Recession-Hard/Soft Landing

Analysis on Turkey is available below. Highlights A dovish Fed or robust U.S. growth does not constitute sufficient conditions for a bull market in EM. China’s business and credit cycles are much more important factors for EM than those of the U.S. A recovery in the Chinese economy and global manufacturing is not imminent. The common signal reverberating from various financial markets is that the risks to the global business cycle are still skewed to the downside. Feature Current investor perceptions of emerging markets are mixed. Some expect EM to benefit greatly from low U.S. interest rates. These investors view even a partial trade deal between the U.S. and China as sufficient for EM to embark on a bull market. BCA’s Emerging Markets Strategy team disagrees with this narrative. We deliberated the significance of the U.S.-China confrontation to EM in our September 19 report; therefore, we will not go over this subject here. Rather, in this report we discuss some of the more common misconceptions surrounding EM currently, and infer what these mean for investment strategies. Perception 1: The share of resource sectors (materials and energy) in the EM equity benchmark has declined substantially. This along with the expanded role of consumers and consumer stocks (Alibaba, Tencent and Baidu) in EM economies and equity markets has made their share prices less exposed to the global trade cycle and commodities prices. Reality: It is true that in many EM bourses, the weight of consumer stocks has been growing. Nevertheless, their financial markets in general, and equity markets in particular, remain very sensitive to the global trade cycle and commodities prices. Chart I-1 illustrates that the aggregate EM equity index has historically been and continues to be strongly correlated with the global basic materials stock index. The latter includes mining, steel and chemical companies. Global materials stocks also exhibit a very strong correlation with Chinese banks’ share prices. Moreover, global materials stocks also exhibit a very strong correlation with Chinese banks’ share prices (Chart I-2). The rationale for the high correlation is that both mainland banks’ profits and global demand for basic materials are driven by a common factor: China’s business cycle. Chart I-1EM And Global Materials Stocks Move Together Chart I-2Chinese Bank And Global Materials Share Prices Are Highly Correlated For example, construction in China is contracting (Chart I-3), which entails both higher NPLs for Chinese banks and lower demand for basic materials. China accounts for about 50% of global consumption of industrial metals, cement and many other basic materials. Finally, EM ex-China bank stocks also correlate strongly with global basic materials share prices. The basis is as follows: Many emerging economies export raw materials, and commodities price fluctuations impact their business cycle, exports and exchange rates. Chart I-3China: Construction Activity Is Contracting Chart I-4High-Yielding EM: Currencies And Local Bond Yields Historically, in high-yielding EM markets, currency depreciation has led to higher interest rates and lower bank share prices, and vice versa (Chart I-4). Lately, EM bond yields have not risen in response to EM currency depreciation. However, we believe this correlation will soon be re-established if EM currencies continue drifting lower.  In short, China’s money/credit cycles drive not only the mainland’s business cycle, banking profits and NPLs, but also global trade and commodities prices. The latter two - via their impact on exchange rates and in turn interest rates - have historically explained credit and domestic demand cycles in high-yielding EM. Perception 2:  EM stocks are a high-beta play on the S&P 500, i.e., EM equities outperform when the S&P 500 rallies, and vice versa. Reality: Since 2012, the beta for EM equity versus the S&P 500 has often been below one (Chart I-5). Furthermore, since 2012, EM share prices often failed to outpace their DM peers during global equity rallies. Indeed, EM relative equity performance versus DM, as well as the EM ex-China currency total return index, have been closely tracking the relative performance of global cyclicals versus global defensive stocks (Chart I-6). Chart I-5EM Equities Beta To The S&P 500 Chart I-6Global Cyclicals-To-Defensives Equity Ratio And EM   In short, EM equities and currencies have been, and will remain, sensitive to the global business cycle rather than the S&P 500. Since 2012, the latter has - on several occasions - decoupled from the global manufacturing and trade cycles. Perception 3:  EM stocks, currencies and fixed-income markets are very sensitive to U.S. interest rates. Hence, a dovish Fed will lead to EM currency appreciation.  Reality: Chart I-7 reveals that EM currencies, total returns on EM local currency bonds in U.S. dollar terms and EM sovereign credit spreads do not exhibit a strong relationship with U.S. Treasury yields. U.S. interest rate expectations have a much smaller impact on EM financial markets than commonly perceived by the investment community.  Overall, U.S. interest rate expectations have a much smaller impact on EM financial markets than commonly perceived by the investment community.  Chart I-7EM And U.S. Bond Yields: No Stable Correlation Chart I-8China Cycle And EM Stocks Led U.S. Bond Yields On the contrary, the declines in U.S. bond yields in both 2015/16 and in 2018/19 were due to the growth slowdown that emanated from China/EM. The top panel of Chart I-8 illustrates that Chinese import growth rolled over in December 2017, yet U.S. bond yields rolled over in October 2018. What is more, EM share prices have been leading U.S. bond yields in recent years, not the other way around (Chart I-8, bottom panel). Perception 4:  If the U.S. avoids a recession, EM risk assets will recover. Chart I-9EM Profits Are Driven By Chinese Not U.S. Business Cycle Reality: EM per-share earnings contracted in 2012-2014 and in 2019, despite reasonably robust growth in U.S. final demand (Chart I-9, top panel). This suggests that even if the U.S. economy avoids a recession, that will not be a sufficient condition to be bullish on EM. EM corporate profits are highly driven by China’s business cycle. The bottom panel of Chart I-9 illustrates that mainland domestic industrial orders have been the key driver of EM corporate profit cycles since 2008. Perception 5:  EM equities, fixed-income markets and currencies are cheap. Reality: EM stocks are not cheap. They are fairly valued. Equity sectors with very poor fundamentals have very low multiples. Hence, they are “cheap” for a reason. These include Chinese banks, state-owned enterprises in various countries and resource companies. Equity segments with robust fundamentals are overpriced. Given that Chinese banks, state-owned enterprises in various countries, resource companies, and cyclical businesses have very large market caps, EM market-cap based equity valuation ratios are low – i.e., they appear cheap.  To remove the impact of these large market cap segments, we constructed and have been publishing the following valuation ratios: median, 20% trimmed mean and equal-sub-sector weighted (Chart I-10). Each of these is calculated based on the average of trailing and forward P/E ratios, price-to-book value, price-to-cash earnings and price-to-dividend ratios. EM equities relative to DM are not cheap either. Chart I-11 demonstrates the same ratios – median, 20% trimmed-mean and equal-sub-sector weighted values for EM versus DM. Chart I-10EM Equities Are Not Cheap Chart I-11Relative To DM EM Stocks Are Not Cheap Further, when valuations are not at extremes as in the case of EM equities at the moment, the profit cycle holds the key to share price performance over a 6 to 12-month horizon. EM earnings are presently contracting in absolute terms, and underperforming DM EPS. Two currencies that offer value are the Mexican peso and Russian ruble. Chart I-12EM Local Yields Are Low In Absolute Terms And Relative To U.S. In the fixed-income space, EM local bond yields are very low in absolute terms and relative to U.S. Treasury yields (Chart I-12). EM sovereign and corporate spreads are not wide either. As to exchange rates, the cheapest currencies are those with the worst fundamentals, such as the Argentine peso, Turkish lira and South African rand. The majority of other EM currencies are not very cheap. Two currencies that offer value are the Mexican peso and Russian ruble. Yet foreign investors are very long these currencies, and a combination of lower oil prices and portfolio outflows from broader EM will weigh on these exchange rates as well. Takeaways And Investment Strategy Chart I-13EM Currencies And Industrial Metals Prices EM risk assets and currencies exhibit the strongest correlation with global trade and commodities prices. Chart I-13 indicates that the EM ex-China currency total return index closely tracks commodities prices. This corroborates the messages from Chart I-1 on page 1 and Chart I-6 on page 4.  China’s business and credit cycles are much more important for EM than those of the U.S. A dovish Fed or strong U.S. growth are not sufficient reasons to bet on an EM bull market. A recovery in the Chinese economy and global manufacturing is not imminent. Individual EM countries’ domestic fundamentals such as return on capital, inflation, banking system health, competitiveness and politics drive individual EM performance. On these accounts, the outlook varies among EM. Readers can find analyses on specific EM economies in our Countries In-Depth page. Asset allocators should continue underweighting EM stocks, credit and currencies versus their DM counterparts.  Absolute-return investors should outright avoid EM, or trade them on the short side. Within the EM equity space, our overweights are Mexico, Russia, Central Europe, Korea ex-tech, Thailand and the UAE. Our underweights are South Africa, Indonesia, Philippines, Hong Kong, Turkey and Colombia. The path of least resistance for the U.S. dollar is up. Continue shorting the following basket of EM currencies versus the dollar: ZAR, CLP, COP, IDR, MYR, PHP and KRW. We are also short the CNY versus the greenback. As always, the list of our country allocations for local currency bonds and sovereign credit markets is available at the end of our reports – please refer to page 16. Take Cues From These Markets We suggest investors take cues from the following financial market signals. They are unequivocally sending a downbeat message for global growth and risk assets: The ratio between Sweden and Swiss non-financial stocks in common currency terms is heading south (Chart I-14). Swedish non-financials include many companies leveraged to the global industrial cycle, while Swiss non-financials are dominated by defensive stocks. Hence, the persistent decline in this ratio presages a continued deterioration in the global industrial sector. Where is the next defense line for this ratio? To reach its 2002 and 2008 nadirs, it will need to drop by another 10%. In the interim, investors should maintain a defensive posture. Chart I-14A Message From Swedish And Swiss Equities Chart I-15A Breakdown In The Making? U.S. FAANG stocks appear to be cracking below their 200-day moving average. The relative performance of global cyclical versus global defensive stocks is relapsing below the three-year moving average that served as a support last December (Chart I-15). U.S. FAANG stocks appear to be cracking below their 200-day moving average (Chart I-16). If this support gives, the next one will be about 17% below current levels. Finally, U.S. high-beta share prices are on the verge of a breakdown (Chart I-17). The next technical support is 10% below current levels. Chart I-16FAANG Are On The Support Line Chart I-17U.S. High-Beta Stocks Are On The Edge Bottom Line: The common message reverberating from these financial markets corroborates our fundamental analysis that a global business cycle recovery is not imminent, and that global risk assets in general, and EM financial markets in particular, are at risk of selling off further. Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com   Turkey: Is The Mean-Reversion Rally Over? Turkish financial markets have rebounded to their respective falling trend lines (Chart II-1). Are they set to break out or is a setback looming? Chart II-1Back To Falling Trend Chart II-2TRY Is Cheap Pros The economy has undergone a considerable real adjustment and many excesses have been purged: The current account balance has turned positive as imports have collapsed. Going forward, lower oil prices are likely to help the nation’s current account dynamics. The lira has become cheap (Chart II-2).  According to the real effective exchange rate based on unit labor costs, the currency is one standard deviation below its fair value. Core and headline inflation have fallen, allowing the central bank to cut interest rates aggressively. However, the exchange rate still holds the key: if the currency depreciates anew, local bonds yields will rise and the ability of the central bank to reduce borrowing costs further will diminish. Finally, private credit and broad money growth have decelerated substantially and are contracting in inflation-adjusted terms (Chart II-3). Chart II-3Money & Credit Have Bottomed Chart II-4Banks Have Been Aggressively Buying Government Bonds The recent gap between broad money and private credit growth has been due to commercial banks buying government bonds (Chart II-4). When a commercial bank purchases a security from non-banks, a new deposit/new unit of money supply is created. Banks’ purchases of government bonds en masse have capped domestic bond yields. However, if pursued aggressively, such monetary expansion could weigh on the currency’s value.   Cons Presently, potential sources of macro vulnerability in Turkey are: Foreign debt obligations (FDOs) – which are calculated as the sum of short-term claims, interest payments and amortization over the next 12 months – are at $168 billion, which is sizable. The annual current account surplus has reached only $4 billion and is sufficient to cover only 2.5% of FDOs, assuming the capital and financial account balance will be zero. Clearly, Turkey needs to both roll over most of its foreign debt coming due and attract foreign capital to finance a potential expansion in its imports if its domestic demand is to recover. Critically, $20 billion of net FX reserves, excluding gold, swap lines with foreign central banks and net of domestic banking and non-banking corporations’ foreign exchange deposits, are not adequate either to cover foreign debt obligations. Even though headline and core inflation measures have fallen, wage inflation remains rampant (Chart II-5). If wage inflation does not drop substantially very soon, rapidly rising unit labor costs will feed into inflation leading to negative ramifications for the exchange rate. This is especially crucial in Turkey given President Erdogan has undermined the central bank’s credibility and is resorting to populist measures to revive his popularity. Finally, Turkish banks remain under-provisioned. Currently, the banking regulator is requiring banks to boost their non-performing loans (NPL) ratio to 6.3% of total loans.This a far cry from the 2001 episode when the NPL ratio shot up to 25% (Chart II-6).   Even though interest rates rose much more in 2001 than last year, the private credit penetration in the economy was very low in the early 2000s. A higher credit penetration usually implies weaker borrowers have borrowed money and heralds a higher NPL ratio. Typically, following a credit boom and bust, it is natural for the NPL ratio to exceed 10%. We do not think Turkish banks stocks, having rallied a lot from their lows, are pricing in such a scenario. Chart II-5Surging Wages Are A Risk Chart II-6NPL Ratio Is Unrealistic Investment Recommendation We recommend both absolute-return investors and asset allocators not to chase Turkish financial markets higher. Renewed market volatility lies ahead. Given we expect foreign capital outflows from EM, Turkish companies and banks will encounter difficulties in rolling over their external debt and attracting foreign capital into domestic markets. This will produce a new downleg in the exchange rate. In turn, currency depreciation will weigh on performance of local bonds as well as sovereign and corporate credit. Stay underweight.   Andrija Vesic, Research Analyst andrijav@bcaresearch.com Footnotes Equities Recommendations Currencies, Credit And Fixed-Income Recommendations

