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Weekly Insights - Edition 1
This is the first edition of the new Weekly Insights report
Welcome to the first edition of the Weekly Insights report!
As noted in the link above, the weekly insights report presents some of the key findings from our institutional research service.
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Weekly Macro Themes Report - key points
1. Inflation Outlook: Clear upside risks to inflation.
Backlogs, commodity Bull, and Base effects spiking inflation short-term.
Recovering demand, vaccination/normalization, excess stimulus, and rebounding capacity utilization to push up core inflation medium-term.
Inflation expectations rising: risk that it becomes self-reinforcing.
2. Global Policy Pulse: Global interest rate cycle shifting to hikes.
YTD seen 14 rate hikes across small/developing central banks, 5 hikes by EM (Brazil/Russia/Turkey): 19 rate hikes in total so far this year (!)
As inflation rises, life normalizes, economies recover/reopen, it will be very difficult to justify ongoing or further easing.
From here expect more central banks to taper/remove stimulus.
3. Global Lending Conditions: Banks starting to relax.
Banks tightened the standards by which they make lending decisions aggressively into the pandemic (uncertainty, credit risk).
Across developed markets, we are seeing a tentative easing.
Expect banks to ease lending standards further as competition increases and credit conditions, outlook improve.
4. Europe Macro: Euroboom?
Leading indicators point to a coming economic boom for Europe.
EURO STOXX 50 has made a major breakout: raise conviction on the bullish European equities view.
EURUSD testing a major resistance level, the improving macro outlook and equities breakout could help the FX breakout too.
5. AUDUSD: Bullish Aussie dollar.
Australian macro/earnings pulse gaining strength, housing market starting to heat up (may follow example of neighbors in NZ).
Commodities bull, global risk-on sentiment supportive.
Valuation & positioning neutral: upside path is clear for AUDUSD.
Global Markets Monitor - notable developments
Price: still fairly risk-on overall; global equities breadth edging higher, credit spreads lower, USD attempting to break down, commodities and EMFX breaking higher.
Sentiment: of most interest is the shifts in USD & gold sentiment: gold sentiment/positioning had a decent reset (lower), but is now turning up: similarly USD sentiment/positioning rebounded during the brief rebound, but is now turning down again. On balance it makes for a supportive short-term outlook for gold (and bearish US dollar index).
Market Themes: paying particular attention to EMFX - there was decent reset in market breadth across EM currencies, and an attempted breakdown at the index level. EMFX has since rebounded from oversold conditions and a failed breakdown: looks bullish to me, especially given stronger commodities, improving economic optimism globally, and renewed USD weakness. This helps remove a short-term risk flag for EM equities (for now).
On the Radar
Macro & Markets: on the economic data front it’s fairly light this week, but CPI data from the US & China will be worth a look, also the NFIB survey, and China money supply. On markets, I’m watching the attempted break down in the DXY and tentative break out in gold.
Research Agenda: I will probably take a look at the evolving macro picture in China later this week and see also if there’s anything of note in China A-shares/CGBs, also keen to review REITs, listed infrastructure, UK equities, and emerging markets.
Top Charts of Topdown
Here’s a selection of charts that were particularly notable.
1. Inflation Expectations vs TIPS Breakevens: Survey-based measures of inflation expectations have surged to decade-highs, while it’s not a perfect 1-for-1 relationship there is a fairly clear and logical link with TIPS breakeven inflation (aka market based “inflation expectations“). While I think breakevens look expensive here, there could be further upside yet, particularly if inflation risks materialize as noted above.
Key point: inflation expectations are high and rising.
2. Small/Developing Central Bank Policy Rates: This chart tracks the number of rate hikes vs rate cuts across the smaller and developing country central banks. I like to track this group as they tend to be more sensitive to inflation and the global economic cycle and hence tend to be at the leading edge of global interest rate cycles. By this picture, we are clearly turning the corner on the rate hike front.
Key point: the global interest rate cycle is turning (to rate hikes).
3. Bank Lending Standards (vs debt capital markets): As noted, banks have begun to tentatively ease the standards by which they make lending decisions. It is early steps, and in many ways reflects the improving economic outlook, not to mention competition from debt capital markets - where credit spreads are back at pre-crash lows, and the chase for yield is on.
Key point: banks are starting to relax lending standards.
4. EMFX Back From the Brink: My equal-weighted 25-currency EMFX index has come back from the brink, and back into its short-term uptrend channel. As the chart shows, short-term market breadth had collapsed to oversold levels, and since then has turned back up strongly. This is a classic bullish setup. So by itself it is interesting, but as an intermarket risk signal for EM equities, this is definitely a positive sign.
Key point: EMFX technicals look good - good sign for EM equities.
5. European Equities - Big Breakout: After multiple attempts, it looks like European equities are finally breaking out of their almost decade-long trading range. As far as technical signals go, this is fairly compelling and prompts me to raise conviction on the bullish European equities view. From my perspective, this basically builds on the existing case (cheap relative valuations, supportive policy backdrop, improving earnings/macro pulse, vaccine progress, and leading indicators).
Key point: European equities are breaking out; raise bullish conviction.
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