Macro Digest: Italy, Tencent and Trade war.......the beginning of the end (?)

There is Trump vs. China with the imminent raise of 200 bln. of tariffs on China on September 6^th, but here in Europe EU "Finance minister" Moscovici is hitting the headline this morning with harsh and confrontational interview in Italian papers:

 

 

EU'S MOSCOVICI SAYS IF EU'S 3 PERCENT DEFICIT/GDP LIMIT IS BROKEN IT WOULD CREATE DIFFICULTIES "THAT I DON'T EVEN WANT TO IMAGINE"

 

http://www.askanews.it/economia/2018/08/31/moscovici-italia-non-pu%C3%B2-lamentarsi-corregga-conti-2019-top10_20180831_023657/

 

The interview ask for a clear commitment for budget deficit reduction of 0.6% and keeping inside the 3% - he also points out that Italy been main beneficiary already on "flexibility"…. This is a very tough line which is also

Followed up by announcement that PM Conte won't seek second mandate (You can't blame him for that…)

 

Unlike Greece 180-degree turn there seems to be a deep routed wish for the Populist parties in Italy to seek confrontation with the EU and now for EU to take them one… This DOES NOT bode well for Italian assets and probably will spill-over into the EUR as well. This is the start of the "budget season" for all countries – it's always full of headlines, strikes and trouble, but this year the stake are higher..

 

 

Italy – Germany 10 Y Government Yield spread…

 

 

 

Italian 10 YR BTP Yield vs. 5 YR CDS

 

 

 

Tencent dropped 5% in Hong Kong trading hours yesterday on this:

 

Tencent's online gaming problems in China just got worse (CNN)

 

https://www.bloomberg.com/news/articles/2018-08-30/china-to-control-number-of-new-online-games-for-children-s-eyes

 

 

China is cracking down on online gaming, adding to worries for Tencent.

Shares in the top Chinese internet company plummeted more than 5% in morning trading in Hong Kong on Friday, after Beijing announced plans to limit the number of new online games and restrict the amount of time kids spend playing on electronic devices.

Tencent (TCEHY) is the world's biggest gaming company with a huge part of its business in China, a market where it was already facing other problems caused by regulators. Its stock has plunged nearly 30% since January, wiping out more than $160 billion in market value.

Chinese authorities will "control the number of new online games, explore an age-appropriate reminder system in line with national conditions, and take measures to limit the use time of minors," the Education Ministry announced in a statement late Thursday. It said the measures are part of a government effort to reduce nearsightedness in children and adolescents.

Tencent is already hurting from increased regulation of the gaming industry. The company reported a rare decline in profit earlier this month, blaming the drop mainly on regulators not approving licenses that allow companies to make money from new mobile games.

During an earnings call, Tencent President Martin Lau assured investors that the restrictions were temporary. But the latest government announcement adds to concerns about an increasingly restrictive environment for tech firms in China.

China is the world's largest gaming market.

Tencent has still not gained approval from Chinese authorities to make money from some of its most popular mobile games such as "PlayerUnknown's Battlegrounds." Regulators also blocked a game called "Monster Hunter: World" for which big sales were expected. Another game, "Honor of Kings," came under intense scrutiny last year for allegedly causing addiction in young people.

Tencent and Netease (NTES), another major game developer, should be more resilient to the new restrictions than smaller firms, according to Karen Chan, an analyst at investment bank Jefferies. The industry heavyweights have already introduced control systems to regulate how much time children spend playing their games, she said in a note to investors.

But Chan acknowledged that the impact of the new measures on Tencent and others won't become clear until more details are announced. Questions remain over what the limit will be on the number of new games, how it will be implemented and whether it will further delay the approval process, she said.

The ministry's announcement also took aim at parents and educators, saying they should reduce the time kids spend on smartphones and tablets and encourage children to play and exercise outside for at least an hour a day.

