Takeaway: We remain comfortably neutral on the “Abenomics Trade” here as domestic factors conflict with globally interconnected risks.

Gee, what a boring year it has been for the bulk of investors with capital allocated to Japan. The Nikkei 225 is trading at roughly the same level it did back in the last week of JAN – as is the USD/JPY cross. Truly, Japanese financial markets have been as boring in the YTD as BoJ monetary policy statements have been since Governor Haruhiko Kuroda got his term started with a bang in APR of last year.


Judging by speculative net length in the futures and options markets, it remains our view that many international investors dog-piled into the “Abenomics Trade” (i.e. long Japanese equities/short the JPY) at the end of last year – likely in an attempt to chase what had been one of our 2013 “moneymaker” trades alongside our #RatesRising and #GrowthAccelerating (i.e. the outperformance of the domestic growth style factors) themes.




What hasn’t been so fortunate for investors is the -6.6% YTD decline in the Nikkei 225 or the +2.8% appreciation of the Japanese yen versus the US dollar. Moreover, the outlook from here remains undecided as ever as domestic factors conflict with globally interconnected risks.


This high-conviction directionless view is something we have been wrestling with since the end of JUN, when we detailed the economic puts and takes contributing to what we continue to see as a fiscal and, more importantly, monetary policy vacuum in Japan:


  • JAPAN POLICY VACUUM PART II? (6/30): We lack conviction on the intermediate-term direction of the Abenomics Trade and we think investors should remain on the sidelines for now.
  • REITERATING OUR RESEARCH VIEW ON JAPAN (7/15): We reiterate our call of not having a high-conviction call on Japan here amid a convoluted globally-interconnected monetary policy outlook.


In full disclosure, this view comes after recommending investors short and subsequently cover Japanese equities back in mid-FEB and late-MAY.



It’s worth noting that from MAY 28 through JUN 30 the Nikkei 225 appreciated +3.3% in the face of a +0.5% advance in the JPY/USD cross. Since then, however, the Nikkei 225 has traded flat (i.e. +0.3%) in the face of a -1.1% decline in the JPY/USD cross. That’s a good cover followed by an even better call to move to the sidelines amid a breakdown in the well-known inverse correlation supporting the Abenomics Trade.


If you ask us, we think that inverse correlation is breaking down due to one primary factor: market participants trying to decipher whether or not the recent strength in the US Dollar Index is a harbinger of good news (i.e. a Quad #1 or Quad #2 setup in the US) or a bad news (i.e. a Quad #3 setup in the Eurozone that facilitates a Quad #4 setup in the US as our domestic #Q3Slowing theme remains in play).


For those of you who would like more details regarding the aforementioned scenario analysis, please refer to the following presentations: REPLAY: 3Q14 MACRO INVESTMENT THEMES CALL (7/9) and VIDEO & SLIDE DECK: ARE YOU PREPARED FOR QUAD #4? (8/5).


Looking to factors specific to Japan, the 2Q GDP report was yet another nonevent in the context of forcing the BoJ’s hand. The release was in line with consensus expectations and those of the Japanese government, as confirmed by Economy Minister Akira Amari following the release, which had a muted impact on the otherwise-volatile Japanese equity market (it closed up +0.4% on the day).


  • 2Q Real GDP: -6.8% QoQ SAAR from 6.1% prior
  • YoY: -0.1% from 3% prior
    • C: -2.7% YoY from 3.5% prior
    • I-Residential: -1.9% YoY from 12.1% prior
    • I-Commercial: 7.1% YoY from 11.6% prior
    • G: 0.6% YoY from 0.7% prior
    • X-M: 2.3% YoY from -38.6% prior
  • 2Q GDP Deflator: 2% YoY from -0.1% prior


Importantly, LDP officials expect GDP to rebound in the third quarter (as do we), so there would appear to limited need for either fiscal or monetary policymakers to step in here to aid Japan’s recovery from the tax hike-induced weakness. It’s worth noting that the 3M trend in the preponderance of Japanese growth data is decidedly positive.




This is especially true for the BoJ; recall that while acting president of the Asian Development Bank, Kuroda was very critical of the piecemeal easing measures oft-implemented by his predecessor Masaaki Shirakawa. Rather, the current BoJ chief prefers the “big bang” stimulus – something that may not be necessary until reported inflation slows throughout 2H14, which is something our models are forecasting. That puts the timeline for an expansion of the BoJ’s QQE program in the 1H15 range.




All told, be it Yellen & Co. potentially preparing to devalue the USD (and thereby inflating the JPY) or #GrowthSlowing in the US and EU that perpetuates a meaningful reversal of #VolatilityAsymmetry, we think it’s best for investors to remain on the sidelines (i.e. not involved or a combination of low gross and tight net exposures) with respect to the Abenomics Trade.  


Lastly, if you aren’t yet familiar with the debate surrounding the outlook for US monetary policy we’ve been trying to prepare investors for since JAN, we highly encourage you to review the following Reuters article: "Yellen Resolved to Avoid Raising Rates Too Soon; Fearing Downturn" (7/12).


Have a wonderful evening,




Darius Dale

Associate: Macro Team


Takeaway: Recent economic data is supportive of our bullish bias on Chinese equities.

A meaningful helping of China’s JUL high-frequency economic data was reported overnight/over the past few days. The key takeaways are highlighted in the bullets and tables below.


