Nomura's Bob Janjuah has released an update on his market take.
Time has come to update my views. I have not written since late January as markets and economies have by and large moved as we expected back then. That late January note – which set out in detail my market views into April/May – is reproduced in its entirety below, and below each main bullet point I set out (in bold font) my latest views:
(original release date 27 January 2014)
It's funny how – after not writing for over two months – I put a note out last week (highlighting some key levels) and within hours of publishing we have gone on to test and break some of these key levels. So in the spirit of the ongoing narrative:
1 – I remain firmly and resolutely structurally BEARISH the post-2008/09 QE-driven rally in risk assets. So no change there. As the year unfolds in both EM and DM we will, I think, see that most major and relevant data (economic) and earnings trends will be weak or deflationary. QE has so far failed to create the broad-based real economy inflation in incomes, earnings and productivity needed to get growth going again and thus has largely failed to achieve its primary objective, which was to drive the muchneeded post-2008/09 debt deleveraging – heavy indebtedness, now also including the EM bloc, still dominates.
May 2014 Update: The global data and earnings flow since January has supported my views outlined above, and over the belly (middle two calendar quarters) of 2014 I continue to expect downward growth and earnings revisions, with global deflation being the key macro theme. In particular, the risk of STRONG headline inflation, specifically in food prices driven by the Ukraine situation and by El Nino, and at the same time weak and weakening core inflation driven by weak income growth and soft discretionary consumption, will present a major (net) deflationary growth challenge to policymakers and markets.
2 – QE has been a friend for the paper wealth of the top 1%, at the expense of the many, through boosting speculation and financial engineering. But QE stopped being a friend of commodities in 2010/11, it stopped being a positive for EM around late 2012/13, has I think stopped being a positive for housing assets from around mid-2013/early 2014, and in 2014/15 the "last man standing" in the QE fan club – equities – will also fall out of love with QE. Why? Because as 2014 unwinds the data will, I think, expose policymakers as falling far behind the curve, persisting with a policy tool, whose "success" is increasingly narrowly based and which is failing to deliver broad-based inflation, growth or any other meaningful positives to the real economy, whose incomes, earnings and cashflows must ultimately validate all financial market asset valuations. I think later in 2014 the themes of deflation and recession will dominate, and in the middle of this it will I think be difficult to watch Fed Chair Janet Yellen and other policymakers flip flop and attempt to extract themselves from their policies.
May 2014 Update: No change of view – see update above. The waning of US housing data and the lack of growth in leverage by the US real economy (the private sector) over the past three to four months IMHO strongly support the views outlined above. And, it is now a consensus opinion, among many investors that I talk to, that we are dependent on policymakers and their willingness to persist with a set of policies that have largely failed real economies, but which have led to what many now increasingly see as speculative financial asset ‘bubbles’ in which the global top 1% has been the winner, largely at the expense of the other 99%. Civil society is the big loser. And while the top 1% may live comfortably in ‘gated communities’ and alike, this misses the bigger picture – the recent EM civil unrest shows clearly what can happen when wealth disparity gets too large (and which needs to be addressed sooner rather than later). The claimed ‘wealth’ effect and the trickle-down theory of economics are increasingly disputed and real redistribution policies are inevitable.
3 – We think that weak Chinese data explain last week's price action. The reality is that the pressure behind the dam had been building for weeks – there was excessively bullish positioning and sentiment coming into 2014. Fear and greed appeared to be at work again. Investors were too hopeful coming into 2014, and last week fear dominated as, so far in 2014, the global data point to very mediocre global growth at best, mediocre earnings, and generally deflationary economic data. The important thing for me now is that after failing to see a weekly close above 1850 on the S&P500, last week there was a weekly close below 1800, which forces me to rethink my timing. My best guess from here now is:
A – Using the S&P500 as a risk proxy, 1800 and 1770 as weekly closes are now key levels. Intra-week we can bounce around, but we need to see – this week or next week latest, a weekly close above 1800 if we are going to see a quick turnaround and rally back to 1850. In such a case, and as per my note from last week, once we see a weekly close above 1850, then 1950 S&P by April remains the target.