China is the world's largest gaming market, accounting for a quarter of global revenue, according to market research firm Newzoo. The firm forecasts China's total gaming revenue will reach $38 billion in 2018.

-- Catherine Wang contributed to this report.

 

 

https://nordic.businessinsider.com/us-china-trade-war-trump-wants-tariff-on-200-billion-of-chinese-goods-2018-8?r=US&IR=T

 

 

 

 

 

 

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Macro Digest: Why PBOC countercyclical measures is boost to EM/China and a sign of top in Dollar...

 

China reintroduces countercyclical measures on CNY fixing & signals support for market

 

Action: China is openly supporting a stable CNY and through this "commits" to intervention and support of economy:

Reaction: This is big support for Chinese stock market which we believe is close to its low with final test being the new tariffs kicking in on September 5^th

Trade recommendation: Buy China A-shares ETF- MCHI:XNAS @ market open 61.30 with stop/loss @ 57.00 on close (Chart below) + This confirmation of potential top in US$ strength as "floating dollars is increasing"….

 

 

It's becoming more and more evident that PBOC and Yuan is a key ingredient in Emerging Markets valuations (and overall Dollar direction) – the shift as with most things Chinese is gradual yet with big potential marginal impact.

 

The measure is a commitment to keep the Yuan stable and through this stability create less outflow/down pressure on CNY which will translate to less US Dollar buying overall. It's part capital control, part confidence in economy but most importantly: This is seen as China's willingness to once again "support" the market and the economy which means this is good for Chinese stocks and Emerging Market overall. (See chart below)

 

In Friday's statement, the China Foreign Exchange Trade System cited the strengthening dollar and the trade friction as the main reasons investors kept bidding down the yuan. The reapplication of the "countercyclical factor," it said, could help the yuan remain largely stable. (Source: WSJ – China Central Bank Reintroduces Measure to Bolster the Yuan)

 

Financial Times:  This move is an attempt to stave off two risk related to rapid currency depreciations; speculative capital outflows and rising trade tensions with Washington" said Eswar Prasad, an expert on China's financial system at Cornell University

 

Yuan Counter-Cyclical Formula May Replay 2017 Stock Boom (Bloomberg)

2018-08-27 00:47:34.567 GMT

 

By Kyoungwha Kim

(Bloomberg) -- For a reminder of how yuan policy can set off a boom for mainland shares, we only need to look at last year's action.

USD/CNY slid from 6.9 to 6.5 in the seven months after the PBOC introduced its new yuan fixing rule in May 2017 to stem market volatility. Consumer stocks led the CSI 300 Index of China's largest companies in a strong rally over that period.

Remember, China drew down $1 trln of its FX reserves from 2014 to 2016 without containing the yuan's depreciation. The PBOC's fixing adjustment proved to be very powerful, helping to engineer strength in the yuan and the boost to consumers'

purchasing power lit a fire under local enterprises. As MLIV noted recently, mainland stock markets just need a stable floor to set off a strong rally and the yuan shift will provide that.

 

 

China USDCNY & Shanghai Stock Market under different "countercyclical measures"

 

 

Source: Bloomberg

 

More importantly overall remember that the best future direction of the US Dollar is driven by the net change of future expected growth between US and China – (The change in US growth next 6-12 month minus change in China growth next 6-12 month)

 

We have for the past weeks been focusing on this cyclical change whereby we expect a peak to have been established in the US economy, and an acceleration incoming from the Chinese economy as monetary policy and infrastructure spending is increased to counter a too tight deleveraging process. This will mean stable CNY, weaker US Dollar in our opinion which supports both our believe that China is close to low (with the ultimate test being the 200 billion September 6^th new tariffs)

 

 

 

 

The counter-cyclical-measures is "secret" or rather we know the input but not the weights between the different components: 

 

Mid-point rate = Closing rate + change in currency basket + discretionary change or in Natixis excellent piece from August 18^th, 2017: China's exchange rate policy: Adding a "countercyclical factor" to gain control:

 

 

 

 

This is the ETF mentioned – iShares MSCI China ETF – weekly chart courtesy of my good colleague Kim Cramer who warns that violation of supporting could set up further weakness- hence we operate with recent low being intact on any sell-off…

 

 

 

 

 

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

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

 

 

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Macro Digest: Alibaba earnings tomorrow a make or break story?

