MACRO Digest: April - the darkest place in hell?

'The darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis.

Dante Alighieri

 

 

…I happen to think AUDJPY and EURJPY are key leading indicators…¨

 

Overnight EUR.JPY broke down ….of course mainly on EUR, but interestingly I am starting to see research which calls for JPY strength to "help" the Japanese economy through increase "buying power"…. Ref. GaveKal.

 

 

But..

 

What does EURJPY breakdown mean except EURO finally tanking for real?

 

It's certainly the case that JGB yield is rising:

 

 

I guess we have to wait for AUDJPY the ultimate "Risk on / Risk off" to give us the answer.. and AUDJPY is off from high of 102.50 in November – RISK ON high… to now 92.46 with 88.22 break a clear sign of RISK ALERTNESS warranted.

 

I believe JPY cross' is harbinger for what could become a very tough April – the market is getting to terms with a June non-economic driven hike – The hike will entirely be driven by a "margin call" on bank and asset inflation not on economics – I don't think even the FOMC will wager that.

 

 

I visited London early this week – one of the smartest "real value investors" I know (beating Berkshire over ten years) runs a "filter process" on +10.000 stocks – his selection of "cheap stocks" is now down to …..25 stocks! The norm is 300-600….  Of course this does not mean stocks are expensive or ready to roll over, but it means EVERY SINGLE stocks in the world is trading at or above "fair value". The expected return for 3 and 5 years remains ZERO…..with 10 y showing up at 2% !

 

 

Another good indicator is JPM's CDS – every time it break 50 SMA it seems market is going into RISK-OFF

 

 

The GLOBAL stock market is also breaking its 50 SMA – so while DAX & STOX50 is on fire global markets overall is falling! 

 

Just to illustrate the "momentum of DAX" – here it is vs. its mean reversion.

 

 

Economically – as I had expected – EURO data is now slowing down – Europe is EXPORT machine when rest of world slowing down Europe will get hit, so while Draghi is busy declaring victory of QE and the coming inflation, the markets is again making sure he will look out of touch – as out of touch as he was in Q1-2014 saying deflation would not happen in Europe.

 

Lower commodities, strong US dollar impact on EM and US economy, and the fact that EURO may be weaker vs. the US dollar, but it's actually stronger vs. many big growth nations in the EM.

 

 

To prove the point the 5Y5Y US is now again falling – indicating less believe in inflation in the US and hence, of course, the global economy through the US dollar link. Draghi, and the Greek government, seems to be think they live in separate universe where different rules applies.

 

 

 

 

Main macro views:

 

·        US: Fed hikes in June on MARGIN CALL on asset inflation – Nothing to do with economics. US growth QoQ will hit close or below zero by Q3 or Q4 – keeping yields low. Still see sub 1.5% and even 1.25% this year in 10 YR US fixed income.

 

·        Europe: The big start to year will fade as there is no "export markets" growing into Q3 and Q4 – expect sharp slow-down over summer and Bunds below zero.

 

·        EM: Biggest value, but call on the US dollar debt expensive right now….net impact from weaker currency not felt due to this heavy US funding reliance. South Africa, Turkey and Brazil remains my biggest shorts.

 

·        Commodities: Despite my alpha model selling Gold – I remain constructive in net allocation(Beta allocation to commodities increasing)  and forward looking. Buying out-of-money gold calls is a MUST…….

 

·        OVERALL: 2015 is a lost year for world growth and reforms as the two growth engines of the world: US and EM both slowing down. Europe in no position to add anything to global growth as we are entirely dependent on foreign demand through exports due to lack of reform domestically. 2015 is transition year on growth which will bottom in Q3/Q4 and 2016 increasingly looks like a very challenging year for markets as momentum of QE in Europe and Japan runs out…..

 

 

Positions:

 

Beta: Same… 75% in FI – mainly US 10 year.

 

Alpha:

 

·        Max (4 units) short EUR now – stop 1.1150

·        Max (4 units) short EURSEK – stop 9.3068

·        Long 2 units USDJPY – stop 119,68

·        Short 2 unit Wheat's – 512.00

·        Short 2 unit XAU – stop 1194.00

 

Conclusion:

 

It's time to exercise preservation of capital – April could become a very tough month in terms of both volatility and risk. There are too many moving parts in this big puzzle called the markets.

 

Be safe

 

Steen

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
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