ハイライト 今後12か月で景気後退が発生するとまだ見ていない、… : 景気後退は金融政策が引き締め的なときにのみ発生する。現状は金融は緩やかであり、FRBが引き締めにつながる一連の利上げを実行するほどの状況になるまでには時間がかかるだろう。 … それでも懸念がないというわけではない、… : 逆イールドは問題の前兆というよりFRBの資産買入の反映のように見えるが、先行指標は通年で悪方向に動いている。 … 調査データは世帯と企業の信頼感が脆弱であることを明確に示している: 消費者信頼感指数や最新のISM調査はムードの悪化を示している。ハードデータはソフトデータより良好だが、不安が自己実現的になる危険性がある。 我々は建設的な見方を維持するが、成長見通しに対するリスクには警戒している: 労働市場は失業率を押し下げるほど活況であり、製造業の縮小にもかかわらず、国内外でサービス部門は拡大を続けている。拡大は減速しているが、まだ終了していない。 特集 先月のサウジのエネルギーインフラへの攻撃（図表1）をオイル市場が素早くやり過ごしたものの、投資家の懸念は他にも尽きない。米中交渉が日ごとに融和と冷却を行ったり来たりし、ブレグジットが滑稽さの中の茶番のように混迷を続け、ワシントンで激しい弾劾戦の構えが築かれている状況では、企業が長期の投資支出を決断するのは容易ではない。世界の輸出量は7月までの8か月間で年率ベースで6か月が縮小しており（図表2）、多国籍企業の利益見通しに冷や水を浴びせている。賃金労働者は企業が利益減少時に人員削減を行うと知っているため、消費者信頼感も貿易交渉の浮き沈みに左右される。 Chart 1 中東の緊張はもう先月の話 不安のループ 不安のループ 懸念は周知の事実だが、それらが長く続けばそれ自体が景気後退を引き起こす可能性がある。 Chart 2 何かを減らしたければ、それに課税せよ 何かを減らしたければ、それに税をかけよ 何かを減らしたければ、それに税をかけよ もし市場が中国問題やブレグジットの懸念をずっと前から織り込んでいなければ、楽観的に見づらいだろう。弾劾の見世物は新しいが、ペンス政権から投資家や企業が恐れるべきことが何かあるかは不明だ。もし調査データが景気後退の芽をまくほどに一貫してセンチメントの悪化を示していなければ、悲観的に見づらい。結論として、景気循環は後期にあり、データの軟化と地政学的緊張の組み合わせが投資家の残された楽観を削りつつある。 当社の景気後退／ベアマーケット指標 金融政策の引き締めは、十分条件ではないにせよ景気後退の必要条件である。我々が均衡フェドファンド金利の推定を維持している60年の期間を通じて、フェドファンド金利が我々の均衡推定値を上回っても拡張が直ちに止まることはなかったが、拡張が停止して景気後退が起きたのはそれが起きた時だけだ（図表3）。我々は現在、均衡金利が2％のターゲットを大きく上回っていると推定しており、今月末のFOMC会合では1.75％に向かっているように見える。現時点のインフレの穏やかな進みを考えれば、我々の均衡推定が概ね正しければ、金融政策は2020年を通じて緩和的であり続けるはずだ。 Chart 3 金融政策は緩和的でさらに緩和へ：グリーン 金融政策は緩和的で、さらに緩和へ向かっている：グリーン 金融政策は緩和的で、さらに緩和へ向かっている：グリーン 我々はFRBが拡張を終わらせるつもりはないと確信しているが、我々の単純な景気後退指標の他の構成要素は懸念を示している。イールドカーブは5か月連続で逆イールドになっている。逆イールドは歴史的に金融政策が過剰にタイトであることの信頼できる指標であり、景気後退を予見する点で立派な実績を持っている（図表4）。しかし、今日の前例のないほどにネガティブなタームプレミアムはイールドカーブのメッセージを混乱させ、過去との比較を歪めている可能性がある。1 Chart 4 イールドカーブは逆転しているが…：イエロー イールドカーブは逆転したが…：イエロー イールドカーブは逆転したが…：イエロー コンファレンスボードの先行景気指標（LEI）の前年比変化が我々の景気後退指標のもう一つの構成要素である。LEIはイールドカーブと同じくらい信頼でき、かつ急速に減速している（図表5）。しかし、LEIはこの拡張期において同様の下落から二度回復したことがあり、まだ縮小には至っていない点に注意する。製造業偏重のため、LEIは貿易緊張の実質的な緩和なしには加速を再開しないだろうが、米中間の限定的な合意は不可能ではない。 Chart 5 LEIの成長は急速に減速：イエロー LEIの成長は急速に減速している：黄色 LEIの成長は急速に減速している：黄色 結論： 緑1つと黄2つは景気サイクルの見通しに対する力強い支持とは言えないが、それでもこの組合せは拡張期間を通じて投資家に十分な報酬を与えてきたリスク志向のコースを維持することを示している。 低迷する製造業のISM … 米国は世界情勢の影響を遅れて受けるが、9月の製造業ISM報告は最終的に影響を受けていることを確認した。 先週火曜日の冴えない製造業ISM報告は、S&P 500の2日間の売りを引き起こし、金融系テレビはこれを危機以来の最悪の第4四半期のスタートと強調した。総合指数は50のコンセンサスを大きく下回り、2009年6月以来の低水準に落ち込み、2015-16年の世界的な製造業不況以来初めて50のブーム/バストラインを2か月連続で下回った（図表6、上段）。崩れゆく輸出（図表6、第二パネル）と停滞する新規受注（図表6、第三パネル）が総合指数を押し下げた。わずかな希望の光は在庫の大幅な縮小（図表6、第四パネル）により受注在庫比率が上昇したことだった（図表6、下段）。 Chart 6 世界的な製造業の減速が米国に到達 世界的な製造業の減速が米国に波及 世界的な製造業の減速が米国に波及 Chart 7 消費者はISMを気にしなかった... 消費者はISMを気にしなかった... 消費者はISMを気にしなかった... 予想外に悪い報告はメディアで再び景気後退懸念を煽ったが、どうやら一般大衆の間ではそうではない（図表7）。潜在的な経済的脅威は、この報告が雇用や投資を削ぐ可能性から生じる。木曜午後に発表されたNFIBの月次雇用報告は、中小企業が依然として積極的に人員を募集していることを示唆しているが、応募者の母集団は縮小し続けている。アトランタ連銀のGDPNowモデルは製造業ISM発表後、非居住用固定投資の3四半期GDPへの寄与を+10ベーシスポイントから-10ベーシスポイントに引き下げたが、全体の成長率は1.8％を見込んでいる。 … そして消費者信頼感の低下 … 主要な消費者センチメント調査も低下傾向にあるが、それでも歴史的水準に比べれば高い位置にある（図表8）。その二面性がブル対ベアの論争を維持させており、強気派は高い水準を指摘し、弱気派は低下する方向性を挙げる。ここで水準対方向性の議論を決着させるつもりはないが、実質消費の成長は調査の期待コンポーネントと強い相関を示してきたことは指摘しておく。期待が低下すれば消費も落ち込むが、期待指数が90年代半ばレベル以上にとどまる限り、消費は経済成長をトレンド水準付近に維持するように思われる（図表9）。 Chart 8 … そして依然としてかなり楽観的である ...そして彼らは依然としてかなり楽観的だ ...そして彼らは依然としてかなり楽観的だ Chart 9 消費は依然として堅調に見える 消費は依然として良好に見える 消費は依然として良好に見える … それに対して依然として堅調なハードデータ 調査データが着実に期待を下回っている一方で（先週のかつては強固だった非製造業ISMも含む）、ハードデータはプラスのサプライズを提供している。経済サプライズ指数がようやく7月初めに底を打ち平均回帰の過程に入って以来、実質活動の指標は励みになる（図表10）。9月の雇用情勢報告は採用のペースが鈍化していることを示し、賃金成長が不可解に停滞したが、広義の失業率はドットコム・ブームのピーク以来初めて7％を下回り、史上最低値からわずか一段階上にある（図表11）。年初来の力強い株式上昇は家計純資産を可処分個人所得で割った倍率を史上最高水準に押し戻しており、家計全体として貯蓄率を上げる必要はほとんどないことを示唆している（図表12）。 Chart 10 ハードデータは低い基準を超えた ハードデータは低いハードルをクリアした ハードデータは低いハードルをクリアした Chart 11 労働市場は依然として余剰人員を吸収している 労働市場は依然として余剰を吸収し続けている 労働市場は依然として余剰を吸収し続けている Chart 12 貯蓄率が下がる余地がある 貯蓄率が低下する余地がある 貯蓄率が低下する余地がある 総括 米国は比較的閉鎖的な経済であり、主要な他国と比べて世界的な動向に対してより長いラグで反応するのが通例である。今年は国内の財政刺激の低下で減速するはずだったが、世界的な弱さが今や米国にも波及し始めている。投資家にとっての問題は、この減速がどこまで進むかだ。単なるサイクル中盤の減速で、1～2四半期成長を落とすだけなのか、それとも拡張の終焉なのか？ FRBは拡張を維持するために適切に行動すると今年何度も約束しており、それはほとんどマントラとなっている。市場はそれを真に受けており、先週木曜には非製造業ISM公表直後のS&P 500の1％の下落がすぐに1％の上昇に転じ、金曜には混在した雇用情勢報告が再び1％の押し上げをもたらした。投資家がFRBが成長見通しのリスクを緩和するために金融政策を緩和する意志と手段があると信じる限り、悪いニュースは依然として株式にとって良いニュースである。大中小の中央銀行間で金融緩和がルールとなっている世界で、FRBが追加緩和の余地を持っていることを考えれば、我々は株式市場の判断が正しいと考えている。 投資家が心配することは山ほどあるが、心配がブルマーケットの燃料にもなることを忘れてはならない。 我々の楽観的見解は有益なトレーディング格言にも支えられている。悪いニュースで株が下がらない（あるいは良いニュースで上がらない）ということは何かを示している。この場合、S&P 500が波状的な悪材料にもかかわらず転覆し続けていないことは、かなりの悲観をすでに織り込んでいることを示している。たとえば米中貿易交渉からかなりの良いニュースが出れば、株式は歴史的なブルマーケットのパターンに沿って再び上昇を再開し、ゴールに向けて猛ダッシュする可能性がある。 投資への示唆 弱い調査が実体の弱さに転じるという懸念はもっともである。企業や消費者のセンチメント低下が自己実現的な予言になる可能性は明らかだ。企業経営者が貿易ルールの不確実性の中で手をこまねいていれば、企業の投資や雇用は枯渇する可能性がある。ある人の支出は別の人の所得であり、その逆も同様で、家計が支出を貯蓄に回せば所得は減少する。企業が投資意欲を失っている時に家計が支出を取りやめれば、貯蓄は眠ってしまい金利を下げるだけで、成長見通しへの不安をさらに煽る可能性がある。 我々が恐れるべきものはおそらく恐怖それ自体ほど多くはないかもしれないが、恐怖は伝播し自己強化的である点を考えれば、それでも十分である。我々の観点からの良いニュースは、企業も家計もまだ岐路に立っているわけではないと考えていることだ。実質の最終国内需要（在庫調整と純輸出を除くGDP）は、昨年の第4四半期の急落、1か月に及ぶ連邦政府閉鎖、継続する関税の混乱にもかかわらず堅調に踏みとどまっている。労働市場は依然として逼迫しており、賃金の上昇を助けるはずだ。現時点でFRBが新興のインフレ圧力と対峙して介入する可能性は低く、好循環の入り口が開かれている可能性がある。 どのサイクルも永遠には続かないし、今回のサイクルも確かに後期にあるが、我々は3～12か月の景気循環的タイムフレームでは引き続きポジティブである。短期的にはより慎重であり、0～3か月の戦術的タイムフレームでは通常より保守的にポートフォリオを位置づけ、ポジションを短い綱で管理するのが適切かもしれない。投資家は今後数か月間警戒感を抱えながら生活しなければならないが、ブルマーケットはそのような不安の“壁”をよじ登ることを見失ってはならない。 Doug Peta, CFA チーフ米国投資ストラテジスト dougp@bcaresearch.com 脚注 1 BCAのU.S. インベストメント・リサーチ・ウィークリー・レポート「Everybody Into The Pool!」(2019年6月24日掲載)を参照。usis.bcaresearch.comで入手可能。

ハイライト 欧州および世界の成長は第4四半期に反発するが、その反発は長続きしないだろう。 債券：債券利回りはわずかに上昇すると予想され、特に深くマイナス圏にある利回りがそうである。欧州または世界の債券ポートフォリオではドイツ国債をアンダーウェイトする。 通貨：ゼロ／マイナス利回りの通貨が最も上昇余地を持ち、我々の選好は引き続き円である。 株式：成長とバリュエーションの綱引きにより、広範な株式市場指数は横ばいチャネルにとどまるだろう。しかし利回りがより高いため、債券より株式を優先する。 株式セクター：中国以外の景気循環株が中国関連株をアウトパフォームするだろう。資源および／または工業セクターに対して銀行を引き続きオーバーウェイトする。 株式地域：ユーロストックス50を上海総合指数および／または日経225に対して引き続きオーバーウェイトする。 特集 快適さと不快感は絶対的なものではなく相対的なものである。手を冷たい水に入れると、それが快適に感じるか不快に感じるかは、手がどこから来たかによる。室温から来た手なら冷たい水は不快に感じられるだろう。しかしもし手が氷水から来たなら、冷たい水は至福に感じられるだろう！ 同じ原理が、我々や金融市場が短期的な経済成長をどのように認識するかにも当てはまる。強い拡大の後では、年率1％の穏やかな成長率は不快に感じられる。しかし経済収縮の後では、1％の成長は非常に心地よく感じられる。 ここから重要な点が二つ導かれる： 短期的には、市場は成長率そのものよりも、成長率が加速しているのか減速しているのかを重視する。 成長の短期的なドライバー、すなわち債券利回り、クレジット、そして原油価格については、それらの単なる変化ではなく、それらの変化の変化、すなわちインパルスに注目しなければならない。なぜなら、債券利回り、クレジット、原油価格のインパルスが経済成長の加速や減速を引き起こし、しばしば数ヶ月の先行性を持つからである。 今週のチャートとチャート I-1–I-4を組み合わせれば疑いはない。ユーロ圏、米国、中国では、国内債券利回りの6か月インパルスが国内の6か月クレジットインパルスをほぼ完璧な精度で先導してきた。 今週のチャート 信用成長は第4四半期に反発、その後減速する クレジットの伸びは第4四半期に回復、その後は鈍化する クレジットの伸びは第4四半期に回復、その後は鈍化する チャート I-2 ユーロ圏の債券利回りインパルスは信用インパルスをリードする ユーロ圏の債券利回りインパルスはクレジット・インパルスに先行する ユーロ圏の債券利回りインパルスはクレジット・インパルスに先行する チャート I-3 米国の債券利回りインパルスは信用インパルスをリードする 米国の債券利回りインパルスは同国のクレジット・インパルスに先行している 米国の債券利回りインパルスは同国のクレジット・インパルスに先行している チャート I-4 中国の債券利回りインパルスは信用インパルスをリードする 中国の債券利回りインパルスはクレジット・インパルスに先行する 中国の債券利回りインパルスはクレジット・インパルスに先行する このほぼ完璧な精度に基づけば、ユーロ圏と米国の信用インパルスは第4四半期に短期間反発するはずである。しかし中国では、反発はほとんど、あるいは全く期待できない。ユーロ圏と米国では債券利回りが急落し、それが信用インパルスに追い風をもたらしたが、中国では動きが小さかった。実際、中国の債券利回りの6か月インパルスは過去数か月でむしろ逆風領域へと深まっている（チャート I-5）。 チャート I-5 ユーロ圏と米国では債券利回りインパルスが追い風だったが、中国ではそうではない 債券利回りのインパルスはユーロ圏と米国では追い風だったが、中国ではそうではなかった 債券利回りのインパルスはユーロ圏と米国では追い風だったが、中国ではそうではなかった したがって、第4四半期の信用成長の反発は中国ではなく欧州と米国に起因するだろう。戦術的には、これは中国以外の景気循環株を中国株より有利にする。しかし2020年前半にかけては、債券利回りが今後あらゆる地域で非常に急落しない限り、主要経済圏全てで信用インパルスは薄れていくと予想する。 インパルスに基づく投資 多くの人にとって、債券利回り、クレジット、原油価格の変化ではなくインパルスが経済成長の加速・減速を駆動するという点は混乱を招く。混乱を解消するために、その点を明確にしよう。 ユーロ圏と米国の信用インパルスは第4四半期に短期間反発するはずだ。 債券利回りの低下は新たな借入を誘発する。例えば、米国の債券利回りが0.5％低下すると、住宅ローン申請件数が一定程度増加する（チャート I-6）。新規借入は需要を押し上げ、成長を生む。しかし次期にさらに0.5％低下しても、同じ程度の新規借入と成長を生むだけであり、重要な点は利回りの低下が同じであれば成長は加速しないということである。 チャート I-6 一定の債券利回り低下は一定の新規借入増加を引き起こす 債券利回りの一定の低下は新規借入の一定の増加を引き起こす 債券利回りの一定の低下は新規借入の一定の増加を引き起こす 最初の0.5％の利回り低下に続いて、より大きな例えば0.6％の低下が起これば成長は加速する――これは追い風インパルスを意味する。逆に直感に反して、最初の0.5％の低下に続いて0.4％のようなより小さな低下が続けば、成長は減速する――これは逆風インパルスを意味する。 ドイツの景気後退を自動車のせいにするな チャート I-7 ドイツの自動車生産は第3四半期に反発した ドイツの自動車生産は第3四半期に反発した ドイツの自動車生産は第3四半期に反発した もしドイツ経済が第3四半期に縮小し、いわゆるテクニカル・リセッションに入れば、反射的に自動車産業の問題が原因だと非難されるだろう。しかし証拠はその説明を支持していない。ドイツの新車生産は第3四半期に反発した（チャート I-7）。問うべきは：もし自動車でないとすれば、減速の真の原因は何か、である。 もっともらしい答えは、ドイツは最近、原油価格インパルスから深刻な逆風を受けたということだ。ドイツはGDP単位当たりの道路交通量が世界で非常に高く、米国に次いで2番目である（表 I-1）。ドイツの高い交通強度の説明として考えられるのは、米国と同様にドイツが複数のハブとスポークを持つ分散型経済であり、交通の交差が多いことだろう。しかし米国とは異なり、ドイツの輸送は原油輸入に大きく依存しており、これらは代替が難しく価格に対して非常に非弾力的である。原油価格と歩調を合わせてドイツの原油輸入の価値が上昇すると、ドイツの純輸出は減少し、成長を押し下げる。 表 I-1 ドイツはGDP単位当たりの道路交通強度が非常に高い 成長は第4四半期に持ち直すが、2020年に失速する 成長は第4四半期に持ち直すが、2020年に失速する   要するに、原油価格インパルスはドイツの短期的な成長の加速と減速に大きな影響を与えている。2019年6月ごろまでの6か月期間は深刻な逆風インパルスに相当した。これは、その期間の原油価格が30％上昇したが、直前の6か月期間では40％下落しており、合わせて70％の逆風インパルスに相当するからである。1  ドイツはGDP単位当たりの道路交通量が世界で非常に高い国の一つである。 通常の数か月のラグを考慮すると、この深刻な逆風インパルスはドイツの最近の減速に大きく寄与した。原油価格の6か月インパルスの振動は、ドイツの6か月経済成長の振動を不気味なほどの精度で説明している（チャート I-8）。良いニュースは、原油価格の深刻な逆風インパルスが緩和され、第4四半期にドイツ経済成長の反発を可能にしたことだ。 チャート I-8 原油価格インパルスがドイツの成長変動を説明する 原油価格のインパルスがドイツの成長の変動を説明する 原油価格のインパルスがドイツの成長の変動を説明する それでも、想定される反発はワイルドカード、すなわち「地政学的リスクインパルス」によって無効化される可能性がある。明確にしておくと、これは技術的な意味でのインパルスではないが、類似の概念である：潜在的なテールイベントの数が増えているのか減っているのか。第4四半期について我々の主観的な答えは、それらは減少している、である。 欧州では、イタリアでの新しい連立政権の形成が当面の間イタリア政治をテールイベントの候補から外した。一方、英国ではベン・バート法案が10月31日の合意なきブレグジットを排除するのに十分に起草されたと我々は想定する。他方、米中貿易戦争や中東の緊張は第4四半期を通じて停滞状態にある可能性が高い。 第4四半期のポジショニング 世界および欧州の成長が第3四半期に失望的であった後、我々は第4四半期の反発を期待する。しかし現時点では、その反発の勢いが2020年深くまで続くと確信するには至っていない。第4四半期に向けたポジショニングは以下の通りである： 第4四半期の反発を期待する。 債券： 債券利回りはわずかに上昇すると予想され、特に深くマイナス圏にある利回りがそうである。欧州あるいは世界の債券ポートフォリオではドイツ国債をアンダーウェイトする。 通貨： ゼロ／マイナス利回りの通貨が最も上昇余地を持ち、我々の選好は引き続き円である。ブレグジットの決着が付けば、ポンドが最大の動き手となる可能性があり、我々の印象は上方向である。ただし実行する前により明確な状況を待つ。 株式： 成長とバリュエーションの綱引きにより、広範な株式市場指数は過去2年間に存在している横ばいレンジにとどまるだろう（チャート I-9）。しかし債券より利回りが高いため、醜い対決では株式を優先する。 株式セクター： 中国以外の景気循環株が中国関連株をアウトパフォームするだろう。資源および／または工業に対して銀行を引き続きオーバーウェイトする。 株式地域： ユーロストックス50を上海総合指数および／または日経225に対して引き続きオーバーウェイトする（チャート I-10）。 チャート I-9 グローバル株式はここ2年間ほとんど動いていない グローバル・エクイティはこの2年間ほとんど動いていない グローバル・エクイティはこの2年間ほとんど動いていない チャート I-10 引き続き欧州をオーバーウェイトする ##br## 中国に対して 中国に対してヨーロッパを引き続きオーバーウェイトで保つ 中国に対してヨーロッパを引き続きオーバーウェイトで保つ   フラクタル・トレーディング・システム* ニッケル価格の最近の急騰は供給混乱、特にインドネシアの輸出禁止に関する懸念によるものである。しかし、その上昇幅はテクニカルに過熱しているように見える。これを金とのペアトレードとして表現する：金ロング／ニッケルショート。 チャート I-11 ニッケル対金 ニッケル VS. ゴールド ニッケル VS. ゴールド 利食い目標を11％に設定し、対称的なストップロスを適用する。 いかなる投資においても、過度のトレンド追随やグループシンクが自然な不安定点に達すると、外的な触媒の有無にかかわらず既存のトレンドが崩壊しやすくなる。初期の警告サインは、投資のフラクタル次元がその自然な下限に近づくことである。励みになることに、このトリガーはあらゆる資産クラスにわたるさまざまな規模の逆トレンド・ムーブを一貫して特定してきた。 2016年6月9日以降のフラクタルトレーディング・モデルのルールは次の通りである： 投資が確立されたトレンドにある状態でフラクタル次元が下限に近づくと、それは流動性によるトレンド反転の潜在的トリガーである。したがって、逆トレンドのポジションを建てる。 利食い目標は直前13週間の動きの3分の1の反転幅とする。対称的なストップロスを適用する。 利食い目標またはストップロスでポジションをクローズする。そうでなければ13週間後にポジションをクローズする。 リスク管理にはポジションサイズの倍率を用いる。リスクが高いポジションほどポジションサイズは小さくする。 * 詳細はヨーロピアン・インベストメント・ストラテジー特別レポート「フラクタル、流動性 & トレーディング・モデル」（2014年12月11日付）を参照。eis.bcaresearch.comで入手可能である。 Dhaval Joshi, チーフ 欧州インベストメント・ストラテジスト dhaval@bcaresearch.com フットノート 1 WTI原油価格の6か月ステップは$74.15、$45.21、$58.24であった。最初の変化は40％の下落に相当し、二番目の変化は30％の上昇に相当した。したがって6か月インパルスは70％であった。 フラクタル・トレーディング・モデル 景気循環向け推奨 構造的推奨 終了したフラクタルトレード トレード 終了したトレード 資産パフォーマンス 通貨＆債券 株式セクター 国別株式 指標 債券利回り チャート II-1 注目指標 - 債券利回り 注目すべき指標 - 債券利回り 注目すべき指標 - 債券利回り チャート II-2 注目指標 - 債券利回り 注目すべき指標 - 債券利回り 注目すべき指標 - 債券利回り チャート II-3 注目指標 - 債券利回り 注目すべき指標 - 債券利回り 注目すべき指標 - 債券利回り チャート II-4 注目指標 - 債券利回り 注目すべき指標 - 債券利回り 注目すべき指標 - 債券利回り   金利 チャート II-5 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し チャート II-6 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し チャート II-7 注目指標 - 金利見通し 注目すべき指標 - 金利期待 注目すべき指標 - 金利期待 チャート II-8 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し  