B – If we cannot recapture 1800 this week or next, then a weekly close below 1770 points to a much more bearish picture for February. A weekly close below 1770 this week or next tells me that the risk/rewards favour a meaningful risk-off move to the low-1700s in the S&P during February, with even 1650 and 1600 possible. In this more bearish short-term scenario I'd expect Ms Yellen and her late February testimony on the Hill to be a catalyst for a bullish turnaround – if the S&P drops 100/150 points in the next two-three weeks I suspect that she will then send out extremely dovish signals, which the market will not be able to resist responding to. At this point in time, if this is indeed how it plays out, then from late February through to April I'd look to recapture 1800 and then aim for a weekly S&P close above 1850 into end Q1 2013 or April.
C - As per 3A above, upon a weekly close above 1850, then 1950 still attracts. But clearly 1950 is more likely under scenario 3A rather than under scenario 3B – under scenario 3B 1850 may act like a major double top. Based on last week's closes I am now 60/40 in favour of scenario 3B.
May 2014 Update: We avoided a weekly close in the S&P500 below 1770 and, two weeks later in early February the S&P did indeed recaptured 1800 on a weekly close, so scenario 3A has been in play. The S&P has now spent most of the past two months in and around the key levels (i.e., 1850 and 1900) which I had laid out under scenario 3A. Going forward I still expect to see – as laid out in January in 3C above – the S&P, as a proxy for the risk-on call, to show a little more upside. My target for the next two weeks or so remains 1950.
Chasing this last 3% to 5% of upside may be risky however, because thereafter I see the belly of 2014 (calendar Q2 & Q3) as a risky spot and I very much favour risk-off over this period. The key concern remains that over Q2 and Q3 I expect data flows will show increasing growth weakness and strong (core) deflationary trends, while, at the same time, policymakers globally are going to show more weakness, more indecisiveness, more uncertainty, more divergences (amongst each other) and, overall, get further and further ‘behind the curve’. In particular, global policymakers appear wedded to QE, even though they themselves are increasing either stating clearly, or at the very least, through their actions, that they themselves can see that we may have (over)reached the credible limits of a policy that has been oversold to us all and where only the owners of capital have benefitted, largely at the expense of the rest – the broad labour pool.
Let's see, but either way 2014 is already proving to be more challenging, more volatile, more illiquid and more bearish than the significantly bullish positioning and sentiment indicators warranted as we came into this year, and way more bearish than the significantly bullish consensus emanating from the sell-side. We will likely see painful counter-trend rallies, perhaps even to marginal new highs (3A above) – never underestimate the willingness and ability of some central bankers to persist with flawed policies – but, overall, I think the end of the post-2009 QE-driven bull is at hand (or very soon to be at hand) and the onset of the next significant (post-QE) deflationary bear market, which I think will run deep into 2015, should now begin to guide all investment decisions.
May 2014 Update: No change to the above. Notwithstanding the view that we may see S&P get up to 1950 (+/- a little) over the next fortnight or so, over the rest of Q2 and Q3 we could see a decent correction of up to 20% in the risk-on trade. Low 1700s in the S&P attracts, and thereafter, depending on weekly closes, low 1600s/mid-1500s S&P could be in play. For now, however, the key level to the upside is 2000 as a weekly close on the S&P – if achieved then I would have to revisit my bearish bias for the belly of 2014. To the downside a weekly close below 1770 would, I feel, easily put a 1700 S&P within reach. Beyond that I would need to assess data and price action at the time before highlighting the next set of levels, but I would not be surprised to see policymakers again attempt to boost markets later this year - there should be no surprise if this happens because the reaction function of central bankers has become depressingly predictable. But any rally over late Q3/early Q4 could well prove to be only a very short and sharp reprieve assuming my views on global growth continue to prove correct. If I am right about risk-off over the belly of 2014, I’d also be concerned about a strong RALLY in the JPY as the JPY-funded global carry trade would (partially at least) see an unwind. This could well see selling of eurozone peripheral debt (the European elections may also weigh heavily), which for me, as a longer-term investor, would be a great buying opportunity. Longer term, I continue to like core duration (pretty much across all DM), and the asset class of choice in a world where nothing is cheap remains European corporate credit. China/EM remains a major concern and, in particular, I think the CNY will become a major talking point over the rest of the year – ultimately I still feel that the CNY will be used as a policy tool by China to put some form of floor on the growth weakness in China.