Looking back
For macro data and news flow, it was a light week.
Credit: This has been across the board in the US, Europe and Asia, with India and South Korea being the exception in Asia as those sovereigns closed at their tightest levels for the week on Friday. If you recall I’ve been calling US 10 year a short since coming on board and we closed last week at 2.61%, close to 3 month highs. Bunds are back over the 1% club, at 1.08%. Soon enough we’ll have Portugal (3.21%) tighter than the US and potentially at some point Greece (5.61%).
Equities: Predominantly down across the board in the US and Europe, with Asia mixed. The S&P and Eurostoxx closed at 1985 (-1.1%) and 3235 (-1.2 percent) for the week. Asia saw the NKY just shy of the 16K mark at 15,948 (+1.8%) for the week. The Hang Seng and ASX 200 bucked the trend, closing down -2.8% and -1.2% for the week at 24,595 and 5,531 respectively.
FX: Mixed picture of USD strength and weakness, with the major commodity currencies weakening against the greenback whilst sterling and the euro staged a comeback from the previous week. Amongst other Asian currencies it was a story of USD strength, with the Yen at 107.34 on Friday’s close being the biggest loser at -1.22% for the week. The renminbi was the sole name to buck the trend, gaining 10 basis points on the US dollar.
Geopolitical risks and conflicts: Ukraine – same old, same old, with fighting continuing and the winter is coming. In the Middle East, the strikes against IS continued and much of the weekend has been dominated by the beheading of another Western journalist.
To be honest, to refer to the areas they control as the Islamic State is to do a disservice to Islam and Muslims everywhere – let's call it what it is, it’s a state of terror – the terror state. This game is as old as time and they can try to wrap up their actions in the ideology of their interpretation of religious teachings, but at the end of the day, it’s a de-evolution of humanity, where people are barbaric enough to not only murder and kill those that disagree with them, but commit complete and outright genocide.
I think the airstrikes against IS are a very good thing, however if these airstrikes do not extend into Syria, its akin to running on a treadmill – you can push as hard as you want, you are not going to move forward. Yes, if airstrikes are carried out in Syria, it helps Assad, but as I was saying during a client event in Hong Kong this weekend, everything in life has a cost benefit ratio. If you want to wipe out these barbarians you must follow them across any border. Further, Kerry needs to include Iran in the Middle East Coalition - it's too big of a force in the region to be ignored.
Lastly, as a strategist I like to sometimes project myself into different people, in the attempt to get a better sense or feel for how they could or may think – at the very least, it keeps me entertained.
So what would I do today, if I woke up as Vladimir Putin and I was looking to enhance my already impressive chess game? After my morning breakfast and ritual swim I’d take a look at Iraq and very clearly conclude that these colonial drawn borders of old are no more. I would not bother with the half step measures of the West, ie “Let’s try to clean the weeds on one side of the garden (Iraq) whilst letting them flourish on the other (Syria) and let it regroup”.
Instead, I would strengthen Russia’s history with the Kurdish people, by arming and training them on a much quicker and larger scale than what the US and its allies have done or could do. If there is a potential for a beacon of stability and light in that region, its in Kurdistan.
Turkey would be happy as they would be insulated from the IS, Iran would be pleased as there would be one less volatile region to worry about and the West would be fuming over this. In addition to helping the Kurdistan people, it would demonstrate that Russia is very much a world power, and one willing to help its friends. It would draw attention away from Ukraine, enhance our strategic positioning in the Middle East, not to mention provide lucrative trade contracts and once again, it would infuriate the West.
Central Bank Watch: The RBNZ decision was as expected with unchanged rates at 3.5% (after four consecutive hikes) and offered a more dovish tone than the market was expecting. In regards to the strength of the Kiwi, “its current level remains unjustified and unsustainable” said central bank governor Graeme Wheeler, as well as commenting that further “significant depreciation” was expected.
Macro Data Rehash
It was a light week data wise.
Asia: China trade data was mixed, while the loan data was in line (702.5 bn against. 700 bn estimated) post last month’s massive miss. The monthly data for FAI, retail sales and IP continued their missing trend – with FAI and IP in at 16.5% versus 16.9% estimated , 8.5% versus 8.8% estimated respectively. Chinese inflation looks subdued for August, in at 2.0% versus 2.2% estimated.
Europe: July’s IP came in better than expected 1% against0.7% estimated.
US: Data mainly to the downside, with misses in JOLTs job openings (4,673 against 4,700 estimated). Initial jobless claims (315K versus 300K estimated) as well as wholesale inventories (0.1% versus 0.5% estimated). August advance month on month retail sales were in line at +0.6%, whilst the September preliminary University of Michigan Confidence survey beat at 84.6 with an 83.3 estimate.