ハイライト 米国経済のファンダメンタルズは依然として強いが、投資家の動揺がニュースの浮き沈みに合わせて株式を変動させている。投資家センチメントが主導的役割を果たしているため、アニマルスピリッツの動きを追跡するための単純なフレームワークを紹介する。 利益見通しは控えめで、リスク許容度は堅調、金融政策の環境は景気拡大を支えている。しかし、地政学的な不確実性や潜在的な非合理的な熱狂は警戒信号を発している。 リセッションへの懸念は過剰だと引き続き考えているが、ベアマーケットが常にリセッションと同時に起きるという決まりはない。懸念すべき点はいくつかあるが、他の潜在的なベアマーケットの引き金に関する当社の総合的な評価は、差し迫った問題を示していない。 特集 ベア派は最近多くの懸念材料を見つけることができる。貿易戦争は依然として世界貿易の見通しに影を落とし、世界の製造業活動は減速し、英国とドイツの経済は第2四半期に縮小し、最近の攻撃は中東の石油施設が投資家の認識より脆弱であることを示した。金融メディアでは夏の間ずっと「Rワード（リセッション）」が溢れ、Googleで「recession」を検索する回数は大金融危機に至る数か月に達した水準に急増した。しかし、その夏の不安は長続きしなかった。貿易緊張の鎮静化の見方とFRBからの金融支援を受け、S&P 500は既に夏の下落分をすべて取り戻している。 市場の振れは国内のマクロ経済的な環境によって引き起こされたものではなく、概して目立った変化はなかった。米国経済は2018年の追い風の後に減速しているが、世界的な減速にもかかわらず十分な財政支援を受けており、トレンドに沿ったあるいはそれ以上の成長を維持している。これまでのところ、減速は製造業に限定されており、過去の鉱工業生産サイクルの歴史はその減速がほぼ終盤に差し掛かっていることを示唆している。サービス業は先進国全体で強さを保ち、米国の消費のファンダメンタルズも堅調である。 しかし、ファンダメンタルズが全てではなく、最近は政治家の気まぐれがそれに優先している。結果としての不安は下方修正された期待値を相対的に容易に上回ることを可能にしており（Chart 1）、S&P 500の利益が急落するのではないかという懸念はほとんどない。しかし、利益は問題の半分に過ぎない。投資家がその利益に対して支払う意欲のある倍率（マルチプル）がもう半分であり、もし利益成長が一桁台前半にとどまるならば、そちらが重要な揺動要因になり得る。 Chart 1 市場と経済データは一致していない 市場と経済データが同期していない 市場と経済データが同期していない アニマルスピリッツの動向を追跡するための単純なフレームワークを紹介する。 マルチプルは大部分が投資家の熱意の関数であり、我々は姉妹サービスであるグローバルETFストラテジーが開発した「景気後退を除くベアマーケット・チェックリスト」を用いてそれを追跡しようとする（Table 1）。このチェックリストは期待、価格、需要、熱狂、政策、地政学の6つの次元にわたりアニマルスピリッツを測ろうとする。チェックリストの構成は必然的に主観的であり、そのため我々はそれをファンダメンタル分析の補完として歓迎している。我々は引き続き来たる株式市場の転換点を探るために積極的に投資しており、アニマルスピリッツを掘り下げることでより広範な潜在的触発要因を追跡できる。 Table 1 景気後退を除くベアマーケット・チェックリスト 高揚する不安 高揚する不安 期待 Chart 2 持続可能な水準へ回帰... 持続可能な水準に回帰... 持続可能な水準に回帰... 昨年、法人税率引き下げを受けて異常に強い期末の利益成長を予想していたが、利益期待は歴史的に見て控えめである（Chart 2）。コンセンサスのS&P 500の通年利益見通しは2018年比でわずか1.5%の成長を見込んでいる。先週の初め時点で、アナリストはS&P 500の第3四半期利益が前年同期比で3%の減少になると見込んでいた。これらの見積もりは、第3四半期の決算シーズン開始前の最後の2週間で、企業が控えめな見通しを示すことを確実にするためにさらに下方修正される可能性が高い。 おそらくコンセンサスはやや保守的すぎるのかもしれない。法人税減税の前年同期比効果は消えたが、FRBや他の主要中央銀行のハト派転換は利益成長を支えるだろう。特に経済が依然として強い米国では、金融環境の緩和が現在の拡張の寿命を2020年まで延ばすのに役立つはずだ。 結論：利益成長が急上昇することはないだろうが、FRBが拡張を支援し続ける限り利益が縮小する可能性は低い。利益のハードルは非常に低く設定されており、S&P 500の企業がそれを上回るのは比較的容易であろう。 価格 我々はバリュエーション指標を注意深く監視しているが、それにあまりこだわりすぎないようにしている。割高（割安）な株は、投資家がしばらくの間非合理的であり続ける限り、さらに割高（さらに割安）になり得る。バリュエーションが平均回帰しやすくなるのは、それらが極端な水準に達したときだけである。 Chart 3 正常な鏡像関係が回復した 正常な鏡像関係の復元 正常な鏡像関係の復元 フォワード・マルチプルは、フォワード利益見通しと併せて考えるとより洞察を与える。2018年のように利益見通しとフォワード・マルチプルの両方が同時に高止まりするのは異例であり、投資家は通常、利益がピークに達していると疑うと高いマルチプルを支払いたがらない。今年はより通常の鏡像関係が回復しており、予想利益成長が平均を下回ったことで、平均を上回るフォワード・マルチプルが相殺されている（Chart 3）。 Chart 4 確かに高まっているが、まだ問題ではない 明らかに高止まりしているが、まだ問題ではない 明らかに高止まりしているが、まだ問題ではない   他の従来のバリュエーション指標も高めに推移しているが、平均から1標準偏差以内であれば極端とはほど遠い（Chart 4）。S&P 500の株価売上高倍率は、我々が極端領域の始まりと見なす2標準偏差水準に近づいている唯一の指標である。注目すべきは、現行の世界的な地政学的環境の下でもバリュエーションはわずかしか低下していないことである。最初の関税発表後に一時下落したものの、主に回復しており、その後のエスカレーションにも幾分鈍感に見えることは、投資家が貿易リスクに対してやや安堵している可能性を示唆している。 結論：株式は十分に織り込まれており、関税不確実性によってバリュエーションがわずかしか影響を受けなかったことは我々の注目を引いている。ただし1シグマの偏差は直ちに反転を示すものではないため、バリュエーションに赤旗を上げる前により多くの指標が2シグマの閾値に近づくのを待つつもりである。 買い意欲 IPO活動はアニマルスピリッツの代理変数である。好意的に受け止められるIPOは、投資家が将来に対して旺盛な買い意欲を持っており、ブル相場の終焉を恐れていないことを示す。しかし、新規上場が過度に好評を得ると、IPOの買い意欲は逆張りのシグナルとなる。IPOブームが起きれば、楽観が持続不可能な水準に達しており、サイクルの終わりが近いことを示すからだ。現時点では、IPO市場は健全だが過熱してはいないと判断している。 Chart 5 企業の健全性の改善か、リスク選好の高まりか？ 企業の健全性の改善か、それともリスク選好の高まりか？ 企業の健全性の改善か、それともリスク選好の高まりか？ 2017年以降IPO案件数が安定していることは健全だと考えるが、その平均的な資金調達額がその間に2倍以上になっている事実は、投資家が未上場や新規上場企業により高い評価を与える傾向が強まっていることの兆しかもしれない（Chart 5）。かつてより高い評価を受けるようになっている企業の増加分の中に、利益をまだ上げていない企業が着実に含まれていることはやや不安である（下記「熱狂」セクション参照）。したがって、ウィーワーク（WeWork）の親会社のIPOに対して投資家が強く抵抗したことは好感が持てる。オフィススペースのサブリース事業者が経営陣の当初見積もりの約4分の1程度の評価になるという報道は、機関投資家が次のホットディールを盲目的に追いかけていないことを示している。 今年上場を完了した企業は概して良好なパフォーマンスを示している。今年これまでに米国で上場した企業の60%は公募価格を上回って取引されている。2019年の「成功した」IPOの中央値は上場来で50%のリターンを記録し、一方「失敗した」IPOの中央値は23%の損失となっている。この非対称性と「成功した」IPOの数が多いことは、IPOが引き続き概して好意的に受け取られていることを示唆している。 結論：地政学的および世界経済成長の逆風にもかかわらず、新規発行に対する投資家の買い意欲は維持されており、ウィーワークが公的な所有基盤を集めるのに苦戦したことは彼らが一定の健全な懐疑心を保っていることを示している。短期的見通しに関しては、我々は投資家の買い意欲をライトグリーンと評価する。 熱狂 IPO活動は投資家の熱狂を窺い知る窓にもなる。利益がマイナスのまま上場する企業の割合は、ドットコム・クラッシュ前に観察された水準に達している。利益を生み出していないIPOが、利益を出している企業のIPOよりも投資家に好意的に受け入れられているという事実は懸念材料である（Chart 6）。 Chart 6 行き過ぎている 熱狂に流される 熱狂に流される 我々はS&P 500の総合的なバリュエーションが通常の範囲内にあると指摘したが、最も高評価の株群の間では一部の熱狂が発生しているようだ。BCAリサーチのエクイティ・トレーディング・ストラテジープラットフォームのバックテスト機能を用いて、株価収益率（P/E）、フォワードP/E、価格対有形簿価、株価売上高倍率、株価営業キャッシュフロー倍率でランク付けした上位第1デシルの銘柄バスケットを作成した（1）。 Chart 7 最も割高な株がさらに割高になっている 最も割高な銘柄はさらに割高になっている 最も割高な銘柄はさらに割高になっている 上位デシルのP/E銘柄の中央値P/Eが上昇していることは、投資家が最も割高な銘柄に資金を集中させて最高水準のバリュエーションを支持し続けていることを示唆している。同じパターンは他の4つのマルチプルの上位デシルでも見られる（Chart 7）。我々が追跡する5つの指標のうち4つは現在、平均から2標準偏差以上の水準にあるか、それを上回っている。 結論：利益を生まない企業のIPO需要と最高評価銘柄の極端なバリュエーションは、投資家がやや行き過ぎていることを示唆している。この次元はオレンジで評価する。 政策 我々は以前、ここ50年のすべてのリセッションにおいて金融引き締めが前提条件であったと指摘した。拡張をできるだけ長く維持するという繰り返しの公約に沿って、FRBは今月初めに2度目の利下げを実施し、世界の中央銀行は同期的なハト派転換に踏み切っている。9月会合での政策緩和の一致した期待にもかかわらず、ECBは「QE Infinity」と呼ばれる期限なしの債券買い入れプログラムの発表でややハト派的に市場を驚かせた。他の先進国の中央銀行、例えば既に緩和的なニュージーランド準備銀行は、想定より大きな利下げという形でハト派的なサプライズを続けている。 結論：米国および世界の中央銀行の過度のハト派姿勢は、この景気拡張の寿命を延ばすはずである。 地政学 米中貿易戦争は世界経済にとって最大のリスクであり、投資家不安の主因であり続けている。重要なサウジインフラへのイランの攻撃は、市場を不安定化させ投資家の懸念を増幅させる可能性もある。当社のジオポリティカル・ストラテジーサービスは、短期的には米中関係の緊張が和らぐ可能性を示唆する一方で、イランが継続的な懸念要因となるとの見方を取っている。 米国側の動機は単純明快である。何よりもまず、現政権は来年11月に再選されたいと考えている。選挙の結果を今から断定するのは時期尚早だが、政権が念頭に置いているであろう大前提は明らかだ。選挙期間中にリセッションが発生すると現職党は常にホワイトハウスを失う（Chart 8）。もし強硬な貿易政策が経済をリセッションの方向に押しているように見えれば、政権はその攻撃性を緩めるだろう。 Chart 8 2020年のリセッションはトランプの再選見通しにとって最大の脅威である 2020年の景気後退はトランプ再選の最大の脅威 2020年の景気後退はトランプ再選の最大の脅威 イラン側の登場である。彼らの（疑われる）サウジの重要石油施設への攻撃は、2中東の緊張が激化し原油価格が急騰する可能性を示している。我々が先週書いたように、米国経済は1970年代ほど原油価格ショックにさらされにくくなっており、主に世界最大の石油生産国としての台頭による影響であるが、世界の他の地域は脆弱である。原油価格ショックは米国以外の主要経済でのリセッションを誘発し得る。 米国は比較的閉じた経済であり、世界的なショックには他の経済に比べて遅れて反応することが多い。しかし結局は反応するのであり、もし原油価格ショックが世界の主要経済でリセッションを引き起こすなら、それは最終的に米国経済をも脅かすだろう。拡張を2020年11月まで維持するためには、米国の政策担当者がイランの好戦性がもたらす影響を解消するために中東に注意を向ける必要があるかもしれない。政権はイランへの対応に対応するために中国との緊張を緩和して対応の余地を確保する必要があるかもしれず、また貿易緊張が世界成長に与える限界的な圧力が原油価格の急騰に対して世界経済をより脆弱にすることを防ぐためにもそうする必要があるかもしれない。 ベアマーケットの引き金に関する我々の総合的評価は、差し迫った問題を示していない。 我々の地政学チームが示唆してきた米中の一時的な停戦は、包括的な貿易合意ほど市場にとって有益ではないが、現実味を帯びているように見える。中国の国慶節を配慮して、米国は10月1日に予定されていた関税引き上げ（2,500億ドル相当の中国輸入品に対する25%から30%への引上げ）を延期する。同時に中国は関税の免除を出し、米国産農産物の購入を増やすと約束した。日本との通商合意も原則合意に達しており数日中に署名される見込みで、米国と欧州との関係もわずかに改善している。3 結論：最新の貿易緊張の一時停止は投資家センチメントとリスク資産のパフォーマンスを押し上げているが、現政権の行動や公的発言の予測不能性は市場を動揺させる可能性を依然として持っている。我々はこの次元をオレンジで評価する。 投資への示唆 リセッション懸念は過剰だと引き続き考えているが、投資家がすべての懸念を完全に克服するには時間がかかるかもしれない。多くの恐怖は2019年の利益見通しの修正に既に織り込まれており、企業が期待を上回るハードルはかなり低く設定されている。これにハト派的な政策環境と依然として堅調な投資家の買い意欲が加われば、拡張はさらに継続する余地がある。 しかし現時点で株式が確実に有利とは言えない。バリュエーションは高く、世界成長は不確実であり、地政学はワイルドカードである。ボラティリティは高止まりし、散発的な急騰の対象となる可能性が高い。我々は米国経済に対しては引き続きポジティブであり、世界成長が年内後半に回復すると予想し続けているため、バランス型ポートフォリオにおいては少なくとも株式を同等比率で保つことを投資家に推奨し続ける。   Jennifer Lacombe, シニアアナリスト jenniferl@bcaresearch.com Doug Peta, CFA チーフ米国投資ストラテジスト dougp@bcaresearch.com 脚注 1 利用可能： https://ets.bcaresearch.com/ 2 アブカイクは世界で最も重要な石油処理施設であり、フーライス油田は世界最大のガワール油田に隣接している。 3 BCAリサーチのジオポリティカル・ストラテジー・ウィークリーレポート「トランプの戦術的撤退」、2019年9月13日掲載を参照。gps.bcaresearch.comで入手可能。

ハイライト   ポートフォリオ・ストラテジー 相対利益見通しの改善、原油価格急騰の可能性の高まりと地政学的リスクプレミアムの上昇、著しく割安なバリュエーション、および極端に売られ過ぎのテクニカル指標はいずれも、S&P エネルギー・セクターに対してオーバーウェイトの姿勢が適切であることを示唆しています。 原油価格および天然ガス価格のインフレ、業界のハイイールドスプレッドの低下、資本支出のより厳格な管理、魅力的な相対的バリューはいずれも、S&P E&Pインデックスをオーバーウェイトすることが有利であることを示唆しています。 最近の変更点 今週のポートフォリオに変更はありません。 Table 1 原油ファクター 原油ファクター 特集 先週の株式市場はレンジ内推移となり、サウジアラビアの石油施設に対するドローン攻撃とそれに伴う急騰した原油価格、そしてFRBの限定的でややタカ寄りの利下げを消化しました（Chart 1）。米中貿易戦争のニュースヘッドラインはやや後退しましたが、近年で最大級の石油生産の混乱が表面化したことは不安材料です。 原油価格は急騰し、原油のボラティリティは急上昇しました。市場参加者が原油価格に地政学的リスクプレミアムを織り込んでいなかったためです（Chart 1）。これは市場参加者への警鐘であり、当社が予想するように、以前は休眠していた地政学的リスクプレミアムが原油市場に強烈に戻ってくれば、長期的な影響が生じます。 Chart 2は、歴史的に原油価格ショックが米国の景気後退と同時に発生していることを示しています。BCAのコモディティ＆エネルギー戦略（CES）サービスが今後数か月でさらなる原油価格急騰を排除していないことを考えると、原油インフレがほぼ倍増することは、最後の一押しとなり景気後退の要件を満たす可能性が高いでしょう。 Chart 1 Mind The Oil Vol Spike 原油ボラティリティの急騰に注意 原油ボラティリティの急騰に注意 Chart 2 Doubling In Oil Prices Are A Bad Omen For Stocks 原油価格が倍増することは株式にとって悪い前兆だ 原油価格が倍増することは株式にとって悪い前兆だ 正確に言えば、1970年代半ば以降、期末の月次データを用いると、年率で91％の原油価格上昇は景気後退と同義であり、偽陽性はありませんでした。これを満たすためには、WTI原油は12月までに概ね$86/バレルまで急騰する必要があります（上段、Chart 2）。これは高いハードルに思えるかもしれませんが、当社のコモディティ＆エネルギー戦略（CES）サービスは、今後数か月で大幅な原油価格上昇の確率を上昇させ始めています。 株式に関しては、過去5回の原油価格ショックのいずれにおいてもS&P 500は著しい下落を被っており、少なくとも歴史が類似するならば、SPXは再び急落するでしょう（中段、Chart 2）。 米国経済は現時点で景気後退には陥っていませんが、外生的な原油価格ショックで景気後退に傾くほど脆弱です。念のために言えば、米国は「良いデフレ」、すなわち原油価格の下落からは恩恵を受け、原油価格の急騰からは被害を受けます。Chart 3はこの逆相関を示しています。 重要なのは、James D. Hamiltonの「Historical Oil Shocks」NBER論文を再読したことが示唆に富んでいた点です.1 この論文でハミルトンは「戦後の11回の景気後退のうち1回を除くすべては原油価格の上昇を伴っており、例外は1960年の景気後退である」と記録しています。ハミルトンは続けて「原油ショックと経済的景気後退の相関は単なる偶然とは言い切れないほど強いように見える…これは原油価格の上昇自体がほとんどの戦後景気後退の単独の原因であったと主張するものではない。 むしろ示される結論は、原油ショックが少なくともいくつかの戦後景気後退に寄与した要因であったということである（強調は当方）」。 Chart 3 GDP And Oil Are Inversely Correlated GDPと原油は逆相関にある GDPと原油は逆相関にある  今週は、景気循環性の深いセクターとその主要サブコンポーネントの一つを更新します。 Table 2 Real GDP Growth (Annual Rate) And Contribution Of Autos To The Overall GDP Growth Rate In Five Historical Episodes 原油ファクター 原油ファクター 原油価格ショックの恩恵を受けるのはエネルギー・セクターのみですが、消費者やその他多くのセクターはエネルギー投入コストの上昇に対処しなければなりません。ハミルトンは自動車生産と産出の関連について重要な指摘をしています：「原油価格上昇の後に見られる主要な反応の一つは、自動車支出の減少、特に米国で製造される大型車の減少である」。 彼はこの関係をTable 2で示しており、当社もこれを再現しました.2 Chart 4は自動車関連のさまざまな経済系列を示しており、現時点のメッセージは厳しいものです。原油価格ショックが発生した場合、車両関連の生産縮小が全体の生産にマイナス影響を与え、景気後退の確率を高めることは明らかです。 Chart 4 What’s Up With Autos? 自動車はどうなっているの？ 自動車はどうなっているの？ 要約すると、地政学的リスクは原油市場に織り込まれつつあり、もし原油が$86/バレル付近まで急騰すれば、この外的ショックは1970年代以降の過去の原油インフレ急騰時と同様に経済を景気後退へ傾ける可能性が高いです。我々は、2018年12月のイールドカーブ逆転時に聞かれたような「今回は違う」と宣言する識者の見解に安易に同調する誘惑を退けます。これらの不確実性の高まりを踏まえ、全体の株式市場の見通しについては慎重な姿勢を維持します。 今週は、景気循環性の深いセクターとその主要サブコンポーネントの一つを更新します。 エネルギーの出番か？ 最近のサウジアラビアの石油処理・生産施設に対するドローン攻撃は、原油市場における地政学的リスクプレミアムの見直しを投資家の意識に再び集中させました（上段、Chart 5）。BCAのコモディティ＆エネルギー戦略（CES）およびジオポリティカル・ストラテジーサービスが最近概説したように、将来の原油価格急騰リスクが高まっていることを踏まえ、我々はS&P エネルギー・セクターをオーバーウェイトのまま維持し、高確信のオーバーウェイトを再確認します。   原油価格の上昇はインフレ期待の上昇にも波及し、S&P エネルギー・セクターの魅力をさらに高めます（中段・下段、Chart 5）。 この原油供給の混乱はタイミングとして不運であり、米国の原油在庫が最近減少していることから、相対的株価比率のサポート要因となります（原油供給は逆転表示、第二パネル、Chart 6）。 Chart 5 Energy Catch Up Phase Looms エネルギーのキャッチアップ局面が迫る エネルギーのキャッチアップ局面が迫る Chart 6 Energy Can Burst Higher エネルギーは急騰する可能性がある エネルギーは急騰する可能性がある 需要面では、非OECDの需要は2015/2016年の製造業不況後の回復開始以来上昇基調にあります。重要なのは、BCAのグローバル・リーディング・エコノミック・インディケーター拡散指数が新興市場により加速しており、新興国の最近の金融緩和措置が新興市場の原油需要を下支えすることを示唆している点です（Chart 6）。その結果、依然として低迷しているS&P エネルギーの相対的な売上予想は反転するはずです（第三パネル、Chart 6）。 このニッチで景気循環性の深いセクターの財務諸表を見ても、大きな懸念材料は見当たりません。ネット有利子負債／EBITDAは約2倍で、幅広い非金融セクターと同等、利払いカバレッジは約5倍です（Chart 7）。同セクターは株主還元に対して以前より慎重になっており、配当性向は過去平均に戻っています（図示せず）。 詳細を見ると、S&P エネルギー・セクターはGICS1の他セクターと比べて最高の配当利回りを誇り、SPXを185ベーシスポイント上回っており、低金利時代に利回りを求める投資家にとって比較的安全な選択肢を提供します（下段、Chart 7）。 実際、S&P エネルギー・セクターは極めて割安で、その28社の合計時価総額は現在、1銘柄であるMicrosoftと同等の価値しかありません。当社の相対バリュエーション指標は急落しており、現在は過去平均から概ね2標準偏差下、過去30年での低水準です（第二パネル、Chart 8）。 Chart 7 Repaired B/S With The Highest GICS1 Sector Dividend Yield GICS1セクターで最も高い配当利回りを有する修復済みB/S GICS1セクターで最も高い配当利回りを有する修復済みB/S Chart 8 Oversold And… 売られ過ぎ、そして… 売られ過ぎ、そして…   エネルギー・セクターのテクニカル面も極端に売られ過ぎており、当社の相対テクニカル指標は深くオーバーソールド領域にあります。このような低水準は過去の反転局面でも見られており、急反発があっても驚きません。セクター内の内部動向も同様に極端で、40週間移動平均線より上で取引されるサブグループの割合や、52週間の変化率がプラスの割合はいずれもゼロ近辺に停滞しています（第四・第五パネル、Chart 8）。 セルサイドのアナリストも同様に悲観的で、エネルギー・セクターの収益および利益が市場全体を上回る確率は低いと見ています。これは短期的な現象にとどまらず、セルサイドは5年という時間軸でも見切りをつけているようです（Chart 9）。このような極端な弱気ムードは逆説的にポジティブです。 我々のU.S. エクイティ・ストラテジーの相対利益成長マクロモデルは、主要な利益ドライバーの多くを正確に捉えることで相対利益トレンドの予測において優れた実績を持っています。現在、相対EPSモデルはスリングショット的な回復局面にあり、これは過度に悲観的なセルサイドのアナリスト群とは著しく対照的です（第二パネル、Chart 9）。 Chart 9 …Undervalued …割安 …割安 総合すると、相対利益見通しの改善、原油価格急騰の可能性の高まりと地政学的リスクプレミアムの上昇、著しく割安なバリュエーション、および極端に売られ過ぎのテクニカル指標はいずれも、S&P エネルギー・セクターに対してオーバーウェイトの姿勢が適切であることを示唆しています。 結論： S&P エネルギー・セクターをオーバーウェイトで維持してください。この景気循環性の深いセクターは当社の高確信オーバーウェイトリストにも含まれています。 探査・生産（E&P）株への追加投資 S&P のオイル＆ガス探査・生産（E&P）株は原油価格とほぼ連動してきましたが、最近は大きな乖離が生じており、我々は前者がキャッチアップすることでこのギャップが縮小すると見ています（上段、Chart 10）。 天然ガス価格でさえ冬眠状態から脱し、最近買い戻しが入り、相対株価が基礎となるコモディティから大きく乖離して異常に低迷していることを示唆しています（第二パネル、Chart 10）。 E&P領域には強い悲観が根付いており、純EPSのリビジョンは「これ以上悪くならない」レベルまで沈んでいます。そのため、原油価格がわずかに上昇するだけでも、この人気のない深い景気循環の一角の評価を引き上げる触媒となり得ます（下段、Chart 10）。 最近ではエネルギーのデフォルト率が上昇していますが、ハイイールドのE&Pオプション調整スプレッドは2015/2016のように急騰しておらず、破綻のシグナルとは言えません。むしろ、最近の原油価格上昇とさらなる急騰の見通しを踏まえると、独立系生産者の債権保有者は一息つける状況です（ジャンクスプレッドは逆転表示、中央および下段、Chart 11）。 Chart 10 Primed To Follow Oil Prices Higher 原油価格の上昇に追随する準備が整っている 原油価格の上昇に追随する準備が整っている 総合すると、原油価格および天然ガス価格のインフレ上昇、業界のハイイールドスプレッド低下、資本支出の管理強化、魅力的な相対バリューはいずれも、S&P E&Pインデックスをオーバーウェイトすることが有利であることを示唆しています。 営業指標に関しては、フリーキャッシュフローは2016年の谷から2倍以上になり、現在は安定しています（第二パネル、Chart 12）。この資本集約型の産業は手段に合わせて運営することを強いられ、負債による拡張計画にはより慎重になっています。キャッシュの使途も精査されるようになりました。キャップエックスは総キャッシュフローに対する比率で、景気循環ピーク時には35％から60％超に上昇しましたが、現在は47％に修正され、過去20年平均をやや上回っています（Chart 12）。 Chart 11 No Yellow Flags 懸念事項はありません 懸念事項はありません Chart 12 Cash Discipline Should Start To Pay Off キャッシュ・ディシプリンは成果を上げ始めるはずだ キャッシュ・ディシプリンは成果を上げ始めるはずだ 幅広いエネルギー分野と同様に、E&P株はどの評価指標をとっても説得力のある割安感があります。例を挙げると、配当利回り差は市場全体に対して150bps、相対的な株価売上高比率は3倍から均衡に修正され、EV/EBITDAベースではE&P株は市場全体に対して35％のディスカウントで取引されています（Chart 13）。 とはいえ、E&P指数に対する我々の建設的見解にはリスクがあります。シェールオイル分野が損益分岐点を維持し、最近の史上高水準の生産を維持するためには、原油価格が$50〜$55/バレルを上回る水準である必要があります。念のため言えば、業界のキャップエックス崩壊は原油価格の急落および大幅な相対株価下落と同義です（Chart 14）。 Chart 13 Bombed Out Valuations 売り込まれ過ぎたバリュエーション 売り込まれ過ぎたバリュエーション Chart 14 Capex Collapse Is A Big Risk 設備投資の急落は大きなリスクだ 設備投資の急落は大きなリスクだ 総合すると、原油価格および天然ガス価格のインフレ上昇、業界のハイイールドスプレッド低下、資本支出の管理強化、魅力的な相対バリューはいずれも、S&P E&Pインデックスをオーバーウェイトすることが有利であることを示唆しています。 結論： S&Pのオイル＆ガス探査・生産インデックスを引き続きオーバーウェイトとします。この指数に含まれる銘柄のティッカーは次のとおりです：S5OILP – COP, PXD, DVN, HES, APA, MRO, XEC, COG, CXO, EOG, FANG, NBL。   Anastasios Avgeriou, U.S. エクイティ・ストラテジスト anastasios@bcaresearch.com   脚注 1      https://www.nber.org/papers/w16790 2      同上。 現在の推奨 現在の取引 サイズとスタイルの見解 ディフェンシブよりサイクリカルを中立で取り扱う（ダウングレード注意） グロースよりバリューを重視 スモールよりラージを重視（ストップ：10%）

Dear Client, BCA’s New York conference takes place next week on September 26-27, and I look forward to meeting some of you there. Because of the conference, our next report will come out on October 3. Dhaval Joshi Highlights If the WTI crude oil price breached $70, Germany’s net export growth would suffer a short-term relapse. If the WTI crude oil price breached $90, Germany’s economic growth would suffer a much longer setback. The WTI crude oil price is now trading at $59, well below even the first pain threshold. Hence, at the moment, the oil price ‘spike’ is a minor irritant rather than a major risk to a German (and European) economic rebound in the fourth quarter. Stay overweight the Eurostoxx50 versus the Shanghai Composite and Nikkei225. If the WTI price stabilises well below $70, we intend to initiate an overweight to the DAX versus global equities. German bunds are a structural short relative to U.S. T-bonds. Feature Chart of the WeekOil Price Oscillations Have Explained German Growth Oscillations With A Spooky Precision It is touch and go whether Germany suffered a technical recession through the second and third quarters.1 We will know in about six weeks’ time, once the statisticians have finished crunching the numbers. But for the financial markets, this is old news. A technical recession in Germany during the second and third quarters is already baked in the market cake. The economy and financial markets are entwined in a perpetual dance. In a dance, sometimes one person decides the steps and sometimes the other person does, but the couple always moves together. And so it is with the economy and markets. The ZEW indicator of (German) economic sentiment recently hit its lowest level since 2011, and the performance of the DAX versus global equities has moved in near perfect lockstep (Chart I-2). Chart I-2A German Recession Is Already Baked In The Market Cake Some people try to predict the movement of markets based on the releases of backward-looking economic data or even supposedly real-time economic data, such as sentiment surveys. Good luck with that. The markets instantaneously discount those releases. To predict the markets, the key question is: what will the future releases look like? If the German economy rebounds in the fourth quarter, then the stark underperformance of the DAX constitutes a compelling buying opportunity versus other equity markets. That said, a new potential risk has emerged: the spike in the crude oil price. Germany Is Highly Sensitive To The Oil Price Europeans are large importers of energy, with 55 percent of all energy needs met by net imports. Moreover, the volume of energy they import tends to be price inelastic. Hence, when energy prices plunge, it boosts net exports and thereby it boosts growth. Conversely, when energy prices soar – as they have recently – it depresses net exports and thereby it depresses growth.2  98 percent of Germany’s consumption of oil depends on imports. This is especially true for Germany whose energy import dependency, at 65 percent, is well above the European average. The most important energy source is still oil which accounts for over a third of Germany’s primary energy use (Chart I-3). Moreover, 98 percent of Germany’s consumption of oil depends on imports.3   Chart I-3Germany Is Highly Sensitive To The Oil Price Most of Germany’s oil consumption is for transport. On a timeframe of decades, the planned decarbonisation of all sectors by 2050 should all but eliminate fossil oil from German energy consumption. However, on a timeframe of quarters, oil consumption for transport is highly inelastic and non-substitutable. Hence, in recent years, swings in the oil price have always caused swings in Germany’s net exports (Chart I-4). Based on this excellent relationship, a likely rebound in German net exports in the fourth quarter would be threatened if the WTI crude price reached and stayed in the mid $70s. Chart I-4Swings In The Oil Price Cause Swings In Germany's Net Exports For Economic Growth, The Oil Price Impulse Is What Matters Empirically, we have found that the German economy is much more sensitive to the oil price than other European economies (Chart I-5 and Chart I-6). This could be because other drivers of the economy such as credit developments are less significant in Germany. Chart I-5Germany Is More Sensitive To The Oil Price... Chart I-6...Than Other European ##br##Economies Most analysts argue that it is the change in the oil price that is relevant for the economy. This is obviously correct for the impact on inflation, which is, by definition, the change in a price. However, it is incorrect to argue that the change in the oil price drives economic growth. Instead, it is the impulse of the oil price – the change in its change – that drives economic growth. To understand why, consider a simplified example. Let’s say a 20 percent drop in the oil price added to Germany’s net exports, causing the economy to grow 1 percent. In the following period, another 20 percent drop in the oil would cause the economy to grow again by 1 percent, so growth would stay unchanged. On the other hand, if the oil price dropped by 10 percent, the economy would still grow, but now at a reduced rate of 0.5 percent. Therefore somewhat paradoxically, though the oil price has declined by 10 percent, growth has slowed. This is because the second drop in the price (10 percent) is less than the first (20 percent) – which means the tailwind impulse has faded.   