Live from the Asia Pacific.
As we have seven trading days left to the end of the quarter, let me wish you all a profitable, insightful, positive and growth-filled week. While initially I was going to focus on equities, the US and India in particular, not to mention the +4% we saw in Portuguese equities (PSI20) this week, I just cannot get the Federal Open Market Committee statement and US moves last week out of my mind… so it's monetary policy and currencies in focus again.
I'll try to catch up on my other thinking later in the week.
Key macro data points to watch over next week*
Central banks: Speakers: Monday, ECB’s Draghi. Thursday, BoC’s Poloz. Friday, both the Fed's Yellen and BoE’s Carney. There is also quite a few Fed speakers here and there this week, including S. Fisher today.
This week: (March 23-27): PH 4.0%e 4.0%p (Mar 26); TW 1.875%e 1.875%p (Mar 26); SA 5.75%e 5.75%p (Mar 26).
Next Week: (March 30 – April 3): No major central banks are scheduled to meet.
Economic data flash Probably the most closely watched data will be China’s HSBC (LONDON:HSBA) flash PMI estimate, followed by inflation in the US as well as the final 4Q US GDP reading. Inflation out of Japan, as always, remains key.
China: HSBC China PMI 50.4e 50.7p
Japan: Preliminary Markit PMI 52.0e 51.6p; Inflation +2.3%e +2.4%p
Australia: Conference Board Leading Index
New Zealand: Trade Data
UK: Inflation headline +0.1%e +0.3%p; Inflation core +1.3%e +1.4%p, PPI, Retail sales
Eurozone: Consumer confidence, Preliminary Markit PMI 51.5e 51.0p, M3 Money Supply YoY
US: Preliminary Markit PMI 54.7e 55.1p; Inflation headline -0.1%e -0.1%p; Inflation core +1.6%e +1.6%p; Durable goods +0.5%;
Final 4Q GDP reading +2.4%e +2.2%p; Final 4Q Personal Consumption +4.2%p
*Source: Bloomberg and Saxo Capital Markets
Digestion of the FOMC statement ... still ongoing ...
This week, a lot of people will still be digesting, re-reading and talking about last week’s Fed meeting. So once again over the weekend, your friendly neighborhood macro strategist was going through a replay of the March 18 FOMC statement, including Janet Yellen’s speech as well as her press conference.
The more KVP thinks about the statement – having reread it a number of times now, as well as reviewed a number of previous statements – the more inclined he is to think that a lift-off in 2015 is almost a near certainty. Yes, it's data dependent, actually it’s really inflation dependent – they are comfortable with everything else (growth, labour market, capacity utilization … “Unemployment rate ... and the labour market have improved more than I would have expected”: Yellen, Q&A press conference) and even with inflation they are aware that lower energy prices are going to be sticking around.
Here are some questions and responses that one can get on this view:
1. “But what about the recent trend of poor US economic data, for instance the Citi Economic US Surprise Index is abysmal, surely this is a slowdown that will impact their decision making?”
Citi Economic US Surprise Index versus S&P 500. The Surprise Index has come off severely. Is there more to come or is risk to the upside?
It is correct that the Citi Economic US Surprise Index has been in a clear and harsh downtrend since the start of the year. Yet, economic growth and data points are like stock prices: there are ups and downs – the key thing is the trend. Yellen herself says in the Q&A segment, that despite some scaling down of growth expectations from December, the current growth forecasts are still above trend. In other words, the Fed is not worried about growth.
2. “Okay, but if they were so clear on lifting rates later this year, why not just take ‘patient’ out and leave everything else unchanged, why add the extra language that ‘This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.'"?
That question can be answered with another question: why change anything in the first place? That is, if they wanted to keep rates unchanged for the year, why move now to alter the language – similar to how proactive they were in the January meeting, which was only a press release meeting.
Clearly, Yellen knows that if the indication is too strong, i.e. if they had just taken "patient" out and not used any further guidance on timing, the market would assume the hike was imminent and the (US Dollar Index) would have popped from its then 99.50 level to 1.05/10 in a heartbeat. Sounds excessive? We’ve hit a recent high of 100.33 on the DXY; last week’s pullback was a big one at -2.4%, yet sensible given that for the previous four consecutive weeks, the index was up a total of +6.5%.
Taking the recent high of 100.33, the DXY was up over 25% since mid-July’s 80 level. With almost half of that move taking place in 2015 alone, with the +11.5% pop.
DXY on fire – the moves in the US Dollar Index have been substantial.
Yellen has to indirectly talk the strength of the USD down. She knows structurally the USD is going higher, yet that does not mean the she cannot try to curb it somewhat before they move.
