The double-dip risk and its market implications

- "Market participants face seriously limited visibility on the pace of near-term growth,
particularly for the advanced economies."
- "However, we do not believe that the global economy is about to fall back into a recession."
- "A double-dip – which is not the central scenario we choose – would most likely drive
rates even lower, but bond price upside is fairly limited, particularly at the front end."
- "In the event that the US did become the first to slide back into recession, the USD would be
hard pushed to find any support, at least initially. As the downturn shifts from local to global, it would become clear that there is nowhere to hide from a double-dip scenario. Against this backdrop, the USD would likely regain its status as a safe-haven play."
CreditAgricole Eco News 20100719

Views from the Bund

Key investment theme: "We believe MSCI China may see a near-term rebound because: (1) MSCI China’s weak performance YTD may have factored in some bad news about the economic slowdown; (2) China’s liquidity situation has started to see some improvements; (3) the Ministry of Agricultural index fell for the second straight month by 1.4% in June, which
could give governing authorities more leeway in their adjustment of monetary policies when needed. However, we stay cautious on MSCI-China because: (1) we see continued downward earnings revision risk as China’s economic slowdown ripples through from macro-sensitive sectors, such as steel, to more downstream sectors such as property, industrials, capital
goods, and airlines, etc; (2) a number of sector-specific policy risks to hurt earnings of and to de-rate multiples of related companies; and (3) banks’ fund-raising activities are only half-way through. Amid market volatilities, we identify investment opportunities from China’s economic rebalancing: (1) China’s consumer staple and low- and medium-end consumer
discretionary sectors, given (a) these sectors’ sticky growth track record both in upturns and downturns of the economic cycle; (b) China’s ongoing wage hikes; (c) the urbanization trend in central and western China; (d) the fact that these sectors are already subject to complete market competition, and are subject to the least policy risk; (e) the emerging consumer finance industry in China to boost consumption. Based on case studies of Hengan and Changyu Wine, we hold our view that quality mid-cap (US$1-3B) names in consumer staple and low- and medium-end consumer discretionary sectors that are trading at teens’ multiples may offer the best opportunity to repeat Hengan’s and Changyu’s very high share price increase of 50x over 10 years. (2) Investment opportunities arising from the Western China Development strategy. (3) Investment opportunities from the railway sector’s visible capex, such as China Railway Group."
What is changing: "China has released policies such as: (a) introducing the new resource tax charged at 5% of the revenue for coal, natural gas and oil companies; (b) putting price caps for coal companies; and (c) requiring a real name registration system for the online gaming sector."
China model portfolio adjustment: "We are bullish on consumer staples low- and medium-end consumer discretionary, expressways, IPPs, banks, and insurance, while we are bearish on commodities, property, energy, paper, and airlines."
JPMorgan China Equity Strategy Economics 20100716

The last defence against a sharp contraction in activity: The monetary defence

- "Globalisation and competition from emerging countries are likely to lead to a sharp contraction in activity in most OECD countries."
- "In order to withstand this development, these countries have used:
• first private-sector indebtedness, which had to be interrupted in 2007-2008, and which caused the banking crisis;
• then government indebtedness, which had to be interrupted in 2010."
- "The only remaining defence against a drop in activity is currently the monetary defence."
- "Due to the very low interest rates and the abundance of liquidity, central
banks are enabling:
• the private sector to deleverage more easily;
• banks to finance the low-quality assets and loans they still have in their balance sheets;
• some over-indebted countries to obtain refinancing."
- "The "monetary defence" is thus preventing a surge in household and corporate bankruptcies, a fresh banking crisis and certain countries from defaulting. Removing the monetary defence would lead to a new and drastic crisis and a collapse in activity."
Natixis Flash Economics 356 20100712

