Below are a few country-level summaries you may find helpful to expanding upon your global investment motif. As always, feel free to email us to the extent you’d like to dig deeper into a specific country or topic.
In China, the bulk of key high-frequency growth data surprised to the downside in MAY, headlined by the sharp slowdown in Fixed Assets Investment and FDI. At +9.6% YoY the former was the slowest rate of change since MAY ’00, while the latter saw the first negative print since DEC at down -1% YoY. We’ve reiterated time and time again that China has not bottomed and will not bottom anytime soon, which is precisely why industrial metals (copper, iron ore, nickel, palladium, aluminum, rebar, etc.) are demonstrably lagging the reflation rally in the commodity space from a multi-duration, multi-factor perspective. As highlighted our 6/9 note titled, “Got Demand?”, the global demand curve continues to trend lower, which creates an air pocket across risk assets globally to the extent the Fed cannot devalue the U.S. dollar any further from here.
In Japan, the 2Q MoF Business Survey was the latest piece of data highlighting Japan’s ongoing bout with #Quad4; the headline All-Industry reading of -7.9 was the lowest print since 2Q14. Elsewhere in Japan, cash on corporate balance sheets hit a record high of $1.01T in FY15 amid ongoing structural deterioration in Japan’s growth outlook. A U.S. equity bull would say that’s bullish (buybacks, dividends, etc.), but the Nikkei 225 Index’s -24% peak-to-present return would seem to suggest otherwise. Consistent with our 2Q Macro Theme, the breakdown of the #BeliefSystem remains ongoing throughout both the Eurozone and Japan.
In India, the economy’s ongoing shift into #Quad3 is incrementally confirmed with the advent of the APR Industrial Production and MAY CPI data. At +5.8% YoY, the latter is the fastest rate of headline inflation since AUG ’14 and calls into question the RBI’s easing bias. Indian financial markets have figured this out on a very immediate-term basis (e.g. SENSEX down -1.4% WoW; 1Y OIS Spread +3bps wider WoW; 10Y Yields backed up +5bpsWoW; and INR down -0.5% WoW vs. the USD), bucking what had been a trend of persistent resilience. We anticipate this inflection will be sustained with respect to the intermediate-term TREND.
In Turkey, slowing growth (Real GDP slowed -90bps in 1Q to +4.8% YoY) and ongoing plans to make the country’s leadership more authoritarian in nature have weighed heavily upon Turkish financial markets of late (e.g. BI 100 Index down -2.6% WoW; 10Y Yields backed up +28bps WoW; and TRY down -0.5% vs. the USD WoW). Regarding the latter, leaders of the ruling AKP have confirmed plans to transition more power to President Recep Tayyip Erdogan, but only after the summer recess. In the interim, the party will focus on prioritizing a new package of laws that includes measures on the economy and taxes. Normally, that would be a bullish catalyst, but the aforementioned move to authoritarianism, at the margins, remains a meaningful bearish overhang. On the flip side, at least 330 votes are needed in 550-seat parliament to trigger a referendum to amend the constitution and the AKP currently only has 317 seats. This implies Erdogan might fall short of his desire to transition Turkey to an executive-branch leadership model, but we’ll cross that [potentially bullish] bridge when we get there.
In Russia, Putin cut the benchmark One-Week Auction Rate -50bps to 10.5% on Friday. OK, we made that statement largely in jest, but it’s not at all farfetched to suggest supporting Russia’s economic recovery ahead of critical parliamentary elections in SEP has likely become one of CBoR’s primary objectives (Yellen/Obama/Clinton anyone?). That said, however, their shift in APR to an easing bias and now the aforementioned follow-though here in early-JUN is quite warranted given trends across Russia’s key high-frequency inflation indicators, which are all slowing on a trending basis as of the APR/MAY timeframe. Moreover, steepening base effects for headline CPI through year-end should perpetuate additional rate cuts as reported inflation continues its trend lower. Additionally, fiscal policy looks to get incrementally supportive, at the margins, to the extent Putin ramps up spending ahead of the aforementioned elections. This combination of supportive monetary and fiscal policy in an economy that’s already trending in #Quad1 is as potent a bull case in EM that I’ve seen in recent memory. I’m inclined to be bullish on Russia, but refuse to chase that exposure here amid our bearish expectations for financial markets globally (i.e. we’ll probably get to buy RSX much cheaper than ~$17).
Enjoy the rest of your evening,