Looking ahead
This is a high octane week, with a series of key events falling primarily on September 18. This is hands down going to be one of the most important trading days of 2014. For the tactical amongst you, get ready to trade. For the structural/strategic (more medium-long-term) amongst you, look out for dislocations that could offer interesting entry points. We have:
Equities: The pricing of Alibaba, a hotly anticipated IPO & one-of-a-kind franchise
• GBP: Scottish referendum vote - will they stay or leave the 300 year union with the UK
• USD: The FOMC meets, the market is expecting a change in language in their statement
• CHF: The Swiss National Bank meets, the market is wondering whether there will be a change in the 1.20 EURCHF peg
What are my thoughts on Alibaba?
If I gave you around USD 160bn – which is roughly the market value that Alibaba will have – and with that you hired the best of the best, created cutting edge infrastructure, technology, facilities, marketing, etc, you still could not replicate this business. There is not another China out there, where we are going through the same combination of the creation of both a very large middle class consumer market (ie more spending to come) and immature internet penetration of around 24%. Compare this to Germany or the US with 84% (ie the potential for growth and diversifying into different consumer avenues is of truly epic proportions).
Investors in Google have received 30% CAGR over 10 years
It has scarcity value on a number of different metrics including:
• Most direct pure play on the Chinese consumer story – the market has been screaming for investment exposure to structural multi-decade investment theme.
• There are few Asian world class internet tech players, Alibaba will benefit from joining this space amongst the likes of Softbank, Tencent and Naver Corp.
• Now that I think about it, some of the tech names such as Tencent (700 HK) may get shorted as a hedge to Alibaba allocations and/or as institutional investors diversify their Asian tech holdings to make room for Alibaba.
• It's best positioned to build and create a full-scale logistics business in China. Something that is drastically needed.
• It has monopoly and entrenchment position in its home market that cannot be copied, nor challenged seriously by other international tech giants
• This calibre and type of company only IPOs about once a decade, it’s the type of placing an investor sees only a handful of times in their life. It is not just another IPO or tech company.
I think the name offers something for either a trader looking for a 20% to 30% return over six months post the listing, or an investor looking to make eight to ten times your investment over 10 years, similar to Google (14x, +30% compound annual growth rate in about 10yrs). Google had the same noise around it being expensive, questions asked on its growth rate assumptions (which it surpassed), questions on its business models as well as the shareholding structure, etc. And for those that were also concerned about Facebook being to expensive – let's not forget the technical glitches surrounding that IPO courtesy of the NASDAQ – well at Friday close of $77.48, it is up 106 percent since its IPO in a little over two years, resulting in a CAGR of around 37%.
Our European based equity strategist Peter Garnry has been all over Alibaba. Please catch his take on Saxo TV here
Our trading team will be offering CFDs from the first day of trading, which is expected to be this September 19
Sterling September 12 closes: GBPUSD 1.6268, EURGBP 0.7969, GBPJPY 174.61. How would I trade sterling? Very tactically!
If we get to Thursday and its still looking too close to call (50/50), I believe the best way to play this is immediately post the event.
If Scotland decides to stay in the Union, sterling will roar back and strengthen – so jump on that move, long cable, long GBPJPY and short EURGBP. I personally prefer the former two, as Europe and Japan have structural issues that will move their currencies lower over the medium-to-long term. Whilst cable may look the best on the chart for the chance of a bounce back, bear in mind the FOMC will also be making a decision (here I am assuming we’ll know the results of the referendum before their decision)
If Scotland decides to leave the Union, sterling should come off immediately – by how much is the question and to be frank I’d leave the math to the academics and just rely on one’s trading instinct, as well as trailing stops. It could take a few trading sessions for the dust to settle and then we’ll be presented with one of the all-time best opportunities of going long sterling and here again I’d prefer the other side to be the euro or yen.
If it seems clear that the polls are moving towards one direction, one may start putting out a line and complete the full position post the event.
There are obviously a host of other asset classes whose price action is correlated to the above, ie equities with Scottish assets, headquarters, etc. My own take? I have no edge here, yet a part of me cannot help but think this momentum towards an independent Scotland has been a very emotional and nationalistic movement, with zero to negative thought towards what happens when it goes through. The bottom line is: no one knows how this would unfold. I think this week, the “rational” camp will go all out to secure a 'No' vote so that Scotland stays in the Union. The point is, there can still be an organised and well laid out plan for Scottish independence in the future – so why rush into a potential abyss?
FOMC?
With tapering due to come to an end next month, US data on a whole is trending in the right direction, the market will be anticipating a change in forward guidance with rates being left unchanged.
