IGM Credit, IGM FX and Rates
03 Aug 2020
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Broad risk aversion was the market driver yest, as the market increasingly priced in the rumbling Trump-Russia controversy.
We were somewhat surprised last wk when the Comey saga first broke that the market initially shrugged it off, given the big implications over the Trump presidency and more pertinently, the possibility of it impeding any n/t push on the fiscal/tax policy front.
That said, the market has since reacted to the tune that we expected.
We draw attention to our viewpoints over the past few days, some of which detail the Trump-Russia saga, some of which detail how we expect the US economy to rebound less than most expects.
Click here for our viewpoint on "When was the last time we heard anything about Trump fiscal/tax policies?"
What is clear to us before is now being priced in by the market, that the White House will be mired in damage-control limitation and that there won't be much focus on pro-growth policies in the n/t, and that the remnants of some parts of the Trump trade (UST/USD) will crumble.
We also highlighted yest that the USD was at risk of capitulation (see here for the viewpoint) and this bore out from late European trade.
Market pricing of Fed hikes slide
What was even more noteworthy was the sharp slump in UST yields. We highlighted yest that while UST yields remained higher as compared to Nov, this was on the basis of rising inflation expectations globally and hawkish Fedspeak that continues to signal 3 hikes for 2017.
That said, our core position since early 2017 has been that we see 2 hikes instead given subdued wage growth and the Trump debacles would eventually weaken the soft data (consumer/biz sentiment) and weigh on consumer spending.
In the wake of recent US political turmoil, it seems like the fixed income market is starting to turn to our view. Note market pricing for a Fed hike in Jun has dropped quite a bit to around 60% currently while a fully priced hike has been pushed out from Sep to Nov.
As we highlighted yest, look for more USD weakness to follow while we suspect there will be further downside pressures in belly UST yields ahead.
The USD Index has already declined to our first target of 97.45 and we are eyeing an immediate extension towards 97.15. Momentum could spark an overshoot to 95.45.
Immediate resistance now at 98.00, 98.42 and 98.72 (downtrend resistance from 11 May high).
UST yields slumped, with the 2s -5.3bps at 1.246%, 5s -9.4bps at 1.754%, 10s -10.1bps at 2.224%, 30s -7.6bps to 2.916%.
For the 5s, the clear beak below 1.800% is a tech negative, paving the way for a retest of it's 18 Apr low 1.695% and 1.667% ahead.
For the 10s, it is approaching the static support of 2.200%, and we see momentum pushing it down towards 2.135%, 2.088% and 2.000% ahead in a repeat of the mid-Mar to mid-Apr move. Resistance now at 2.277% and 2.317%.
We see capital flight towards EM markets
We also see US stocks retreating from their elevated levels, with the risk that this could be the turning point in the post-Trump rally.
Beyond the obvious capital flight from US equities into safe havens such as the UST, Yen Swiss Franc, there remains an obvious search for yield and we see the likelihood of more capital flowing out into the EM markets where the allure is of a high-yielding alternative haven.
While the Latin markets have recently caught up with the EM updraft on the basis that they are less susceptible to US politics or to crude's volatility, their economic dynamics aren't as strong and we still prefer EM Asia in this respect given some of the economies here harbour solid domestic demand dynamics. Note too that with the USD weakness, carry is a net positive.
Look to buy into dips from here.
With the recent dip in Indonesian stocks, it represents an opportunity to adopt a buy on dips strategy.
Momentum may also push S.Korea stocks up to fresh cyclical highs, with President Moon set to saviour political goodwill in the post-election honeymoon.
Interestingly, we would highlight the prospect of outperformance in the Philippines. The PSEi looks poised for a retest of 8118.44 and a breakout.
Note too that we called at the end of Mar for a downside reversal in USD/PHP in our special EM Asia case study and we hold onto this view.
IGM Credit, IGM FX and Rates
By Tim Cheung 03 Aug 2020
Xinhua News Agency reported the Politburo held a meeting on the economy on 30 July (Thursday). The CCP also held a meeting with non-CCP political parties and non-political representatives. President Xi chaired both meetings. Compared to the meeting held on 17 April, we note some changes in wording were made to the remarks on monetary and fiscal policies in the 30 July meeting. 30 July meeting (as per Xinhua News Agency): - "While requiring full implementation of macro policies, the meeting called for pursuing a more proactive and effective fiscal policy that delivers solid outcomes, and a more flexible and appropriate monetary policy that targets sound results, according to the meeting". 17 April Meeting (as per Xinhua News Agency): - "Monetary policies should be more flexible and balanced and instruments such as reserve requirement ratio cuts, interest rate reductions and reloans should be fully leveraged to ensure reasonable and sufficient liquidity and a lower interest rate in the loan market, the meeting said, stressing the need to channel capital into the real economy, especially medium-sized, small and micro enterprises".
Topics Industry News