforming expectations. USD/CAD fell by 0.3% this week. The spring 2019 BoC Business Outlook Survey was released on Monday. It’s worth mentioning that the Business Outlook Survey Indicator fell from a strongly positive level in the winter survey to slightly negative, implying the softening in recent business sentiment. Report Links: A Shifting Landscape For Petrocurrencies - March 22, 2019 Into A Transition Phase - March 8, 2019 Balance Of Payments Across The G10 - February 15, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: Producer and import prices came in at -0.2% year-on-year in March, higher than the previous reading of -0.7%. Trade balance increased to a surplus of 3.2 billion CHF in March. Exports increased to 21 billion CHF, and imports increased to 17.9 billion CHF. Swiss watch exports increased by 4.4% year-on-year in March. USD/CHF rose by 1% this week. The global growth stabilization and improving sentiment in the euro area are offsetting the attractiveness of the safe-haven franc. We are long EUR/CHF for a 1% profit. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Waiting For A Real Deal - December 7, 2018 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 There is little data from Norway this week: Trade balance in March fell to 13.9 billion NOK. USD/NOK fell after the spike overnight, returning flat this week. The Norwegian krone is still trading at around one sigma band below its fair value, while the economic activity is improving with rising oil prices. Our long NOK/SEK position is now at a 3.6% profit. Report Links: A Shifting Landscape For Petrocurrencies - March 22, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been negative: The unemployment rate increased to 6.7% in March. USD/SEK appreciated by 0.2% this week. Like the Norwegian krone, the Swedish krona is undervalued, trading at a large discount to its fair value. We remain overweight the SEK, which will benefit from a bottoming in global growth. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Global Liquidity Trends Support The Dollar, But... - January 25, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades
ハイライト グローバル株式およびその他のリスク資産は、今後数週間はボラティリティ高止まりの横ばい推移となり、その後一連の出だし失敗を経て世界成長がようやく加速するにつれて年末までは徐々に上昇するだろう。 私たちは現在、フェドが以前想定していたよりも遅いペースで利上げを行うと見ているが、最終的にはインフレを抑えるために利上げを急がざるを得なくなるだろうと考えている。 フェドファンド金利はおそらく2021年に4％で頭打ちとなり、市場が現在織り込んでいるよりも四半期ごとに0.25ポイントの利上げが合計9回多く示唆される。 12か月の投資期間では、投資家はグローバル株式をオーバーウェイトし、国債をアンダーウェイトし、現金配分は中立を維持すべきである。 ドルは第2四半期にピークを迎え、その後年末までおよび2020年にかけて弱含みとなり、来年遅い時期に再び強含み始めるだろう。 投資家は今後数週間、新興国（EM）および欧州株を一時的に格上げする準備をすると同時に、景気循環型の株式セクターへのエクスポージャーを増やすべきである。 工業用金属と原油は年の経過とともに強含みとなるだろう。金は押し目で買うべきである。 投資家は2020年末にポートフォリオのリスク低減を開始し、2021年の景気後退に備えるべきである。
チャート 001
特集 また始まるのか？ 昨年6月によりディフェンシブになった後、私たちは12月のFOMC後の急落を受けて株式に対して強気に転じた。株式が反発を続けるにつれて、私たちは楽観を和らげた。3月初めに私たちは「年初から上昇してきた世界の株式は、投資家が慌てていわゆるグリーンシュートの出現を待つため、今後6～8週間で『デッドゾーン』に入る可能性が高い」と書いた。1 先週金曜日に発表された期待外れの欧州PMIデータは、グリーンシュート論に一部止めを刺した格好だ。ドイツの製造業PMIは6年ぶりの低水準に落ち込み、新規受注の構成要素はグレート・リセッション以来の弱い水準を示した。これを受けてドイツの10年国債利回りは2016年以来初めてマイナス圏に入り、米10年国債利回りも15か月ぶりの低水準まで下落し、3か月/10年のカーブが逆イールド化した。歴史的に見て、逆イールドは米国の景気後退を予測する信頼できる指標であった（チャート1）。 チャート1イールドカーブの逆転、景気後退、およびタームプレミアム
イールドカーブの逆転、景気後退、そしてタームプレミアム
イールドカーブの逆転、景気後退、そしてタームプレミアム