Non-commercial investors turn short USD

- "The latest IMM data covers the week from 6 July to 13 July."
- "Following the USD peak in early June (since which the USD has corrected 5%
lower), speculative investors have gradually reduced their long positions and have
now once again turned net short USD. This shift partly reflects an unwinding of short
EUR positions, but also the build-up in long AUD, CAD, CHF and JPY positions."
- "Positioning risk has become more two-sided in EUR/USD. Since net short EUR
positions peaked at 40% of open interest in early May (a 3 sigma event), threequarters
of these have been unwound. This implies that the upside risk on EUR/USD,
all other things equal, has been reduced. The latest move in EUR/USD towards 1.30
after the IMM data was collected is likely to have seen EUR shorts further reduced."
- "The JPY has been on a bullish trend since May (appreciating close to 10% in effective
terms) coinciding with a 180-degree turnaround in speculative positioning. After
being net short JPY to the tune of 45% of open interest in early May, non-commercial
investors are now net long with 35% of open interest. As the JPY rises, however, so
does the probability of intervention by the Bank of Japan, which only amplifies the
downside risk on JPY that already exists from positioning."
DenDanske IMM Positioning 20100719

Asian growth stays strong, with signs of a soft-landing

- Asian growth stays strong, with signs of a soft-landing "The key data releases over the past week were China and Singapore second quarter GDP. Markets generally reacted positively to signs of a soft-landing in China and continued robust growth in Singapore,
despite expectations of a weaker second half as global demand declines."
- China’s second quarter GDP growth eases… "Recent tightening measures appear to be working, as China’s Q2 GDP growth came in slightly lower-than expected at 10.3% y/y, in line with other slowing indicators such as industrial production, M2, retails sales, and fixed assets (see Highlight). Inflation for June came in much lower than expected (2.9% y/y), helping to ease concerns of overheating, and reducing the likelihood of additional tightening measures in
the near term. Other export-oriented economies in the region are still booming, such as Singapore which posted another quarter of rapid GDP growth (see Highlight). Both Singapore and Japan raised their official economic growth forecasts for 2010 to 13-15% (from 7-9%) and 2.6% (from 1.8%), respectively. India posted an inflation outturn of 10.55% in June, rising expectations of further interest rates hikes in the next monetary policy meeting scheduled on July 27th."
- …monetary tightening continues "As expected, Thailand raised its policy rate by 25bps to 1.50% last week, following similar moves in recent weeks by Korea, Malaysia, Taiwan, and India. On the other hand, Japan and Philippines remained on hold. Tightening measures reveal the region’s confidence in the growth outlook (see IMF Hightlight)."
- In the coming week…. "The coming week is relatively light on data releases. Markets will focus on June’s CPI inflation for Hong Kong, Singapore and Malaysia, and exports orders for June in Taiwan."
BBVA Asia Weekly Watch 20100719

The Hesitation Blues

- "Recovery’s apparent loss of momentum stops well short of signaling an economywide decline in activity. Barring a further breakdown in financial conditions, we anticipate second half growth in a range of 2% to 2½%."
- "Fed officials revised down their own growth and inflation forecasts but remained more upbeat than our own projections. Officials have deemphasized exit strategy discussions and acknowledged the revival of downside risks. But their baseline view does not support active consideration of new policy options."
- "Unconventional monetary policy proved highly effective in restoring key elements of financial stability. While conditions have weakened again somewhat, policymakers’ near-term message likely will reaffirm a readiness to support recovery."
- "Core retail sales rose in June but downward revisions to previous levels reveal greater hesitancy to spend among consumers despite solid income gains. A parallel retreat in business confidence underscores the importance of securing a more supportive financial setting."
Citigroup Comments on Credit 20100716

White biotech: Revolution in instalments

- "Industrial biotechnology offers huge development opportunities for the chemicals industry, enabling more efficient processes, innovative products and reduced dependence on the raw material oil. However, there is still a long way to go in building a chemicals industry geared to biomass. The main obstacles are price competition from established value chains based on oil and rivalry between medical and industrial biotech in the race for R&D funds."
DeutscheBank Talking Point 20100719