There is ample reason to watch your screens and portfolio tomorrow pre-US open when Alibaba post results.. Alibaba is up 5% vs China A-Shares minus 20% YTD

 

Theme: China leads Emerging markets lower(on deleveraging) but is SERIOUSLY activating fiscal- and monetary policy to support the economy, we expect China to start accelerating late 2018/early 2019 leaving a very vulnerable 4-6 month from now.

 

Our take:  China is cheap, very cheap relative to the US which is slowing down from here (Peak in growth in Q2-2018 – plus Mid-term elections)

 

Below our valuation metrics courtesy of Steve Resnick of Hedge IQ

 

·         CSI 300 Index vs SPX is 1 std. deviation cheap (look back to 2005) – all-time low 1.2!

·         The spreads is a massive 3.7 std.deviations when looking back 24 months – (Equals EXTREME rare and cheap)

·         Median PE of A-shares have collapsed from 44x to 22x

·         RSI – Relative Strength (20 days) is @ 36 – close to oversold

·         13Week momentum is 3.1 standard deviations – ie. really sold, sold…

 

Overall we are "constructive" on value, unsure on timing, but we want to use next sell-off in China/EM to to buy – We think either Alibaba or other earnings or worsening of Trade WAR could create big opportunity.

We will keep you posted…

 

 

Our colleague Eleanor Creagh has written an excellent PRE-Earnings report..

 

https://www.home.saxo/insights/content-hub/articles/2018/08/22/what-to-look-for-from-alibabas-earnings

 

 

 

The Chinese market is one of the worst performing this year:

 

 

 

 

 

Shanghai Composite Index…..

 

 

 

WSJ – Alibaba earnings: What to watch

 

https://www.wsj.com/articles/alibaba-earnings-what-to-watch-1534932435

 

Chinese e-commerce titan Alibaba Group Holding Ltd. BABA 0.92% will report fiscal first-quarter earnings before the U.S. market opens Thursday. Analysts say NYSE-listed Alibaba's core commerce revenues will show strong growth but that earnings will be hit as the company ramps up its investments in areas such as logistics and expands its presence in bricks-and-mortar retail. Buying the rights to stream the recent soccer World Cup on Youku, Alibaba's video-streaming channel, likely weighed on margins as well, they said.

Here is what you need to know:

EARNINGS FORECAST: Analysts polled by FactSet expect the company to report earnings of 6.0 billion yuan ($876 million), a 60% decrease over the 14.6 billion yuan earned during the same period last year.

REVENUE FORECAST: Alibaba's quarterly revenue is likely to have reached 81.4 billion yuan, up from 50.2 billion yuan a year earlier, the survey showed.

What to Watch

INVESTMENTS: Watch out for any guidance on future investments and how they may affect margins as Alibaba extends its spending spree this year. In July, the Hangzhou-based company invested $2.2 billion in Focus Media, a prominent Chinese outdoor advertiser, to strengthen advertising beyond its online platforms. That follows a move in May by Alibaba, its majority-owned logistics unit Cainiao Network and other investors to spend almost $1.4 billion for a 10% stake in express-delivery company ZTO Express Inc.

 

 

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

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

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Macro Digest: It's not Turkey, it's the debt cycle

https://www.home.saxo/insights/content-hub/articles/2018/08/17/macro-digest-its-not-turkey-its-the-debt-cycle

 

Steen Jakobsen

Chief Economist & CIO

 

There is currently a lot of focus on Turkey, and for good reason, but Turkey is really only a second or third derivative of the global macro story.