The DXY finishing 2015 at above 110 is not an unreasonable probability. Just note as in most things in the market, the majority of the move happens before the anticipated event, that is, post the first Fed hike. Yes there will still be a squeeze for those in die-hard, no-hike camps – and it will be uuuuuuuuugly – but eventually the momentum will shift to more of a grind up over the next few years.
3. “What are some of the more interesting aspects of the statement that you found?”
KVP was losing sleep over this part of the FOMC statement: “…an increase in the target range for the federal funds rate remains unlikely at the April FOMC Meeting”. Why focus on a specific month? Especially as there is no meeting in May and the next two are on June 17 and July 29? The fact that they are not meeting in May and the fact that it’s about as clear as a no-rate change in the next meeting as you can get from the Fed.
I think they are ready to hike and will look to have April, May and potentially June – one more quarter – to get a final stretch of data. If in that period inflation holds relatively steady, a hike is a done deal. Those focusing on the incremental steps of "are they going to raise it by 50 or 75 basis points by the end of the year", are missing the picture. This is solely about lift-off for the Fed, after which they will grind up in a very slow, wait-and-see approach. It will be a very subdued and elongated hiking cycle, like nothing we’ve seen before. This resonates with the fact that the global financial crisis in many ways, was like nothing we’d seen before.
4. “The thesis that you’ve had for a Fed hike this year since 3Q 2014: what would cause you to change to a neutral Fed for 2015?”
It would have to be some kind of systematic shock that potentially upsets or at the very least, leaves a time lag as a prudent pathway for the Fed. So something along the lines of war, a massive natural disaster in the US, etc. Granted all are low probabilities thankfully.
However, one thing with a slightly higher probability is oil, of which we are bearish to neutral at best. KVP would be buying $40 strike and OTM puts on oil futures, as with the new lows we made last week and the hocus-pocus nature of the up days – i.e. all are headline news flow-driven, rather than actual improvements in supply and demand – the risk is very much to the downside, with potential for a rapid escalation move downwards.
If oil for one reason or another tanked to $30 and stayed there, then all bets would be off on the Fed for 2015. Not sure about $30 and definitely not sure about oil staying at those price levels if/once it got there. Note also that last week’s volumes on up days were below the year-to-date average volumes of 385,000. We will soon be getting into storage capacity constraints which will not be supportive of the oil price and at the same time more supply continues to come on (US reached 9.42m b/d, highest since 1983).
Also geopolitically, we could be on the cusp of a US/Iran agreement that would see the latter becoming more fully integrated in the world, i.e much more future oil supply coming on line from the Iranians. The $40 handle could be broken in the next few weeks.
5. “Okay, assuming your US Fed hike in June/2H15 holds, are there any near-term risks or concerns that you may have on US dollar strength?”
Actually yes. There is no May FOMC meeting and April is as good as off the table – that means we have 1.5 months to the next FOMC meeting on April 29 where at best, the language could be more hawkish. But I personally think the language does not need to get more hawkish; the language is sufficient for a move tomorrow.
So post April, the next meeting is on June 17, another two months. So these gaps could see some weakness and lack of news to push the USD apart from the US economic data – which depending on whether you are bearish, your view is the trend is down and it's getting worse, there is no way the US is growing +2.0% this year, let alone 3.0%. Or if you are bullish, your view is we are close to the bottom or are at the bottom of the economic negative surprises and things should get better over 2Q.
So can the DXY drop another -2% over the next week or two? Yes it could easily retrace to the 96 handle – a 50% febo retracement level. I think anything south of that is a clear buy on dips; 90, the 38.2% retracement level should be a much harder floor. The key level to watch for on the upside is two consecutive weekly closes above 101.80.
DXY, last $97.909. Key levels to watch: $101.80 +4.0%, $96 -1.9%, $90.29 -7.8%
One thing that sticks out clearly to me is on the Aussie and Reserve Bank of Australia. Any kind of delayed Fed hike – in this case not expecting them to move until June at the earliest – means that the RBA has to do its own heavy lifting. So, post last week’s meeting, the probability of the RBA moving on April 7 or May 5 has increased in my view. This is lovely as the stubborn AUD/USD has bounced back, closing at 0.7775 on Friday, which is ludicrous when one takes into account the following:
- It's only 22pips lower than the 78c level it was pre the last RBA 25 basis point surprise cut in February. We have actually seen a high of 0.7907 since then. And on the March 3 meeting where the market was surprised again, except this time by the lack of a cut, we were above the 0.78 levels
- Iron ore continues to be weak (-14% YTD), as do other commodities
- China is in a much worse state than most people think and the effects of future easing will be very different
- The Fed will hike in the 2H, earliest will be in June but most likely July/September – there are four more RBA meetings before the Fed's July 29 meeting and six more meetings if you think the Fed hike comes on September 17. It's not a question of whether the RBA will cut, its more like will a 25bp cut be enough before the Fed acts.
