Economic Growth
The contours of a deal to solve Italy's banking problems are starting to emerge. This is good news for European risk assets. Nevertheless, reviving Italian growth will require even more ECB easing. The appetite for radical measures is low at present, but this will change if euro area growth remains lackluster and efforts by Japan to introduce helicopter money policies prove successful.
A collection of 10 important charts to monitor closely through the summer months.
The ongoing stampede into EM bonds is unsustainable. Running away from G7 bonds does not necessarily entail buying EM bonds. These are two separate investment decisions. Lower commodities prices, weaker EM currencies and higher G7 bond yields will undermine EM bond returns going forward. A new relative bond trade: long Polish and Hungarian 5-year / short South African and Turkish 5-year local bonds, currency unhedged.
This week, we are sending a <i>Special Report</i> written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market. In addition, we are also sending you a joint <i>U.S. Bond Strategy/Global Fixed Income Strategy Weekly Report</i> which discusses the end of the secular bond bull market and the implications for global bond strategy.
There has not been much of an improvement/recovery in the Chinese economy. Credit growth is weakening anew, which warrants a downbeat cyclical outlook for China's industrial sectors. Malaysia is heading into a classic credit/banking downturn. Go short Malaysian banks stocks and short the ringgit versus the U.S. dollar. In South Africa, take profits on the yield curve flattening trade. Continue shorting the rand versus the U.S. dollar.
The latest data releases confirm that the Chinese economy regained its footing. In the near term, growth figures should continue to surprise to the upside. Earnings preannouncements by Chinese listed firms show a significant acceleration in earnings in the second quarter from a year ago, while the market continues to expect sharp earnings contractions for Chinese companies.
Developed Market bond yields are too low relative to improving global growth and the strong recovery in risk assets post-Brexit. Reduce portfolio duration to below-benchmark.
Long-time subscriber Mr. X recently visited our office to discuss three issues: Brexit, the outlook for China and the seeming contraction between the performance of equity and bond markets. This <i>Special Report</i> is a transcript of our conversation and, not surprisingly, the broad conclusions supported a cautious investment strategy.
Today, on a tactical basis, we are moving our allocation on EM hard currency bonds to neutral from underweight. In this <i>Special Report</i>, we elaborate on the reasons leading to this decision.
A number of divergences have emerged in global financial markets. These gaps are unsustainable. The recent improvement in Asian trade/manufacturing has been largely due to firming demand for electronics/semiconductors. Meanwhile, demand/output for industrial goods and basic materials - the areas leveraged to Chinese capital spending - remain weak. Fixed-income traders should bet on yield curve steepening in India: receive 1-year/pay 10-year swap rates.