Now let’s put in the actual numbers for the oil price’s 6-month impulse. The period ending around June 2019 constituted a severe headwind impulse. This is because a 30 percent increase in the oil price followed a 40 percent decline in the previous period, equating to a headwind impulse of 70 percent.4 Allowing for typical lags of a few months, this severe headwind impulse is a likely culprit, or at least a contributing culprit, for Germany’s slowdown during the second and third quarters. As the Chart of the Week compellingly illustrates, oscillations in the oil price’s 6-month impulse have explained the oscillations in Germany’s 6-month economic growth with a spooky precision. Empirically, other explanatory factors are not needed.  The period ending June 2019 constituted a severe headwind impulse from the oil price. Now the good news. Until the last few days, the oil price’s severe headwind impulse had eased – and this fading of the headwind strongly suggested a rebound in German economic growth during the fourth quarter and beyond. This raises a crucial question: to what level would the crude oil price have to spike for the maximum headwind impulse to return, and thereby extinguish the chance of such a rebound? By reverse engineering the price from the maximum headwind impulse, the answer is the WTI crude price at $90. Pulling all of this together, the first pain threshold is WTI breaching $70, at which Germany’s net export growth could suffer a short-term relapse. The second and greater pain threshold is WTI breaching $90, at which Germany’s economic growth could be stifled for much longer.  Having said all that, WTI is now trading at $59, well below even the first pain threshold. Hence, at the moment, this is a minor irritant rather than a major risk to a German (and European) economic rebound. Stay overweight the Eurostoxx50 versus the Shanghai Composite and Nikkei225. And in the coming week or so, if the WTI price stabilises well below $70, we intend to initiate an overweight to the DAX versus global equities. The ECB Fired A Dud So much for the ECB’s promise to ‘shock and awe’ the markets. The bazooka ended up firing a dud! Unlimited QE is not really unlimited when the ECB’s asset purchase program is running close to its individual issuer limit, and its country composition cannot deviate too far from the ECB’s capital key. QE is nothing more than a signal of intent to keep policy interest rates ultra-low for a protracted period. In any case, QE is nothing more than a signal of intent to keep policy interest rates ultra-low for a protracted period. But once the markets have fully discounted this intent – as they have in the euro area and Japan – the monetary policy armoury is effectively out of ammunition (Chart I-7-Chart I-10). So it is not surprising that the ECB fired a dud. Chart I-7Monetary Policy Is Exhausted In The Euro Area... Chart I-8...But The U.S. Still Has ##br##Ammunition Chart I-9Monetary Policy Is Exhausted In Japan... Chart I-10...But China Still Has Ammunition Some people counter that there are even more exotic monetary policy options in the pipeline, such as ‘helicopter money’. However, as Mario Draghi correctly pointed out, “giving money to people in whatever form is not a monetary policy task, it’s a fiscal policy task.” Helicopter money might be a step too far, but its notion encapsulates the shape of things to come in Europe. With euro area monetary policy exhausted, the baton is passing to fiscal policy. The upshot is that in a bond portfolio, German bunds are a structural short relative to U.S. T-bonds. Fractal Trading System* Although we are structurally overweight Italian long-dated BTPs, the 130-day fractal dimension is signalling that the pace of the rally is now technically extended and therefore vulnerable to a countertrend correction. This week’s trade recommendation is to express this via a short position in the Italian 10-year BTP, setting a profit target of 3 percent with a symmetrical stop-loss. In other trades, short the U.S. 10-year T-bond quickly achieved its profit target, while short financial services versus market reached the end of its holding period in slight loss. 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-11 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 We define a technical recession as two consecutive quarters of contraction in real GDP. 2 Energy dependence = (imports – exports) / gross available energy. 3 According to the Federal Institute for Geosciences and Natural Resources. 4 The 6-month steps in the WTI crude oil price were $74.15, $45.21, and $58.24. The first change equated to a 40 percent decrease and the second change equated to a 30 percent increase. So the 6-month impulse was 70 percent. Fractal Trading System Cyclical Recommendations Structural Recommendations Closed Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

Highlights Chart 1Waiting For A Manufacturing Rebound The 2015/16 roadmap is holding. As in that period, the ISM Manufacturing PMI has fallen into recessionary territory, but the Services PMI remains strong (Chart 1). As is typically the case, bond yields have taken their cue from the manufacturing index. The resilient service sector and global shift toward easier monetary policy will support an eventual rebound in manufacturing, and the Fed will continue to play its part this month with another 25 basis point rate cut. As for the Treasury market, much stronger wage growth than in 2016 will prevent the Fed from cutting rates back to zero. This means that the 10-year yield will not re-visit its 2016 trough of 1.37% (Chart 1, bottom panel). Strategically, investors should maintain a benchmark duration stance for now, but stand ready to reduce duration once the global manufacturing data stabilize. Feature Investment Grade: Overweight Chart 2Investment Grade Market Overview Investment grade corporate bonds underperformed the duration-equivalent Treasury index by 105 basis points in August, dragging year-to-date excess returns down to +323 bps. In remarks last week, Fed Chairman Powell noted that the Fed has lowered the market’s expected path of interest rates, and that he views this easing of financial conditions as providing important support for the economy.1  The July FOMC minutes echoed this sentiment, sending a strong signal that the Fed will do everything it can to prevent a significant tightening of financial conditions. The accommodative monetary environment is extremely positive for corporate spreads. In terms of valuation, Baa-rated securities offer the most value in the investment grade corporate bond space (Chart 2). Baa spreads remain 13 bps above our cyclical target (panel 2).2 Conversely, Aa and A-rated spreads are 2 bps and 1 bp below target, respectively (panel 3). Aaa spreads are 15 bps below target (not shown). The main risk to spreads comes from the relatively poor state of corporate balance sheets. Our measure of gross leverage – total debt over pre-tax profits – was already high, and was revised even higher after the Bureau of Economic Analysis’ annual GDP revision (panel 4). But for now, likely in large part due to accommodative Fed policy, loan officers aren’t inclined to cut off the flow of credit. C&I lending standards remain in “net easing” territory (bottom panel). Table 3ACorporate Sector Relative Valuation And Recommended Allocation* Table 3BCorporate Sector Risk Vs. Reward* High-Yield: Overweight Chart 3High-Yield Market Overview High-Yield underperformed the duration-equivalent Treasury index by 114 basis points in August, dragging year-to-date excess returns down to +551 bps. The average index option-adjusted spread widened 22 bps on the month. At 385 bps, it is well above the cycle-low of 303 bps. We see more potential for spread tightening in high-yield than in investment grade. Within investment grade, only Baa-rated spreads appear cheap. However, in high-yield, Ba-rated spreads are 49 bps above our target (Chart 3), B-rated spreads are 151 bps above our target (panel 3) and Caa-rated spreads are 398 bps cheap (not shown).3   Junk spreads also offer reasonable value relative to expected default losses. The current Moody’s baseline forecast calls for a default rate of 3.2% over the next 12 months. This translates into 207 bps of excess spread in the High-Yield index after adjusting for expected default losses (panel 4). That 207 bps of excess spread is comfortably above zero, though it is below the historical average of 250 bps. As noted on page 3, C&I lending standards have now eased for two consecutive quarters and job cut announcements are off their highs (bottom panel). Both trends are supportive of lower default expectations in the future. MBS: Neutral Chart 4MBS Market Overview Mortgage-Backed Securities underperformed the duration-equivalent Treasury index by 63 basis points in August, dragging year-to-date excess returns down to -31 bps. The conventional 30-year zero-volatility spread widened 9 bps on the month, driven entirely by the option-adjusted spread (OAS). The compensation for prepayment risk (option cost) held flat at 29 bps. At 51 bps, the OAS for conventional 30-year MBS has widened back close to its average pre-crisis level (Chart 4). However, value is less attractive when we look at the nominal MBS spread, which remains near its all-time lows.4 The nominal spread has also widened less than would have been expected in recent months, considering the jump in refi activity (panel 2). The mixed valuation picture means we are not yet inclined to augment MBS exposure. However, we are equally disinclined to downgrade MBS, given our view that Treasury yields are close to a trough. An increase in Treasury yields would cause refi activity to slow, putting downward pressure on MBS spreads. All in all, we expect the next big move in the MBS/Treasury basis will be a tightening, as global growth improves and mortgage rates rise. However, valuation is not sufficiently attractive to warrant more than a neutral allocation. Government-Related: Underweight Chart 5Government-Related Market Overview The Government-Related index underperformed the duration-equivalent Treasury index by 12 basis points in August, dragging year-to-date excess returns down to +152 bps. Sovereign debt underperformed duration-equivalent Treasuries by 45 bps on the month, dragging year-to-date excess returns down to +442 bps. Local Authorities underperformed the Treasury benchmark by 31 bps, dragging year-to-date excess returns down to +212 bps. Meanwhile, Foreign Agencies underperformed by 11 bps, dragging year-to-date excess returns down to +141 bps. Domestic Agencies outperformed by 13 bps in August, bringing year-to-date excess returns up to +44 bps. Supranationals outperformed by 3 bps, bringing year-to-date excess returns up to +39 bps. Sovereign debt remains very expensive relative to equivalently rated U.S. corporate credit (Chart 5). While the sector would benefit if the Fed’s dovish pivot eventually results in a weaker dollar, U.S. corporate bonds would still outperform in that scenario given the more attractive starting point for spreads. We continue to recommend an underweight allocation to Sovereigns. Unlike the debt of most other countries, Mexican sovereign bonds continue to trade cheap relative to U.S. corporates (bottom panel). Investors should favor Mexican sovereigns within an otherwise underweight allocation to the sector as a whole. Municipal Bonds: Neutral Chart 6Municipal Market Overview Municipal bonds underperformed the duration-equivalent Treasury index by 104 basis points in August, dragging year-to-date excess returns down to -46 bps (before adjusting for the tax advantage). The average Aaa-rated Municipal / Treasury (M/T) yield ratio rose 9% in August, and currently sits at 85% (Chart 6). The ratio is close to one standard deviation below its post-crisis mean, but slightly above the 81% average that prevailed in the late stages of the previous cycle, between mid-2006 and mid-2007. We shifted our recommended stance on municipal bonds from overweight to neutral near the end of July.5 The reason for the downgrade was that the sector had become extremely expensive. Yield ratios have risen somewhat since then, but not yet by enough for us to re-initiate an overweight recommendation. We also continue to observe that the best value in the municipal bond space is found at the long-end of the Aaa curve. 2-year and 5-year M/T yield ratios remain below average pre-crisis levels, while yield ratios beyond the 10-year maturity point are above. 20-year and 30-year Aaa M/T yield ratios, in particular, are the most attractive (panel 2). Fundamentally, state & local government balance sheets remain in decent shape and a material increase in ratings downgrades is unlikely any time soon (bottom panel). Our recent shift to a more cautious stance was driven purely by valuation and not a concern for municipal bond credit quality. A further cheapening in the coming months would cause us to re-initiate an overweight stance.    