MIDDAY MACRO - 7/27/2021
Daily Color on Markets, Policy, and Geo-Politics
MIDDAY MACRO - DAILY COLOR – 7/27/2021
OVERNIGHT/MORNING RECAP & MARKET ANALYSIS
Narratives/Price Action:
Equities are lower, with tech under pressure, taking its direction from China’s continued crackdown
Treasuries are higher, with the curve flattening on the more risk-off tone
WTI is lower, on little new oil specific news, and instead in line with general negative market sentiment
Analysis:
Beijing’s increased attacks on specific Chinese sectors finally spilled over as the Nasdaq fell off a cliff at the New York open. Price action is more muted in Treasuries given FOMC uncertainties, although the long end is bid.
The S&P is outperforming the Russell and Nasdaq with Value, High Dividend Yield, and Low Volatility factors, and Utilities, Real Estate, and Consumer Staples sectors are all outperforming.
S&P optionality strike levels decreased with the zero-gamma level moving to 4332 while the call wall remains at 4400; technical levels have support at 4355 and resistance at 4390, then 4415.
Treasuries are less bid than expected given price action in equities, but uncertainty over tomorrow's FOMC outcome is likely causing caution there.
We see many trying to connect the more anti-monopolistic tone out of the Biden Administration and Congress to actions by Beijing, hence a warning that U.S. big-tech companies are next, and we fully push back on this connection.
Xi and Beijing continue to consolidate power and push a more aggressive expansion of the authoritarian surveillance state.
To do this, they need to push nationalistic emotions that the western world and private business are against the Chinese people, and the state has your (the little guy’s) back.
They also need access to the troves of personal data that their tech industry has accumulated.
Hence, the incentives motivating Washington and Beijing are entirely different, and so will the resulting final regulatory landscape and ultimately the profitability of targeted sectors.
To be clear, we do see a clear shift in the tone out of DC regarding big business, which is to be expected, but actions so far have not materially changed the fundamental business landscape while our legal system will weaken much of the current legislative push.
With a good chunk of big-techs earnings still coming and the likelihood that tomorrow's FOMC meeting will not materially change yield dynamics, this dip in Tech/Growth will likely be quickly bought.
Money exiting China will need a new home, and sentiment continues to favor growth factors as second-half economic and earnings growth is still uncertain.
We expect to see a loss of growth factor outperformance later in the year (as valuations become further stretched), but the time for a resurgence in reflation-themed trades is not likely to do well tactically yet.
Econ Data:
S&P/CS Home Prices' national index rose 2.1% in May, a faster increase than expected. The year-over-year gains increased to 17.0%, the fastest annual increase since August 2004. Home prices rose in all 20 major MSAs, with Phoenix recording the fastest YoY gain (+25.9%) and Chicago the slowest (+11.1%). The national home price index reported by FHFA rose 1.7% in May and was up 16.6% year-over-year, the fastest pace on record (data back to January 1975).
Why it Matters: Housing price growth set a record for the second consecutive month. Price gains in all 20 cities were in the top quartile of historical performance; in 17 cities, price gains were in the top decile. We believe this is peak housing price appreciation and that price increase will cool demand while supply generally grinds higher over the rest of the year. We don’t think there will be a notable cooling, but things can’t continue at this pace.
Total Durable Goods increased 0.8% in June, missing expectations of an increase of 1.9%. Orders excluding transportation were also below forecasts, rising 0.3%. May’s total and core were notably revised higher to 3.2% to 0.5%, respectively.
Why it Matters: June's weaker than expected report puts pressure on our positive 2H growth outlook. May’s revisions were a counter-positive, increasing the likelihood Thursday’s Q2 GDP will surprise to the upside, given the more significant business equipment investments.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Value is higher on the week thanks to today’s tech-led weakness
Chinese Iron Ore Future Price: Iron ore is little changed on the week given the muddy backdrop
5yr-30yr Treasury Spread: Curve is flatter on the week as traders await tomorrow's FOMC outcome
EUR/JPY FX Cross: The Yen is higher on the week, keeping the cross in the middle of its two-month downtrend
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
Real Supply Side Constraints:
Busy Ports: Global boxport capacities to remain tight through to 2025: Drewry – Splash 247
Drewry’s latest Global Container Terminal Operators Annual Review and Forecast report predict global container port capacity will increase by an average of 2.5% per year. With global demand set to rise by an average of 5% per annum over the same period, average utilization rates will increase from the current 67% to over 75%.
Why it Matters:
“While 75% utilization at a port or terminal level is not sufficiently high to be of major concern, at a global level, this expectation of tightening port capacity in a market plagued by congestion due to supply chain imbalances is a cause for concern” the report cautioned. Bottom line, there will be logistical and cost pressures coming from shipping for a while longer
China Macroprudential and Political Tightening:
Not Going Great: U.S. and China Leave Room to Talk After Contentious Meetings - Bloomberg
Foreign Minister Wang Yi reiterated requirements from Beijing in Monday’s talks in Tianjin with Deputy Secretary of State Wendy Sherman, namely that the U.S. stop criticizing China’s political system, drop all sanctions and tariffs, and stay out of Hong Kong, Taiwan, and Xinjiang affairs. Senior Biden administration officials told reporters afterward that Sherman was focused on setting guardrails on ties rather than negotiating specific issues.
