“The triumphant success of Hong Kong demands - and deserves - to be maintained.”
Charles, The Prince of Wales
The crowds of tens of thousands in Hong Kong are swelling in number. Today, Chinese National Day, the numbers are likely to increase significantly. While started by students, all facets of the population are represented. One can only be in awe at how so many can demonstrate peacefully, even in the face of harsh and utterly unnecessary police tactics: Not one single shop window has been broken in 5 days of protest.
Back to the Global Macro Grind…
How did this all get started?
In the run-up to the 1997 Handover of Hong Kong, Universal Suffrage was promised under Article 45 of the Basic Law. In 2004, the National People’s Congress said this would not occur before 2012. In 2007, the NPC pushed the date to 2017. In 2014, Universal Suffrage is redefined: Everyone can vote, but only for the 2 or 3 candidates pre-selected by Beijing. The serious matter of a peoples’ freedom to elect their leaders has been made a farce by the Central Government and the current Hong Kong leadership.
Over the summer, Beijing completely misread the situation thinking that its version of a seemingly democratic process would be sufficient to keep the Hong Kong people at bay. Yet the proposal was so far off the mark and without any room for negotiation that a tipping point was reached.
While Beijing is known for digging in and using all means necessary to obtain its will, it appears the people of Hong Kong are willing to do the same this time around. There is no quick solution given Hong Kong Chief Executive CY Leung’s unwillingness to work for the Hong Kong people he supposedly represents. Leung’s administration has fantastically mismanaged this situation.
The Central Government needs this win. A loss of face isn’t the primary concern: The very survival of the Communist Regime is at stake in the eyes of China’s leaders. No progress is being made at containing unrest in Xinjiang Province where Uyghur separatist are claiming the region.
To add to Beijing’s woes, the Chinese economy is cooling quickly. Fixed assets investment is slowing both sequentially (as of AUG) and on a trending basis – as are retail sales, exports and imports. Manufacturing PMI and consumer confidence are also slowing on a trending basis as of SEP and AUG, respectively. Additionally, the property market is in dire straits, as Darius Dale details in a note yesterday titled, “DEFCON 2.5: The “China Overhang” Is Likely To Continue”.
Already, we have seen a few, albeit small, public gatherings in large cities supporting the protesters in Hong Kong. What if demonstrations spread beyond Hong Kong?
In the last few days, the world has experienced an unprecedented crack-down on social media and freedom of speech to prevent just that from happening. But we know very little about it in the United States. One would need to live in the PRC to experience it. It’s hard for us to imagine what the internet looks like when one only gets to see a carefully selected portion of it. Overnight, there are reports of a Trojan virus aimed at infiltrating the iPhones of HK protesters. Make no mistake, this is a first rate electronic communications war being played out in front of us.
How will the world react to all of this? The United Kingdom, as former colonial masters, surely has a moral responsibility. But the West is and will be reluctant to take a stand against China. Cross-strait relations also play a factor: Beijing continues to strive for a unified China, inclusive of Taiwan. The wrong action in Hong Kong could further alienate the Taiwanese people.
Unless the protesters get tired we will all be watching this for some time. There will be economic impact. But the big changes will play out in the long term.
Can democracy thrive in Hong Kong? And will this lead to a softening of the regime in Beijing?
The people of Hong Kong appear ready to find out.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.46-2.55% (bearish)
SPX 1 (neutral)
RUT 1090-1026 (bearish)
EUR/USD 1.26-1.38 (bearish)
WTIC Oil 90.16-94.42 (bearish)
President and Resident of Hong Kong
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This note was originally published at 8am on September 17, 2014 for Hedgeye subscribers.
“Leadership is the capacity to translate vision into reality.”
We held our inaugural Hedgeye Cares Charity Golf Challenge at Great River Golf Club in Milford, CT yesterday. The group of my colleagues that banded together to form the Hedgeye Cares committee did an outstanding job translating a vision into a reality.
Like most charity events, it wouldn’t have been a success without the support of myriad sponsors. On the corporate side, we were pleased to get support from The Lincoln Motor Company, Salesforce.com, Bloomberg, D.B. Root, MBIA, Better ITS, the Arizona Coyotes, and Firefly Space Systems just to name a few. In addition, many individuals like you were kind enough to lend a helping hand by either buying a foursome or providing items for the silent auction.
Aside from being a very enjoyable day, we also raised close to $100,000 for Bridgeport Caribe Youth Leaders, which is an all-volunteer program based in Bridgeport, CT that provides “children with diverse educational, sports and community awareness programs that foster physical, intellectual and social development, while instilling pride and helping them build character and self-esteem, so that they can reach their full potential and value their role in society.”
Certainly a group more than worthy of our support. Again, we thank you.
Back to the Global Macro Grind...
Even as many of my Hedgeye colleagues were away from their screens yesterday, the global macro news flow continued. The most relevant global market over the next 24 hours is of course likely to be the Treasury market with the Federal Reserve policy meeting occurring later today. Regardless of what the Fed says today, it is likely that very few investors have “nailed” the last month of interest rate moves, except in hindsight.
As shown in the Chart of the Day below, on August 15th, the 10-year yield hit a 2.30% low. Within a month, by September 15th, the 10-year yield had tacked on 30 basis points and reached basically a three month high. This morning the 10-year yield is trading off the recent highs from a couple of days ago, albeit only marginally. Even if you didn’t nail the move, or did so in hindsight, the fact remains having a view on rates, and thus the U.S. dollar, is critical in global macro positioning.
So, what is the Fed going to say and how are we positioned?
Despite the lack of a crystal ball, we are sticking with our house view that Fed will be more dovish than expected. With reported inflation relatively benign, the housing sector seeing some cracks (arguably a lot!), and the most recent employment data points softer than expected, there seems to be little incentive for the Fed to ramp up the hawkish rhetoric.