トランプ大統領がテレビ評論家のスティーブン・ムーアをフェドの理事に任命する決定を下したことも事態を好転させなかった。供給側（サプライサイド）の「経済学者」ラリー・クドローの推薦を受けたムーアは、2007年の住宅市場の懸念を軽視したこと、2010年にQEがハイパーインフレを引き起こすと的確に予測したことで知られ、トランプ減税が財政赤字を小さくするだろうと信じている点でも有名だ。 世界成長は年の後半に加速するだろう これらの憂慮すべき展開を踏まえ、景気とリスク資産に対して再び景気循環的に弱気に転じるべき時だろうか。私たちはそうは考えない。今後数週間は株式にとって厳しい局面があり得る――これは私たちのマクロクオンツ・モデルが現在示しているリスクだ――が、一連の出だし失敗を経て世界成長がようやく加速するにつれてセンチメントは改善するはずだ。実際、すでにいくつかの前向きな兆候が見えている：上昇している先行指標を持つ国の比率を追跡する当社のグローバル先行経済指標の拡散指数は上昇しており（チャート2）、グローバルLEIを先行している。サービス業のPMIも概ね改善しており、世界成長の弱さは主に貿易と製造業に集中していることを示唆している。さらに貿易面でも、バルチック・ドライ指数や世界のコンテナ船の活動を示す週次のHarpex海運指数といったいくつかの先行指標が安値から反発している。 我々はイールドカーブのシグナルを過小評価すべきだと考える。現在それはマイナスのタームプレミアムによって深刻に歪められているからだ。もし米10年のタームプレミアムが2004年の水準に戻っていれば、3か月/10年のスロープは200ベーシスポイント以上急勾配になり、この問題について誰も話題にしないだろう。実際、今日のタームプレミアムを考慮すれば、1995年にはほぼ確実にカーブは逆転していただろう。当時株式を手放した者は歴史上最も偉大なブルマーケットの一つを逃したことになる。 また、米10年利回りの一部低下はポジティブな展開を反映していることは言うまでもない：フェドがよりハト派に転じたのだ。10年/30年部分のイールドカーブを見れば、実際にはスティープ化している。これは市場がフェドの行動をリフレーション的であると見なしている兆候である。 逆イールドカーブが経済活動を鈍化させる明確な因果メカニズムはないが、イールドカーブの逆転が投資家を怯ませ、それによって金融環境のタイト化を招くという自己成就的予言になる可能性はある（チャート3）。このような「ドゥームループ」は概念的には可能だが、今年初めに我々が議論したように、現在の環境で発生する可能性は低い。2いずれにせよ、金融環境は年初以来緩和している。これは今後数か月の成長を押し上げるはずだ。 チャート2世界成長は##br##安定し始めている可能性がある
世界の成長は安定し始めている可能性がある
世界の成長は安定し始めている可能性がある
チャート3年初来の金融環境の緩和は世界成長にとって好材料
年初以来の金融環境の緩和は世界経済の成長にとって好材料だ
年初以来の金融環境の緩和は世界経済の成長にとって好材料だ
中国のクレジット成長は上昇へ 世界成長は中国経済の減速に足を引っ張られてきた。昨年のデレバレッジ化キャンペーンは投資支出の大幅な減速を招き、これは世界中の資本財メーカーやコモディティ生産者に悪影響を及ぼした（チャート4）。 歴史的に見て、クレジット成長が名目GDP成長に近づくとき、中国は金融部門への締め付けを緩めてきた（チャート5）。おそらく我々はそのポイントに達したようだ。季節調整で歪んだ弱い2月の数値にもかかわらず、クレジット成長はついに前年比で加速している。 チャート4中国：デレバレッジ化キャンペーンは投資支出に悪影響を与えた
中国：デレバレッジ化の取り組みは投資支出に悪影響を及ぼした
中国：デレバレッジ化の取り組みは投資支出に悪影響を及ぼした
チャート5歴史的に、中国はクレジット成長が名目GDP成長に接近するとデレバレッジを縮小してきた
歴史的に見ると、信用の伸びが名目GDP成長率に近づくと、中国はデレバレッジの取り組みを縮小してきた。
歴史的に見ると、信用の伸びが名目GDP成長率に近づくと、中国はデレバレッジの取り組みを縮小してきた。
我々は中国のクレジット成長が過去の再レバレッジ局面ほど大きく上昇するとは予想していない。だが、これは経済の状態がより良くなっているためであり、現状からの債務増加に内在的な制約があるためではない。 中国の高い貯蓄率は、ターム名目GDP成長率よりも金利を大きく下回る水準に保ってきた。これは債務持続可能性の主要な決定要因である（チャート6）。3中央政府が現在のように大部分の地方債務と企業債務に対して暗黙の保証を維持している限り、デフォルトリスクは最小限にとどまるだろう。いずれにせよ、総債務がGDP比240％に達していることを考えれば、クレジット成長が1パーセンテージポイント上昇するだけで、GDPの2.4％に相当する大きなクレジット刺激が生じることになる。 中国のクレジットインパルスは輸入を約6～9か月先行する（チャート7）。これは年の後半における世界貿易にとって良い兆候である。 チャート6中国の高い貯蓄率は金利をトレンドの名目GDP成長率を大きく下回る水準に保ってきた
中国の高い貯蓄率が金利をトレンドの名目GDP成長率を大幅に下回る水準に抑えている
中国の高い貯蓄率が金利をトレンドの名目GDP成長率を大幅に下回る水準に抑えている
チャート7中国のリフレーション的刺激は世界貿易に恩恵をもたらすだろう
グローバル・トレードは中国のリフレーション的な刺激から恩恵を受けるだろう
グローバル・トレードは中国のリフレーション的な刺激から恩恵を受けるだろう
貿易戦争の一服か？ 貿易戦争の緊張緩和は事態を改善するだろう。自称「名交渉人」であるドナルド・トランプは、来年の大統領選挙前に中国との合意をまとめる必要があり、同時にその合意が米国にとって有利な条件で成立したと有権者に納得させなければならない。 任期序盤に中国と合意に達することは、双方向の貿易赤字を減らせなかった場合にはリスクがあった――米国の財政政策が景気循環的であることを考えればそれは全くあり得る結果だ。しかし現時点では、トランプは中国と素晴らしい取引をまとめたと自慢でき、かつその成果が実現するのは再選後であると有権者に安心させることができる。したがって、トランプが合意の締結を目指す可能性は高まっている。 中国側は可能な限り大きな交渉力を確保したがっている。これは、自国経済が双方の利益にならない貿易協定を突っぱねても、その影響を十分に吸収できるほど強いと説得力を持って示せることを意味する。クレジットサイクルが中国成長の支配的な原動力であるため、これはデレバレッジ化キャンペーンを一時的に後回しにすることを必要とする。世界成長の加速と強い国内需要は欧州に恩恵をもたらす 中国の成長加速は今年後半に欧州の輸出セクターを助けるだろう。中国のCaixin購買担当者指数（PMI）の輸出コンポーネントは底値から上昇している。これはユーロ圏のPMIを約三か月先行している。一方で、ユーロ圏の国内需要はより緩和的な財政政策と低下する債券利回りの恩恵を受けるだろう。 イタリアにとっては債券利回りの低下が特に有益だ。昨年三月にポピュリスト政権が選出された後の利回り急騰と企業信頼感の喪失は景気後退に突入させた（チャート 8）。現在、10年物BTP利回りが高値から100ベーシスポイント以上低下しているため、イタリア経済は回復し始めるはずだ。 国内成長が加速しても欧州中央銀行は今年利上げを行わないだろうが、市場はおそらく2020年以降に数回の利上げを織り込むだろう。これによりコア欧州債券市場の利回り曲線がわずかに再スティープ化し、長らく苦しんでいる銀行の収益にはプラスに働くはずだ。 ブレグジットは依然として懸念材料だ。この継続する物語は滑稽な段階に達しており、1) 英国はEU離脱に投票したが、2) 議会はブリュッセルと満足のいく合意に達しない限りEUに留まることに投票し、しかも3) 提示されていた唯一の合意案を拒否した。多くの英国有権者がもはやブレグジットを望んでいないことを考えると（チャート 9）、我々は政府がいわゆる先送りを続け、二度目の国民投票が発表されるか「ソフト・ブレグジット」合意が策定されるまでその問題を先送りにするだろうと考えている。いずれの結果も市場には歓迎されるだろう。 チャート 8イタリアの債券利回りはもはや逆風ではない
イタリア国債利回りはもはや逆風ではない
イタリア国債利回りはもはや逆風ではない
チャート 9英国：やり直しとなれば残留側が勝つ可能性が高い
英国：やり直しが行われれば、残留派が勝つ可能性が高い
英国：やり直しが行われれば、残留派が勝つ可能性が高い
フェッドはどうするか？
チャート10
昨年の「クリスマス暴落」はフェッドの反応関数を明らかによりハト派の方向へと変えた。今後数か月でジェローム・パウエルが利上げを行うとは予想していないが、世界成長の再加速は12月にフェッドを再び引き締めに向かわせる可能性が高い。フェッドは2020年に四半期に一度の利上げを継続し、インフレ上昇に対応して2021年には引き締めペースを加速させるだろう。 総じて、我々はこのサイクルの終わりまでにフェデラルファンド金利が約4%に上昇すると見ている。これは市場が現在織り込んでいる水準よりも四半期ごとの25ベーシスポイントの利上げが九回多いことを意味する（チャート 10）。我々はフェデラルファンド先物のショートポジションで損切りになったが、顧客には2021年6月限フェデラルファンド先物または同等の手段をショートすることを推奨する。 米国経済：再び好調 基本的に米国経済は堅固な基盤にあり、より高い金利にも耐えられる。10年前とは異なり、住宅市場は良好な状態にある（チャート 11）。持ち家空室率は記録的な低水準近辺にある。フィコ・スコアを見る限り、住宅ローンの貸出の質は依然として高い。労働市場も堅調で、求人件数は二月に再び過去最高を記録した（チャート 12）。健全な住宅市場と労働市場の組み合わせは消費者にとって不可避的に良い。 チャート 11米国の住宅の基礎条件は堅調