Turkey represents the catalyst for a new theme, which is "too much debt and current account deficits equals crisis". In that sense, we have come full cycle from deficits and debt mattering in the 1980s and '90s but not in the '00s and '10s post- the Nasdaq crash and great financial crisis under the biggest monetary experiment of all time.

In our view, the order of sequence for this crisis is as follows:

1. The debt cycle is on pause as first China and now the US have deleveraged and 'normalised'.

2. The stock of credit or the 'credit cake' has collapsed. First it was the 'change of the change of credit', or the credit impulse, which tanked in late 2017 and into 2018. Now it is also the stock of credit. Right now, global M2 over global growth is less than one, meaning the world is trying to achieve 6% global growth with less than 2.5% growth in its monetary base… the exact opposite of the 00's and '10s central bank- and politician-driven model.

3. This smaller credit cake is spilling over to a stronger USD (as US growth increases versus the rest of the world) and a higher marginal cost of funding (as the amount of dollars available in the credit system shrinks), leading to a mini-emerging market crisis.

4. Finally, the Turkish situation was really created by the aforementioned factors but it was made worse by President Erdogan's autocratic and naive monetary and fiscal response. The reason this mini-crisis is not idiosyncratic is points one through three, but the market is still treating Turkey as the starting point of the current EM mini-crisis.

Where do we go from here? More and more investors seem to believe that we are on the brink of an 'Asian crisis 2.0' or a liquidity crisis. 

I no longer think that there are really any preordained paths or predestined scenarios for all of this, but my forecast would be:

1. A 25% chance of a Turkish default within 12 months. Erdogan is not following the three standard responses to a funding crisis: an aggressive monetary and fiscal response, seeking help from outside (read: European Union or International Monetary Fund), and/or creating a currency board/closing convertibility of TRY. The present approach contains none of these elements, which could lead to further escalation and an overall EM crisis.

2.  A 25% chance a strong reversal of quantitative tightening from the Federal Reserve, supported by the European Central Bank and major central banks. The timing here could be around the Jackson Hole event at the end of August. Overall, US monetary policy and growth have peaked, and the mini-crisis together with the Trump administration's trade tariffs is creating a need to first pause and then reverse policy lower. The world is almost coming to a standstill, after all, from the Fed's extremely hollow tightening.

3. A 25% chance that China comes to the rescue in a fashion similar to 2007/08. China is now asynchronically easing both monetary policy and fiscal policy as growth is not only undershooting targets but doing so significantly. To me, the recent technology sector sell-off is a sign that the lows could be coming in soon. A 'Chinese rescue' scenario could also be called another delay, or yet more 'pretend-and-extend', but the data and research I am seeing from China (plus the research I have published) points to a country that is acutely aware of the risks posed by growth shortfalls based on too much deleveraging relative to the country's position in its overall economic transformation (China 2025).

Be aware that the potential potency of Chinese stimulus is now much smaller than it was last time as the country' debt is higher, productivity remains low, and global transmission is clogged.

4. A 23% chance that global recession, based on points one through three, arrives by Q4'18 or Q1'19. This recession would spring from the enormous underestimation of the damage done to SMEs and MMEs by: tariffs, a rising marginal cost of capital, and a USD that is too strong for the world's indebted markets.

5. A 2% chance that the world recovers, with this event coming to be seen as a mere blip on the radar. In this scenario, the US economy is strong enough to carry the rest of world, Italy sees 3% growth, and the EU solves Brexit… remember, nothing is impossible.

Market views

US markets are more than three standard deviations more expensive than the MSCI World index. I repeat: three (based on a 24-month look backwards).

Our recommendations:

Forex: We are now neutral on Dollar- Long JPY, CHF, and Gold (Gold is 91% correlated with CNY – which is coming off) . We are extremely alert on our USD long as the main driver of dollar equals US growth minus global growth. We expect US growth to have peaked and for global growth to expand relative to US growth; due to USD's reserve status... this is the driver on the dollar rate.

