Macro Monitor
Why Value Failed—Top-Down & Bottom-Up Views
From a top-down view, since 2003, Value’s performance has been much more closely tied to various asset markets and macro drivers. From a bottom-up perspective, we believe the change in Value’s migration behavior might be the key to its failure. We believe macro tailwinds and positive surprises are both necessary for a true Value revival.
Risk Aversion Index: Stayed On “Higher Risk” Signal
While macro data has turned from “bad” to “less bad,” a lot of hope for a quick recovery in economic activity has been priced in. We recommend staying within range of the Fed’s fire power for the time being.
A Cross-Asset Dash For Cash
March’s mad dash for cash didn’t stop with rates/credit/FX markets. Among equities, there was also a strong preference for cash liquidity. The market rewarded companies that had strong cash positions and punished those without—which explains why traditionally defensive styles actually underperformed.
Double-Digit Yield & Double-Dipping Curves
As the coronavirus materially increases the odds of a recession, some important parts of the U.S. yield curve (10Y-3M; 5Y-2Y) double-dipped into inversion. The two prior episodes occurred in late 1989 and mid-2006 and, in both cases, a recession followed within 18 months.
Risk Aversion Index: Stayed On “Higher Risk” Signal
We will remain cautious toward lower-grade credit until we see the peak in new coronavirus cases. It all comes down to the recession call and the coronavirus has significantly increased recession risk.
Coronavirus—An Accelerator, Not A Catalyst
Chinese and Hong Kong markets are currently following the same script as seen during the SARS outbreak, but we caution against using S&P 500 performance as a guide for what is likely to happen this time around.
Risk Aversion Index: New “Higher Risk” Signal
We are turning more cautious toward lower-grade credit and will likely remain so until we see the peak in new coronavirus cases.
The Decade Of U.S. Exceptionalism & The Year Ahead
Two words sum up the past decade pretty nicely: U.S. Exceptionalism. The superiority of U.S. assets really comes down to the unique combination of growth (U.S. stocks), yield (U.S. bonds), and relative safety (both U.S. stocks and bonds).
Risk Aversion Index: Stayed On “Lower Risk” Signal
While the overall near-term tone is still positive for risky assets, complacency seems widespread too. This tempers our enthusiasm to chase risky assets at this point.
Slowdown Or Recession? No Confidence In “Confidence”
The ultimate question is whether the Fed’s recent “insurance cuts” are enough to overcome uncertainties about trade talk—and the upcoming election—to avert a recession. We updated our “Slowdown vs. Recession” study to see where we stand now. The bottom line is: It’s too early to rule out a recession.
Playing With Fire & Ice—An Inflation Scorecard
We put together an Inflation Scorecard that monitors two critical sets of inflation drivers: demand pull and cost push. The qualitatively-adjusted score is much closer to a neutral reading than the mechanical composite (which suggested quite a bit more disinflationary headwind).
Risk Aversion Index: New “Lower Risk” Signal
We are turning favorable again toward credit, especially emerging market sovereign debt.
Cross-Asset Cross Currents—All About The Recession Call
September was an emotionally exhausting month for investors as reversals in major themes produced wide-ranging repercussions. Movements in various markets have been increasingly tied to bonds—the market that is most sensitive to recession outlook.
Risk Aversion Index: Fell But Stayed On “Higher Risk” Signal
Recent data has certainly increased the risk of an imminent recession, but more confirmation is needed to move us into the recession camp.
From Hongkongitis To Hongkongoma
We call the current problem in Hong Kong, Hongkongoma, a complex problem underpinned by an ever-widening wealth gap and aggravated by an anti-mainland sentiment as a result of HK’s lost sense of superiority. The Extradition Bill is just the latest trigger.
Risk Aversion Index: Stayed On “Higher Risk” Signal
More and more signs are pointing to investors’ loss of confidence in central banks’ ability to revive the global economy. We maintain “neutral” on all credit classes.
When A Cut Is Not Enough
The recent rate cut managed to bring policy uncertainty back into the market by two seemingly harmless words—”mid-cycle adjustment.”
Risk Aversion Index: Stayed On “Higher Risk” Signal
A hawkish Fed cut, immediately followed by Trump’s new tariffs, caused quite a bit of market indigestion, a clear reminder of how quickly things can change.
