Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Macro Digest: Goodbye global policy panic, hello false stability
Steen Jakobsen
Chief Investment Officer
Summary: Brace yourselves for a major momentum shift because although volatility is low we believe that markets have been lulled into a false calm and are unprepared for the massive policy move that's taken place in China.
• Action: Reducing China from overweight to neutral
• Why: Technical chart pattern and President Xi changing focus from economic support to structural reforms
• Impact: China stocks' outperformance to fade and US dollar looks set to break higher, together with US yields….(following China’s lead)
The following quote from Sinocism.com neatly summarises what's afoot:
‘On Friday he (President Xi) chaired the monthly Politburo meeting that signaled a shift in the near-term policy mix for the economy as well as intensifying efforts in propaganda work. It looks like the message is “now that we have stabilized things we are going back to emphasizing structural reforms over stimuli”. We will have to wait and see how real that really is…’
See Caixing Global, Bloomberg and The South China Morning Post for more background.)
The outperformance in China has been significant YTD:
• Why: Technical chart pattern and President Xi changing focus from economic support to structural reforms
• Impact: China stocks' outperformance to fade and US dollar looks set to break higher, together with US yields….(following China’s lead)
The following quote from Sinocism.com neatly summarises what's afoot:
‘On Friday he (President Xi) chaired the monthly Politburo meeting that signaled a shift in the near-term policy mix for the economy as well as intensifying efforts in propaganda work. It looks like the message is “now that we have stabilized things we are going back to emphasizing structural reforms over stimuli”. We will have to wait and see how real that really is…’
See Caixing Global, Bloomberg and The South China Morning Post for more background.)
The outperformance in China has been significant YTD:
I will provide more details when I have talked to China-based sources.
Global policy panic is over….(for now)
We see a major shift in the urgency from global policy makers from panic stimulus to consolidation, which is now confirmed by the most important global leading policymaker – China – making this move.
President XI seems to be “happy” with progress and performance, now shifting gears to consolidation from what we called “the global policy panic”… we are now entering the “the false stabilisation”…..where policymakers go from stimulus to autopilot. This coincides with massive momentum divergence signals in China and also in US stock markets, which of course make us sit up and take notice even more.
The below chart is the CSI-300 (China). We have been long China since early Q4 on the global policy panic and we now move to neutral from a large overweight. The coming summer phase is likely to see flat performance with very little upside, except possibly when we get “the trade deal” announcement, which should provide an excuse to take profit on all overweight risk-on trades.
We see the next major turn in late summer, late July/August when the recent policy changes comes through as higher yields and less credit flow, but the economic data will improve from here.
Global policy panic is over….(for now)
We see a major shift in the urgency from global policy makers from panic stimulus to consolidation, which is now confirmed by the most important global leading policymaker – China – making this move.
President XI seems to be “happy” with progress and performance, now shifting gears to consolidation from what we called “the global policy panic”… we are now entering the “the false stabilisation”…..where policymakers go from stimulus to autopilot. This coincides with massive momentum divergence signals in China and also in US stock markets, which of course make us sit up and take notice even more.
The below chart is the CSI-300 (China). We have been long China since early Q4 on the global policy panic and we now move to neutral from a large overweight. The coming summer phase is likely to see flat performance with very little upside, except possibly when we get “the trade deal” announcement, which should provide an excuse to take profit on all overweight risk-on trades.
We see the next major turn in late summer, late July/August when the recent policy changes comes through as higher yields and less credit flow, but the economic data will improve from here.
China’s 10-year government bond is up >30 bps in April alone.
The “stimulus is disappearing”…
The “stimulus is disappearing”…
There is some indication that China’s yields lead US yields (China is countercyclical from US – leading), which means we need to monitor US 2-year and 10-year yields closely for a sharp rise!
Also – Nasdaq made a new high yesterday, but interestingly there were more stocks making 52-week lows than 52-week highs!
We remain concerned about the extremely low level of volatility as a false sign for market returns. There is some linkage between the US yield curve and future VIX levels:
In conclusion:
• Reduce overweight in China
• Expect rising USD and US yields from here… DXY @ 97.39 and 2-year @2.39 and 10-year @2.59
• Equity market should go flat over summer – real risk starts in late July/August when both policy actions and actual data will show none to little overall improvement in economic growth
• The coming month will be called: The False Stabilisation which most likely will lead to eventually stagflation, driving MMT in Q4 when national government will boost spending, tax cuts to “replace European Central Bank lack of transmission” after a decade of zero interest rates
• Volatility should start rising from here – higher US dollar, less liquidity (vis-à-vis Q4 and Q1), higher personal tax payments in the US plus huge increases in EM-consumption and the cost of energy makes the market very predictable in our view.
• Reduce overweight in China
• Expect rising USD and US yields from here… DXY @ 97.39 and 2-year @2.39 and 10-year @2.59
• Equity market should go flat over summer – real risk starts in late July/August when both policy actions and actual data will show none to little overall improvement in economic growth
• The coming month will be called: The False Stabilisation which most likely will lead to eventually stagflation, driving MMT in Q4 when national government will boost spending, tax cuts to “replace European Central Bank lack of transmission” after a decade of zero interest rates
• Volatility should start rising from here – higher US dollar, less liquidity (vis-à-vis Q4 and Q1), higher personal tax payments in the US plus huge increases in EM-consumption and the cost of energy makes the market very predictable in our view.
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