米国の住宅ファンダメンタルズは堅調だ
米国の住宅ファンダメンタルズは堅調だ
チャート 12米国の労働市場は堅調である
米国の労働市場は堅調だ
米国の労働市場は堅調だ
チャート13
個人貯蓄率は現在7.6%にあり、家計の純資産対可処分所得比率から期待される水準よりもかなり高い（チャート 13）。貯蓄率の低下は消費支出が所得よりも速く増加することを可能にするだろう。後者は賃金上昇によって支えられているため、これは消費にとって強気材料となる。 設備投資意向は過去数か月で低下したが、歴史的基準から見ると依然として高い水準にある（チャート 14）。実質非住宅資本ストックは回復開始以来平均でわずか1.7%しか成長しておらず、リセッション前の期間の3%から低下している（チャート 15）。生産性成長の景気循環的な上振れ、上昇する労働コスト、低い余剰生産能力の水準は、企業が新しい工場や設備に投資する動機付けとなるはずだ。 チャート 14設備投資意向は軟化したが、依然として高水準にある
設備投資の意向は軟化したが、依然として高水準にある
設備投資の意向は軟化したが、依然として高水準にある
チャート 15米国の設備投資余地はまだある
米国への資本投資にはさらなる余地がある
米国への資本投資にはさらなる余地がある
企業債務：どれほどのリスクか？ チャート 16米国の企業債務は世界基準で極端ではない
米国の企業債務は世界基準では極端ではない
米国の企業債務は世界基準では極端ではない
近年、企業債務水準は大幅に増加し、契約条項の緩いローンの増加に見られるように引受基準は悪化した。それでも状況は深刻とは程遠い。 他国と比べると、米国の企業債務はかなり低い（チャート 16）。フランスの企業債務はGDP比で143%に達し、米国の2倍である。これはフランスの企業セクターがすべて順調であることを示すわけではないが、事実としてフランスは企業債務の危機に見舞われていない。これは米国が差し迫った危機に瀕していないことのシグナルにもなる。 現金を差し引くと、米国の企業債務のGDP比は1989年と同じ水準にあり、その年のフェデラルファンド金利はほぼ9%であった。法人ネット負債対EBITDの比率は比較的低いままである。利子負担能力比率は歴史平均を上回っている。加えて、過去数年で企業資産もかなり速く増加しており、企業の債務対資産比率は概ね安定している（チャート 17）。 企業部門の金融収支－－企業の収入と支出の差－－は依然としてGDPの1%でプラス圏にある。過去50年のすべての景気後退は企業部門の金融収支が赤字になったときに始まっている（チャート 18）。 チャート 17米国の企業債務：どのくらい高いか？
米国の企業債務：どこまで高くなる？
米国の企業債務：どこまで高くなる？
チャート 18企業部門の金融収支は依然として黒字
企業部門の金融収支は依然として黒字
企業部門の金融収支は依然として黒字
住宅ローンのようにレバレッジドな機関が多く保有する債務とは異なり、ほとんどの企業債務は年金基金、保険会社、ミューチュアル・ファンド、イーティーエフのような非レバレッジのプレイヤーによって保有されている。銀行貸出は非金融企業部門債務のわずか18%を占め、1980年の40%から低下している（チャート 19）。銀行が保有するレバレッジド・ローンのシェアは10年前の約25%から現在は10%未満に低下している。さらに、今日の銀行は過去よりもはるかに高品質の自己資本を多く保有している（チャート 20）。これにより企業債務は経済にとってシステミックに重要である度合いが低くなっている。 チャート 19銀行は企業セクターへのエクスポージャーを削減した
銀行は企業向けのエクスポージャーを縮小した
銀行は企業向けのエクスポージャーを縮小した
チャート 20米国の銀行は十分な自己資本を保有している
米国の銀行は健全な資本水準にある
米国の銀行は健全な資本水準にある
我々が12月にリスク資産に対してより強気になった理由の一つは、株式が急落し企業スプレッドが拡大したにもかかわらず金融ストレス指数に大きな追随がなかったためである。例えば、悪名高いテッド・スプレッドはほとんど動かなかった（チャート 21）。 チャート 21テッド・スプレッドは落ち着いており、深刻な金融ストレスの兆候は示していない
TEDスプレッドは良好に推移しており、金融ストレスの重大な兆候は見られない
TEDスプレッドは良好に推移しており、金融ストレスの重大な兆候は見られない
みんなラリーに同意している 米国経済に大きな不均衡がないことを踏まえると、投資家はなぜフェッドが実際にはさらに利上げできないと考えているのだろうか。フェデラルファンド金利の実質ベースはかろうじてゼロを上回っているにすぎないのに。答えは、投資家がラリー・サマーズの世俗的停滞（セキュラー・スタグネーション）論を受け入れているように見えることである。これは中立金利が過去に比べて今日ははるかに低いという仮説である。 我々はこの理論にいくぶんの同情を持っているが、これは生産性や人口動態といった長期的な金利決定要因に関する理論であることを忘れてはならない。この理論は景気循環的な金利のドライバー、すなわち余剰生産能力の量、財政政策のスタンス、信用の成長、賃金動向などについてはほとんど何も語っていない。 今十年初め、我々がまだ債券に非常に強気であったときには、経済は極めて低い金利を必要としているともっともらしく主張できた：産出ギャップは依然として大きく、デレバレッジのサイクルは始まったばかりであり、住宅と株価は下押しされ、賃金上昇は乏しく、大不況の間の短い景気刺激のバーストの後に財政政策は制約的になっていた。中立からはほど遠いか？ 上述のすべての要因は、過去数年の間に完全にまたは部分的に方向を転じている。財政政策を一例として挙げると、IMFは米国の構造的財政赤字が2014–15年にGDPの平均で3.3%だったと推計している。2019–20年にはIMFは赤字がGDPの平均で5.6%になると見込んでいる。 より緩和的な財政政策はどの程度まで米国の中立金利を押し上げたのだろうか。保守的に仮定して、追加の1ドルの財政刺激が総需要を1ドル押し上げるとしよう。この場合、財政政策は過去5年間で総需要に対してGDP比で2.3%を上乗せしたことになる。総需要が1パーセンテージポイント増加すると中立金利が1%上昇すると仮定すると（これはイエレン元FRB議長が支持したテイラールールの仕様と一致する）、財政政策だけで中立金利を2パーセントポイント以上押し上げたことになる。 上の議論は、長期的な構造要因が中立金利を下押ししているとしても、景気循環的な要因が中立金利をかなり押し上げた可能性があることを示唆している。FRBは今後1〜2年の経済にとって適切な水準を見据えて金利を設定するはずなので、金利が過度に低い状態が長く続くことになりかねない。これにより経済は過熱し、最終的にはインフレが急上昇するだろう。 インフレの脅威 良いニュースは、我々のお気に入りの指標のいずれも大規模な差し迫ったインフレ上昇を示していないことだ（チャート22）。関税が高まっているにもかかわらず、消費者向け輸入物価のインフレ率は鈍化している。コア中間財の生産者物価インフレ率は減速している。ISMや地域連銀の調査における支払価格項目は急落している。インフレ・サプライズ指数は反転して低下している。調査ベースおよび市場ベースのインフレ期待はともに昨夏より低いままである。これらの動きに沿って、BCAの独自のパイプライン・インフレ指標は2年半ぶりの低水準に下落している。 賃金上昇は加速しているが、生産性の伸びの方がさらに大きくなっている。その結果、単位労働コストのインフレ率は昨年中頃から低下している。単位労働コストはコアCPIの約12か月先行指標である（チャート23）。これは少なくとも来年下半期までは消費者物価のインフレ率が不快なほど高い水準に達する可能性は低いことを示唆している。 Chart 22米国における差し迫った大規模インフレ上昇の兆候は見られない
米国で差し迫った大規模なインフレーションの急騰の兆候は見られない...
