Macro Outlook : Gunning For Green Shoots

While the EM crisis rages on, the preoccupation is with capitulation in the days ahead as we head into month end.

>> Reports are calling for further stress in the system – India and Indonesia to lead the way and Malaysia, the next target. Overriding sentiment is one of calm and the situation to be contained.

“Despite rising stress in India and Indonesia on capital outflows and the
potential contagion effect on Asia, we do not expect it to develop into a
financial crisis as the two banking systems are largely domestically funded,
making them less vulnerable to sharp slowdown in deposit/loan growth.” Source : Deutsche

“In Malaysia, while the current account balance is likely to remain in
surplus, it is important to note that a sizable share of export revenues
are often not brought back home (showing up as capital outflows).
Taking this into account, we believe Malaysia’s ‘effective’ current
account balance may well already be in deficit.” Source : CS

>> The forecasts are calling for tentative economic strength to return in the later half of 2H13. Just read the 2 slightly contradictory outlooks out of JPM below. Higher PMI ? Lower GDP ?

“Emerging Asia was hurt most by the weakness in global industry. Outside China, production contracted during 1H13. The latest evidence shows the pace of inventory accumulation moving sharply lower. Against this backdrop, the rebound in China’s August PMI and Taiwan’s July activity data suggest that the regional industrial cycle is starting to turn. We expect August surveys from the rest of the region to confirm this shift and look for EM Asian industry to swing quickly from weakness to strength in the coming months.” Source : JPM

“While nearly all EM economies have taken part in this sell off, the pressure has been particularly acute in those countries with large current account deficits and/or large short-term foreign currency denominated liabilities. The combination of weak growth and policy tightening to contain currency pressures is a mix that has persisted long enough in some large EM countries to have a negative impact on 2H13 GDP.” Source : JPM

>> EM bonds still under threat in the near term

“EM bond outflow rose again. EM bonds saw USD1.29bn worth of outflows in the week ended 21 Aug. In the breakdown, EM hard currency bond flows saw most of the pressure, with USD731m outflows (0.7% of AUM). Local currency bond funds had USD361m  outflows (0.3% of AUM) and blended funds lost USD200m of assets. The redemption pressure also increased on the HY bond fund front, as global HY funds registered USD2.65bn worth of redemptions. ” Source : Citi

>> Higher US Yields will be a trend and here to stay. The latest TIC data and technicals point to that even as yields reunite with their 2011 levels. Other risks include the debt ceiling and the US Budget next month.

“The latest TIC flows documented as one of the worst outflows since 2004. The loss of demand stems from lower foreign private demand for UST and, as in past periods, this is not being offset by any official buying.

Between the two, private demand is more volatile – and it has been falling on trend since July 2011. Official buying is unlikely to return any time soon to offset it. Emerging Market FX reserves have been shrinking $45bn on average since tapering was first announced in May. With no reserves growth, and EM countries facing foreign capital outflows, the official demand for US debt is likely to remain muted. ”

>> Europe remains the darling.

“The Euro area recovery has legs. After having exited recession last quarter the Euro area appears to be gaining further momentum. With the flash composite PMI increasing by another 1.2pts to 51.7 in August it is already in line with our 2H13 GDP forecast of 0.75%ar. Importantly, the improvement is increasingly broad based. The country details of the flash PMI imply a huge 3pt jump outside Germany and France, to a level of 52.5 on average. As this group is mostly accounted for by Italy, Spain, and Ireland (given the PMI’s limited country coverage), it points to a strong return to growth in the periphery. In fact, the August level of the PMI is consistent with growth of 1.5%q/q saar in these countries. This is well ahead of our forecast and points to upside risk to an already upbeat forecast.” Source : JPM

>> Nobody understands what is happening to Gold.

FT Headlines : Gold rallies on fall in US home sales

>> Bizarre logic to me.

For the Week Ahead

Yes. It is time to see the moon for the stars or the forest for the trees. Yet I feel any moment that the delicate equilibrium we have come to may just tip over should US equities suffer a correction and we are hanging on a thread here. The G3 does not have a growth story for us, just a recovery story which does not bear the same promise as an EM boom.

We are running smack into month end and the market moves in the next week will not be indicative of macro trends but rather the positioning of the markets, which I suspect to be pretty flattish for the trading accounts but significantly disruptive for real money and we should see some support for bonds and the USD.