- This new 'Fast and Furious' series will give a quick overview of current trading themes a la Archbridge Capital, without indulging into the detail of any one idea. For that we refer to our regular notes, which tend to give a more detailed view of a single theme.
- A lot of QE talk, but the fact remains that QE tapering is coming, probably by end of this year.
- US: We see long equities vs bonds, long US equities vs EM equities (esp. with large current account deficits), long the US$ vs Yen and GBP and overall underweight EMs
________________________________________________________________________________________
USA:
We see growth in the housing sector and auto sector supportive of second half growth. Some consumer spending pick-up due to the fiscal drag effects beginning to fade in the second half of the year should provide further support. Additionally, we think that better EU growth (leaving the recession behind in the 2nd half of the year) will assist to off-set any slowing from EMs and hence further assist the US recovery. We do not expect QE tapering until earliest in December this year and have confidence that any policy errors (ie early tapering) will be avoided. This results in tapering coinciding with stronger economic growth. Inflationary pressures will be kept at bay and in fact some deflationary pressures may continue to develop due to a) weaker commodity prices due to EM slowdown and b) the depreciating yen but will prove temporary.
We see growth in the housing sector and auto sector supportive of second half growth. Some consumer spending pick-up due to the fiscal drag effects beginning to fade in the second half of the year should provide further support. Additionally, we think that better EU growth (leaving the recession behind in the 2nd half of the year) will assist to off-set any slowing from EMs and hence further assist the US recovery. We do not expect QE tapering until earliest in December this year and have confidence that any policy errors (ie early tapering) will be avoided. This results in tapering coinciding with stronger economic growth. Inflationary pressures will be kept at bay and in fact some deflationary pressures may continue to develop due to a) weaker commodity prices due to EM slowdown and b) the depreciating yen but will prove temporary.
EU:
Euroland will come out of its recession in the second half of 2013 and will reach moderate growth rates. This bottoming out period should provide opportunities especially in equity world. One point to note is that the last week has shown strong EU equity performance, while periphery spreads have widened. Monetary stance will probably have to become more stimulative, especially in the UK, as interest rates are correlating too strongly to the US rates.
EM:
Continued slowdown in EM growth. Especially in China via a) an engineered slowdown which reduces credit and avoids an asset bubble b) lower exports c) an attempt to turn the economy to a more domestic consumption driven and less foreign investment driven one. Chinese slowdown is affecting other EMs like Australia who rely on China for her exports.
Japan:
Massive continued monetary easing should assist in keeping bond yields at low levels, while depreciating the yen further and helping equities to rally. Economic growth is being stimulated by BOJ and government policies, but more is needed especially in the arena of structural reforms, which we expect to materialise after the Abe government wins overwhelmingly in the Upper House elections.
THE LONG AND SHORT OF IT:
Bonds: Short
We see the way clear for further bond weakness (albeit slower than we experienced to date) especially in the USA (and with it lower gold prices in the medium term). EU bond yields have so far followed suite and we do not believe that their economies are equipped to handle such a move and expect (the ECB to a small extent) the BoE to increase QE measures in order to prevent further yield appreciation (they have started this process by giving forward guidances for the first time, we believe there is more to come). These measures will inadvertently result to weaken their currencies vis-a-vis the US$ (see below). JGB rates have not followed the rate increases in the rest of the world and we do not expect them to do so going forward, due to massive monetary easing (and recently increased frequency) and agreements that we suspect have been made with major bondholders. This lack of movement in the JGB markets give us more confidence about our Japanese trading opinions below.
Cap on fast rate rises in rest of world:
Rates will not be allowed to rise a huge amount too quickly, especially outside of the USA since a rise of 300 bps with current economic growth would wipe out value worth 30% of japan's GDP (with its entire banking system) and 20% of the UK's GDP. This underlines the notion that if we see rates rise further in the USA then other nations will have to redouble their efforts to keep their rates down. Further QE and much weaker FX rates would become necessary for the above two mentioned countries.
Equities: Long
With unemployment falling in the USA, the economy gaining some momentum again in the second half of the year, while real rates are slowly rising we should see equity markets benefiting the most from this. We expect cyclicals will take the pole position from financials, who have been carrying q2 strength. Continued strength in the US housing market may be taken advantage of via purchasing lumber.
Japanese real rates are set to fall as inflation expectations and inflation picks up while nominal rates are kept at bay by the BOJ and their massive QE policies. We also believe, looking at recent JGB moves that Japan has overcome the initial fear that bondholders would panic out of their holdings of bonds entirely. Instead yields have not risen as in the rest of the world which should allow for further yen weakening and further economic strength. This should translate into substantially stronger equity valuations in Japan. Please also note that more than 50% of Japanese companies are currently debt free. Abe's third arrow includes the reduction of corporate tax in Japan from 40% to approximately 20-25%. And there are a large number of trillions in Mr. and Mrs. Watanabe's cash accounts just waiting to be deployed. A real deployment into equities may have just started, while foreign investors will also continue to allocate funds into the Japanese equities markets, while hedging their Yen exposure.
FX: Long $
Monetary policy differences should be the key driver of FX rates in our current economic structure and here we expect the US$ to be strongest and the Yen to be the weakest, due to monetary policy differentials. While we do expect the UK to push monetary easing further as their yields rise inadvertently and hence weaken the GBP further, perhaps much further. Please note that the UK has substantial problems with investments, which have collapsed since the 2008 crisis and have not recovered. This keeps the UK economy structurally weak, even though private consumption seems to be picking up, but only by increasing debt.The savings ratio in % has collapsed from 8% after the crisis to a mere 4% currently. All of the recent economic strength in the UK is based on this short term driver...
(We have been asked by our readers to comment about the Euro-US$ FX rate and we shall oblige:
ECB policy is still too tight. Tail risks getting priced out due to the ECB's OMT and the establishment of the ESM. Additionally, we see EU growth pick up in the second half of the year which could prove supportive and assist further in pricing out break-up risk. Overall we see Euro-US$ within a range with a small strengthening bias towards the euro in the next months. But closer to QE tapering we see that pendulum switching in favour of the US$.)
(We have been asked by our readers to comment about the Euro-US$ FX rate and we shall oblige:
ECB policy is still too tight. Tail risks getting priced out due to the ECB's OMT and the establishment of the ESM. Additionally, we see EU growth pick up in the second half of the year which could prove supportive and assist further in pricing out break-up risk. Overall we see Euro-US$ within a range with a small strengthening bias towards the euro in the next months. But closer to QE tapering we see that pendulum switching in favour of the US$.)
In EM world (underweight), we see them trying to weaken their currencies as their export markets (China) are slowing and money that was searching for yield in a liquidity induced world is starting to make its way back to the developed markets like the US. This should have longer term bearish effects on EM currency and bond markets, as well as equity markets. The danger is that this movement becomes more violent over time as a lack of value buyers may result in a 'no bids' scenario...
Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.