- Macro landscape remains characterised by policy easing, QE
- Current structural setup implies eventual correction, but timing is uncertain
- 'You can run from global macro for a while, but you can’t hide'
- Precious metals, positive-yielding government debt key assets
- 'Expect new year-to-date highs in a lot of the yield-heavy crosses'
By Kay Van-Petersen
The big-picture global macro backdrop is roughly unchanged. We are still in the midst of the largest monetary policy experiment of all time, bubbles populate the world, and they all share one thing in common: they are a construct of the record low-yield, easy money-printing environment by which we remain surrounded.
The sailing into uncharted waters continues, yet hundreds of years of rhyming historical precedents – loose monetary policy, financial repression, confidence deficits, elevated valuations – do not bode well for the future.
We are nearing the end-game of the "false gods" era (read: central bankers) and we are seeing flashes of fatigue and doubt appearing over and over again. Just as lightning strikes before the mother of all thunder storms, the eventual fallout from all of this will make the crisis of 2008 look like a minor squall.
Wait for it... Photo: iStock
It will not be a tight-and-tidy spill linked to the US housing market, but something more like a widespread global cancer.
We’ve seen the third consecutive disappointment from the Bank of Japan’s attempts to ease policy further still (January 29, July 29, and September 21), consistent rallying of the domestic currencies despite rate cuts/dovish stances by central banks (witness the EUR, NZD, and the AUD going into their respective central bank meetings) and of course we saw September 9, when seemingly out of the blue the VIX closed up 40% and the S&P fell 2.5% after close to two months of sub-1.0% moves in either direction.
What happened right before that? Well, the European Central Bank met on September 8 and declined to come out with any more “easing” for the party – not even an extension of the quantitative easing window. The market, of course, did not like that one bit. German bunds went from below minus 10 basis points to plus five within 24 hours, dragging US and Japanese 10-year yields with them and sparking a risk-off environment where everything seemed to have a correlation of one.
As I said to clients the following Monday, it reminded me of 2008. “There were only two things up on Friday,” I commented; “volatility and the USD – even ‘safe-haven’ assets such as gold/silver the yen and the Swiss franc were clobbered.”
These are flashes of things to come. The issue, as always, is timing… are we talking the next three months, or the next three years? I am honestly still not sure, but we are getting closer and closer.
You can run from global macro for a while, but you can’t hide.
On the flip side of the coin, and just to play “contrarian Charlie” for a moment, everyone is sitting at record cash while waiting for the other shoe to drop and thinking that this is all unsustainable. To my eyes, this suggests that the pain trade is up.
And that’s most likely what we are still going to get, because when everyone is waiting for the inevitable, guess what? The inevitable does not happen. So if you are waiting for a 10% pullback in the S&P 500, well, good luck because there will be an avalanche of cash on the side looking to buy any dips. Remember how I said (and really believe) that Brexit was a game-changer? That it could potentially be the shock that takes us to a much-needed washout and ultimately a return to the business cycle? Well, it didn’t even last a week – the excess liquidity just absorbed it and the markets treated Brexit like a drop in the ocean.
It was a shock, but it hardly turned markets upside-down. Photo: iStock
The big picture: structural positioning
The “old-school macro” positions stand: long gold and other precious metals, with the majority of the exposure constructed through miners in both underlying and long-dated calls. We should see higher highs in the likes of gold, silver, and other precious metals; the miners are still lagging the moves in the underlying and it will be interesting to see whether the reporting season that kicks off in October starts to feed through to some well-deserved re-rates.
Look at long, positive-yielding government debt with the likes of the US and Australia, as well as solid, “real-asset” companies with positive- yielding cash flows. There are quite a few blue-chip companies yielding 5-10% dividend yield without the gimmicks of financial engineering (i.e. BP over IBM). I continue to think other alternatives sharing the characteristic of a denominator that cannot be debased – i.e. there is a finite supply – deserve some looking into.
Whether you’re a private individual with access to cryptocurrencies such as Bitcoin or a Family office with access to German RE/PE investments and the like, some diversification from traditional “liquid asset markets” is prudent.
I am also starting to look around the corner into 2017 and a few things are starting to look very compelling, such as USDMXN at 19.90. At close to the 20.00 level, long peso/short dollar may be a beach trade for 2017 with the same theme playing out across MXN bonds (short the CDS, long equities etc.).
There are always opportunities – do the work on MXN and Mexico.
The tactical book: Positioning into year-end
We have incredible event risks going into year-end with the US presidential election on November 8, the Italian referendum on December 4, a potential Federal Reserve rate hike (November 2 or December 14), the European banking sector – the list goes on.
With the Fed having missed the opportunity to move on September 21, and with November 2 considered a wash given the election, the next “real” Fed meeting is on December 14 – light years away in this market. At the same time, the BoJ (November 1 and December 20) is not likely to move anytime soon after its recent fumble, and the ECB (October 20 and December 8) will keep its powder dry until the Italians vote on the constitution.
Net-net, I believe we could be entering the longest regime of USD weakness/liquidation that we have had so far this year. Expect us to break out of the range-trading environments that we’ve been stuck in for months, i.e. across currencies, commodities, and equities. This is quite a significant call, as the successes achieved in these markets have gone to the range-traders and it’s been hard for macro, CTAs, and trend-followers in general to do well in this choppy environment.
Expect new year-to-date highs in a lot of the yield-heavy crosses like NZDUSD (with a move from 0.7274 to 0.7600 possible as the pair takes out new levels) AUDUSD (0.7669 to 0.79 ), USDINR (66.6125 to 66.30), and USDRUB (63.9663 to 62.5000).
In gold, we can see the metal moving up to will take out the year-to-date high at $1,384/oz, with a $1,400/oz breach being very feasible. Coffee, which presently trades around 153.55, is seeing some very strong positive price action and market positioning could see significant upside with the 180 level being challenged.
It will be risk-on (new highs in US equities), and that’s the pain trade given the levels of cash on the sidelines and the fact that everyone has been waiting for the other shoe to drop for the last few years…
The key risk to this USD liquidation/multi-asset range-breaking thesis is if we start to make new highs in G3 bond yields (lower lows in bond prices) once again. In such a case, the very thing that took equities up (lower and lower yields) will unravel equities and lead to an outbreak of risk-off sentiment.
I don’t expect it to happen, but there are definitely some bears out there watching.
Go kiwi go! We could continue to new ytd highs taking 0.7600 from the current 0.7274 levels:
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Source: Saxo Bank
Expect new lows in USDINR and USDRUB as the rupee and rouble strengthen:
Source: Saxo Bank
— Edited by Michael McKenna