Why it Matters:
Earlier this month, Xi signaled that his government would be more assertive on the world stage, saying at a speech marking the 100th anniversary of the ruling Communist Party that his people “will never allow any foreign forces to bully, coerce and enslave us.” As we further emerge from the 100-year celebration, expect more tough posturing and actions from Beijing, who has some catching up to do on tit-for-tat spats with the West.
A trade-weighted index looking at the value of China’s yuan climbed to a five-year high last week, and analysts expect the currency to remain at elevated levels in the foreseeable future. The strength in the yuan’s value was driven mainly by China’s large current account surplus in the past year, which in turn has been boosted by the nation’s strong export performance and rising trade surplus.
Why it Matters:
The Global Public Investor survey, published annually by the London-based OMFIF think tank, showed 30% of central banks plan to increase their reserve holdings of yuan over the next 12-24 months, compared with just 10% last year. In contrast, 20% of central banks plan to reduce their holdings of the US dollar over the next 12-24 months, and 18% plan to reduce their euro holdings. Of course capital flows and appreciation of the yuan may be weakened by recent crackdowns and increased geopolitical tensions.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Homegrown: China Crackdown Wrecks Demand for Loans to Fund Overseas M&A - Bloomberg
Chinese companies’ use of debt to pay for overseas expansion is on track to shrink to a seven-year low, thanks in part to Beijing’s sweeping regulatory crackdown. Foreign currency-denominated loans taken out by Chinese firms to finance outbound mergers and acquisitions shrank to $2.6 billion in the first half of this year, worse than the $3.4 billion a year ago in the depths of the pandemic.
Why it Matters:
China Inc.’s overseas shopping spree has been cooling since 2017, as Beijing imposed curbs on the risks a debt-fueled binge could pose to the financial system, while the pandemic dampened appetite for leverage to expand abroad. We highlight this notable reduction to reinforce what we see elsewhere; Beijing is still pushing to acquire critical technologies from overseas purchases in a few select areas. Otherwise, it advocates for homegrown growth and innovation solutions while trying to insulate the Chinese economy from foreign leverage/control.
Dollar Funding: U.S.-listed Chinese companies must disclose government interference risks -SEC official – Reuters
Some policymakers worry Chinese firms are systematically flouting U.S. rules, which require public companies to disclose to investors a range of potential risks to their businesses. "Public companies must disclose significant risks which, for China-based issuers, may sometimes involve risks related to the regulatory environment and potential actions by the Chinese government," Lee, who served as acting head of the SEC from late January to mid-April, told Reuters in an interview
Why it Matters:
Last year Congress passed a law that would kick Chinese companies off U.S. exchanges unless they adhere to American auditing standards. Initially, regulatory actions were to protect U.S. investors from loss, but now the tone set looks to have levels of "blocking" that would limit Chinese firms supporting Beijing in critical areas from accessing dollar funding sources. Beijing knows this and is also trying to wean its economy off the need for dollars which may help explain their recent crackdown on overseas listings as they attempt to insulate industry.
Electrification Policy:
Digital Disinformation: Disinformation for Hire, a Shadow Industry, Is Quietly Booming - NYT
Private firms, straddling traditional marketing and the shadow world of geopolitical influence operations, are selling services once conducted principally by intelligence agencies. They sow discord, meddle in elections, seeding false narratives, and push viral conspiracies, mostly on social media. And they offer clients something precious: deniability.
Why it Matters:
The continued push to electrify and digitalize everything will rely on the consumer's ability to trust as they give more and more information to firms. Unfortunately, since we have entered uncharted territories and significant amounts of people are incapable of discerning truths from lies, everything from products/services demanded to election results will continue to be influenced by the growing industry of disinformation peddlers.
ESG Monetary and Fiscal Policy Expansion:
Concentration: Deal Boom Under Threat in Washington as Aon Tie-Up Dies - Bloomberg
Aon Plc's decision on Monday to abandon a $30 billion takeover of insurance brokerage Willis Towers Watson Plc after Justice Department pushback is the latest signal that transactions that consolidate industries could run into trouble. The Justice Department, in a statement, said that the deal would have consolidated the insurance brokering industry from three big competitors to two.
Why it Matters:
Biden has vowed to take on the U.S. economy's most dominant companies with an executive order. Biden has also named advocates of stricter antitrust enforcement to key positions in his administration. Finally, the House Judiciary Committee approved an antitrust bill that would force large technology companies to exit certain businesses. This should give any investments based on monopolistic power growth or M&A sector consolidation pause.
