This month we took a deeper look into private markets, where we have been bearish for most of this year.
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We consolidate our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content.
FX, Rates, and Commodities:
- Bullish 2-Year Gilts (17 August, Richard Jones)
- Fade strength in TWI GBP (10 August, Richard Jones)
- Geopolitical risks boost oil (2 August, Viresh Kanabar)
- Flipping bullish on CNH (1 August, Macro Hive, SGX)
- Macro scenarios for the US and Canada (July, Macro Hive, TMX)
Equities and Credit:
- Spread tightening has run its course(11 August, John Tierney)
- Momentum are max short USTs (17 August, Bilal Hafeez)
Central Banks Views:
- Fade BoE after UK inflation data(16 August, Henry Occleston)
- Fed on course to hike in November (11 August, Dominique Dwor-Frecaut)
Bilal’s Asset Allocation
- This month we took a deeper look into private markets, where we have been bearish for most of this year.
- We found that private market activity fell in H1, with total vehicles closed down over 50%.
- Investment trusts exposed to the private market are currently trading at wide discounts to their NAV as low liquidity and fears over asset valuations hurt investor sentiment.
- Private credit currently looks attractive versus high yield given the floating rate exposure, especially in the US where balance sheets remain strong and recession fears have calmed. Meanwhile, high-yield spreads have narrowed materially.
FX, Rates, and Commodities
Preparing for UK Short End to Outperform. You can read the entire piece here.
G10 FX and rates markets are chopping around within ranges as investors await a busy September for developed market central banks. Richard looks at market pricing for the big three CBs and concludes that:
- Market pricing for the Fed is very dovish.
- Markets expect one more hike by the ECB.
- Markets expect the BoE to reach 6% by February next year, which would mean another 75 bps of hikes. This looks to be too hawkish given the recent loosening of the labour market.
Therefore, Richard thinks with pricing as stretched as it is, going long the UK short end (2-Year Gilts) is the most attractive trade in the G10 rates space.
BoE Outlook Exposes UK Yields and GBP to More Downside. You can read the entire piece here.
Since the week of 10 July, the GBP TWI is down about 1.1%. Richard thinks that on a trade-weighted basis, the pound can trade back to its 2023 low seen in early March. That is about 4.75% lower than now.
His reasoning for this is simple. As BoE pricing continues its dovish trend, lower UK yields will weigh on the pound. Beyond the GBP TWI, his favourite currency pair through which to play GBP weakness is against the Swiss franc (CHF).
We stay bearish on GBP, particularly against CHF.
Macro Hive Collaborations
Central Bank Policy Divergence in Asia. You can read the entire piece here.
In our latest collaboration with SGX, we look at the diverging interest rate and inflation prospects in Asia. Meanwhile, we focus on the Politburo’s latest meeting, where the following details stood out:
- Local government debt: There were promises to address the debt load of local governments with a ‘debt resolution’. Although no details were given, various options for reducing local debts are available to the central government.
- Jobs: A much-quoted statistic is that China’s youth employment has reached 21%. The Politburo said it would work with private companies and foreign companies to increase employment.
- Property market: A slogan from previous Politburo meetings (‘Houses are for living, not for speculating’) was removed from this week’s communique. This suggests Beijing will be more lenient with the curbs on property companies and house buyers.
- Fiscal support: No headline number for a fiscal support package was mentioned. Recent years have shown Beijing wants to avoid the unlimited spending sprees of previous leaders. Nevertheless, the communique mentioned increasing countercyclical measures, suggesting spending will increase in the second half of 2023.
Assessing Different Macro Scenarios in the US and Canada. You can read the entire piece here.
Our collaboration with TMX looks at the US and Canadian economies, which are both performing well. Given the events of March, we assess the possibility of a banking crisis occurring in either country and its impact on terminal rate expectations.
In the event the BoC turns dovish later this year, we like to buy the TMX 3M Corra September 2024 future.
Geopolitics Impact Brent as China Cuts Crude Imports. You can read the entire piece here.
Rising instability at Russia’s Black Sea ports has likely added a geopolitical premium to Brent. It is now increasingly difficult to obtain insurance for crude and product tankers – which could hurt exports. Currently, Russia exports 0.5mn b/d from the Black Sea, which could be at risk going forward. The other impact is increased costs to re-route oil and refined product transportation through other routes which will increase transportation costs and therefore reduce the price of Russian oil.
Viresh also looks at the latest Chinese crude import data, which appears to be peaking. Despite this, Viresh believes Brent remains well supported at $80 a barrel.
Equities and Credit
Equities remain rangebound. You can read the entire piece here.
In his latest earnings outlook, John expands on why equity markets continue to trade sideways with little to push them much higher or lower. He believes it remains a stock-picker’s market.
John also looks at the latest earnings from advertising companies, and what it means for the economy.
Spread tightening has run its course. You can read the entire piece here.
Credit spreads have trended tighter in recent weeks, despite some high-profile defaults and downgrades of regional banks by Moody’s. Bottomline, these events have been in market prices for months.
One indicator still flashing yellow is quality spreads, or difference between spreads for rating cohorts. These widened in September 2022, when recession concerns peaked, and are still at levels implying concern among credit investors about recession risk.
Credit spreads are near cyclical tights. A combination of defaults and downgrades should limit further upside for high yield but John does not expect spreads to blow out.
There were no updates to our crypto views this month.
Our momentum models cover FX, equities and rates. The basic strategy is to use returns (lookback windows) to give buy/sell signals. You can find the latest report here. Find out how to enhance your portfolio using momentum models here.
Rates momentum models (+1.3% WoW) outperformed FX (+0.7% WoW) and equity momentum models (-0.2% WoW) over the past week. They are the top performer over a three-month time frame (+3.0%), too. Equity momentum models (+2.8%) are also up over the period while FX models aren’t (-0.2%).
Since our last update, momentum models move max short on both Bunds and Gilts.
Central Bank Monitors and Previews
As We Expected, UK Core Inflation Steady, Fade the Hawkish Reaction. You can read the entire piece here.
As we had expected, July UK headline and core inflation beat expectations, driven by rises in rent prices. The BoE should not take this hawkishly. It is roughly in line with their estimates, and they are focused on the details. Services inflation, while higher than the BoE’s estimate, continues to add to our conclusion that wages are not the main driver of cost pressures, and that the BoE will not need to hike to where the market is pricing.
Following the inflation number, Henry’s conviction that it is now time to fade BoE hawkishness has increased.
Core Services Inflation Recovers. You can read the entire piece here.
July MoM headline and core CPI were 0.2%, in line with expectations and unchanged from June. Core goods deflation deepened, OER were roughly unchanged from July, and core services ex shelter rebounded to roughly the same MoM increase as in May.
Dominique believes that the most recent inflation data is consistent with the Fed staying on hold in September and hiking in November.