Week Ahead - Risk Events & Opps: Russian ghosts, Treasury goblins, hawkish BOE ghoulishly underp
Week Ahead – Risk Events & Opportunities: Russia 'ghosts' haunt FAANGs, US market 'goblins' spook Treasuries, BOE hawkishness ghoulishly underpx'd
This week’s themes/trade ideas:
Lots of 'goblins' for US markets - Fed Chair, FOMC, House tax bill, Mueller Russia probe and data deluge (PCE, NFP): After some suspense (even more after this weekend's Instagram teaser video), Trump is expected to announce the Fed Chair nominee before he leaves for an 11-day visit to Asia (Fri). Powell remains our base case (with a Taylor Vice Chair – Mnuchin says we shouldn’t expect that deputy announcement at the same time). Powell speaks (830pm Thu) around the same time of Trump’s announcement. US personal income/spending and core PCE data release (830pm, Mon) are skewed to the upside. In the Russia probe, Special Counsel Robert Mueller is expected to arrest at least one defendant (~9pm Mon). Jobs (ADP Wed, NFP Fri) are expected to recover post-hurricane distortions and ISM (10pm Wed) may improve further after rising to a 13yr high last month. On the other hand, auto sales (Wed) are seen to be more muted as post-hurricane sales are offset by high 2016 base effects. US Treasury refunding announcement (830pm Wed) will unveil plans to gradually increase UST issuance in FY18 to make up for lost Fed buying. Bloomberg sees Tbill/2-3yr issuance to rise but the pattern may change if by Feb-2018 the debt ceiling is not lifted. House Ways & Means Committee is expected to release a tax plan (as soon as Wed). Finally, the FOMC is this week (2am Thu), although it will be eclipsed by Fed Chair announcement. Interestingly, Powell is the first Fed committee member to speak post-FOMC (830pm Thu), followed by Dudley (1220am Fri) and Bostic (615am Fri). NFP is expected to rebound sharply (Fri) as conditions normalize after the hurricane-related plunge in Sep. Consensus sees AHE to fall and unemployment/participation rates unchanged.
Trade idea – Range-trade UST 10s 2.35-2.50%: This week’s balance of risks suggest much volatility in UST 10yr yields with downside risks frontloaded towards Mon-Tue and upside risks backloaded towards Thu-Fri. Net net, we expect the UST curve to end the week steeper and 10yr USTs higher by 5-10bp (current 2.40%). UST 10s have already reacted last week to Powell nomination speculation and Predictit odds are now above 80%, which leaves less room for a surprise, despite Pres. Trump’s teaser video. We propose entering bear steepeners via UST 10 shorts. Steepening is also supported by long CFTC positioning in UST 10s (vs shorts in 2 and 5yrs) - see chart below. One tactical entry point may come after Trump indeed nominates Powell for Fed Chair as expected ('sell the fact').
Trade idea – Tactically long gold: We are tactically long gold as a tactical hedge against a knee-jerk risk of USD weakness into the Mueller investigations.
Visual: UST 2, 5, 10yr yields vs CFTC positioning (inverted) - Investors relatively long 10yr vs short 2/5yrs
FAANGs - Regulators may take a bite into outlook: Russia probe headlines are expected this week as Facebook, Twitter and Google testifies before Congress (Wed) on Russia ads during the 2016 US election. Earnings will be reported out of Facebook (Wed) and Apple (Thu) and iPhone X hits stores (Fri).
Trade idea – Short Facebook vs Apple: Scrutiny into the Russian ad-buying are unfriendly for social media companies that rely on ad growth. Facebook, Twitter and Google may risk more regulation and incurred costs. Importance of ad revenue may be evident when Facebook releases results on the same day (Wed). Chinese internet companies also face similar regulatory scrutiny. Apple on the other hand enters this week from a position of strength after it sold-out pre-orders for iPhone X. We think scarcity (amid supply chain capacity questions) is a net positive for the premium-priced smartphone.
Visual: FAANGs performance (standardized so 1 Jan-17 = 100):
BOE – More reliable than reputation: A BOE MPC rate hike to 0.50% (8pm Thu) is well-telegraphed and has been baked in the price for some time. The focus will be on MPC vote composition as well as updated forecasts for inflation and growth, which could get a boost from UK PMI mfg (Wed).
Trade idea – Tactically long GBP (vs EUR or USD) into BOE: Economists expect a 6-3 vote in favour of a rate hike, but we think a 7-2 pattern – to communicate a stronger consensus – is underappreciated. While MPC members Dave Ramsden and Jon Cunliffe are expected to be in the minority camp, both new board member Silvana Tenreyro and veteran Dep. Gov. Ben Broadbent could vote in favour of a hike. A 7-2 split plus BOE optionality to hike again (under-priced) would make Gov. Carney sound hawkish against market expectations. Positive sterling.
BOE’s Tenreyro (17 Oct): “We are approaching a tipping point. If the data outturns are consistent with the picture I just described, of an output gap going toward zero, then I’d be minded to vote for a bank rate increase in the coming months.”
