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Conclusion: The short term, beta-chasing melt-up we saw across global macro markets last month wasn’t enough to change our conviction on the dominant macro trends within this region.


Positions in Asia: Short the Aussie dollar (FXA); Short a basket of emerging-Asia currencies (AYT).



Not surprisingly, Asian equity markets are down across the board week-to-date, declining -1.8% on a median basis. The interconnected global melt-up we saw in October largely failed to register higher intermediate-term highs, as Asian equity markets remain down -2.5% and -11.3% on a 2mo and 3mo basis, respectively. The same sequence of price action can be applied to Asian currencies as well, falling -1.2% on a median basis in the week-to-date vs. the USD, and down -3.6% and -4.3% on a 2mo and 3mo basis, respectively.

Across the region’s sovereign debt markets, the Reserve Bank of Australia’s interest rate cut and nasty growth data out of Hong Kong are driving the largest deltas. Australian 2yr and 10yr yields have fallen -13bps and -14bps, respectively, in the week-to-date. Hong Kong’s 10yr yields have declined by -14bps as well in the week-to-date, collapsing the territory’s 10s/2s spread by the same amount. 5yr CDS have widened +16.8% on a median basis in the week-to-date and the dramatic tightening we saw in October (-23.3% on median basis) failed to make lower intermediate-term lows vs. the past two (+16.9%), three (+45.2%), and six (+49.7%) months.

Across Asian interest rate swaps markets, we continue to see our themes of Deflating the Inflation and Global Growth Slowing take market interest rate expectations lower. Notably, Chinese 1yr on-shore swaps have declined a full -85bps in the prior 2mo and are down another -16bps in the week-to-date as expectations for PBOC monetary easing grow seemingly larger by the day. Another callout here is that in spite of the broad-based optimism we saw across global equity markets in October, we didn’t see a pick-up in expectations for tighter monetary policy across Asia (1yr swaps advanced only +1bps on a median basis over the last month). What this tells us is that through the noise of the manic media-influenced equity market(s), the aforementioned Global Macro trends remain intact.


Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:

Growth Slowing:

  • China’s manufacturing PMI came in at a rather weak 50.4 in October (vs. 51.2 prior) – the lowest reading since February ’09! What’s worse, the forward-looking subcomponents (new orders, new export orders, and order backlog) all declined sequentially to near-50 or sub-50 levels.
  • Japanese export growth slowed in September to +2.4% YoY vs. +2.8% prior. Additionally, Japanese small business confidence edged down in October to 46.4 vs. 47.2 prior.
  • Hong Kong money supply growth (M3) went negative for the first time in years in September, falling -0.4% YoY. This happened in 2Q08 and was largely flat-to-down on a YoY basis until 1Q09. This is yet another stealth data point to consider when pondering where global growth might be headed over the next 3-6 months.
  • Taiwanese real GDP growth slowed in 3Q: +3.4% YoY vs. +5% prior – a two-year low. Manufacturing PMI ticked down in October to 43.7 vs. 44.5 prior.
  • South Korea’s manufacturing and non-manufacturing business surveys both ticked down in November to 82 (vs. 86 prior) and 84 (vs. 86 prior), respectively.
  • New Zealand’s NBNZ business confidence and outlook surveys both dropped in October to 13.2 (vs. 30.3 prior) and 26.1 (vs. 35.4 prior), respectively.

Deflating the Inflation:

  • Japanese CPI slowed in September to flat YoY vs. +0.2% prior.
  • Chinese input prices PMI sub-index ticked down in October to 46.2 vs. 56.6 prior – the first sub-50 (contraction) reading since March ’09!
  • South Korean CPI slowed in October to +3.9% YoY vs. +4.3% prior.
  • Indonesian CPI slowed in October to +4.4% YoY vs. +4.6% prior.
  • Australian CPI, core CPI, and PPI all slowed in 3Q to +3.5% YoY (vs. +3.6% prior), +2.3% YoY (vs. +2.6% prior), and +2.7% YoY (vs. +3.4% prior), respectively. An unofficial TD Securities gauge of inflation showed continued cooling of late: +2.6% YoY in October vs. +2.8% prior.
  • New Zealand’s CPI slowed in 3Q to +4.6% YoY vs. +5.3% prior.

Sticky Stagflation:

  • Chinese Premier Wen Jiabao reiterated that China will continue to maintain firm controls within the property market and that the country will ease policy at a “suitable time and [to an] appropriate degree”. We’ve been in print saying that we likely won’t see China loosen meaningfully without at least one quarter of sequentially contracting CPI alongside slowing YoY headline inflation trending down towards the State Council’s +4% target. The latest reported inflation data would suggest we’re at least 3-4 months away.
  • China’s banking regulatory body, the CBRC, granted approval to some banks to issue debt in order to fund incremental loan issuance to Chinese SMEs. Elevated inflation continues to keep the Chinese government from coming to the rescue of its ailing small businesses in a meaningful way.
  • Thai CPI accelerated in October to +4.2% YoY vs. +4% prior. The acceleration makes the Bank of Thailand’s monetary policy strategy that much harder, given that they just lowered their 2011 GDP forecast by -36.6% to +2.6%. Rapidly slowing economic growth is supportive of easing, but current CPI readings and an increase to their 2012 inflation forecast requires additional prudence per Assistant Governor Paiboon Kittisrikangwan.

King Dollar:

  • Japan intervened for the third time in the year-to-date to weaken the yen in the spot currency market. Finance Minister Jan Azumi pledged to continue taking “bold action against speculative moves in the market” as the “one-sided speculative moves that don’t reflect the economic fundamentals of [Japan’s] economy.” His lack of understanding on the relative nature of exchange rate determination continues to make Japanese bureaucrats flat-out wrong here, as our analysis shows the yen is being driven solely by “fundamentals”.
  • The Reserve Bank of India raised interest rates for the 13thtime since the start of 2010 (+350bps in the current tightening cycle) and signaled that if the “inflation trajectory conforms to [their] projections” over the next few months (our models suggest this is the most likely scenario), the RBI is likely done tightening monetary policy. India’s benchmark repo rate now stands at 8.5%.
  • Consistent with our outlook since 2Q, the Reserve Bank of Australia finally broke and lowered interest rates by -25bps (now at 4.5% on the overnight cash rate). In explaining the decision, RBA Governor Glenn Stevens cited all the things we’ve been hitting on for months: slowing Asian demand, a weakened domestic labor market, Europe’s Sovereign Debt Dichotomy, and retrenchment in the domestic consumer and corporate sectors. Interbank cash rate futures are currently pricing in a 74% chance the RBA lowers by another -25bps in December.

Eurocrat Bazooka:

  • Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovate”.


  • Japanese manufacturing PMI ticked up in October to 50.6 vs. 49.3 prior.
  • Indian manufacturing PMI ticked up in October to 52 vs. 50.4 prior.
  • South Korean manufacturing PMI ticked up in October to 48 vs. 47.5 prior.
  • Australian manufacturing PMI ticked up in October to 47.4 vs. 42.3 prior.


  • The epic flooding in Thailand (92 billion cubic meters of water) have forced closures of 10,000+ factories and caused structural damage to plants and farmlands currently estimated at $4.6 billion. The closures are noticeably impacting the supply chains of Japanese corporations like Toyota and Sony, helping drag Japanese industrial production down in September to -4% on both a YoY and MoM basis.

Darius Dale


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