Treasury Curve: Maintain A Barbell Curve Positioning Chart 7Treasury Yield Curve Overview The Treasury curve bull-flattened dramatically in August, as the global manufacturing recession continued to pull yields down. At present, the 2/10 Treasury slope is just above the zero line at 2 bps, 11 bps flatter than at the end of July. The 5/30 slope is currently 60 bps, 9 bps flatter than at the end of July. Our 12-month Fed Funds Discounter is currently -98 bps (Chart 7). This means that the market is priced for almost four more 25 basis point rate cuts during the next year. While we have shifted to a tactically neutral duration stance because of uncertainty surrounding the timing of the next move higher in yields, four rate cuts on a 12-month horizon seems excessive given the underlying strength of the U.S. economy. For this reason, we are inclined to maintain a barbelled position across the Treasury curve, and also to stay short the February 2020 fed funds futures contract. The February 2020 contract is priced for three rate cuts over the next four FOMC meetings. One of those rate cuts will occur this month, but if the global manufacturing data recover, further cuts may not be needed. A short position in this contract continues to make sense. On the Treasury curve, our butterfly spread models continue to show that barbells look cheap relative to bullets (see Appendix B). Further, the 5-year and 7-year yields will rise the most when the market prices-in a more hawkish path for the policy rate. Investors should favor the long-end and short-end of the curve, while avoiding the belly (5-year and 7-year). TIPS: Overweight Chart 8Inflation Compensation TIPS underperformed the duration-equivalent nominal Treasury index by 174 basis points in August, dragging year-to-date excess returns down to -104 bps. The 10-year TIPS breakeven inflation rate fell 21 bps on the month and currently sits at 1.55% (Chart 8). The 5-year/5-year forward TIPS breakeven inflation rate also fell 21 bps in August. It currently sits at 1.74%. As we have noted in recent research, FOMC members are monitoring long-dated inflation expectations and are committed to keeping policy easy enough to “re-anchor” them at levels consistent with the Fed’s 2% target.6 Eventually, this will support a return of long-dated TIPS breakeven inflation rates (both 10-year and 5-year/5-year forward) to our 2.3% - 2.5% target range. However, for breakevens to move higher, investors also need to see evidence that inflation will be sustained near 2%. On that note, recent trends are encouraging. Through July, trimmed mean PCE is running at 2.22% on a trailing 6-month basis (annualized) and at 1.99% on a trailing 12-month basis (bottom panel). As a result, the 10-year TIPS breakeven inflation rate looks very low relative to the reading from our Adaptive Expectations model, a model based on several different measures of inflation (panel 4).7 Supportive Fed policy and rising inflation should support wider TIPS breakevens in the coming months, remain overweight.  ABS: Underweight Chart 9ABS Market Overview Asset-Backed Securities outperformed the duration-equivalent Treasury index by 15 basis points in August, bringing year-to-date excess returns up to +74 bps. The index option-adjusted spread for Aaa-rated ABS tightened 4 bps on the month. It currently sits at 28 bps, below its minimum pre-crisis level of 34 bps (Chart 9). ABS also appear unattractive on a risk/reward basis, as both Aaa-rated auto loans and credit cards have moved into the “Avoid” quadrant of our Excess Return Bond Map (see Appendix C). The Map uses each bond sector’s spread, duration and volatility to calculate the likelihood of earning or losing 100 bps of excess return versus Treasuries. At present, the Map shows that ABS offer poor expected return for their level of risk. In addition to poor valuation, the ABS sector’s credit fundamentals are shifting in a negative direction. Household interest payments continue to trend up, suggesting a higher delinquency rate in the future (panel 3). Meanwhile, senior loan officers continue to tighten lending standards for both credit cards and auto loans. Tighter lending standards usually coincide with rising delinquencies (bottom panel). All in all, the combination of poor value and deteriorating credit quality leads us to recommend an underweight allocation to consumer ABS. Non-Agency CMBS: Neutral Chart 10CMBS Market Overview Non-Agency Commercial Mortgage-Backed Securities underperformed the duration-equivalent Treasury index by 16 basis points in August, dragging year-to-date excess returns down to +218 bps. The index option-adjusted spread for non-agency Aaa-rated CMBS widened 6 bps on the month. It currently sits at 69 bps, below average pre-crisis levels but above levels seen in 2018 (Chart 10). The macro outlook for commercial real estate is somewhat unfavorable, with lenders tightening loan standards (panel 4) amidst falling demand (bottom panel). Commercial real estate prices have accelerated of late, but are still not keeping pace with CMBS spreads (panel 3). Despite the poor fundamental picture, our Excess Return Bond Map shows that CMBS offer a reasonably attractive risk/reward trade-off compared to other bond sectors (see Appendix C). Agency CMBS: Overweight Agency CMBS underperformed the duration-equivalent Treasury index by 31 basis points in August, dragging year-to-date excess returns down to +88 bps. The index option-adjusted spread widened 7 bps on the month and currently sits at 56 bps. The Excess Return Bond Map in Appendix C shows that Agency CMBS offer high potential return compared to other low-risk spread products. Appendix A - The Golden Rule Of Bond Investing We follow a two-step process to formulate recommendations for bond portfolio duration. First, we determine the change in the federal funds rate that is priced into the yield curve for the next 12 months. Second, we decide – based on our assessments of the economy and Fed policy – whether the change in the fed funds rate will exceed or fall short of what is priced into the curve. Most of the time, a correct answer to this question leads to the appropriate duration call. We call this framework the Golden Rule Of Bond Investing, and we demonstrated its effectiveness in the U.S. Bond Strategy Special Report, “The Golden Rule Of Bond Investing”, dated July 24, 2018, available at usbs.bcaresearch.com. Chart 11 illustrates the Golden Rule’s track record by showing that the Bloomberg Barclays Treasury Master Index tends to outperform cash when rate hikes fall short of 12-month expectations, and vice-versa. Chart 11The Golden Rule's Track Record At present, the market is priced for 98 basis points of cuts during the next 12 months. We anticipate fewer rate cuts over that time horizon, and therefore anticipate that below-benchmark portfolio duration positions will profit. We can also use our Golden Rule framework to make 12-month total return and excess return forecasts for the Bloomberg Barclays Treasury index under different scenarios for the fed funds rate. Excess returns are relative to the Bloomberg Barclays Cash index. To forecast total returns we first calculate the 12-month fed funds rate surprise in each scenario by comparing the assumed change in the fed funds rate to the current value of our 12-month discounter. This rate hike surprise is then mapped to an expected change in the Treasury index yield using a regression based on the historical relationship between those two variables. Finally, we apply the expected change in index yield to the current characteristics (yield, duration and convexity) of the Treasury index to estimate total returns on a 12-month horizon. The below tables present those results, along with 95% confidence intervals. Excess returns are calculated by subtracting assumed cash returns in each scenario from our total return projections. Appendix B - Butterfly Strategy Valuation The following tables present the current read-outs from our butterfly spread models. We use these models to identify opportunities to take duration-neutral positions across the Treasury curve. The following two Special Reports explain the models in more detail: U.S. Bond Strategy Special Report, “Bullets, Barbells And Butterflies”, dated July 25, 2017, available at usbs.bcaresearch.com U.S. Bond Strategy Special Report, “More Bullets, Barbells And Butterflies”, dated May 15, 2018, available at usbs.bcaresearch.com Table 4 shows the raw residuals from each model. A positive value indicates that the bullet is cheap relative to the duration-matched barbell. A negative value indicates that the barbell is cheap relative to the bullet. Table 4Butterfly Strategy Valuation: Raw Residuals In Basis Points (As of September 6, 2019) Table 5 scales the raw residuals in Table 4 by their historical means and standard deviations. This facilitates comparison between the different butterfly spreads. Table 5Butterfly Strategy Valuation: Standardized Residuals (As of September 6, 2019) Table 6 flips the models on their heads. It shows the change in the slope between the two barbell maturities that must be realized during the next six months to make returns between the bullet and barbell equal. For example, a reading of +49 bps in the 5 over 2/10 cell means that we would only expect the 5-year to outperform the 2/10 if the 2/10 slope steepens by more than 49 bps during the next six months. Otherwise, we would expect the 2/10 barbell to outperform the 5-year bullet. Table 6Discounted Slope Change During Next 6 Months (BPs) Appendix C - Excess Return Bond Map The Excess Return Bond Map is used to assess the relative risk/reward trade-off between different sectors of the U.S. fixed income market. The Map employs volatility-adjusted breakeven spread analysis to show how likely it is that a given sector will earn/lose money during the subsequent 12 months. The Map does not incorporate any macroeconomic view. The horizontal axis of the Map shows the number of days of average spread widening required for each sector to lose 100 bps versus a position in duration-matched Treasuries. Sectors plotting further to the left require more days of average spread widening and are therefore less likely to see losses. The vertical axis shows the number of days of average spread tightening required for each sector to earn 100 bps in excess of duration-matched Treasuries. Sectors plotting further toward the top require fewer days of spread tightening and are therefore more likely to earn 100 bps of excess return. Chart 12Excess Return Bond Map (As Of September 6, 2019)     Ryan Swift, U.S. Bond Strategist rswift@bcaresearch.com Jeremie Peloso, Research Analyst jeremiep@bcaresearch.com Footnotes 1 https://www.cnbc.com/2019/09/06/watch-fed-chairman-jerome-powells-qa-in-zurich-live.html 2 For more details on how we arrive at our spread targets please see U.S. Bond Strategy Weekly Report, “The Value In Corporate Bonds”, dated February 19, 2019, available at usbs.bcaresearch.com 3 For more details on how we arrive at our spread targets please see U.S. Bond Strategy Weekly Report, “The Value In Corporate Bonds”, dated February 19, 2019, available at usbs.bcaresearch.com 4 The nominal spread is simply the difference between MBS index yield and the duration-matched Treasury yield. No adjustment is made for prepayment risk. 5 Please see U.S. Bond Strategy Weekly Report, “A Message To The TIPS Market”, dated July 23, 2019, available at usbs.bcaresearch.com 6 Please see U.S. Bond Strategy Weekly Report, “A Message To The TIPS Market”, dated July 23, 2019, available at usbs.bcaresearch.com 7 For further details on our Adaptive Expectations Model please see U.S. Bond Strategy Weekly Report, “Adaptive Expectations In The TIPS Market”, dated November 20, 2018, available at usbs.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification Corporate Sector Relative Valuation And Recommended Allocation

Highlights Currency markets continue to fight a tug-of-war between deteriorating global growth and easing global financial conditions. Such an environment is typically fertile ground for a dollar bull market, yet the trade-weighted dollar is up only 2.3% this year. The lack of more-pronounced strength in the greenback suggests that other powerful underlying forces are preventing the dollar from gapping higher. The breakdown in the bond-to-gold ratio is an important distress signal for dollar bulls. As both political and economic uncertainty remain elevated, likely winners in the interim remain safe-haven currencies such as the yen and the Swiss franc. For the remainder of the year, portfolio managers should focus on relative value trades at the crosses, rather than outright dollar bets. Stand aside on the pound for now. Aggressive investors can place a buy stop at 1.25 and sell stop at 1.20. The Riksbank’s hawkish surprise was a welcome development for the krona. Remain long SEK/NZD. The SEK might be the best-performing G10 currency over the next five years. Feature Yearly performance is an important benchmark for most portfolio managers. As most CIOs return to their desks from a summer break, they will be looking at a few barometers to help them navigate the rest of 2019. On the currency front, here is what the report card looks like so far: The dollar has been a strong currency, but the magnitude of the increase has been underwhelming, given market developments. The Federal Reserve’s trade-weighted dollar is up only 2.3% this year. In contrast, the yen is up 3.6% and the Canadian dollar 2.3%. Meanwhile, the best shorts have been the Swedish krona (down 9.7%) and the kiwi. Through the lens of the currency market, the dollar has been in a run-of-the-mill bull market, rather than in a panic buying frenzy (Chart I-1). Chart I-1A Report Card On Currency Performance Gold has broken out in every major currency. This carries a lot of weight because it has occurred amid dollar strength, a historical rarity. Importantly, the breakout culminates the seven-or-so-year pattern where gold was stable versus many major currencies (Chart I-2). We are no technical analysts, but ever since gold peaked in 2011, all subsequent rallies have seen diminishing amplitude, which by definition were bull traps. This appeared to have changed since 2015-2016, which could be a signal that the dollar bull market is nearing an end. Commodities have been a mixed bag. Precious metals have surged alongside gold. Despite the recent correction, oil is still up 13.8% for the year. Meanwhile, natural gas is in a bear market. Among metals, nickel has surged 70%, while Doctor Copper is down 5.1%. The only semblance of agreement is among soft commodities, which have been mostly deflating (Chart I-3). In short, there has been no coherent theme for commodity currencies. All the talk of a Sino-U.S. trade war, Chinese A-shares are up 18.7% for the year. This more than makes up for any CNY depreciation.  