Macro:

All 3 of the major central banks are now on hold. The PBOC is the only standout in tightening financial conditions through its repo pricing, although this should be seen as a normalisation rather than a reversal. Market reactions to central banks have been muted of late as politics takes centre stage.

 

Equities:

Equities are becoming less correlated as central bank liquidity takes a backseat. Fundamentals have yet to regain influence. Currently markets are reacting more to FX and political noise as politics takes centre stage in the media and the markets. A reversal of USD strength has weakened Japanese and European markets of late. In China, a hawkish central bank is weighing on markets.

 

Bonds:

The year so far has seen a steady tightening of credit spreads across IG and HY. Duration, however, has not done so well, the US 10 year is holding just below 2.5%, the 10 year bund above 0.4% and the 10 year JGB spiking from 0.04% to over 0.10%, prompting intervention from the BoJ.

Our position has been to be long credit and hedge out duration. This still stands.

One area of note is the leveraged loan space which is seen as ideal in an environment of rising rates. Investors are deploying roughly $1 billion per week through ETFs and mutual funds. This has triggered a record number of loan repricings (over $100 billion in January alone). Even in a bull market investors should still be selective and avoid overpaying for assets.

 

FX:

The weakness in USD continues. The USD rose rapidly following the US election result, perhaps too rapidly, and we are faced now with profit taking and circumspection. President Trump is talking down the USD, and accusing Germany and China of holding down the value of their currencies. In Frankfurt the German finance minister Schauble has supported Trump’s argument, claiming that the ECB has kept the EUR too low for Germany. And in Beijing, the PBOC raised rates in Open Market Operations and its Standing Lending Facility to rein in liquidity but with the collateral effect of supporting RMB.  In the longer run, fundamentals support a strong USD but in the short term, USD weakness is likely to continue.

 

Commodities:

There has been some concern that the OPEC production cut may not hold, Iraq for one has increased production and apart from Saudi, other members have not cut production to plan. Saudi Arabia has had to pick up the slack in the cuts. That said, spot prices have held steady with very little volatility. The spread between WTI and Brent, expected to widen, tightened slightly. Fundamentals suggest the spread should widen going forward. The 12 month contango in oil has all but disappeared.

We maintain our tangential trade, long MLPS LN, in expectation that at least this policy of Trump’s (liberalising the energy sector in the US) will face less resistance as he fights multiple battles at home.

 

Week ahead:

Feb 6

  • German factory orders
  • Fed’s Harker speaks

Feb 7

  • German industrial production
  • Taiwan trade data
  • US trade balance
  • Japan current account

Feb 8

  • UK House of Commons votes on Article 50
  • RBI sets rates.
  • Japan key machinery orders

Feb 9

  • BoJ’s Nakaso speaks
  • Netherlands inflation
  • US initial claims
  • Fed’s Bullard and Evans speak
  • Japan PPI

Feb 10

  • India trade data, industrial production
  • China credit data, aggregate financing, new RMB loans, M2
  • France IP, manufacturing production,
  • UK IP, manufacturing, trade balance, GDP estimate
  • US Michigan sentiment