The Macro Take: The year the bear will growl
- Emerging markets are not fixed and the correction is now spilling over into developed markets
- It still feels like we’d need more blood on the street to warrant going in aggressively whilst everyone else is coming out
- I continue to be bearish on the global macro picture for 2016
- Thank god for Martin Luther King Day, as the US will have Monday off for some continued wound licking with the S&P, Nasdaq & Russell all down
By Kay Van-Petersen (KVP)
After much thought and deliberation over the holiday break – as well as just plain running out of money – I decided to get back to the game. And of course I missed you all, yes even you.
So the first Macro Take of the year will focus on an overview of 2016. Suffice to say if you had acted on the Macro Rossetta Stone piece I put out in August last year – you would not have to come back to the office this year, in fact you’d probably be debating whether you want to lift a helicopter or a yacht to go with the private beach house that you just lifted, as your positions continued to make money being short high yield, commodities, emerging markets and being long volatility.
2016 global macro backdrop
Coming into 2016 and being bearish on emerging markets, commodities and high yield for pretty much most of 2015 I expected a continuation of my views. However like everyone, very surprised by the speed of the correction so far this year.
Much of my frustration last year was thinking the stealth crisis in emerging markets would be a death through a thousand cuts that would drag out over years (ie remember that October rally in emerging markets and CMD last year? Ludicrous). Now it looks like we may get a much quicker death, but still early days.
My basic theme for 2016 is very simple. Emerging markets are not fixed, we’ve had multiple years of an incredible bull market there, given the China expansion (as well as 14% of GDP stimulus in 2008/09) and the commodity super cycle.
All of this served as a huge multi-story parking lot for quantitative easing. Debt which was the whole issue with the crisis in 2008, has actually increased dramatically by $57 trillion (and this was a report completed in February 2015 by McKinsey almost a year ago, after record bond issuances in 2015).
Emerging markets are not fixed and the correction that is occurring and needs to continue, is now spilling over into developed markets. The paradox of it all, is the only thing that can temporary abate the pain is massive co-ordinated fiscal stimulus (ie monetary stimulus is running on fumes if even that and is having less and less of an effect as we saw with cumulative rounds of QE in the US), but we are really too indebted to be adding on more debt.
It does not mean we will not, but that we should not. Prices need to correct to where they need to correct and the sooner they do so, the better the system can get back to cleaning itself and the business cycle can come back into play.
I think by the end of the year, emerging markets will be down considerably more, the USD will be stronger and there will be some bottoms set in a few commodities this year.
The biggest risk I see is a scenario where global headwinds get so bad, that we see the Federal Reserve backtracking into some kind of QE4 or “People’s QE” that sounds a lot more digestible.
Because I think at that point the market will know the game is truly finished. Gold will go ballistic and so will things such as bitcoin! Expect the continuation of QE from the Bank of Japan and the European Central Bank, as well as some potential new entrants into the QE ship - perhaps Canada?
2016 is also going to be one of the most geopolitically charged years that we’ve had in decades, with the onset of the US elections, escalating tensions in the Middle East, Emerging market activity (Brazil, SA, ML, ID, CH) and Europe (Brexit) and unfortunately more terror threats globally.
As promised in the beginning of the previous year. This is the one guarantee you can have this year, structurally higher volatility and a lot more uncertainty. With the VIX already getting close to 31 on just the second Friday of the year – bear volatility in mind on your position sizing and portfolio exposure (ie a $100m portfolio when volatility is at 14, is not the same as a $100m portfolio when volatility is at 27).
It also means you want to think about monetizing volatility in your structural trades. That is, keep a core clip of around 40%-60% and then trade around the remaining clip. That is, NZDUSD moves down around -3% in a week, take some profit, but if it jumps +3% the next week, add onto your structural short.
The Federal Reserve Bank is not going to hike four times this year – forget about it. I am not even saying that given the start of the year, I just think growth (globally and in the US) in the first half of 2016 is still not going to be as good as people think.
Also bear in mind this is an US election year which should get heavy towards the second half of the year. By the end of the year the USD should be stronger across the board, except this time it will be more driven by weakness in other currencies (central banks needing to cut) than from any real USD strength. With that said, you are going to have to be a much better currency picker in 2016 than 2015 against the USD.
I still think we’ll see higher highs in most emerging market currencies – which is saying a lot given big moves in crosses like ZAR this year – because we still have not seen enough of a correction in the imbalances in a lot of these countries. Also just look at the moves coming out of the likes of Zuma’s South Africa, or the political situation in Brazil – there is still no light at the end of the tunnel across most developing markets.
I will put out a portfolio of live positions for clients to be able to follow and track. Strategically speaking for the year, I like being long DollarSwissy, short KiwiDollar and on the carry side of things like long AussieSwissy, KiwiSwissy, KiwiCanada – the former milk over oil trade has been an absolute winner since I flagged it in August/September last year.
Kudos to the clients who put this on – you're around +10 figures in the money and that’s before accounting for the net carry on the trade. I continue to think Canada’s macro fundamentals are in dire straits.
On the yuan, take it from the guy that called the devaluation several times (think we even put something on TradingFloor 24 hours before the devaluation) whilst everyone else was vehemently against it and at the time I said USDCNY hitting 7.00 within 12 months of the initial move was not at all aggressive.
Now it definitely does not look aggressive with Friday's 6.59 close. This cross is only heading one way over time, I don’t understand why everyone is so surprised and perplexed over it.