米国で差し迫った大規模なインフレーションの急騰の兆候は見られない...
Chart 23単位労働コストの減速は当面インフレ圧力を和らげる
...そして、単位労働コストの減速は当面の間、インフレ圧力を和らげるだろう
...そして、単位労働コストの減速は当面の間、インフレ圧力を和らげるだろう
その時点では、インフレが上昇に転じるリスクが高い。これによりFRBは2021年初めに急激な利上げを開始せざるを得なくなり、ドルが上昇し株式やスプレッド・プロダクトが売られる可能性がある。結果として金融状況が引き締まり、2021年中～後半に米国と世界の景気が後退に陥る恐れが高い。 当面はグローバル株式に強気を維持し、来年後半に防御的姿勢へ転換 Chart 24アナリスト予想はかなり控えめである
アナリストの予想はかなり控えめだ
アナリストの予想はかなり控えめだ
上で述べた二段階のFRBによる引き締めサイクル――12月に始まり2020年にかけて徐々に利上げを行い、その後インフレ上昇に反応してより積極的な利上げに移行する――が今後数年間の投資見解を形作る。本刊行物の冒頭にある主要金融市場予測チャートは、主要資産クラスが向かう先の大まかなスケッチを示している。 株式や他のリスク資産は、FRBが年内にさらに利上げを示唆して市場の準備を始める時期の前後でボラティリティが高まるものの、最初の段階の利上げを織り込むことができるだろうと我々は考えている。昨年9月とは異なり、利益見通しはより保守的だ。ボトムアップの推計では、2019年に米国で1株当たり利益（EPS）が3.9%上昇し、世界のその他地域で5.4%上昇する見通しである（チャート24）。成長の加速、金融環境の緩和、継続的な自社株買いの組合せは、これらの数値に上振れ余地を示唆している。 さらに重要な点は、9月とは異なり、FRBは経済が良好に推移している場合にのみ利上げを開始するだろうということである。パウエルは米国経済が減速し始めたちょうどその時に「金利は中立からは遠い」と述べてしまい、誤りを犯した。もしその発言が米国の成長がまだ加速している時点で出ていたなら、投資家はおそらくそれを無視しただろう。 ジェローム・パウエルは同じ過ちを繰り返さないだろう。代わりに別の誤りを犯す可能性がある：経済を過熱させ、FRBが明らかに後手に回り、追いつくために慌てて利上げを行わざるを得ない状況にしてしまうことである。その結果生じるスタグフレーション的な環境――労働力不足により成長が鈍化しつつインフレが上向く状況――は株式や他のリスク資産にとって有毒となるだろう。 タイミングを正確にするのは難しいが、我々は投資家に対して今後12〜18か月は控えめにリスク志向を維持することを推奨する。ただし、FRBが利上げのペースを加速する前の来年後半には株式とスプレッド・プロダクトへのエクスポージャーを削減すべきだ。 国際株式を一時的に格上げする準備をする 米国株式市場は他の市場と比べて「ロー・ベータ」になりがちである。もし今年後半に世界成長が加速するなら、国際株式は米国株式をアウトパフォームするだろう。我々はEEMイーティーエフのプットを1月3日に売却して104%の利益を得ており、現在は新興国株式を純粋にロングすることを推奨している。世界成長の回復を示すさらなる確証が得られ次第、為替ヘッジなしの条件で新興国株式と欧州株式の両方をオーバーウェイトへ格上げすることを数週間以内に検討する予定だ。 日本株については判断が分かれるところだ。強い世界成長は日本の多国籍企業に恩恵をもたらすが、国内市場に重心を置く企業は政府が10月に消費税を引き上げるなら打撃を受ける可能性がある。当面は日本株の格上げは見送るつもりだ。 グローバルなセクターレベルでは、我々は今年初めにディフェンシブ寄りの配分を縮小した（昨夏により慎重になっていた後で）。投資家にはエネルギーとインダストリアル（工業）をオーバーウェイトすることを推奨する。金融とマテリアル（素材）にも好感を抱き始めている。前者は今年後半のイールドカーブのスティープ化やクレジット成長の加速から恩恵を受けるだろう。後者はより堅調な中国経済から利益を得るだろう。ヘルスケア、情報技術、コミュニケーション・サービスは中立配分を維持する。不動産と公益事業は債券利回りが上昇し始めるとどちらも傷を負う。生活必需品のような古典的なディフェンシブ・セクターもアンダーパフォームするだろう。 世界の債券利回りは上昇しそうだ 世界の債券利回りは、成長が上振れサプライズを起こすにつれて今後12〜18か月で上昇する可能性が高い。インフレが加速するにつれて利回りは2021年前半に向けてさらに上昇し続けるだろう。 過去のリスクオフ局面とは異なり、次の景気後退に向かう過程で米国債が大きなセーフヘイブンの役割を果たすとは限らない。上述の通り、今日債券利回りがこれほど低い理由の一つはターム・プレミアムが非常に低下していることだ。FRBの債券買入の累積効果がターム・プレミアムを押し下げている可能性は高いが、より大きな影響は投資家が米国債をさまざまなマクロリスクに対する保険として見なしていることに由来している。投資家は、経済が景気後退に陥ると株価は下落し、住宅市場は悪化し、賃金上昇は鈍化し、雇用見通しは悪化するが、少なくとも債券ポートフォリオの価値は上がるだろうと考えることに慣れているのだ。 この考え方の問題は、それが有効なのはFRBが成長の強まりに対して利上げを行う場合だけだという点だ。もしFRBがインフレが手に負えなくなっていることに反応して利上げを行うなら、米国債利回りは上昇する一方で株式は下落する可能性がある。これは実際、1960年代後半から2000年代初頭にかけては常態だった（チャート25）。 Chart 25米国債利回りが上昇する一方で株式が下落する可能性
米国債利回りは上昇する一方で、株価は下落する可能性がある
米国債利回りは上昇する一方で、株価は下落する可能性がある
もし米国債がセーフヘイブンの地位を失えば、ターム・プレミアムは上昇するだろう。利回り上昇が株式市場を弱め、投資家が株式と債券の両方から現金へと一斉に逃げることで、さらなる利回り上昇と株価下落を招くという悪循環が生じる可能性がある。 投資家は今後12か月間、米国債に対してはやや短めのデュレーション・スタンスを維持し、その後インフレが表面化し始める2020年中頃にはデュレーションを最大限アンダーウェイトにするべきだ。デュレーションをロングする（長めの債を保有する）判断が合理的になるのは、FRBが金利を制約的な水準まで引き上げ、経済が景気後退に入った場合だけである。それが起こるのは2021年下半期まで見込まれない。 地域別には、今後12か月間で米国債に対して欧州、カナダ、オーストラリア、ニュージーランド、特に日本の国債を好む。米国経済が最も過熱するリスクにさらされているからだ。通貨ヘッジありの観点では、10年物米国債利回りは世界の主要国の中で低い部類に入る（表1）。例えば日本の10年国債は通貨ヘッジありの条件で2.72%を提供し、ドイツ国債は2.94%を示している。 Table 1先進国の債券市場
2019年第2四半期 ストラテジー見通し：デッドゾーンからエンドゾーンへ
2019年第2四半期 ストラテジー見通し：デッドゾーンからエンドゾーンへ
米ドル：ソフト・パッチへ向かう 米ドルの見通しを測るのはやや厄介だ。米連邦準備制度理事会（Fed）は今後12か月間で段階的に利上げを行うにせよ、市場が織り込んでいる水準よりは高い利上げを行う見込みだ。他の大半の中央銀行がまだ様子見の姿勢を続けているため、短期金利差は米ドルに有利に動く可能性が高い。それでも、日本を除けば、世界的な成長が強まると投資家は2020年以降の他の先進国での追加利上げを織り込む可能性が高い。その結果、長期の利回り差は短期の利回り差ほど拡大しないかもしれない。 おそらくそれ以上に重要なのは、米ドルはカウンターサイクリカル、つまり世界成長の動きと逆方向に動く通貨であるという点だ（Chart 26）。この逆循環性は、米国経済が世界の他地域と比べて製造業よりもサービス業により重点を置いていることに起因する（Chart 27）。したがって、世界成長が加速すると、資本は米国から世界の他地域へ流れる傾向が強まり、外貨需要が増え、ドル需要は減少することになる。 Chart 26ドルは逆循環通貨である
ドルは景気循環に逆行する通貨である
ドルは景気循環に逆行する通貨である
Chart 27米国はグローバル成長に対する低ベータの投資対象である
米国はグローバル成長に対する低ベータの投資先
米国はグローバル成長に対する低ベータの投資先
もし世界成長が今年後半に持ち直すなら、ドルは第2四半期にピークを付け、その後2019年末から2020年にかけて弱含む可能性が高い。ドルの動きは、2017年の経過と似た経路をたどるかもしれない。2017年はFedが4回利上げした年だが、貿易加重換算の広義ドルはそれでも7％弱含んだ。 Chart 28円はリスクオフ通貨である
円はリスクオフ通貨だ
円はリスクオフ通貨だ
2017年と同様に、ユーロは今年後半に米ドルに対して上昇するだろうし、多くの新興国通貨やコモディティ通貨も同様に上昇するだろう。ただし、2017年に多くの通貨がドルに対して上昇したのに日本円がその動きに参加しなかったのと同じように、円は米ドルに対してあまり勢いよく上昇するのは難しいだろう。 円は“リスクオフ”通貨であり、したがって世界のリスク資産が上昇すると円は弱まる傾向がある（Chart 28）。さらに、もし今年後半に世界の国債利回りが日本国債（JGB）利回りに対して上昇するならば、円は打撃を受けるだろう。特に、財政政策の引き締まりを受けて日銀がイールドカーブ・コントロールの運用を長引かせざるを得ない場合はその傾向が強まる。123を下回る場面ではEUR/JPYをロングするつもりだ。 一旦弱含んだ後、米ドルは来年末に再び上昇する 米国経済が2020年に供給面の制約にますます直面するにつれ、成長は鈍化し、インフレは加速するだろう。Fedはインフレの上昇以上の速さで利上げを行って応じる。結果として実質金利が上昇し、ドルに上方圧力がかかるだろう。 このスタグフレーション的な環境では、株式は急落し、クレジットスプレッドは拡大する。米国の金融環境の引き締まりは世界中に波及し、世界成長はそれがなかった場合よりも一層減速するだろう。これがさらにドルを加速させる。米ドルがピークを付けるのは、Fedが2021年末に利下げを開始した時点のみである。 コモディティ：より強気に 今年後半のドルの弱含みと、中国の回復に牽引された世界成長の強化はコモディティにとって追い風となる。BCAのコモディティ・ストラテジストは、現行水準で銅のロングを推奨する。また、原油に対する強気のバイアスも維持している。ブレントは今年平均75ドル/バレル、2020年は80ドル/バレルになると見込んでいる。米国のシェール生産の増加は、深海の輸出施設整備の遅延によって相殺され、供給は比較的タイトに保たれるだろう。 過去のレポートでは、インフレヘッジとして金を購入することの有用性を論じてきた。ただし、我々はドル強気見解のためにそれを実行に移すのを控えてきた。今やドルが今後数か月でピークを付けると見ているため、1275ドル/オンスを下回る場面があれば金を買いたい。 Peter Berezin, チーフ・グローバル・ストラテジスト グローバル・インベストメント・ストラテジー peterb@bcaresearch.com 脚注 1 Please see Global Investment Strategy Weekly Report, “グレツキーのドクトリン,” dated March 1, 2019. 2 Please see Global Investment Strategy Weekly Report, “FCIドゥーム・ループの可能性は低い,” dated January 4, 2019. 3 Please see Global Investment Strategy Weekly Report, “本当に世界には政府債務が多すぎるのか？” dated February 22, 2019. ストラテジー & マーケット動向 マクロクォント・モデルと現在の主観的スコア
チャート29
タクティカル・トレード ストラテジー推奨 クローズド・トレード