Equities have performed well across the board, mostly up double digits. The only notable laggards have been in Asia, specifically Japan, Hong Kong and Korea. That said, of all the talk of a Sino-U.S. trade war, Chinese A-shares are up 18.7% for the year. This more than makes up for any CNY depreciation. This also suggests that capital flows into equities have not been a major driver of currencies this year. Chart I-2Gold Has Been The Ultimate Currency Chart I-3Commodities Are A Mixed Bag Yields have collapsed, with higher-beta markets seeing bigger drops. Differentials have mostly moved against the dollar in recent weeks as the U.S. 10-year yield plays catch-up to the downside. One important question is that with Swiss 10-year yields now at -0.96% and German yields at -0.67%, is there a theoretical floor to how low bond yields can fall (Chart I-4)? Chart I-4Yields Have Melted Heading back to his office, the CIO is now pondering how to deploy fresh capital. On one hand, the typical narrative that we have been operating in the quadrant of a deflationary bust, given the trade war, manufacturing recession, political unrest and rapidly rising probability of recession is not clearly visible in financial data. This would have been historically dollar bullish, and negative for other asset classes. However, the plunge in bond yields begs the question of whether this is a prelude to worse things to come. A more sanguine assessment is that we might be at a crossroads of sorts. If economic data continues to deteriorate due to much larger endogenous factors, a defensive strategy is clearly warranted. One way to tell will be an emerging divergence between our leading indicators and actual underlying data. On the flip side, any specter of positive news could light a fire under sectors, currencies and countries that have borne the brunt of the slowdown. Time is of the essence, and strategy will be dependent on horizons. A review of the leading indicators for the major economic blocks is in order. Are We At The Cusp Of A Recession? Centripetal systems tend to stay in equilibrium, while centrifugal forces can explode in spectacular fashion. In the currency world, this means that the tug of war between deteriorating global growth and easing liquidity conditions cannot last forever. Either the dollar breakout morphs into a panic buying frenzy or proves to be a bull trap. Are we at the cusp of a bottom in global growth, or approaching a riot point? Let us start with the economic front: U.S.: Plunging U.S. bond yields have historically been bullish for growth. More importantly, the recent decline in the ISM Manufacturing Index is approaching 2008 recessionary levels. Either easing in financial conditions revive the index, or the decoupling persists for a while longer. The tone on the political front appears reconciliatory, which means September and October data will be critical. In 2008, the divergence between deteriorating economic conditions and falling yields was an important signpost for a riot point (Chart I-5). Eurozone: The Swedish manufacturing PMI ticked up to 52.4 in August. Most importantly, the new orders-to-inventories ratio is suggesting that the German (and European) manufacturing recession is reversing (Chart I-6). For all the debate about whether China is stimulating enough or not, the beauty about this indicator is that there are no Chinese variables in it (the euro zone and Sweden export a lot of goods and services to China). Any surge higher in this indicator will categorically conclude the euro zone manufacturing recession is over, lighting a fire under the euro in the process. Whatever the number is, if it can stabilize Chinese growth, a powerful deflationary force that dictated markets in 2018-2019 will dissipate.  China: Chinese bond yields have melted alongside global yields. This is reflationary, given the liberalization in the bond market over the past few years. Policy makers are currently discussing the quota for next year’s fiscal spending. Whatever the number is, if it can stabilize Chinese growth, a powerful deflationary force that dictated markets in 2018-2019 will dissipate. Chart I-5Is U.S. Manufacturing Close ##br##To A Bottom? Chart I-6Is Eurozone Manufacturing Close To A Bottom? Discussions among industry specialists suggest some anecdotal evidence that many manufacturers have been engaged in re-routing channels and parallel manufacturing chains to avoid the U.S.-China tariffs. This is welcome news, since global exports and global trade are still in a downtrend. A key barometer to watch on whether the global slowdown is infecting domestic demand will be Chinese imports (Chart I-7). So far, the message is that traditional correlations have not yet broken down. As a contrarian, this is positive. Manufacturing slowdowns have tended to last 18 months peak-to-trough, the final months of which are characterized by fatigue and capitulation. However, unless major imbalances exist (our contention is that so far they do not), mid-cycle slowdowns sow the seeds of their own recovery via accumulated savings and pent-up demand. In the currency world, the dollar has tended to be an excellent counter-cyclical barometer. On the dollar, the bond-to-gold ratio is breaking down, in contrast to the rise in the DXY. This is not a sustainable divergence (Chart I-8). The last time the bond-to-gold ratio diverged from the DXY was in 2017, and that proved extremely short-lived. As global growth rebounded and U.S. repatriation flows eased, dollar support was quickly toppled over. Chart I-7Chinese Imports Could Soon Rebound Chart I-8Mind The Gap Ever since the end of the Bretton Woods agreement broke the gold/dollar anchor in the early 1970s, bullion has stood as a viable threat to dollar liabilities, capturing the ebbs and flows of investor confidence in the greenback tick-for-tick. While U.S. yields remain attractive, portfolio outflows and a deteriorating balance-of-payments backdrop will keep longer-term investors on the sidelines. Chart I-9Dollar Bulls Need A More Hawkish Fed Capital tends to gravitate towards higher returns, and the U.S. tax break in 2017 was a one-off that is now ebbing. Meanwhile, despite wanting to resist the appearance of influence from President Trump, the Fed realises that the neutral rate of interest in the U.S. is now below its target rate, which should keep them on an easing path. A dovish Fed has historically been bearish for the dollar (Chart I-9). Bottom Line: In terms of strategy, heightened uncertainty can keep the greenback bid in the coming weeks, but we will be sellers on strength. Our favorite plays remain the Swedish krona, the Norwegian krone, and, for insurance purposes, the Japanese yen. Outright dollar shorts await confirmation from more economic data. What To Do About CAD? The Bank of Canada (BoC) decided to stay on hold at its latest policy meeting. This was highly anticipated, but the silver lining is that the BoC might later reflect on this move as a policy mistake, given the arms race by other central banks to ease policy. The three most important variables for the Canadian economy are a:) what is happening to the U.S. economy, b:) what is happening to crude oil prices and c:) what is happening to consumer leverage and the housing market. On all three fronts, there has been scant good news in recent weeks. Heightened uncertainty can keep the greenback bid in the coming weeks, but we will be sellers on strength.  The Nanos Investor Confidence Index suggests Canadian GDP might be at the cusp of a slowdown after an excellent run of a few quarters (Chart I-10). One of the key drivers for the CAD/USD exchange rate is interest rate differentials with the U.S., and the compression in rates could run further (Chart I-11). Unless the BoC adopts a looser monetary stance, a rising exchange rate is likely to tighten financial conditions. Rising energy prices will be a tailwind, but the Western Canadian Select discount, and persistent infrastructure problems are headwinds. As such, we think domestic conditions will continue to knock down whatever benefit comes from rising oil prices. Chart I-10Canadian Data Has##br## Been Firm Chart I-11A Firm Exchange Rate Could Tighten Financial Conditions On the consumer side, real retail sales are deflating at the worst pace since the financial crisis, but consumer confidence remains elevated given the robust labor market data (Chart I-12). However, if house prices continue to roll over, confidence is likely to crater (Chart I-13). Chart I-12Canada: Consumer Spending Is Weak Chart I-13Canada: The Housing Market Is Softening On the corporate side of the equation, the latest Canadian Business Outlook Survey suggests there has been no meaningful revival in capital spending. This is a big headwind, since Canada finances itself externally rather than via domestic savings. For external investors, the large stock of debt in the Canadian private sector and overvaluation in the housing market are likely to continue leading to equity outflows (from bank shares) on a rate-of-change basis (Chart I-14). Chart I-14Foreign Investors Are Fleeing Canadian Securities Technically, the USD/CAD failed to break below the upward sloping trend line drawn from its 2012 lows, and the series of lower highs since the 2016 peak is forcing the cross into the apex of a tight wedge. The next resistance zone on the downside is the 1.30-1.32 level. Our bias is that this zone will prove to be formidable resistance. We continue to recommend investors short the CAD, mainly via the euro. Housekeeping We were stopped out of our short XAU/JPY position amid fervent buying in gold. Even though we are gold bulls, the rationale behind the trade was that the ratio of the two safe havens was at a speculative extreme. We will stand aside for now and look to re-establish the position in the near future. The Risksbank left rates on hold this week. This was welcome news for our long SEK/NZD position. The weakness in the SEK this year was expected given the surge in summer volatility, but the magnitude of the fall took us by surprise. In general, as soon as President Trump ramped up the trade-war rhetoric and China started devaluing the RMB, the environment became precarious for all pro-cyclical currencies. In terms of strategy going forward, the SEK probably has some additional downside, but not a lot. It is currently the cheapest currency in the G10. Should the Riksbank be actively trying to weaken the currency ahead of ECB policy stimulus this month, the final announcement, depending on what it entails, might be the bottom for the SEK and top for the EUR/SEK. Finally, as the Brexit drama unfolds, the outlook for the pound is highly binary. Aggressive investors can place a buy stop at 1.25 and a sell stop at 1.20. Anything in between should be regarded as noise.    Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the U.S. have been firm: PCE deflator nudged up from 1.3% to 1.4% year-on-year in July. Core PCE was unchanged at 1.6% year-on-year. Michigan consumer sentiment index fell from 92.1 to 89.8 in August. Trade deficit narrowed marginally by $1.5 billion to $54 billion in July. Notably, the trade deficit with China increased by 9.4% to $32.8 billion in July. Initial jobless claims was little changed at 217 thousand for the past week. Unit labor cost increased by 2.6% in Q2. Nonfarm productivity remained unchanged at 2.3%. Factory orders increased by 1.4% month-on-month in July. More importantly on the PMI front, Markit manufacturing PMI was down from 50.4 in July to 50.3 in August. ISM manufacturing PMI deteriorated to 49.1 in August, while ISM non-manufacturing PMI increased to 56.4, up from the previous 53.7 and well above estimates. DXY index fell by 0.5% this week. The recent worries about a near-term recession since the 10/2 yield curve inverted last month has been supporting the dollar, together with possible additional tariffs against China and the Chinese yuan devaluation. Going forward, we believe the dollar strength will ebb, given fading interest rate differentials. Report Links: Has The Currency Landscape Shifted? - August 16, 2019 USD/CNY And Market Turbulence - August 9, 2019 Focusing On the Trees But Missing The Forest - August 2, 2019 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been firm: Unemployment rate was unchanged at 7.5% in July. Both headline and core preliminary inflation were unchanged at 1% and 0.9% year-on-year respectively in August. PPI fell from 0.7% to 0.2% year-on-year in July. On the PMI front, Markit composite PMI was little changed at 51.9 in August. Manufacturing component was unchanged at 47, while services component nudged up slightly to 53.5. Retail sales growth fell from upwardly-revised 2.8% to 2.2% year-on-year in July, still better than the estimated 2%. EUR/USD appreciated by 0.5% this week. While the manufacturing sector across Europe remain depressed, the services sector seems to be alive and well. The ECB monetary policy meeting next Thursday will be key for the path of the euro. Report Links: Battle Of The Central Banks - June 21, 2019 EUR/USD And The Neutral Rate Of Interest - June 14, 2019 Take Out Some Insurance - May 3, 2019 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been mixed: Housing starts fell by 4.1% year-on-year in July. Construction orders increased by 26.9% year-on-year in July, a positive shift from 4.2% contraction in the previous month. Capital spending growth slowed to 1.9% in Q2. Manufacturing PMI fell slightly to 49.3 in August, while services PMI jumped from 51.8 to 53.3. USD/JPY increased by 0.5% this week. The consumption tax hike in Japan is scheduled for October 1. The tax rate will rise from 8% to 10%, with possible exemption on several goods such as food and non-alcoholic beverages, which could be a drag on domestic spending. That being said, we continue to favor the Japanese yen due to the risk of a recession amid the escalating global trade war. Report Links: Has The Currency Landscape Shifted? - August 16, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 Battle Of The Central Banks - June 21, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the U.K. continued to deteriorate: Nationwide house price index was unchanged in August. Markit composite PMI fell to 50.2 in August: Manufacturing component slowed to 47.4; Construction PMI fell to 45; Services component decreased to 50.6. Retail sales contracted by 0.5% year-on-year in August. GBP/USD increased by 1.2% this week. Brexit remains the biggest driver behind the pound. British PM Boris Johnson’s brother resigned this week, citing tension between “family loyalty” and “national interest”. Our Geopolitical Strategy upgraded a no-deal Brexit probability to about 33%, maintaining that it is not the base case since nobody wants an imminent recession. From a valuation perspective, the pound is quite cheap and currently trading far below its fair value. Report Links: Battle Of The Central Banks - June 21, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 Take Out Some Insurance - May 3, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been mixed: Building approvals keep contracting by 28.5% year-on-year in July. Australian Industry Group (AiG) manufacturing index increased to 53.1 in August. The services index soared to 51.4 in August from a previous reading of 43.9. Current account balance shifted to A$5.9 billion in Q2, the first surplus since 1975. Retail sales contracted by 0.1% month-on-month in July. GDP growth slowed down to 1.4% year-on-year in Q2, the lowest rate in over a decade. Exports and imports both grew by 1% and 3% month-on-month respectively. Trade surplus narrowed marginally to A$7.3 million. AUD/USD increased by 1.4% this week. While Q2 GDP growth rate continued to soften, the current account and PMI data are showing tentative signs of a recovery. On Monday, the RBA kept interest rates unchanged at 1%. In the press release, the Bank acknowledged that low income growth and falling house prices limited household consumption in the first half of the year. Going forward, the tax cuts, infrastructure spending, housing market stabilization, and a healthy resources sector should all support the Australian economy, and put a floor under the Aussie dollar. 