Risk Aversion Index: Stayed On “Higher Risk” Signal
Our Risk Aversion Index fell in June but stayed on the “Higher Risk” signal generated in May.
Slowdown Or Recession? Confidence Is Key
The pattern of sharp sell-offs followed by equally sharp rallies continued in June. Most risky assets recouped nearly all the losses suffered in May, and then some.
All That You Don’t Hear About The Curve
While the 10Y-3M curve inversion does warrant extra attention, movements in other parts of the curve also need to be taken into consideration.
Signs Of Margin Pressure Ahead
Banks’ lending standards for C&I loans (typically to large businesses) tightened quite a bit in Q1, which bodes ill for both investment and overall economic growth going forward.
Risk Aversion Index: Maintains “Lower Risk” Signal
Our Risk Aversion Index ticked lower in April and stayed on the “Lower Risk” signal. Most risky assets participated and the rally was broad-based. The only fly in the ointment is EM assets. The recent weakness in both Chinese stocks and the Yuan is certainly worth paying attention to.
On The Cutting Edge—End Of Fed Hikes?
The Fed not only signaled no rate hike for the rest of 2019, but also committed to unwinding its balance-sheet reduction program, starting in May and ending in September. The market took it one step further and priced in a rate cut in the second half of 2019.
Risk Aversion Index: Stayed On “Lower Risk” Signal
With most major central banks now turning dovish, our view on credit is more constructive. We still view pull-backs in EM assets as better entry points. Investment grade corporate bonds are also attractive, and we maintain a neutral view on Munis and High Yield bonds.
The Great British Breaking Show—All You Need To Know About Brexit
The biggest near-term wild card is the infinitely confusing and hopelessly unpredictable Brexit.
Risk Aversion Index: Stayed On “Lower Risk” Signal
While global central banks’ dovish turn provides a supportive backdrop for the risk rally, short-term overbought conditions are everywhere too.
恭喜发财- Red Envelopes From The Fed & PBoC
A significant policy move by China’s People’s Bank of China (PBoC) has gone largely unnoticed.
Risk Aversion Index: New “Lower Risk” Signal
With the Fed now pausing its rate hikes, and the PBoC recapitalizing banks and reactivating lending, our view on credit has turned from defensive to neutral, with a more constructive bias. One of our biggest concerns, global central bank liquidity withdrawal, has been eased by the recent policy moves.
Tightening And Trade Risks Still Underestimated
Many were caught off guard by the relentless drop in stock prices and bond yields, but we think the real problem is that most people have underestimated the twin threats of central bank tightening and the ongoing trade war with China.
2019 Time Cycle—Hope Springs Eternal
We are heading into a pre-election year that boasts one of the best time-cycle patterns. Most markets, Developed and Emerging, show good patterns for 2019, even with different election cycles.
Risk Aversion Index: New “Higher Risk” Signal
Despite some near-term oversold conditions in risky assets, we continue to recommend defense and expect higher volatility to remain across all asset classes.
The Fed Should Pause And It Will
Liquidity reduction (QT) by global central banks is already showing up in slower M1 growth in all G3 countries. Slower M1 growth has led economic slowdown by about twelve months.
Bond Yield Proxy—A Tool For Equity Investors
We created an equity basket that can track the movement of the U.S. 10-year yield. Overall, it does a good job of capturing the major moves.
Risk Aversion Index: New “Lower Risk” Signal
Despite the recent signal whipsaws, we have been cautious toward all risky assets and we continue to recommend defense amid higher volatility across all asset classes.
Divergence Everywhere—A Cross-Asset View
The 40 bps jump in the 10-year yield, a 2-standard-deviation event, occurred within a five-week win-dow. Interestingly, historical data doesn’t suggest a continued increase in the near term.
Risk Aversion Index: New “Higher Risk” Signal
We have been leaning toward the defensive side despite the recent signal whipsaws and we continue to recommend caution in light of the increase in volatility across all asset classes.
Mid-Term Elections—History Might Not Be A Good Guide
While mid-term elections are rarely big market movers, this year’s election demands more attention as it has the potential to alter the balance of political power in Washington.