Highlights A sooner-than-anticipated end to the Federal Reserve’s balance-sheet runoff should give a welcome boost to international liquidity conditions. Moreover, reflationary efforts in China, cautious global central banks, and easing global financial conditions all point to a rebound in economic surprises. This will support pro-cyclical versus defensive currencies and argues against a strong USD. At this point, it is too early to tell how long a pro-cyclical FX stance will be warranted. Sell NZD/CAD. Feature Since the turn of the year, this publication has argued that a correction in the dollar was increasingly likely, and that the main beneficiaries of this move should be the more pro-cyclical currencies. Because U.S. domestic fundamentals remain much stronger than the rest of the G10’s, our preference has been to favor commodity currencies versus the yen instead of playing dollar weakness outright. This theme remains in place for now. However, we are increasingly concerned about the dollar and think the outperformance of commodity currencies could last longer than originally expected. Essentially, an end to the Federal Reserve’s balance-sheet runoff, more cautious central banks, and easier global financial conditions could set the stage for a significant rebound in commodity currencies. U.S. Excess Reserves Vs. Commodity Currencies Whether it is from Governor Lael Brainard, Cleveland Fed President Loretta Mester, or the FOMC minutes, the message is clear: The days of the Fed’s balance sheet runoff are numbered. Ryan Swift, BCA’s Chief U.S. Bond Strategist, has written at length that the Fed’s balance sheet attrition has had a limited direct impact on U.S. growth. However, Ryan and the FOMC members both agree that a smaller balance sheet impacts the ability of the Fed to control the level of the fed funds rate.1 With less excess reserves in the banking system, the New York Fed has to intervene more often to keep the policy rate below its ceiling. This might seem like a very technical point, but it is an important one for many FX markets. Prior to the financial crisis, expanding excess reserves on U.S. commercial banks would coincide with improving dollar-based liquidity. Moreover, since 2011, reserves even lead our financial liquidity index (Chart I-1). Since there is 14 trillion of USD-denominated foreign-currency debt around the world, these fluctuations in U.S. excess reserves, and thus global liquidity, can have an impact on the price of assets most levered to global growth conditions. Chart I-1U.S. Excess Reserves Contribute To The Global Liquidity Backdrop Chart I-2 illustrates that commodity currencies are indeed very responsive to changes in U.S. excess reserves, particularly when these pro-cyclical currencies are compared to counter-cyclical ones like the JPY. Meanwhile, the trade-weighted dollar tends to move in the opposite direction of excess reserves, reflecting the dollar’s countercyclical nature (Chart I-3). This relationship, however, is not as tight as the one between commodity currencies and the reserves. Chart I-2Improving Growth In Excess Reserves Leads To Stronger Commodity Currencies... Chart I-3...And To A Weaker Greenback A corollary to the growing consensus within the FOMC to end the balance-sheet runoff sooner than later is that the contraction in excess reserves will end. A bottoming in the rate of change of the reserves is consistent with a rebound in commodity currencies, especially against the yen, and with a correction in the dollar. Gold prices are very sensitive to global liquidity conditions. Today, not only is the yellow metal moving closer to the US$1350-US$1370 zone that marked its previous highs in 2016, 2017, and 2018, but also, the gold rally is broadening, as exemplified by the advance / decline line of gold prices versus nine currencies, which is making new highs (Chart I-4, top panel). This indicates that the precious metal could punch above this resistance level. Gold is probably sniffing out an improvement in global liquidity conditions. Since rising gold prices tend to lead EM high-yield bond prices higher (Chart I-4, bottom panel), investors need to monitor this move closely. Chart I-4A Broadening Gold Rally Is Consistent With Easing Liquidity Conditions Bottom Line: The growing chorus among FOMC members singing the praises of the end of the Fed’s balance-sheet runoff points toward a significant slowdown in U.S. excess reserves attrition. While this may not be a significant development for U.S. domestic economic variables, it should help liquidity conditions outside the U.S. While this could weigh on the greenback, the probability is higher that it will help commodity currencies in the short run, especially against the yen. Global Policy And Commodity Currencies In China, new total social financing hit CNY 4.6 trillion in January, well above the normal seasonal strength. Accordingly, the Chinese fiscal and credit impulse is starting to improve (Chart I-5). While this rebound is currently embryonic, our Geopolitical Strategy team has argued that a massive increase in Chinese credit this January would indicate a change in Beijing’s economic priorities.2 The Chinese government may be trying to limit the downside to growth, and reflation may expand. This would result in a further pick-up in the credit impulse. Chart I-5The Chinese Credit Impulse May Be Bottoming Easing EM financial conditions – courtesy of rebounding EM high-yield bond prices – and rising Chinese credit flows should ultimately lead to improving growth conditions across EM. As a result, our diffusion index of EM economic activity – which tallies improvements across 23 EM economic variables – should bounce from currently very depressed levels. Such a recovery is normally associated with a weaker trade-weighted dollar, a stronger euro, rising commodity prices and rising commodity currencies – both against the USD and the JPY (Chart I-6). Chart I-6IF EM Growth Conditions Improve, This Will Have A Profound Impact On the FX Market We can expand this line of thinking to the global economy. Our Leading Economic Indicator Diffusion Index, which compares the number of countries with a rising LEI versus those with a falling LEI, already rebounded five months ago. Historically, this signals an upcoming rebound in the BCA global LEI. Additionally, other major central banks are also sounding an increasingly cautious tone. This should accentuate the easing in global financial conditions that began in late December, creating another support for global growth. However, global investors remain very pessimistic on global growth, as exemplified by this