Comment of the Day
Video commentary for January 27th 2021
Value Stocks, U.S. Dollar Among Top Trades After Hawkish Fed
This article from Bloomberg may be of interest to subscribers. Here is a section:
“The Fed’s latest update is net negative for risk assets, as it seems to show that the Fed has a lower strike put than we thought - in other words Powell would be comfortable to allow further market weakness and volatility without intervening,” said Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors.
“Investors should continue to avoid developed markets government bonds as there is only downside there. We are rotating into defensive equities, long-dated U.S. Treasuries, commodities and VIX futures - Volatility will be here for a while.”
My view - The Fed is talking about raising rates faster than any other developed market central bank. That represents a strong tailwind for the Dollar Index and it broke upwards to new recovery highs today. This has been a consistent rebound from the lower side of the range and nothing has yet happened to question potential for a run back towards the psychological 100 level.
China Rushes to Deliver Stimulus as Fed Pulls Back in New Era
This article from Bloomberg may be of interest to subscribers. Here is a section:
And having avoided the all-out stimulus of Western peers when the Coronavirus first struck in early 2020, the PBOC finds itself with dormant consumer prices and room to “open the monetary policy tool-box.”
For China, that sets the stage for a triple dose of support from increased lending, lower borrowing costs and — potentially — a weaker yuan that would boost exports. The PBOC has already made a down payment on rate cuts and most economists expect more to come.
By China’s normal standards, the prize for successful stimulus will be small — more preventing a continued slide in growth than driving a fresh acceleration. And past policy errors — allowing a debt bubble to expand to enormous size — add risk to the outlook and a constraint on the PBOC’s freedom of maneuver.
If Yi and his team can pull it off, though, the boost from PBOC stimulus should offset at least some of the drag on global growth from Fed tightening. International Monetary Fund projections show China is set to contribute more than one-quarter of the total increase in global gross domestic product in the five years through 2026, exceeding the U.S.’s roughly 19% share.
My view - China avoided overstimulating the economy during the pandemic because they didn’t have to. Most factories have attached dormitories. That ensured production hummed even as much of the country was locked down. Instead they used the massive surge in export revenue as catalyst to reshare the economy. Clamping down on property developer leverage and reshaping innovation priorities in the tech sector were top of the list.
Weaker Yen, Stronger Japanese Stocks Seen Ahead: BofA
This note appeared in Bloomberg may be of interest to subscribers. Here is a section.
A mix of Federal Reserve tightening and spring investment flows from Japanese funds should result in a weaker yen but support the country’s government bonds and equities, strategists at Bank of America (NYSE:BAC) wrote.
Bank expects pronounced Fed and BOJ divergence as latter stays on hold; that will be exacerbated by spring investment flows, led by the newly established university fund and life insurance funds’ seasonal activity, strategists Shusuke Yamada, Tomonobu Yamashita and Tony Lin wrote
Sees BOJ maintaining yield curve control despite rumors of tightening
“For Japanese fixed-income investors, implications of policy divergence are relative stability of JGB over foreign bonds, higher FX-hedge cost, rising FX carry, and a stronger USD,” they said
Forecast USD/JPY will fall to 118 by mid-year despite cheap valuation
“We believe pressure to keep JPY undervalued will prove more significant especially in the spring when the Fed-BoJ policy divergence would be pronounced and institutional money may flow into foreign assets without FX hedge,” they said
Tougher U.S. rates typically favor Japanese equities
As market volatility increases, flows from Japanese funds and light positioning among global investors should also support the market, they wrote.
My view - The Bank of Japan has made no statement about changing its yield curve control policy. With 10-year JGB yields at the upper side of the stated band, we will find out in coming days whether they are going to continue to defend the policy.
The Chart Seminar 2022
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022.
Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location.
At present I am looking at a late May date for a London seminar and I am open to other times and locations subject to demand.
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