Top 10 Questions for 2H10

- Will There Be a Double-Dip Recession?
- Will Sovereign Balance Sheets Turn into a Global Crisis?
- Can Emerging Markets Drive Global Growth?
- Is the Treasury Rally Sustainable?
- Where to Invest in a Rising Rate Environment?
- Are Corrections a Buying Opportunity?
- Why is Selectivity Important?
- Is Investor Demand Enough to Support Gold?
- What Will Drive Oil and Grains Higher in the Near-Term?
- How Important are Asset Allocation Principles?
DeutscheBank Global Outlook July2010

The Global FX Monthly Analyst

- "In recent weeks the US growth outlook has deteriorated again, which translates into weaker USD forecasts."
- "Some fiscal/political worst-case scenarios in the Euro-zone have not materialised, although near-term risks remain.""
- "Talk about reserve diversification into JPY and reduced scope for intervention create JPY upside risks."
- "The CHF may strengthen further, linked to sticky safe-haven flows, strong growth and unwinding risks for CHF funding trades."
GoldmanSachs Global FX Monthly Analyst July2010

Chips, Double-Dips, and a Bullish Bias

- Risk aversion migrates to overstated double-dip concerns — "Sovereign sensitivity has diminished, but the ongoing downward revision to growth expectations is weighing on the markets. The negative momentum probably isn’t over, but an increasing part of the market is discounting the full doubledip and this isn’t reflected in the forward-looking data."
- Expect mixed messages in 2Q earnings — "Strong earnings momentum will be hard to maintain. Our economists expect a meager 2% earnings beat in 2Q. Outlook statements are likely to reflect weaker economic sentiment, though we believe the downside is largely priced in."
- Maintaining a long bias in credit — "The resilience of credit spreads over the last month suggests positioning is now much more balanced. Against attractive valuations and our impression that cash holdings have been built up, we continue to believe that credit spreads can perform despite the challenging backdrop."
- Bonds over CDS — "Derivatives and CDS indexes have outperformed in the rally. Our preference is for adding to cash positions."
- Pockets of value — "Basic materials, energy, financials and TMT are still our favorites. We also see good value in tobacco post-DOJ. Add exposure to highcoupon bank TruPS, which are likely candidates for take-out in 2013."
Citigroup US Credit Outlook 20100716

Yuan as a reserve currency: Likely prospects & possible implications

— "Rising US indebtedness combined with China’s rising economic and financial prowess have led some analysts to forecast the decline of the dollar and the rise of the yuan as the dominant reserve currency. While the macro-conditions such as economic size and trade openess will soon be in place, China will need to make the yuan convertible, create deep and liquid domestic bond markets and improve the rule of law. However, even then, network externalities, political obstacles and peer competitors do not make it a foregone conclusion that the yuan will emerge as the dominant reserve currency."
— "It will take China 15-20 years to put in place the conditions necessary for the yuan to emerge as an important reserve currency and even longer to rival the dollar as the dominant reserve currency. The yuan is set to become one of the major reserve currencies sometime after 2030. By then, three reserve currencies (dollar, euro, yuan) are likely to co-exist, reflecting the underlying tripolar structure of the international economic system."
— "The emergence of the yuan as a reserve currency would confer moderate financial and significant non-financial benefits on China. More significantly, the decline of the dollar would impose tangible constraints on US economic and financial flexibility. In addition to rising financing costs and lower seigniorage revenues, a declining dollar would lead to a hardening of the balance-of-payments constraint. This would have wider geo-political repercussions and affect the political standing of the US in the world."
DeutscheBank Research Briefing 20100716


More On Deficit Limits - Paul Krugman
Misunderstanding Modern Monetary Theory - Credit Writedowns
Do sovereign debt ratios matter? - China Financial Markets
Is Galbraith Right that Deficits are Never a Problem? - Economist's View
Fighting deflation - Econbrowser
Hungary Resists New Budget Cuts Despite Pressure - New York Times
Print job - Free Exchange
The question is: Is the era of cheap Chinese labour over? - Economist
Hungary's IMF revolt augurs ill for Greece - Telegraph
Laurence Kotlikoff replies to Lord Turner: Part 1 - FT Economist's Forum
Germany's New Economic Miracle - Spiegel