week’s very poor global growth expectations computed from the German ZEW survey (Chart I-7). This dichotomy between depressed growth expectations and burgeoning green shoots suggests that risk asset prices have room to rally further in the coming quarter or two. Chart I-7Investors Remain Pessimistic About Growth, Yet Green Shoots Are Popping Up These dynamics are positive for commodity currencies and negative for the dollar. This cycle, the pattern has been for the trade-weighted dollar to correct and hypersensitive pro-cyclical currencies like the AUD and the NZD to perk up only after our Global LEI diffusion index has trough, and around the same time as risk asset prices rebound (Chart I-8). Chart I-8Thinking About Growth, Asset Prices, The Dollar, And Commodity Currencies Treasury yields will most likely also be forced higher by improving risk asset prices and economic activity, especially as bond market flows suggest T-notes currently are a coiled spring. The U.S. Treasury International Capital System data released at the end of last week was very revealing. The press emphasized the large-scale selling of Treasurys from the Cayman Islands – interpreted as selling by hedge funds. Missing from the picture was the enormous buying from these same players over the past 12 months, which corresponded with falling yields and a rallying trade-weighted dollar (Chart I-9). It was a sign of growing fear that pushed up the price of bonds. Chart I-9Hedge Funds Have Room To Liquidate Their Treasury Holdings If, as we expect, global growth beats dismal expectations and risk assets rebound further, the countercyclical dollar should correct. This will further ease global financial conditions and justifying even more a wholesale liquidation of stale bond holdings by hedge funds and further pushing the Fed toward resuming its hiking campaign faster than the market is currently anticipating. This combination is highly bond bearish. Unsurprisingly, this means that the yen, which normally trades closely in line with U.S. Treasury yields, is likely to weaken. Hence, USD/JPY and EUR/JPY could experience significant upside over the coming months (Chart I-10). Chart I-10A Bond Bearish Backdrop Is Also Bad For The Yen Bottom Line: Global growth conditions are evolving away from a dollar-bullish, commodity currency-bearish backdrop. Not only is the dollar-based liquidity set to improve, but China is also releasing the proverbial brake. Additionally, a generally more cautious tone among global central banks will contribute to easing global financial conditions. These developments are likely to result in a period of positive global economic surprises – and an environment where the greenback weakens and where pro-cyclical currencies outperform. But For How Long? It remains a question mark as to how long this pro-growth cycle will last. Parts of the dynamics described above are very self-defeating. If global growth conditions and asset prices rebound strongly, the Fed will be in a better position to increase rates once again. This could quickly curtail the improvement in global financial conditions and favor a strong dollar. Additionally, it is not clear how far Beijing will go in terms of pushing reflation through the Chinese economy. Chinese policymakers are worried about too-pronounced a slowdown but are equally worried about too much debt in their economy, and do not want to repeat the debt binge witnessed in 2010 and 2016. Therefore, they may be much quicker to lift their foot off the gas pedal. This conflicting attitude is best illustrated by recent opposing remarks made by Chinese policymakers. On the one hand, Premier Li-Keqiang expressed concerns regarding the January credit surge, suggesting that some Chinese policymakers are already trying to dampen expectations that stimulus will be substantial. On the other hand, the PBoC sounded utterly unconcerned. Moreover, as our Emerging Markets Strategy service highlights, EM earnings are likely to continue to suffer from the lagged effect of China’s previous tightening. This creates the risk that even if global growth rebounds, EM stock prices, EM FX and all related plays do not follow. This would maintain the dollar-bullish environment and hurt pro-cyclical commodity currencies while supporting the yen. Despite these risks, it is nonetheless too early to tell how short-lived this period of dollar softness and commodity currency strength will be. After all, the dollar is a momentum currency. If the dollar weakness gathers steam, a virtuous cycle could emerge: improving global growth begets a weaker dollar, a weaker dollar begets easier global financial conditions, easier global financial conditions beget stronger growth, and so on. Gold prices may hold the key to cut this Gordian knot. If gold cannot maintain its recent gains, then the pro-cyclical positioning will not be valid for more than three months. However, if gold prices can remain at elevated levels or even rally further, then this pro-cyclical positioning will stay appropriate for at least six to nine months. What is clear is that for now, buying risk in the FX space makes sense. Bottom Line: At this point, too many crosscurrents are at play to evaluate confidently the length of any rally in pro-cyclical currencies relative to defensive ones. Since easier financial conditions ultimately force the Fed to resume hiking and since it is far from clear how committed to reflation Chinese policymakers are, our base case remains that this move will last a quarter or so. However, the fact that a falling dollar further eases global financial conditions, fomenting greater global growth in the process, suggests that a virtuous circle that create additional dollar downside can also emerge. Gold may provide early signals as to when investors should once again adopt a defensive posture. Sell NZD/CAD Something exceptional happened three months ago. For the second time in 25 years, Canadian policy rates