What are my thoughts on EURCHN?
Honestly none at the moment, I’ve not managed to make time for looking at this. Swiss 10 year bonds are at the widest they’ve been for a month at 0.51% whilst the equity market at 8,795 was slightly up last week in what has been a down market for other European equity indices.
Our USDJPY call
Our timing and call last week was phenomenal (great job to our APAC trading floor team) as we reiterated our bullish USDJPY view and said we believed we were moving to a new trading range, where the old 104/105 resistance level is now the new support level. As we enter the highest levels seen on the cross since 2008, what am I thinking now?
Structurally you want to stay short the yen, 110 is the next key level to test – I’d be surprised if we are not in the 115-120 range by 2H15, the multi-year case for USD strength is just getting started and there is a high probability of the need to re-fire Abe’s first arrow next year with the Bank of Japan potentially set to print more money.
Our USDJPY call was up 2.2% for the week
Tactically given that our entry was 105 or better (the target was 110, stop 104.40), we are up +2.2% with no leverage (i if we were 10 times levered we’d be up 22% in a week). At these levels I’d be shaving 15-25% of the position off and look to lose another 10-25% in the 107.50-109.00 range. This gives me the optionality of reloading on any short-term pullbacks and also potentially hedging the position if the FOMC disappoints on Thursday due to a lack of forward guidance or if the tone is too dovish for the market. I’d look for a move in this cross post the FOMC and potentially tactically either jump on or off, whilst still retaining a core position of around 30-50% for that 109.50-110.00 level.
Macro data highlights for coming week
• Central Bank corner: Minutes from the Bank of England and the Reserve Bank of Australia. Decisions from the FOMC and SNB.
• Asia will see second quarter GDP figures and ANZ consumer confidence figures from New Zealand. Japan trade data as well as China Aug property figures.
• In Europe, we’ll have ZEW Survey for September, as well as final CPI prints for August.
• The US will be all about August CPI and housing starts data, not to mention the Philadelphia Fed and leading index.
Macro events
Monday (Time Reference: Singapore/Hong Kong Time Zone)
Australia
- New Motor Vehicle Sales YoY, Aug, -0.4%p (09:30)
Singapore
- Unemployment rate SA, 2Q F, 2.0%a, 2.0%
Europe
- Trade Balance SA, Jul, 15.5bn e, 13.8b p (17:00)
US
- Empire Manufacturing, Sep, 16.00e, 14.69p (20:30)
- Industrial Production MoM, Aug, 0.3%e, 0.4%p (21:15)
- Capacity Utilization, Aug, 79.3%e, 79.2%p (20:30)
Tuesday
Australia
-RBA Sep minutes, (09:30)
Europe
- ZEW Survey Exp., Sep, 23.7p (17:00)
US
- PPI Final Demand MoM, Aug, 0.0%e, 0.1%p (20:30)
Wednesday
New Zealand
- BoP Current Account Balance, 2Q, -1.0bn e, 1.41bn p (06:45)
Australia
- Westpac Leading Index Mom, Aug, -0.1%p (08:30)
Europe
- CPI MoM, Aug, 0.1%, -0.7% (17:00)
- CPI YoY, Aug F, 0.3%, 0.3% (17:00)
US
- CPI MoM, Aug, 0.0%e, 0.1%p (20:30)
- CPI YoY, Aug, 1.9%e, 2.0%p (20:30)
Thursday
New Zealand
- GDP QoQ, 2Q, 0.6%e, 1.0%p (06:45)
- GDP YoY, 2Q, 3.8%e, 3.8%p (06:45)
Hong Kong
- Unemployment rate SA, Aug, 3.3%a, 3.3p%
China
- August property prices (09:30)
Japan
- Trade data (07:50)
- Machine Tool Orders YoY, Aug F, 35.6% (14:00)
US:
- FOMC rate decision, 0.25%e, 0.25%p (02:00)
- Continuing Claims, Sep 6, 2,460k e, 2,487k p (20:30)
- Initial Jobless Claims, Sep 13, 305k e, 315k p (20:30)
- Housing Starts MoM, Aug, -4.9%e, 15.7%p (20:30)
- Phily Fed, Sep, 23.0e, 28.0p (22:00)
Friday
New Zealand
- ANZ Consumer Confidence MoM, Sep, -5.4%p (09:00)
Japan
- All Industry Activity, Jul, 0.1%e, -0.4%p (12:30)
- Nationwide Dept Sales YoY, Aug,- 2.5%p (13:30)
US
- Leading Index, Aug, 0.4%e, 0.9%p (22:00)
Source: Bloomberg and Saxo Capital Markets