They kept their currency artificially too high whilst the EUR and JPY were in complete free-fall. This is the natural path towards the yuan being a free floating currency. Another one that is not hard is the Saudi Riyal, pegged against the USD at 3.75 – the only thing I am mildly surprised at, is that its still standing and it's not even that expensive to bet against this (ie, it's not even 3%), please call our Global Sales Trading desk and ask for “The NDF Man”, aka Tareck Horchani (also on bloomie) if you’d like to hear more about this.
Value and interest should be found in the Eurozone which even whose main indices closed up for 2015, gave away a massive amount of the gains they had at one point.
Japan also continues to look good value wise, with the same underlying QE backdrop. The US as a whole will struggle this year, we probably had our first year of quarter-on-quarter consecutive falls in revenue and its getting tough to justify earnings growth this year – there is so much financial engineering going on, that one can probably make a short basket of companies who are borrowing debt solely to buyback shares and keeps things running.
Also Apple was a big contributor to earnings in the S&P this year, with their successful I-phone upgrade. We may not get that same effect from them until the Q3/Q4 this year. So just like the emerging markets, I would be much more of a stock picker in the US.
Also look at this table below of annual returns on the S&P500. Over the last 13 years, the S&P has had one big down year, two flat years and 10 years where it was up. That just looks and feels wrong.
S&P up 10 out of 13 years, but really more like only down once!
The path of least resistance continues to be yield compression in the Eurozone. Whether European Central Bank president Mario Draghi likes it or not, I think QE will be embedded in Europe for many years.
Just because they will not have the political capital to truly make the fiscal changes needed. I still think by the end of the year, US treasures will have been one of the better performers and I can see scenarios where we may hit the lows of 1.6% on the 10 year (people’s QE anyone?).
So I started to hint at this in my final pieces last year – but it's time to do the work on the gold and silver miners, like yesterday! Firms with good management, solid balance sheets, healthy cash flow/cash balances, paying down debt, etc.
And I would be starting to allocate them to the portfolio, whilst one can never call the bottom – from a long-term strategic sense I would look to be fully invested in this idea over the next two years. The point here being, if we are really going to continue into a storm of economic irresponsibility and continued QE (ie US/Fed backtracks), then assets whose value cannot be tampered with (printing press style) will be that much more valuable (yes, do some work on Bitcoin).
Also gold tends to perform well, when fear is high. I prefer the miners, rather than outright exposure to commodities. And of course silver will offer more downside risk, given that there is also an industrial argument for the use of silver.
For those not keen on individual names such as GG, AEM, PAA, SLV, AG, then check out ETFs such as GDX or GDXJ. If you are concerned about the downside from an outright position, well you can actually buy 1 or 2 year call options on those ETFs (perhaps just wait for an equity bounce, so volatility can come off, as the option premiums are quite elevated at the moment). Worth noting the chart still looks terrible.
GDX (Gold ETF) also has 1-2yrs options available. The chart still looks dreadful
With the US out on Monday due to Martin Luther King Jr Holiday, respite and leadership may be lacking on the equity markets. It is worth noting that most major indices are hovering around the “correction” of 10% and its only the Shanghai Composite which is down -18% YTD, that is flirting with the technical bear market measure of -20%.
Earnings in the US will continue, albeit the question on everyone’s mind is when will all this stop. From my perspective, with a dire global macro outlook for 2016 – certainly for the 1H – its hard to start buying due to fundamental reasons, even valuation reasons.
Yes, we are oversold on RSI & momentum factors, yes all of the “QE gains” in the Europe have been wiped out, but it still feels like we’d need more blood on the street to warrant going in aggressively whilst everyone else is coming out.
We’ve not even hit the lows that the S&P 500 saw in August - that 1860/70 level should put up a fight as the markets will try to bounce in the second half of January. It is also a level that we bounced back off beautifully in September 2014.
On the central bank side of things, there will be a lot of bank decisions – probably the two I am keenest on are Bank of Canada which I think could surprise with a cut (ie wake up and smell the lack of oil Poloz) and the ECB, more for what Draghi could say to try and talk down euro – whether or not it will work is another story. For a feel of the emerging markets’ heartbeat we will have decisions out of Turkey, Malaysia and Brazil.
Economic data wise, expect a theme of preliminary market PMI measures as well as inflation coming out of the US, Eurozone and the UK. And on Tuesday, China will also have its final 2015 growth data with not only the monthly spree of IP, retail sales and FAI data, but also Q4 GDP (+6.9% expected).
Recent key pieces of the franchise
Our quarterly series, with our 1Q16 Essential Trades: The Credit Gap
Our annual landmark and very popular piece Outrageous Predictions for 2016
Key macro data points to watch over next week*
Speakers/Other: Jan 18 – Jan 24
Fed Speak – None scheduled, probably because FOMC is next week.
Other Speakers – BoJ’s Kuroda (18), BoE’s Carney (19),
Meeting/minutes this week: Jan 18 – Jan 24
TU 7.50%e 7.50%p (19), BoC 0.50%e 0.50%p (20), BZ 14.75%e 14.75%p (20-21), BNM 3.25%e 3.25%p (21), ECB 0.05%e 0.05%p
Meetings/minutes next week: Jan 25 – Jan 31
NG 11.0%e 11.0%p (26), FED 0.25%e 0.25%p (27), RBNZ 2.50%e 2.50%p (28), UK 22.0%e 22. 0%p (28), SA 6.75%e 6.25%p (28), RU 11.0%p (29)
ECONOMIC DATA FLASH:
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 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.
-- Edited by Adam Courtenay
Kay Van-Petersen (KVP) is Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to TradingFloor.com, please follow him on twitter @KVP_Macro.