China
The RMB has been steadily depreciating versus the U.S. dollar and has dropped to a new cyclical low versus its trade-weighted basket. All the while, Chinese domestic interest rates have lately drifted higher. When global investors wake up to these dynamics, global share prices and EM risk assets will likely sell off anew. In Mexico, initiate a new yield curve trade: receive 10-year / pay 1-year swap rates.
DXY can test 98 by July, creating a shorting opportunity: it will be hard for the Fed to increase rates more than once without causing an accident. If, it can, it is because global growth is stronger, hampering the USD's prospects. There's some rays of sunshine in Japan and we are closing our long AUD/NZD trade. A few words on the yuan.
While the Fed's recent forward guidance leading markets to increase the odds of a policy-rate hike earlier than previously expected will restrain the recovery in crude oil prices, fundamentals will dominate price formation now that markets have rebalanced.
The window for "stealth" RMB depreciation is likely closed for now. The Chinese authorities are stepping up efforts to boost infrastructure construction with several major announcements last month. Capital spending on transportation infrastructure will likely accelerate at least through next year.
Markets will remain stuck in a trading range, driven by two policy feedback loops: the Fed's and China's.
Both hawks and doves at the Federal Reserve, including Chair Yellen, have stepped up efforts to condition financial markets for a rate hike as early as June.
While it is impossible to time the stock market, even a system whose results are slightly better than a coin-flip can still generate significant <i>alpha</i>. Overweight equities when valuations are favorable, growth is advancing, and financial conditions are easing. Stocks tend to do best when sentiment is bearish but improving, and the market has started trending higher without yet going parabolic. The outlook for U.S. stocks is rather mixed; Europe, Japan and China should outperform (currency-hedged).
A combination of physical rebalancing in the oil markets and geopolitical risk have pushed oil prices above $50/bbl. We therefore close our recommendation - made jointly with BCA's Commodity & Energy Strategy team - to long a December 2016 WTI $50/$55 call spread for a 106.3% gain.
This month's <i>Special Report</i> reviews the literature on equity market timing, and identifies the key indicators that historically have had the best track record. We then aggregate the indicators into an overall scorecard that should prove to be valuable for investors in these volatile times.
Risks to global growth remain to the downside. Selling pressure in cyclical markets and assets will escalate. EM currencies will make new lows versus the U.S. dollar, the euro and yen. Take profits on our long JPY/short KRW and long JPY/short SGD trades. Short KRW versus an equal-weighted basket of the U.S. dollar, yen and euro. Continue underweighting Peruvian equities.