First the bad news:


  • A continued deceleration in capital flows fueled a pullback in deposit growth that caused both traditional (i.e. CNY bank loans) and nontraditional (i.e. “shadow” credit) financing to slow meaningfully. Specifically, new CNY bank loans decelerated to 385.2B MoM from 1.08T prior, while shadow credit decelerated to -309.9B MoM from 535B prior. These deltas caused the total social financing figure of 273.1B CNY MoM to come in at the slowest pace of credit expansion since OCT ’08.
  • Key headline indicators such as fixed asset investment, industrial production and retail sales all slowed MoM, in addition to generally exhibiting negative deviations vs. their respective 3M, 6M and 12M trends.
  • On a rolling monthly basis, the PBoC has now drained a net 20B CNY from the money market, which is a dramatic reversal from inputting a net 105B into the financial system in the previous 1M period and the trailing 3M average of 87.3B in net liquidity provision.


And now the good news:


  • China’s manufacturing PMI data showed considerable strength in JUL, accelerating to 51.7, which was the strongest print since APR ’12. Every sub-index accelerated MoM except gauges for supplier delivery times and employment.
  • On the heels of waning commodity price pressures (click HERE and HERE for more details), CPI came in flat MoM, with headline, food and non-food inflation measures exhibiting negative deviations vs. their respective 3M and 12M trends.
  • Amid a broad-based rollback of macroprudential measures at the local government level, property market stabilization continued for a second month in JUL, highlighted by the sequential acceleration in credit availability and the sequential and trend-based improvement in both land speculation and housing starts – the two key leading indicators for construction activity.


KEEP BUYING “OLD CHINA” - CHINA High Frequency GIP Data Monitor


On the flip side of the aforementioned positive developments in China’s property market, we continue to see slowing growth in both current construction and completions, contracting and slowing growth in demand, slowing home price appreciation and waning readings of general market conditions.


KEEP BUYING “OLD CHINA” - CHINA Property Market Monitor


In light of these dour trends, it remains our view that until China’s property market has regained sound footing, Chinese policymakers will continue to ease, at the margins. From a timing perspective, that’s at least 2-3M of continued loosening which should provide a boon to 3Q GDP growth alongside decelerating inflation.




On balance, this outlook for a continued 1-2 punch of “proactive” fiscal policy and “relatively loose” monetary policy should provide a meaningful tailwind to the high-beta Chinese equity market – particularly those industries exposed to fixed asset investment (i.e. “Old China”).


Simply put, in order for the Communist Party to implement its targeted structural reforms, we think it must first show face on the low-hanging fruit (i.e. the State Council’s GDP, CPI and M2 targets). While said guidance clearly does not represent “hard” targets, any material downside deviations in the context of a widespread perception of financial instability would risk undermining the party’s credibility, in our opinion.


In that light, we continue to like the iShares China Large-Cap ETF (FXI) on the long side, which has appreciated +3.4% since our 7/24 note recommending it on the long side. This compares to a sample mean of -0.7% across the 24 country-level ETFs we track across the EM space and is demonstrably outpacing the -2.7% decline for the S&P 500 SPDR ETF Trust (SPY). Looking to our Tactical Asset Class Rotation Model (details HERE), the China style factor remains the best looking secondary asset class in the global macro universe, accounting for 11 of the top 20 VAMDMI readings.


KEEP BUYING “OLD CHINA” - TACRM 20 20 Vision Thermodynnmic Monitor Bar Chart




All that being said, China has by no means turned the corner from a longer-term perspective, so we are reticent to make this a best idea until we can get the first signs of confirmation that perceived tail risk is receding. Specifically, neither valuation nor sentiment are in “layup” territory, so it’s tough to “back the truck up” on Chinese shares here:


  • We look at EV/TTM EBITDA ratios at the index level to account for varying levels of private sector indebtednesses across the various economies; on this metric the MSCI China Index is more-or-less fairly valued versus the MSCI US Index, while being slightly overvalued vs. the MSCI Europe Index and fairly overvalued versus the MSCI EM and MSCI Japan indices.
  • In a JUL ’14 Bloomberg poll of 550+ global investors, 19% of respondents saw China as being the economy offering the best returns over the NTM. That was fourth-highest total among the eight specific economies listed.




KEEP BUYING “OLD CHINA” - Bloomberg China Sentiment


Don’t be shy with questions if you want to dig into anything highlighted above. Have a great evening,




Darius Dale

Associate: Macro Team

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Takeaway: We are adding FXB to Investing Ideas.

Our macro team is adding the British Pound to Investing Ideas. Stay tuned for a full report detailing our bullish case.


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As a token of our appreciation, we would like to extend an invite to join us at Mad46 from 5-7 p.m. tomorrow, August 14th.  Mad46 is located at the corner of 46th and Madison atop the 19th floor of Roosevelt Hotel.  


Representatives from all ten sectors will be present, and you're welcome to bring colleagues and friends. 




As a token of our appreciation, we would like to extend an invite to join us at Mad46 from 5-7 p.m. tomorrow, August 14th. Mad46 is located at the corner of 46th and Madison atop the 19th floor of Roosevelt Hotel.  


Representatives from all ten sectors will be present, and you're welcome to bring colleagues and friends. 




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