Bloomberg (26 Oct-17): Broadbent said in July that a number of ``imponderables'' are making it ``tricky'' to make a decision on interest rates. He has since said that the U.K. was ``a little bit'' better placed to cope with a hike in rates. He's also said the objective of the MPC was not ``the path of interest rates but the stability of inflation in the medium term and subject to that the stability of the economy.'' Broadbent is the longest-serving MPC member and has never dissented in his six years on the committee.
Visual: UK BOE doves vs hawks (Bloomberg, 25 Oct-17):
BOJ – Committed to Abenomics: A string of Japan data – retails (Mon), employment/IP (Tue) – will share the same space as the BOJ MPC (Tue, Kuroda presser 230pm) and the outlook report, which could see CPI forecasts lowered and target pushed back further. In a Bloomberg interview, Bank of Singapore economist Richard Jerram sees the BOJ lowering CPI forecasts to 0.7-0.8% end-2017. 1.2-13% for 2018. PM Abe is expected to add a boost to Abenomics by possibly releasing an extra budget this week (from Wed according to Reuters).
Trade idea – Strategically short JPY: JPY shorts got even shorter according to recent CFTC data but we don’t think there are signs of complacency. Abenomics is secure for some time and this makes economic data releases practically moot – ‘all news is good news’ for Abenomics (good data is read as victory for continuity whilst bad data reinforces patience). What matters is the policy shift communicated by the BOJ and PM Abe. We think they will stick to the script.
Trade idea – Short KRW vs JPY: USD-KRW at 1120 (current 1124) looks cheap and KRW has room to catch up to JPY weakness (JPY-KRW current 9.89, vs 12mth avge 10.2). Upside surprise from CPI (Wed) could offer good entry opportunity (cons 1.9% vs prior 2.1% yoy).
Eurozone – Uninspiring economic data: EC Economic Sentiment Index (Mon) and Eurozone CPI (Tue) are skewed to the downside as is German CPI (Mon). On the other hand, French data are skewed to the upside (GDP Tue). Merkel coalition talks (30 Oct/1-2 Nov) will be watched after a slow start last week.
Trade idea – Strategic short EUR: We think EUR is on its way to 1.125, a level that could be hit by year-end – see our post-ECB write-up (link).
Trade idea – Strategic long France CAC40 vs Euro Stoxx: Macron momentum makes France a bright spot within the EZ. Watch earnings for BNP Paribas (Tue).
China – The ‘After Party’: After last week’s Party Congress, we expect stability to continue for the time being, particularly in the RMB and in headline economic data. PMIs this week – NBS (Tue), Caixin (Wed) – are expected to be stable to slightly lower. Bumper industrial profits last week (27.7% yoy) reflect net positive dynamics for domestic corporates especially SOEs. We are bearish Chinese rates and locally-traded commodities.
Trade idea – Short SGD-CNH: We still like this trade for our ‘Cash-Plus’ portfolio. We expect RMB to be fixed stable-to-stronger ahead of Trump’s Asia visit this weekend/next week. RMB also outperforms during periods of modest USD appreciation, which is our base case this week.
Trade idea – Tactical short AUD vs NZD on dips: A prospective fall in Chinese commodity demand and/or regulation in local commodity exchanges are negative for AUD, which has hit a bearish turn recently. We like it against any dip in the NZD, which faces some near-term risk related to a formal change in the RBNZ's inflation mandate to include employment, which has been on a positive run. Tactical timing for this trade: After NZ employment (Wed) and Aussie trade balance (Thu).
LatAm – Growth and policy: Any softness in Mexico Q3 GDP (Tue) could put Banxico’s currently tight policy bias in a quandary. MXN intervention will continue but any signs of downside growth risks could shift capacity to intervene away from high rates and more towards FX reserve drawdowns. Argentina IP (Tue) and Brazil IP (Wed) may provide insight into the strength of their economic recovery. Brazil BCB minutes (Tue) may signal a 50bp cut to 7.00% in Dec, but this could be the last of this cycle. Into 2018, Copom’s simulations imply inflation of 4.3% for 2018, which suggest less room for further cuts unless inflation surprises lower.
EM EMEA – ECB reduces pressure for CEE tightening: A softer-than-expected ECB taper could reduce the urgency of CEE central banks to tighten. Poland’s NBP could be swayed by potentially weaker CPI (9pm Tue). Czech CNB is expected hike 25bp to 0.50% (MPC 8pm Thu) but may sound more patient after having already initiated a hiking cycle on 3 Aug.
Trade idea – Short PLN and CZK (post-CNB) vs EUR: We keep our strategic short Zloty and Koruna vs the Euro in our 'Cash-Plus' portfolio premised on the view that a softer ECB approach to tapering will reduce the urgency for tightening in Poland/Czech. In Poland, we watch for any surprise in inflation (9pm Tue, cons 2.1%, prior 2.2%). The consensus around a Czech CNB hike (8pm Thu) and the tail risk of no-hike or dovish guidance makes selling the fact attractive.
Trade idea – Keep short Turkey bias: TRY may continue to suffer on higher UST yields and higher oil. Watch trade deficit (Tue), CBRT Inflation Report (Wed).
Happy trading this Halloween week.
CALENDAR: THIS WEEK