fell in line with New Zealand’s. As Chart I-11 shows, this last happened from 1998 to 1999, when NZD/CAD subsequently depreciated 26%. However, today Canada’s and New Zealand’s current accounts are roughly in line while back then New Zealand had a substantially larger deficit, such a decline is unlikely to repeat itself. Nonetheless, we posit that NZD/CAD possesses ample downside. Chart I-11Bad News For NZD/CAD First, like in 1998-‘99, the real trade-weighted NZD exhibits a larger premium to its fair value than the real trade-weighted CAD (Chart I-12). In fact, the relative premium of the NZD to the CAD is roughly comparable as it was back then. Moreover, our Intermediate-Term Timing Model for NZD/CAD reinforces this message as it suggests that short-term valuations are also stretched (Chart I-13). Chart I-12NZD/CAD Is Pricey... Chart I-13...And Our Short-Term Valuation Metric Agrees Second, the New Zealand economy is currently weaker than that of Canada. Relative consumer confidence and business confidence have been in a downward trend for three years. Historically, while NZD/CAD can deviate from such dynamics, ultimately this cross tends to revert toward relative growth trends. The recent collapse in New Zealand’s economic surprises relative to Canada’s suggests that the timing for such a reversion is increasingly ripe, as there is currently scope for investors to discount a more hawkish Bank of Canada than Reserve Bank of New Zealand. Indeed, 1-year/1-year forward yields in Canada have fallen much more relative to the BoC overnight rate than similar forwards have fallen relative to the RBNZ policy rate. Third, New Zealand real bond yields have collapsed relative to Canada’s. As Chart I-14 illustrates, NZD/CAD tends to follow real yield differentials. So far, NZD/CAD has been less-weak than the real-yield gap would imply, but from late 2003 to early 2005 this cross also managed to defy gravity for an extended time, only to ultimately succumb to the inevitable. Chart I-14Falling Real Yield Spreads Will Weigh On NZD/CAD Fourth, as the top panel of Chart I-15 illustrates, the performance of kiwi stocks relative to Canadian equities tend to lead NZD/CAD, especially at tops. While tentative, the ratio of New Zealand to Canadian stocks seems to have peaked in early 2016. Supporting this judgment, kiwi profits have fallen relative to their Canadian counterparts and relative net earnings revisions are following a similar path – a move normally associated with a weaker NZD/CAD (Chart I-15, bottom panel). Chart I-15Relative Stock Market Dynamics Look Poor Fifth, terms of trades are becoming a growing headwind for NZD/CAD (Chart I-16). The price of agricultural commodities relative to energy products drives this pair, reflecting the comparative advantages of the two countries. BCA’s Commodity & Energy service is currently much more positive on the outlook for the energy complex than the agricultural complex. NZD/CAD is a perfect instrument to implement this view, especially now that the NZD suffers from a very rare negative carry against the CAD. Chart I-16A Negative Tems-Of-Trade Shock For NZD/CAD Bottom Line: NZD/CAD is set to experience an important fall. The NZD currently suffers from a very rare negative carry against the CAD. The last time this happened, a large depreciation ensued. Moreover, valuations and economic trends argue in favor of shorting this pair. Finally, relative bond yields, equity dynamics and term-of-trade outlooks also point to a lower NZD/CAD. Sell at 0.900, with a stop at 0.927 for a target of 0.800. Mathieu Savary, Vice President Foreign Exchange Strategy mathieu@bcaresearch.com Footnotes 1 Please see U.S. Bond Strategy Weekly Report, titled “Caught Offside”, dated February 12, 2019, and the U.S. Bond Strategy Weekly Report, titled “The Great Unwind”, dated September 19, 2017, available at usbs.bcaresearch.com 2 Please see Geopolitical Strategy Special Report titled “China: Stimulating Amid The Trade Talks,” dated February 20, 2019 available at gps.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the U.S. has been mixed: Capacity Utilization underperformed expectations, coming in at 78.2%. However, Michigan Consumer Sentiment outperformed expectations, coming in at 95.5. Finally, the NAHB Housing Market Index also surprised to the upside, coming in at 62. The DXY has fallen by 0.2% this week. We remain bullish on the U.S. dollar on a cyclical basis, given that the Fed will end up hiking rates more than expected. However, the current easing of monetary conditions by Chinese authorities should tactically hurt the dollar and help commodity currencies. Moreover, the fact that the Fed announced that it might bring about an end to the balance sheet runoff sooner than expected will further help global liquidity conditions. The real question now is how long the coming dollar correction will last? Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Global Liquidity Trends Support The Dollar, But... - January 25, 2019 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area has been mixed: The annual growth in construction output underperformed expectations, coming in at 0.7%. The current account balance also surprised to the downside, coming in at 33 billion euros. However, the Zew Survey – Economic sentiment, though negative, surprised to the upside, coming in at -16.6. EUR/USD has risen by 0.4% this week. We remain bearish on EUR/USD on a cyclical basis; given that, we expect real rates to rise much faster in the U.S. than in the euro area. This is because we think that the U.S. economy will remain stronger than Europe’s, a consequence of the fact that the former has experienced a significant private sector deleveraging since 2008 while the latter has not. