Conclusion: The bevy of economic data out of Asia over the last few days adds to our conviction that the bullish rally in many Asian equity markets is likely to run out of legs, provided the U.S. dollar catches a bid. In addition, the data grows increasingly supportive of the relative underperformance of Japanese equities.
Positions: Long Chinese Yuan (CYB); Short Japanese Equities (EWJ); Short the Japanese yen (FXY); Short Emerging Market Equities (FFD)
There has been a slew of economic data coming out of Asia over the last few days – some good, some bad, and some ugly. Rather than belabor the point(s) with excessive prose, we’ll just highlight the meaningful deltas and inflection points in the call-outs and charts below.
- Singapore’s Retail Sales ex Motor Vehicles accelerated in August to +6.2 YoY from +6% in July. We have remained bullish on the Singapore consumer over the last several months due to structural employment tailwinds.
- In line with our call from early July, the Singapore central bank signaled that it will widen the Singapore Dollar’s trading band to allow faster appreciation to combat rising inflation.
- China is considering allowing companies to use yuan for cross-border investment in an effort to expand international trade settlement in the currency and reduce reliance on the dollar. The People’s Bank of China is researching means to permit the use of the yuan by overseas companies for foreign direct investment and to allow Chinese companies to invest yuan internationally.
- Japan’s PPI decelerated in September to (-0.1%) YoY from flat in August, due to the strong yen driving down the cost of imports.
- China’s Foreign Direct Investment accelerated in September to +6.1% YoY from +1.4% in August.
- Singapore‘s GDP growth decelerated in 3Q10 to +10.3% YoY from +18.8% YoY in 2Q10. While consumer trends remain strong in Singapore, we are increasingly cognizant of Singapore’s reliance on exports as a driver of growth, particularly in the volatile pharmaceutical and electronics sectors. As global trade slows due to decelerating demand from the U.S. and W. Europe, countries like Singapore that are overly reliant on exports could see their growth come under increased pressure. Exports account for roughly 200% of Singapore’s GDP.
- Singapore’s Non-Oil Domestic Exports decelerated in September to +22.7% YoY from a revised +30.8% in August. While +23% YoY export growth is nothing to scoff at, an (-810bps) second-derivative slowdown is noteworthy and speaks to the broader slowdown within the Singapore economy from white-hot levels of growth in 1H10.
- Japan revised down its August Industrial Production to (-50bps) MoM from (-30bps).
- China’s Property Prices (70 Cities) rose in September by +0.5% MoM, marking the first sequential uptick on a monthly basis since May. While prices decelerated on a YoY basis in September (+9.1% vs. +9.3% in Aug.), the +56% MoM gain in property sales value and +52% MoM gain in property sales volume exacerbate the slight monthly increase in prices in September and will likely overshadow September’s marginal YoY deceleration. This latest reading may serve to speed up China’s implementation of a nationwide property tax trial.
- India’s Inflation (WPI) accelerated in September to +8.6% YoY from +8.5% in August. This is yet another example of Fed-sponsored inflation that has been accelerating globally. Food inflation accelerated to +16.4% YoY (food is the largest expense line item for 75.6% of Indian households). This latest inflation reading highlights the Indian central bank’s struggles with containing inflation, which may get tougher as they’ve recently signaled that they will intervene in the currency market should the rupee rally pas 43 per dollar. Weaken the rupee and starve your citizenry with inflation or allow it to continue appreciating and reduce your country’s export competiveness is not a catch-22 we’d like to be invested in, despite India’s one billion-plus people and high-single digit GDP growth (both of which are as widely understood by consensus as it gets).
- The number of new hedge funds in Japan is set to reach the highest level since 2006. As many as 27 Japan-focused funds are scheduled to launch this year, with 15 already in operation. While we typically consider fund flows and start-ups as contrarian indicators, we do think the number of Japan-focused hedge funds going up may actually provide incremental selling pressure on the Nikkei, as more investors arrive at the conclusions we reached from our Japan’s Jugular thesis outlined in our 4Q10 Macro Themes call.
- In classic contra-indicator form, the number of hedge funds’ net speculative positions that the yen will rise against the dollar stood at an elevated 48,285 contracts on October 12th. In May, when the yen bottomed at 94.5 per U.S. dollar, there were a net 65,612 contracts forecasting a yen decline. If you don’t know now you know that portfolio managers chase performance and price.
All told, the bevy of economic data out of Asia over the last few days adds to our conviction that the bullish rally in many Asian equity markets is likely to run out of legs, provided the U.S. dollar holds a bid. In addition, the data grows increasingly supportive of the relative underperformance of Japanese equities on both an intermediate term TREND basis and from a long term TAIL perspective. We continue to stand counter to the Blind Belief that QE2 will be a panacea for U.S. economic growth and once consensus understands that or QE2 becomes fully priced in, emerging market equities could come under selling pressure as the gravitational force that is slowing growth in the U.S., Japan, and Europe weigh on markets globally.