Bob Janjuah: "You Have Been Warned"
For a second there we almost got the impression Bob Janjuah was getting a tad bullish, if even just in the short-term. This just released note removes any fears we may have had the frmr RBS strtgst, and current Nomura Fixed Income Contributing Strategist may have lost his touch.
Bob's World: You have been warned!
1 – The global growth picture is, as per our long-term contention, weak and deteriorating, pretty much everywhere – in the US, in the eurozone and in the emerging markets/BRICs. The growth weakness is driven by a shortfall in true end global demand, and in particular we still think the consensus is most off-target in its still too bullish growth expectations for the US and the EM/BRICs complex. The softness in the manufacturing/industrials and basic materials/oil and gas sectors is the most worrisome trend as Western service sectors are in any case already seeing either very weak or close to zero trend growth.
2 – We in the Global Macro Strategy team still think the market consensus is far too optimistic on policy expectations both in terms of the likelihood of seeing more (timely) fiscal and/or monetary policy assistance (globally), and in terms of any meaningful and/or lasting success of any such policy moves. In particular, we think that the period August through to November (inclusive) represents a major global policy and political vacuum. In the eurozone the political ‘impasse’, and the restrictions on (and lack of credibility of) policy are well known and central to the problem. But also in the US, the election cycle to us means no major policy initiative is likely from either Washington or the Fed until later in November at best. And in China, the leadership changes to us suggest only very minor policy inputs/assistance, most likely until the very back-end of 2012 or possibly not until March 2013.
3 – To be clear, Jackson Hole may bring a bit of MBS buying by the Fed, but this will we think have a minimal positive impact on the real economy or on markets. In fact, we would view this as a very weak move by the Fed (if it happens) and we would view such a move as a true representation of how toothless the Fed is right now – this is unlikely to change until after the presidential elections. Furthermore, before the Fed does it next major round of QE (I am looking for USD1trn in December) the market will also unfortunately be forced, in my view, to price IN the fiscal cliff into its 2013 growth and earnings forecasts. This is unlikely to be pleasant, and I would say be very wary of any messages that say that the fiscal cliff is either not important or is already priced in. The fiscal cliff issue is a substantial downside risk and is NOT priced in, according to our metrics.
4 – In the eurozone, I think full fiscal and political union is the only credible answer, but this is unlikely to happen smoothly nor anytime soon. We may be talking years, but certainly many quarters. The only likely credible ‘interim’ holding event, which I think would likely meaningfully alter the asymmetry of risk in the eurozone is full, unlimited, explicit QE by the ECB. Many people will have a view on this – for my part, I think unbounded ECB QE is an almost certain event, but NOT UNTIL the eurozone inflation data are deeply and meaningfully and consistently deflationary. When this deflation comes through, the ECB will I feel use its ‘price stability’ mandate to justify outright QE even while the politicians are arguing. HOWEVER, I think the data will not provide the ECB with the necessary air-cover until Q1 2013 at the earliest. And of course, in my view, the ECB will have to deal with the likelihood (in my opinion) that sovereign PSIs/defaults/debt restructurings are going to be seen in Portugal, Greece (again!), Spain and maybe Italy. And bank debt investors, including in some cases even senior debt bondholders, are also going to have to get used to debt default/write-offs/restructurings across large swathes (but not all) of the eurozone’s banks.
5 – As well as the political and policy vacuum, the very significant parabolic push higher in the price of soft staples (in the commodity market) such as corn, wheat, rice, potatoes and soya, due to US drought and European flooding, is likely to hamper both global growth AND the willingness and ability of policymakers to further debase, pump prime and print substantial amounts of money. I think that core CPI will deflate, especially in the eurozone, but that headline (food) CPI will we think easily offset any relief from lower gasoline/crude prices and will make central bankers very nervous about further distorting the price and supply of money, for concerns about setting off a substantial stagflationary spiral.
6 – In terms of markets, the route map I set out in early April and which I affirmed in early June continues to play out extremely well. After correctly calling the late March/early April 1420 high in the S&P500, and also the early June low, we have also now fully captured the risk-on rally in stocks and credit that began in early June and which has seen the S&P500 rally by over 100 points (8%) and which saw the iTraxx Crossover spread index tighten by over 120bp, from a peak of around 750bp in early June, to a low earlier in July of below 630bp. As Kevin Gaynor discusses in his latest report from last week the rates and FX markets have performed (recently) in a more mixed manner versus our early June expectations, which may simply be down to the ECB move on deposit rates in part forcing money out of the euro (and into USD, the JPY and maybe even GBP) and in part forcing investors into uneconomical buying of German and to some extent French and other (core) global government debt.
7 – Tactically, we have not yet hit my targets for the risk-on phase I called in early June – my S&P500 target was set at 1400/1450 by late July/early August, and my iTraxx Crossover target was set at 600bp. And as I also said in June, this risk-on phase was likely to be a struggle due to headline risk and volatility, market illiquidity, and the general lack of strong investor views/willingness to take big risks. Nevertheless, stock and credit markets have indeed climbed the wall of worry. Over the extreme short term, over the next two to four weeks, I would not be surprised to see my targets ultimately hit. However, having correctly forecast the market risk-off/risk-on moves over the last four months (in terms of direction, time and price targets), I now think the correct thing to do – as I also said in April and June – is to prepare for a serious risk-off phase between August and November (inclusive).
8 – Based on the reasons set out earlier and also covered in my two prior notes, over the August to November period I am looking for the S&P500 to trade off down from around 1400 to 1100/1000 – in other words, I expect over the next four months to see global equity markets fall by 20% to 25% from current levels and to trade at or below the lows of 2011! US equity markets, along with parts of the EM spectrum, will I think underperform eurozone equity markets, where already very little hope resides. For iTraxx crossover, this equates to a spread wide for 2012 of – in my view – 800/1000bp. NOTE however that investment grade cash corporate (non-financial) bonds remain a core (relative!) safe-haven. This four-month coming major risk-off phase will, in my view, also be very USD bullish (my expectation of Fed USD1trn QE in December should eventually alter the bullish USD trend of course) and bullish core government bonds (USTs, Gilts, Bunds) – perhaps we could see 10yr Bunds at 50bp all-in yields, with USTs and Gilts at/close to 1%. By late 2012, based on my Fed December QE view, my tactical call will likely turn bullish/risk-on – let us see about that closer to the time. And of course I still see a very clear path to 800 on the S&P500 at some point in 2013/2014, driven by market revulsion against pump-priming money printing central bankers, but this discussion is also for nearer the time.
You have been warned!