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 Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: Consumer confidence improved slightly to 118.2 in August. Building permits continued to contract by 1.3% month-on-month in July. Terms of trade increased to 1.6% in Q2. NZD/USD increased by 1.2% this week. In a Bloomberg interview earlier this week, the New Zealand finance minister Grant Robertson expressed his confidence on the fundamentals of the domestic economy, especially the low unemployment rate and sound wage growth. The largest downside risk remains the global trade and manufacturing slowdown. As a small open economy, New Zealand is ultimately vulnerable to exogenous factors, especially those related to its large trading partners including U.S., China, and Australia. On the policy side, the finance minister believes that there is “still room to move” in terms of monetary policy. Report Links: USD/CNY And Market Turbulence - August 9, 2019 Where To Next For The U.S. Dollar? - June 7, 2019 Not Out Of The Woods Yet - April 5, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been mostly negative: Annualized Q2 GDP growth jumped from 0.5% to 3.7% quarter-on-quarter, well above estimates. Bloomberg Nanos confidence fell slightly from 57 to 56.4. Markit manufacturing PMI fell to 49.1 in August, right after a small rebound in July to 50.2.  Trade deficit widened to C$1.12 billion in July. USD/CAD fell by 0.5% this week. On Wednesday, BoC held its interest rate unchanged at 1.75%, as widely expected. In its monetary policy statement, the BoC sounded cautiously dovish, and expects economic activity to slow in the second half of the year amid global growth worries. The strong Q2 rebound was mostly driven by cyclical energy production and robust export growth, which could be temporary given the current market volatility. The rate cut probability next month is currently at 40%. Report Links: Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: KOF leading indicator was unchanged at 97 in August. Real retail sales grew by 1.4% year-on-year in July, up from the previous 0.7%. Manufacturing PMI increased to 47.2 in August, up from 44.7 in the previous month. Headline inflation remained muted at 0.3% year-on-year in July. GDP yearly growth slowed to 0.2% in Q2, from a downwardly-revised 1% in Q1. USD/CHF fell by 0.2% this week. We remain positive on the Swiss franc. The global economic slowdown and increasing worries about a near-term recession remain tailwind for the safe-haven 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 Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been mostly negative: Retail sales increased by 0.9% year-on-year in July. Current account surplus plunged by 60% from NOK 73.1 billion to NOK 30.6 billion in Q2, the lowest since Q4 2017. USD/NOK fell by 1.3% this week. The rebound in oil prices this week has supported petrocurrencies. On the supply side, the production discipline is likely to be maintained. On the demand side, fiscal stimulus globally should revive overall demand. A potential weaker USD should also support oil prices in the second half of the year, which will be bullish for the Norwegian krone. Report Links: Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been mixed: Manufacturing PMI increased slightly to 52.4 in August, from 52 in the previous month. Current account surplus narrowed from SEK 63 billion to SEK 37 billion in Q2. Industrial production increased by 3.2% year-on-year in July. Manufacturing new orders increased by 0.4% in July compared with last month. However, on a year-on-year basis, it fell by 2.2%. The Swedish krona rallied this week, appreciating by 1.4% against USD. The Riksbank held its interest rate unchanged at -0.25% this Thursday, and stated that they still plan to raise interest rates this year or early next, but at a slower pace than the previous forecast. Report Links: Where To Next For The U.S. Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights Portfolio Strategy Intensifying recession fears, rising risks of ineffectual monetary policy, and escalating trade policy uncertainty that is shattering corporate America’s capex plans, warn that sizable drawdown risks persist in the broad U.S. equity market in the upcoming 3-12 months. The transition from a virtuous to a vicious EPS-to capex cycle, souring global growth, the firming U.S. dollar that is weighing on cyclical/defensive pricing power and exports, and deteriorating relative balance sheet (b/s) and relative operating metrics compel us to put the cyclicals/defensives portfolio bent on downgrade alert. Recent Changes The cyclicals/defensives portfolio bent is now on our downgrade watch list. Table 1 Feature The SPX moved laterally last week, and remains below the critical 50-day moving average. Recession worries intensified on the back of the first sustained 10/2 yield curve slope inversion. Coupled with the trade war re-escalation, they remain the dominant macro themes. Worrisomely, BCA’s Equity Selloff Indicator captures these dynamics and continues to emit a distress signal (Chart 1). Equities have been relatively resilient in the face of these headwinds. Investors are hoping not only for a U.S./China trade deal, but also that the Fed’s cutting cycle will save the day. Chart 1Mind The Gap What caught our attention from all the speeches at the recent Jackson Hole Symposium was RBA Governor Philip Lowe’s speech, especially the section titled “Elevated Expectations That Monetary Policy Can Deliver Economic Prosperity”.1 Lowe highlighted that “When easing monetary policy, all central banks know that part of the transmission mechanism is a depreciation of the exchange rate. But if all central banks ease similarly at around the same time, there is no exchange rate channel: we trade with one another, not with Mars. There are, of course other transmission mechanisms, but once we cancel out the exchange rate channel, the overall effect for any one economy is reduced. If firms don't want to invest because of elevated uncertainty, we can't be confident that changes in monetary conditions will have the normal effect (stress ours).” The perception that the Fed is going to be the savior of the economy is a big risk, and when reality hits that President Trump’s tariffs are a shock to global final demand and presage profit contraction, volatility will skyrocket (please refer to Chart 3 from the August 19 Weekly Report). Importantly, the virtuous capex upcycle that has been in motion since the Trump inauguration when CEOs voted with their feet and started investing, has ground to a halt according to national accounts (Chart 2). U.S. non-residential fixed investment subtracted from GDP growth last quarter, and we doubt the Fed’s fresh interest rate cutting cycle will arrest the fall. Leading indicators of capital outlays point to additional pain in coming quarters (Chart 2). As a reminder, generationally low interest rates and a real fed funds rate near zero hardly restrict expansion plans. Chart 2Free Falling The shift from a virtuous to a vicious capex cycle is a theme that will start gaining traction as the year draws to a close. While pundits are dismissing the recent steep fall in capex as a one off, our indicators suggest otherwise. The middle panel of Chart 3 clearly depicts this emerging dynamic. Profit growth peaked in 2018 on the back of the massive fiscal easing package and capex is following suit, albeit with a slight lag. There are high odds that a looming profit contraction will further shatter frail animal spirits, sabotage the capex upcycle and tilt into a down cycle. Tack on the ongoing trade uncertainty, and CEOs are certain to, at least, postpone deploying longer-term oriented capital. Worryingly, this transition from a virtuous to a vicious capex cycle is not limited to a few cyclical sectors as we would have expected on the back of the re-escalating Sino-American trade tussle. In fact, basic resources’ and non-capital goods producers’ capital outlays are decelerating, warning that corporate America is in the early stages of retrenchment (bottom panel, Chart 3). Chart 3EPS-To-Capex Down Cycle Chart 4Capex… Charts 4, 5 & 6 break down sectorial capex growth using financial statement reported data from Refinitiv. Seven out of eleven sectors are steeply decelerating from near 20%/annum growth to half that; given that these sectors comprise more than 72% of the total capex pie, they will continue to weigh on overall stock market reported investment. Chart 5…Per… Chart 6…Sector Similarly, the news on the cyclicals versus defensives capex profile is grim. Trade uncertainty and the global growth soft patch has dealt a blow to deep cyclical expansion plans and leading indicators signal that the cyclicals/defensives capex will flirt with the contraction zone in the coming quarters (Chart 7). In sum, intensifying recession fears, rising risks of ineffectual monetary policy, and escalating trade policy uncertainty that is shattering corporate America’s capex plans, warn that sizable drawdown risks persist in the broad U.S. equity market in the upcoming 3-12 months. As a reminder, this is U.S. Equity Strategy’s view, which contrasts BCA’s sanguine equity market house view. Chart 7Relative Capex Blues This week we update our cyclicals versus defensives bias (we are currently neutral) and are compelled to put this portfolio bent on our downgrade watch list. Put The Cyclical/Defensive Tilt On Downgrade Alert Roughly two years ago, when nobody was talking about the brewing capex upcycle, we penned a report titled “Underappreciated Capex” and posited that: “It would be unprecedented if the current business cycle ended without a visible capex upcycle. Since the 1980s recession, all four recessions were preceded by stock market reported capex soaring to roughly a 20% annual growth rate. At the current juncture, capex is merely on the cusp of entering expansion territory and, if history at least rhymes, a significant capex upcycle is looming.” Fast forward to today and as historical empirical evidence had suggested, capex growth peaked near the 20%/annum mark (Chart 3 above). If our assessment is accurate that capex has now likely hit a wall and the virtuous EPS-to-capex cycle reverses to a vicious down cycle as EPS are now contracting, then deep cyclical high-operating leverage sectors are in for a rough ride. This will especially be true if the global recession warnings also morph into an actual recession on the back of the re-escalating Sino-American trade war. More specifically, our capex indicators are firing warning shots. Capex intentions according to a plethora of regional Fed surveys are sinking steadily, which bodes ill for cyclicals versus defensives (Chart 8). One key driver of the capex cycle is China and the emerging markets (EM). News on both fronts is grim. Our real-time indicator that gauges China’s reflation efforts (monetary and fiscal) turning into actual economic activity is Chinese excavator sales that remain in the doldrums (top panel, Chart 9). Chart 8Drop In Capex Will Weigh On Relative Profits Chart 9Elusive Global Growth Granted, global growth remains elusive as we highlighted last week and while softening Chinese economic activity is weighing on global growth, European and Japanese GDP growth is also decelerating with a number of economies already in the contraction zone (bottom panel, Chart 9). Melting global bond yields reflect these growth fears and warn that the relative share price ratio has more downside (middle panel, Chart 9). Export growth is an important indicator that closely tracks the ebbs and flows of global trade. When the trade-weighted U.S. dollar appreciates it dampens trade, the opposite is also true. Currently the Fed’s trade-weighted greenback based on goods has vaulted to cyclical highs, warning that the path of least resistance is lower for trade, thus a net negative for relative export and profit prospects (Chart 10). Similarly, EM capital outflows exacerbate the ongoing global growth blues and put additional strain on EM economies as depreciating currencies sap consumer purchasing power (top panel, Chart 10). The implication is that EM final demand is in retreat. The rising U.S. dollar not only deals a blow to basic resource exports via making them less competitive and leading to market share losses, but it also undermines cyclical sectors' pricing power. The top panel of Chart 11 shows that deflating commodity prices are exerting downward pull on relative share prices. The ISM manufacturing survey’s prices paid subcomponent corroborates this deflationary backdrop. Keep in mind that operating leverage cuts both ways, and now that the pendulum is swinging the opposite way revenue contraction in these high fixed costs industries will fall straight off the bottom line (Chart 11). Chart 10Rising Dollar Dollar Dampens Trade And… Chart 11…Saps Pricing Power Our macro-based cyclicals/defensives EPS growth models do an excellent job in capturing all these moving parts and signal that defensives have the upper hand in the coming quarters (bottom panel, Chart 8). Turning to operating metrics, the inventory buildup in the past few quarters coupled with a softness in overall business sales underscore that relative share prices will continue to trend lower (top panel, Chart 12). On the balance sheet front, relative net debt-to-EBITDA has troughed and widening junk spreads and the inverted yield curve warn that a further relative b/s degrading looms (second & third panels, Chart 12). If our thesis pans out in the coming months, then cash flow growth will come under pressure as the vicious capex cycle flexes its muscles foreshadowing a rise in bankruptcy filings. Already, the news on the profit margin front is disconcerting. Historically, the ISM manufacturing index and relative operating profit margins have been joined at the hip and the recent flirting of the former with the boom/bust line points toward an ominous relative margin squeeze (bottom panel, Chart 12). Chart 12Poor Financial & Operating Backdrop… Chart 13…But Excellent Valuations And Technicals Finally, soft versus hard data surprise oscillations have an excellent track record in forecasting relative share price movements. The current message is to expect additional weakness in relative share prices (second panel, Chart 13). While most of the indicators we track signal that the time is ripe to downgrade this portfolio bent to an underweight stance, bombed out relative valuations, and oversold technicals keep us at bay, at least for the time being (third & bottom panels, Chart 13). However, we are compelled to put the cyclicals/defensives ratio on downgrade alert to reflect the transition from a virtuous to a vicious EPS-to-capex cycle, souring global growth, the firming U.S. dollar that is weighing on cyclical/defensive pricing power and exports, and deteriorating b/s and operating metrics. The way we will execute this downgrade will be via a downgrade of the S&P tech sector (for additional details on the S&P tech sector's downgrade mechanics please refer to last Friday’s U.S. Equity Strategy Insight Report). Bottom Line: Stay on the sidelines in the S&P cyclicals/S&P defensives ratio, but put it on downgrade alert.     Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com     Footnotes 1      https://www.rba.gov.au/speeches/2019/sp-gov-2019-08-25.html Current Recommendations Current Trades Size And Style Views Stay neutral cyclicals over defensives (downgrade alert) Favor value over growth Favor large over small caps

