Core Research

Our core product that pulls together and explains current global macroeconomic markets. Our work provides actionable insight into the global economy. We are heavy graphics users to illustrate concepts and, in some cases, show the direction of a trend. The MI2 Trader / Chart Point pieces are trade focused complements to MI2 Reports written with a call to action based on current market activity. This piece seeks to take the macroeconomic framework and shed light on certain assets.

MI2 China Update: PBOC Cuts Cash RRR, Releasing $188 Billion of Liquidity

  • PBOC Cuts Cash Reserve Requirement Ratio, Releasing $188 Billion of Liquidity 
  • Evergrande dissolves some units of online marketplace
  • Evergrande Group Chairman Hui Ka Yan injected more than 7bn yuan
  • China Won’t Bail Out Property Firms, Partial Easing at best
  • Chinese Developers Kaisa, Aoyuan Face Growing Debt Challenges
  • Didi Global Plans to Delist From New York Stock Exchange
  • PBOC official proposes new way of dealing with distressed debt
  • Citigroup Applies for China Securities License
  • China extends tax exemption for overseas investors in bond market
  • How China’s belt and road is connecting Southeast Asia, political wariness aside
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MI2 Chart Point: Running the Hedges

While we all hope that reports of mild flu-like Omicron symptoms are indeed correct, we won’t have any clarity for a week or two. We also shouldn’t forget that markets were beginning to look extremely extended even before the recent wobble. Whether that was a function of Delta ravaging Europe (now a real risk in the US post-Thanksgiving) or conversely, the threat of accelerative policy normalisation is academic. Bottom line, a far more nuanced approach is now required towards risk, and hence we want to review our trading thoughts with particular reliance on the charts.

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Taper Tantrum Redux?

In last week’s video, we said that if growth and inflation hadn’t materially slowed by March, we feared the Fed would be forced to repeat June’s surprise pivot and tighten real rates. Fast forward a few days, and it looks like events are developing far faster than we expected with a wave of hawkish comments from various officials.

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Thoughts from the Virtual Road

  • Clients differ on whether inflation is “transitory”, but they are united on growth
  • The resilience of risk assets to rates suggests that yields can move higher for now 
  • Stocks continue to confound, but equity investors are looking for cheap tail hedges
  • Clients are starting to pay attention to FX and positioning in various commodities 
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It’s Always Transitory: A 700-Year History

  • Few current market professionals have experienced rising inflation during their careers
  • Hence the risk of placing too much weight on the recent past and missing the big picture 
  • Research shows that inflation has been transitory and deflation dominant for the last 700yrs 
  • Yet current conditions have historically been associated with higher inflation and real rates 
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MI2 Trader: HYG

Last week, we started our virtual autumn roadshow, which we will conclude by the middle of the month. At that point, we will share any feedback in the usual “Thoughts from the Road.” However, while a little premature, we have been struck by the number of equity clients asking for tail risk hedges. Their concern is that, while current dynamics couldn’t be more bullish for stocks, the risks to this halcyon backdrop are rising. In particular, thus far, while fixed income volatility has been limited to the front end of the curve and, as such, was of little risk/interest to stock traders (most equity investors wouldn’t know a bear flattener if it bit them in the ***), that could change quickly.

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MI2 Chart Point: A Big Week in EZ Inflation

 

Comment

Powell’s speech on Friday was an important milestone in the global inflation narrative, a milestone that brought the Fed into line with some of its less prominent peers. With the risks now clearly tilted to the upside, no longer can inflation simply be dismissed as transitory. However, while a bout of honesty from JP is welcome, it does put further distance between the Fed and its larger central bank compatriots in the BoJ and ECB. In particular, despite the data, the ECB, especially Lagarde and Chief Economist Lane, continues to refuse to acknowledge reality. For example, at the end of last month in Sintra, we were told by Christine that we should “not overreact to transitory supply shocks that have no bearing on the medium term.” This advice reminded us of the scene in the Wizard of Oz when the Wizard tells Dorothy to “pay no attention to that man behind the curtain”. This was the icing on the cake in a month where she had already taken policy spin to new highs by refusing to accept that reducing QE was, in fact, tapering! What a remarkable parallel reality we now inhabit!

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MI2 Trader: Precious Metals

 

Comment

In the last few days, the concerns that had been weighing on afflicted risk markets appear to have lifted after what looks increasingly like an intellectual capitulation to one of our core themes; that the current “transitory” inflation surge might be significantly less transient than policymakers and most investors would like. Front-end rates have moved rapidly since early September to price an increasing risk of higher rates. Our short EDZ3 trade is now nicely in the money, and we are pulling down our stop to ~98.77 trailing that move.

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