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 2019 Key Views: The Xs And The Currency Market - December 7, 2018 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan has been mixed: Machinery orders yearly growth outperformed to the upside, coming in at 0.9%. Hurt by a very sharp contraction in shipments to China, the yearly growth of Japanese exports also surprised to the downside, coming in at -8.4%. However, imports yearly growth outperformed to the upside, coming in at -0.6%. USD/JPY has risen by 0.2% this week. We are bearish towards the yen on a tactical basis as the current upturn in liquidity conditions should hurt safe haven currencies. Moreover, reflationary efforts by Chinese Authorities should provide a boon to risk assets and make low yield currencies like the yen even less attractive. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Yen Fireworks - January 4, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the U.K. has been strong: Retail sales and retail sales ex-fuel yearly growth both outperformed expectations, coming in at 4.2% and 4.1%. Moreover, the yearly growth of average hourly earnings excluding bonus also surprised positively, coming in at 3.4%. GBP/USD has risen by 0.9% this week. We expect that a soft Brexit deal remains the most probable outcome out of Westminster. Thus, this factor, along with how cheap the pound is, make us bullish on the pound on a long-term basis. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Deadlock In Westminster - January 18, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia has been mixed: The wage price index yearly growth underperformed expectations, coming in at 0.5%. However, the employment change surprised to the upside, coming in at 39.1 thousand in January. The participation rate also surprised positively, coming in at 65.7%. AUD/USD has fallen 0.7% this week. We are positive on the AUD on a tactical basis. Global monetary conditions have eased thanks to the rising Chinese credit and more cautious global central banks. Moreover, the announcement that the Fed is looking to halt its balance sheet reduction sooner than expected has provided further relief. However, the fundamentals of Australia remain poor, and thus long-term investors should continue to avoid this currency, Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 CAD And AUD: Jumping Higher To Plunge Deeper - February 1, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 The recent data in New Zealand has been mixed: The business PMI in January fell to 53.1. However, the input of the producer price index on a quarter-over-quarter basis surprised to the upside, coming in at 1.6%. NZD/USD depreciated by 0.7% this week. While NZD/USD might have some upside in the short term, we remain bearish on the NZD/USD on a cyclical basis. Both the short-term and long-term interest rates in New Zealand are lower than in the U.S., while the real trade-weighted NZD is trading at 7% premium to its fair value. Thus, the kiwi is relatively overvalued which means that any tactical upside of NZD won’t have legs. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Updating Our Intermediate Timing Models - November 2, 2018 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 The recent data in Canada has been neutral: The December new housing price index stays unchanged at 0%, on both month-over-month and year-over-year basis. The CAD has risen by 0.2% against USD this week. As BCA anticipates oil prices to strengthen more, we also expect the CAD to outperform the AUD and the NZD over the next few months. However, we remain bearish on CAD/USD on a structural basis. The unhealthy housing market in Canada could be a potential risk to the Canadian financial industry and the economy as a whole. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 CAD And AUD: Jumping Higher To Plunge Deeper - February 1, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 The recent data in Switzerland has been positive: The December exports increased to 19,682 million, while the imports increased to 16,639 million. The trade balance in December thus increased to 3,043 million, surprised to the upside. EUR/CHF has been flat this week. We are bullish on EUR/CHF on a cyclical basis. Easy global financial conditions should hurt safe haven currencies like the franc. Moreover, we believe that the SNB will continue to play a heavily dovish bias in order to counteract the fall in inflation caused by the surge in the franc last year. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Waiting For A Real Deal - December 7, 2018 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway has been positive: January trade balance increased to 28.8 million, from previous 25 billion. USD/NOK was flat this week. In general, we are overweight the krone, since we believe the pickup in oil prices will help the Norwegian economy, ultimately boosting the performance of NOK against the EUR, the SEK, the AUD and the NZD. Moreover, the NOK is undervalued and currently trading at a large discount to its fair value, which could further lift the performance of the NOK on a cyclical basis. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Global Liquidity Trends Support The Dollar, But... - January 25, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden has been negative: January unemployment rate has increased to 6.5%. Moreover, the monthly inflation rate comes in at -1%, surprising to the downside. USD/SEK rallied by more than 1% this week. We remain bearish on EUR/SEK since the SEK is currently trading at a discount to its long-term fair value. Moreover, there are many signs pointing to a Swedish economy rebound. The negative rate in the country and easy financial conditions could stimulate the domestic demand and if global growth perks up, the weak inflation readings will prove transitory. The Riksbank has already abandoned it pledge to suppress the krona and it will move this year to lift rates again. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Global Liquidity Trends Support The Dollar, But... - January 25, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades