Core Research

Last week, Julian spoke at the Real Vision Macro Experience. His presentation was entitled “The Last Shall be First and the First Last – A Rotation of Biblical Proportion”. For MI2 clients, none of the content was new per se. But the conference allowed him to pull together and summarise his thoughts from the last year.

• The Fed has told you that they intend to tighten financial conditions to slow growth 
• Despite surging bond yields, financial conditions remain far too easy 
• The problem is that equities don’t respond to rates so much as the Fed’s balance sheet 
• Equity vol should rise, but until the Fed starts QT, bonds will have to do the heavy lifting

•  Western sanctions require unity, but some fissures are visible
• International reserves have exploded this century. Over 50% are USD denominated
•  Demanding payment for Commodities in Rubles parries “integrated deterrence”
•  Gold and Gold mining stocks will benefit from Russia’s new R5000 per gram purchase scheme

• Inflation pressures have pushed JGBs to the top of the YCC peg, forcing BoJ intervention
• Yet their reluctance to raise rates is now spilling into Yen weakness
• Unfortunately, Yen weakness no longer helps Japan and is arguably detrimental
• Lifting the JGB peg slightly would be a logical response and has precedents

Price action around quarter ends can be complicated to interpret. This is especially so in fixed income and FX as we approach the Japanese year-end. If it wasn’t challenging enough, we also have a slew of event risk this week. On the data side, we have preliminary March European inflation and US PCE. As discussed in our last “Ask Me Anything Video” (10th March), we believe the inflation risks remain skewed to the topside simply because, for now at least, companies still possess pricing power, even in Europe.

For long-term dollar bears like us, the tragic events in Ukraine have proved highly frustrating. Not only have they weighed on the Euro, which dominates most of the major FX dollar indexes, but by further stoking inflation pressures, they have complicated every currency trade because you now have to tiptoe around each central bank meeting or speech. That brings us to Powell’s extraordinarily hawkish speech to the National Association for Business Economics yesterday. 

• Events in Ukraine have accelerated the trends to deglobalisation and a new Cold War 
• This will justify increased government regulation and control of economic resources 
• In this environment, the interests of individuals and corporations are secondary 
• The economic costs are high but containable as long as China remains on the sidelines  

• Crisis in the Ukraine provides European Federalists with leverage
• National fiscal easing and mutual EC off-balance-sheet borrowing mooted
• European Defence spending set to rise sharply alongside Energy substitution initiatives
• ECB is facing rising inflation and fiscal expansion

In contrast to the 2008 Olympics, which marked China’s triumphant ascension to economic superpower status, events since the start of the Winter Olympics have been inauspicious, to say the least. Not only is the Middle Kingdom grappling with weakening GDP and a precarious property market, but it now faces a massive acceleration in Covid, which, if Hong Kong is any guide, could get utterly out of control. And if that wasn’t enough, China has been placed in an untenable diplomatic situation by its best buddy Russia. This situation is finally forcing international equity investors to stare in the face the risk of a new Cold War and its potential to massively add to the pain in domestic equity markets.

We know you are all busy. But at times like these, it’s important not to lose sight of the big picture. Therefore, we have decided to send you an hour-long video of our “Ask Me Anything” session, which perfectly summarises our views during this difficult time.