PAUL KRAKE: So many cross currents. So much conviction - April 30, 2018

Paul Krake

Blotter: So many cross currents. So much conviction.

Prepping to write this Sunday blotter doesn’t generally take too long. I take a look at the releases for the week: Earnings, central banks, political speak, economic data. I cross reference them mentally against my prevailing tactical stance and I type away. I always work my best when I let my thoughts flow and then I again make sure I haven’t missed anything. Not rocket science. It’s just my process.

Sometimes though, it takes a little longer. This week is one of those examples, because there is simply a lot happening and I am not sure how to handicap them when determining what will drive developed market yields, the dollar, and global equity beta. Are Apple earnings more relevant than US Payrolls and PMI releases? Will the détente between North and South Korea buoy the region or will it be swamped by US Treasury Secretary Mnuchin’s trip to China? Does the RBA matter to the AUD or is it all about the Fed? While we always face these dilemmas, there appears to be more than normal, and they have heightened importance. Participants, both investors and sell side analysts alike, are convinced that global yields, especially in the US are going to spike, taking the USD with it. Emerging markets, so the narrative goes, are about to enter a period of sustained underperformance. The level of conviction about spiking rates is as high as I have seen it in a very long time and I think the consensus is about to be very wrong.

I am not being contrarian for the sake of it. I am basing my stance that yields are peaking for the year on a slowing global growth environment, inflationary expectations that are topping, and the compelling valuation support that is underpinning emerging market assets. Throw in the fact that, we have record shorts in US 10’s and the next week or so could be a real turning point for fixed income across the globe.

With so many cross currents this week, the bond bears better get some really strong data / hawkish rhetoric or the rush to buy backs shorts will be immense. While long USD positions are less pronounced, a 1% USD slide that sees USDJPY back through 108.00 is highly probable in the event of a fixed income rally. US 10-year yields, the benchmark for bond bears, are 9bps from the highs on the backs of dovish news out of the ECB and BoJ. Is that the real reason or are speculative types just too darn short? Probably a combination thereof, but the potential for a buying frenzy is there if all this news flow this week doesn’t run “hot”.

The EM equity story is becoming compelling. It is undeniable that the news out of the Korean Peninsula is irrefutably positive, even if the Chinese are far from happy about this. The Chinese aircraft incursion into South Korea is a sign that China fears US troops on its North East border without the buffer of the soon to be former rouge state. China’s response is something to watch over the next few months. That said, there is a lot to like about Chinese assets, especially given Mr. Mnuchin’s trip this week. There is very little downside for Chinese equity.

As for the portfolio, we reached levels last week to cover our EEM puts that got us to 54% net long. We also covered our long-held AUD short at 0.7555. The portfolio is classic risk parity, being aggressive long bonds and equities, predominantly EM.

The Fed and RBA meet this week with no change expected. Monday, German CPI. Tuesday, Japan, Canada, the UK and US PMI’s, SK Exports, Canadian GDP, and US ISM Man. Wednesday, SK, China, India, Germany and the EU PMIs, Indian CPI, EU GDP. Thursday, Australian Trade & US Durable Goods. Friday, US employment. On page 3, Cindy discusses Alibaba earnings.

Paul Krake

Founder, View from the Peak

IND-X Advisors Limited

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