Currently short AUD/USD is one of the clearest tactical and structural shorts on my radar. Funnily enough while the Aussie was up 1.8% versus the USD last week, the Kiwi smoked the Dollar, rising +3.2%.
Circles mark RBA surprises: First a cut then a no cut on February 3 and March 3. Next key dates are April 7, May 5,and June 2.
Lastly on the USD and DXY … Anything is possible, as per Yellen in the Q&A press meeting after the statement: “Every meeting is a live meeting, where we can make a decision.”
Year of the ram: reflections and rants
UBER: So Singapore’s Uber has added SuperCars to its fleet of cars that one can order – so one can decide whether they want to pull up in the Lambo or the Maserati (base fares of SGD 200 and SGD 165 + SGD 7/minute). Say what you want about Uber – as well as viability of the offering – but this is great marketing.
What I love is it allows people to dream and live a little. It's also an example of a disruptive business idea that takes away a lot of smoke and mirrors that are prevalent in our global society and approach to things. We need more of these, in fact, there is probably a case for a whole macro investment disruptive theme, albeit it's more expressible in private equity.
For instance the finance industry, whose whole raison d’tre is the optimal allocation of capital to different segments of society’s enterprise. It is actually paradoxical in nature because the finance industry itself is probably the poster boy of sub-optimal use of capital and is long overdue for an overhaul and clean slate from its smoke and mirrors traditional “this is how we’ve done it approach” – that comment always drives me up the wall. “We used to do it like this… “Or, back when I was at X… this was how we did it…” Please just go back in time and stay there, if you are not changing and willing to evolve.
For instance, the fees and costs associated with a lot of mutual funds, pension funds, hedge funds and asset managers are completely obscured from their investors – these include a lot of the default investment schemes some of us may be a part of through our governments and/or our companies. This needs to change. Just how one can enter a website and compare deposit or mortgage rates across numerous banks, one should be able to get onto a site where they can easily measure, standardise and pick their own asset managers based on risk parameters, track record, strategy, regional remit, etc.
At the end of the day, the paradox in this business is there is a very small proportion of people that are Long Talent yet Short Capital, while the majority are Long Capital yet vastly short Talent – in fact there is a clear inverse skew on returns, once capital gets over a certain threshold. Just as we can now go home, pop open Apple (NASDAQ:AAPL) TV, and review a movie or show, one day we WILL be able to do that for funds and money managers out there. We’ll be able to actually see how our hard-earned money is doing in real time. Obviously it would have to be on a vetted and trusted system, with clear transparency, performance and risk metric, regulatory support, etc. It's long, long overdue; if only someone out there was working on something like this, hmmm… either way it's going to be a business in the hundreds of billions of dollars and will give the industry the shake-up it needs and ordinary investors the empowerment as well as transparency that they are long overdue.
Perhaps its time for KVP to pull out that small “hedge fund list” and start up Hindsight Capital – we’d work in four-day shifts, have rotating quarterly vacations, nanny and "rugrat" facilities, state-of-the-art gym and spa, Uber super car perks, full transparency on performance and comp, everybody would be incentivised and paid, our clients and family would be welcome to join us and our families for company offsite in Bali, we’d record every meeting and discussion in the pursuit of truth a la Bridgewater, all in the our quest to be best of breed and approach things differently...
MOVIES: So my half Danish/half American princess and I caught a movie over the weekend – don’t worry KVP was still checking Bloomie articles and messages on the sly. Just joking (she may be read this). It was the new movie Insurgent (the follow-up to Divergent). After thinking that Shailene Woodley was pretty bad ass in the first one and being a complete sucker for anything Sci-Fi, it seemed like a decent trade.
About 10 seconds into it I got a sense of déjà vu, similar to when I kept kicking myself and silently screaming to finish watching The Hunger Games: Catching Tears… I mean Catching Fire! Seriously, is it just me or is there a clear niche lacking in Hollywood for strong willed, smart and action-kicking women. Maybe it’s just because there is a history of strong women in my family – which should not be read that the men of the family are stubborn or anything like that – but c’mon man, lets get some backbone in these scripts! We need more action roles such as Kate Beckinsale in Colin Farrell's Total Recall, now she was haaaaard core man.
Lastly, life is very similar to investing/trading, you end up with what you put up with – so set your standards high, focus on the process and a profitable trading/investing to you all. Be successful and don’t forget to enjoy the journey. The effective use of our time is the most valuable commodity we have.