Fixed Income: Long 10-year and UST as safe-havens, plus we see improving fundamentals.

Commodities: We like grains in the long term and have a small exposure (mainly wheat for now).

EM: We think China is getting cheap… its multiples are down at half of their peak levels and we see the recent technology rout as an opportunity to dip our feet into Chinese stocks. We bought small EM last month and will be adding in increments over the next six months to an overall exposure of 25% on the potential for a Chinese reversal and a turnover in QT.

Equities: We are adding utilities, we like capital goods for their cheapness, but overall we are slowly switching our US equity exposure EM/China.  S&P-500 is now 3.7 standard deviation expensive (24 month look back) and there is good risk opportunity selling here: 2859-00 with stop/loss on 2 ATR + 32 points = 2891-00

 

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

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

 

This email may contain confidential and/or privileged information. If you are not the intended recipient - or have received this email by mistake - please notify the sender immediately and destroy the email. Any unauthorised copying, disclosure and/or distribution of the contents and/or attachments in this email is strictly prohibited.

Email transmission security and error-free delivery cannot be guaranteed as information could be intercepted, corrupted, destroyed, delayed, incomplete and/or contain malware (virus). The sender of this email, therefore, does not accept liability for any errors and/or omissions in the contents of this message, which may arise as a result of email transmission.

Macro Digest: Deficits matters again - revisit to 1980s ? CNY and JPY in focus - deficit vs. surplus

Part of the "Chinese panic" is the rising current account deficit….

 

Conclusion:

 

China needs weaker CNY- we see test and potential break of 7.0000 inside next one year

JPY is a turning point – close to being our highest conviction – We remain short from yesterday's 112,10 with s/l 112-70 (on daily close)

 

Macro wise – world is changing back to a theme not seen since 1980s and 1990s – debt matters and deficits matter – Rising both marginal and absolute price of money changes global flow towards home bias  - in 1980s and 1990s we sold deficit currencies and bought surplus FX – this game could be back.

 

 

This is China current account and the 4Q SMA trend – Source: Bloomberg LLP

 

 

 

Observe how when China "needed" fiscal and monetary stimulus in 2008/09 they had plenty of room – now however the opposite is true. A bi-story of the present trade war is clearly the "non-acknowledged" co-interdependence…. Now both the US and China runs deficits… meaning need of FDI is increasing as a funding tool for the deficits. China has grown up, but now needs more interaction and opening up of capital accounts to share the burden of refinancing and rolling over debt

 

This means Europe and more importantly Japan needs to fund this gap. Japan's 2.4 trillion USD overseas investment however is under some pressure to move home…but Japanese investors is now getting a better "deal" staying home as FX hedging cost eats all the of excess yield:

 

 

 

Only Italy (big tail-risk) can compete in 5y while in 10y France + Belgium + Spain & Italy is similar but not in excess on domestic return….

 

 

 

Source: Bloomberg LLP

 

The big capital flow are starting to reverse and with US growth most likely having peaked and China restarting growth engines – rest of world, including EM and commodities should get some support……but for now focus in squarely on JPY and CNY (plus ever weaker TRY)…. FX will lead and a signal could be forth coming very soon.

 

Safe travels,

 

Steen

 

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

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

This email may contain confidential and/or privileged information. If you are not the intended recipient - or have received this email by mistake - please notify the sender immediately and destroy the email. Any unauthorised copying, disclosure and/or distribution of the contents and/or attachments in this email is strictly prohibited.

Email transmission security and error-free delivery cannot be guaranteed as information could be intercepted, corrupted, destroyed, delayed, incomplete and/or contain malware (virus). The sender of this email, therefore, does not accept liability for any errors and/or omissions in the contents of this message, which may arise as a result of email transmission.