Highlights While a self-fulfilling crisis of confidence that plunges the global economy into recession cannot be excluded, it is far from our base case. Provided the trade war does not spiral out of control, it is highly likely that global equities will outperform bonds over the next 12 months. The auto sector has been the main driver of the global manufacturing slowdown. As automobile output begins to recover later this year, so too will global manufacturing. Go long auto stocks. As a countercyclical currency, the U.S. dollar will weaken once global growth picks up. We expect to upgrade EM and European equities later this year along with cyclical equity sectors such as industrials, energy, and materials. Financials should also benefit from steeper yield curves. We still like gold as a long-term investment. However, the combination of higher bond yields and diminished trade tensions could cause bullion to sell off in the near term. As such, we are closing our tactical long gold trade for a gain of 20.5%. Feature “The Democrats are trying to 'will' the Economy to be bad for purposes of the 2020 Election. Very Selfish!” – @realDonaldTrump, 19 August 2019 8:26 am “The Fake News Media is doing everything they can to crash the economy because they think that will be bad for me and my re-election” – @realDonaldTrump, 15 August 2019 9:52 am Bad Juju Chart 1Spike In Google Searches For The Word Recession President Trump’s remarks, made just a few days after the U.S. yield curve inverted, were no doubt meant to deflect attention away from the trade war, while providing cover for any economic weakness that might occur on his watch. But does the larger point still stand? Google searches for the word “recession” have spiked recently, even though underlying U.S. growth has remained robust (Chart 1). Could rising angst induce an actual recession? Theoretically, the answer is yes. A sudden drop in confidence can generate a self-fulfilling cycle where rising pessimism leads to less private-sector spending, higher unemployment, lower corporate profits, weaker stock prices, and ultimately, even deeper pessimism. Two things make such a vicious cycle more probable in the current environment. First, the value of risk assets is quite high in relation to GDP in many economies (Chart 2). This means that any pullback in equity prices or jump in credit spreads will have an outsized impact on financial conditions.   Chart 2The Total Market Value Of Risk Assets Is Elevated Chart 3Not Much Scope To Cut Rates Second, policymakers are currently more constrained in their ability to react to adverse shocks, such as an intensification of the trade war, than in the past. Interest rates in Europe and Japan are already at zero or in negative territory (Chart 3). Even in the U.S., the zero-lower bound constraint – though squishier than once believed – remains a formidable obstacle. Chart 4 shows that the Federal Reserve has cut rates by over five percentage points, on average, during past recessions. It would be impossible to cut rates by that much this time around if the U.S. economy were to experience a major downturn.   Chart 4The Fed Is Worried About The Zero Bound Fiscal stimulus could help buttress growth. However, both political and economic considerations are likely to limit the policy response. While China is stimulating its economy, concerns about excessively high debt levels have caused the authorities to adopt a reactive, tentative approach. Japan is set to raise the consumption tax on October 1st. Although a variety of offsetting measures will mitigate the impact on the Japanese economy, the net effect will still be a tightening of fiscal policy. Germany has mused over launching its own Green New Deal, but so far there has been a lot more talk than action. President Trump floated the idea of cutting payroll taxes, only to abandon it once it became clear that the Democrats were unwilling to go along. On The Positive Side Despite these clear risks, we are inclined to maintain our fairly sanguine 12-to-18 month global macro view. There are a number of reasons for this: First, the weakness in global manufacturing over the past 18 months has not infected the much larger service sector (Chart 5). Even in Germany, with its large manufacturing base, the service sector PMI remains above 50, and is actually higher than it was late last year. This suggests that the latest global slowdown is more akin to the 2015-16 episode than the 2007-08 or 2000-01 downturns. Chart 5AThe Service Sector Has Softened Much Less Than Manufacturing (I) Chart 5BThe Service Sector Has Softened Much Less Than Manufacturing (II) Second, manufacturing activity should benefit from a turn in the inventory cycle over the remainder of the year. A slower pace of inventory accumulation shaved 90 basis points off of U.S. growth in the second quarter and is set to knock another 40 basis points from growth in the third quarter, according to the Atlanta Fed GDPNow model. Excluding inventories, U.S. GDP growth would have been 3% in Q2 and is tracking at 2.7% in Q3 – a fairly healthy pace given the weak global backdrop (Chart 6). Chart 6The U.S. Economy Is Still Holding Up Well Outside the U.S., inventories are making a negative contribution to growth (Chart 7). In addition to the official data, this can be seen in the commentary accompanying the Markit manufacturing surveys, which suggest that many firms are liquidating inventories (Box 1). Falling inventory levels imply that sales are outstripping production, a state of affairs that cannot persist indefinitely. Third, and related to the point above, the automobile sector has been the key driver of the global manufacturing slowdown. This is in contrast to 2015-16, when the main culprit was declining energy capex. According to Wards, global vehicle production is down about 10% from year-ago levels, by far the biggest drop since the Great Recession (Chart 8). The drop in automobile production helps explain why the German economy has taken it on the chin recently. Chart 7Inventories Are Making A Negative Contribution To Growth Chart 8Auto Sector: The Culprit Behind The Manufacturing Slowdown Importantly, motor vehicle production growth has fallen more than sales growth, implying that inventory levels are coming down. Despite secular shifts in automobile ownership preferences, there is still plenty of upside to automobile usage. Per capita automobile ownership in China is only one-fifth of what it is in the United States, and one-fourth of what it is in Japan (Chart 9). This suggests that the recent drop in Chinese auto sales will be reversed. As automobile output begins to recover later this year, so too will global manufacturing. Investors should consider going long automobile makers. Chart 10 shows that the All-Country World MSCI automobiles index is trading near its lows on both a forward P/E and price-to-book basis, and sports a juicy dividend yield of nearly 4%.1 Chart 9The Automobile Ownership Rate Is Still Quite Low In China Chart 10Auto Stocks Are A Compelling Buy   Fourth, our research has shown that globally, the neutral rate of interest is generally higher than widely believed. This means that monetary policy is currently stimulative, and will become even more accommodative as the Fed and a number of other central banks continue to cut rates. Remember that unemployment rates have been trending lower since the Great Recession and have continued falling even during the latest slowdown, implying that GDP growth has remained above trend (Chart 11). As diminished labor market slack causes inflation to rebound from today’s depressed levels, real policy rates will decline, leading to more spending through the economy.  Chart 11Unemployment Rates Keep Trending Lower The Trade War Remains The Biggest Risk The points discussed above will not matter much if the trade war spirals out of control. It is impossible to know what will happen for sure, but we can deduce the likely course of action based on the incentives that both sides face. President Trump has shown a clear tendency in recent weeks to try to de-escalate trade tensions whenever the stock market drops. This is not surprising: Despite his efforts to deflect blame for any selloff on others, he knows full well that many voters will blame him for losses in their 401(k) accounts and for slower domestic growth and rising unemployment. What about the Chinese? An increasing number of pundits have warmed up to the idea that China is more than willing to let the global economy crash if this means that Trump won’t be re-elected. If this is China’s true intention, the Chinese will resist making any deal, and could even try to escalate tensions as the U.S. election approaches. It is an intriguing thesis. However, it is not particularly plausible. U.S. goods exports to China account for 0.5% of U.S. GDP, while Chinese exports to the U.S. account for 3.4% of Chinese GDP. Total manufacturing value-added represents 29% of Chinese GDP, compared to 11% for the United States. There is no way that China could torpedo the U.S. economy without greatly hurting itself first. Any effort by China to undermine Trump’s re-election prospects would invite extreme retaliatory actions, including the invocation of the War Powers Act, which would make it onerous for U.S. companies to continue operating in China. Even if Trump loses the election, he could still wreak a lot of havoc on China during the time he has left in office. Moreover, as Matt Gertken, BCA’s Chief Geopolitical Strategist, has stressed, if Trump were to feel that he could not run for re-election on a strong economy, he would try to position himself as a “War President,” hoping that Americans rally around the flag. That would be a dangerous outcome for China.  Chart 12Would China Really Be Better Off Negotiating With A Democrat As President? In any case, it is not clear whether China would be better off with a Democrat as president. The popular betting site PredictIt currently gives Elizabeth Warren a 34% chance of winning, followed by Joe Biden with 26%, and Bernie Sanders with 15% (Chart 12). This means that two far-left candidates with protectionist leanings, who would stress environmental protection and human rights in their negotiations with China, have nearly twice as much support as the former Vice President. All this suggests that China has an incentive to de-escalate the trade war. Given that Trump also has an incentive to put the trade war on hiatus, some sort of détente between the U.S. and China, as well as between the U.S. and other players such as the EU, is more likely than not. Investment Conclusions Provided the trade war does not spiral out of control, it is very likely that global equities will outperform bonds over the next 12 months. Since it might take a few more months for the data on global growth to improve, equities will remain in a choppy range in the near term, before moving higher later this year. As we discussed last week, the equity risk premium is quite high in the U.S., and even higher abroad, where valuations are generally cheaper and interest rates are lower (Chart 13).2 Chart 13AEquity Risk Premia Remain Quite High (I) Chart 13BEquity Risk Premia Remain Quite High (II) The U.S. dollar is a countercyclical currency (Chart 14). If global growth picks up later this year, the greenback should begin to weaken. European and emerging market stocks have typically outperformed the global benchmark in an environment of rising global growth and a weakening dollar (Chart 15). We expect to upgrade EM and European equities – along with more cyclical sectors of the stock market such as industrials, materials, and energy – later this year. Chart 14The U.S. Dollar Is A Countercyclical Currency Chart 15EM And Euro Area Equities Usually Outperform When Global Growth Improves     Thanks to the dovish shift by central banks around the world, government bond yields are unlikely to return to their 2018 highs anytime soon. Nevertheless, stronger economic growth should lift long-term yields at the margin, causing yield curves to steepen (Chart 16). Steeper yield curves will benefit beleaguered bank stocks. Chart 16Stronger Economic Growth Should Lift Long-Term Bond Yields, Causing Yield Curves To Steepen Finally, a word on gold: We still like gold as a long-term investment. However, the combination of higher bond yields and diminished trade tensions could cause bullion to sell off in the near term. As such, we are closing our tactical long gold trade for a gain of 20.5%. Peter Berezin, Chief Global Strategist Global Investment Strategy peterb@bcaresearch.com   Box 1 Evidence of Inventory Liquidation In The Manufacturing Sector Footnotes 1 The top ten constituents of the MSCI ACWI Automobiles Index are Toyota (22.6%), General Motors (7.8%), Daimler (7.3%), Honda Motor (6.2%), Ford Motor (5.7%), Tesla (4.8%), Volkswagen (4.8%), BMW (3.8%), Ferrari (3.0%), Hyundai Motor (2.4%). 2 Please see Global Investment Strategy Special Report, “TINA To The Rescue?” dated August 23, 2019. 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