According to his Wall Street Journal podcast from yesterday, the mighty Fed visionary Jon Hilsenrath appears to agree with us. As he noted:
“Given the economic backdrop, they don’t want to send a signal right now that rate increases are imminent.”
Indeed Mr. Hilsenreth, indeed.
So, interestingly, as we head into the main Fed event, the 10-year yield didn’t even make it into the top three things that Keith sends out to subscribers in his “Direct from KM” email every morning at 6:00am, which were as follows (if you aren’t on "Direct" from KM please email email@example.com to get details on being added) :
- ASIA – w/ the Russell 2000 -1.2% YTD, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% YTD, respectively – that’s where the real perf is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA
- USD – one of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – I still think the Fed gets easier throughout Q3/Q4 as the rate of change in US economic growth data slows – consensus is hawkish
- UTILITIES – the Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% YTD – we’ve stayed with that all year and I’m not changing my mind on it into the Fed statement either
Speaking of vision, it seems the Scottish vision of independence will be tested today. According to the most recent three polls, the "No" for Independence voters are maintaining a narrow lead of some four points.
As we have often written, polls in the aggregate matter and in the aggregate the polls continue to imply that the No votes will prevail. Interestingly, as well, online betting site Betfair has already started paying out No votes as they consider the No majority win a foregone conclusion. That all said, until the mighty Jon Hilsenreth opines nothing is truly a foregone conclusion!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.40-2.62%
Shanghai Comp 2267-2357
WTI Oil 91.37-95.12
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.
CLICK HERE to view the document. In today’s edition, we highlight:
- The degree to which Foreign Exchange is breaking down to new lows and the drivers of this move
- The continued buildup of negative momentum in Commodities and commodity-linked equities
Best of luck out there,
Associate: Macro Team
TODAY’S S&P 500 SET-UP – October 1, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 0.78% downside to 1957 and 0.70% upside to 1986.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.91 from 1.92
- VIX closed at 16.31 1 day percent change of 2.07%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Sept. 26 (prior -4.1%)
- 8:15am: ADP Employment Change, Sept., est. 205k (prior 204k)
- 9:45am: Markit US Mfg PMI, Sept. final, est. 57.9 (prior 57.9)
- 10am: ISM Manufacturing, Sept., est. 58.5 (prior 59)
- 10am: Construction Spending m/m, Aug., est. 0.5% (prior 1.8%)
- 10:30am: DOE Energy Inventories
- Senate, House out of session
- 9:30am-1pm: Energy Sec. Moniz speaks at energy security event
- Panel afterwards incl. IHS Vice Chair Yergin, White House counselor Podesta
- 10:30am: Former President Bill Clinton World Energy Engineering Congress keynote address
- 2pm: SEC Commissioner Gallagher speaks at mkt structure conf.
- 2:45pm FINRA CEO Richard Ketchum and SEC head of trading, Steve Luparello, also speak
- 2:45pm: SEC Chair White speaks at panel at Intl Organization of Securities Commissions meeting in Rio De Janeiro
- 4pm: Sec. of State Kerry to meet with Chinese counterpart Wang Yi at State Dept
- U.S. ELECTION WRAP: Latino No-Shows; Senate Control Consensus
WHAT TO WATCH:
- Pershing Square Raises Size of IPO to $2.73b From About $2b
- Eurozone Sept. Manufacturing PMI 50.3; Est. 50.5
- First Ebola Case Diagnosed in U.S. Confirmed in Dallas: CDC
- Japan Stock Orders of $617b Scrapped in Trading Error
- Bristol-Myers Transfers $1.4b of Pension Risk to Prudential
- Nomura, Goldman Sachs Among Firms to Lead Japan Post IPO
- FAA Orders New Pilot Displays for 1,300 Boeing Jets: WSJ
- Oracle Seeks Partners in China to Expand Cloud Service Business
- Fannie, Freddie Investors Lose Suits Over Profits Taken by U.S.
- Wal-Mart Judge Says Retailer Must Face Mexican-Bribe Probe Suit
- Apple Said to Add Gold Option to IPad in Effort to Boost Sales
- BNY Mellon to Shutter Its Derivatives Sales, Trading Group
- U.S. Said to Reach Accord With Brazil Ending Cotton Trade Fight
- Hong Kong Leader Jeered by Protesters on China National Day
- President Obama meets with Israeli Prime Minister Netanyahu
- GM, Chrysler, Ford Sept. Auto sales; SAAR may drop vs Aug.
- Acuity Brands (AYI) 8:56am, $1.22
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Corn Extends Drop to Five-Year Low as U.S. Supply Tops Estimates
- Goldman Sees Corn to Soybeans Extending Losses on U.S. Supplies
- WTI Crude Rebounds Before U.S. Stockpile Report; Brent Climbs
- Nickel Declines to Six-Month Low as Stockpiles Expand to Record
- Arabica Coffee Rises on Outlook for Brazil’s Crop; Cocoa Falls
- Platinum Drops to 5-Year Low as Palladium Declines on Car Sales
- Top Cotton Trader Says Prices Need to Fall More to Cut Surpluses
- U.S. Oil Exports Seen Breaking 1957 Record as Traders Dodge Ban
- Palm Oil Declines After Posting Biggest Monthly Gain Since 2009
- Marubeni Offloads $1 Billion Canadian Coal Mine for a Buck
- Gas Allure in U.K. Power Poised to Extend Into Winter on Outages
- Worst Seen Over for Global Oil Prices as Saudis Cut Output
- Shanghai-London Parity Signals Aluminum Rally: Chart of the Day
- Mideast Turmoil Keeps Gasoline at 45 Cents in Oil States: Energy
The Hedgeye Macro Team
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