Wednesday, 11 July 2018

First Copper, then...

Copper is rolling over on Trade Wars, China slowing. Should drag HY down first, then equities with a few months lag.

Monday, 9 July 2018

My comments on Wolf Street's QE unwind update

In the 9 months since QE unwind started Fed has cut ~5% off the balance sheet. Since then:
  • US Tsy real yields are at top of the QE range, 80bps at 10yr
  • Tsy curve has flattened
  • USD rallied
  • BBB IG bond spreads to 1.6% vs 1.3%
  • US high yield spreads seems to have bottomed
  • EM tanked
  • Liquidity has dried up at times in some areas of bonds markets as they reset to higher yield levels with not much market making to intermediate the move
  • Global Prime Residential is in a bear market in many locations
  • S&P equity breadth narrowed
  • We had one volatility explosion in equities, and one in govvies (Italian 2yr) and several in EM FX/ equities.
Nevertheless with credit growth in Q1 at 18% of GDP annualised, main street USA is doing fine. 

In Q4 balance sheet reductions will go to $50bn a month and next year they are targetting 15%/ $600bn in reductions and potentially 100bps more from here in Fed funds rate hikes which would take Libor to about 3.5%.

If the USD Treasury yield curve steepens on a reflationary policy outlook it could see the 10year at 3.5-4%.

Sunday, 24 June 2018

Markets getting narrower and narrower

If you strip out the FANGs and global equities are flat to down for the year, despite all the share buybacks. That's a narrow market.


Friday, 22 June 2018

R&D capex leaders

PWC did a survey of the top 1000 innovator companies. If you filter for >$250m R&D capex and $500m-10bn revenue, ie companies with multi-bagger growth potential, the vast majority of the companies are in the US.

Friday, 15 June 2018

Real bond returns over the four turnings

Bonds do badly in the 4th and 1st turnings if associated with inflation and well in the 2nd and 3rd. 

Thursday, 14 June 2018

3m HIBOR doubles in a quarter

HIBOR rates have to track USD Libor over time given the peg and HKMA is draining liquidity. 3m HIBOR has more or less doubled in the last few weeks.

HK commercial real estate yields 1-2% vs 5% lending rates.

The systemic banks have balance sheats over 50% of HK GDP, 50% LTV mortgage books, so reset to even a 4-5% real estate yield would be a problem.

Anyway the HK real estate market is still on fire and as Chuck Prince famously remarked “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing."

UK worst ever CA deficit, US borrowing accelerates in Q1

The UKs worst ever CA deficit number I think.

Per the Z1 release, the US created $3.5Tn of credit annualised in Q1, or 18% of GDP, with most of this being the Federal government deficit increase. With the Federal Reserve hiking and QE unwinding, the question is who gets crowded out next and how long before we see some wage inflation... 

Ever since Dubai rolled over at the end of 2009 the crashes keep getting closer to the core.

No rebalancing yet then!