Macro Monitor

We call the current problem in Hong Kong, Hongkongoma, a complex problem underpinned by an ever-widening wealth gap and aggravated by an anti-mainland sentiment as a result of HK’s lost sense of superiority. The Extradition Bill is just the latest trigger.

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More and more signs are pointing to investors’ loss of confidence in central banks’ ability to revive the global economy. We maintain “neutral” on all credit classes.

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The recent rate cut managed to bring policy uncertainty back into the market by two seemingly harmless words—”mid-cycle adjustment.”

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A hawkish Fed cut, immediately followed by Trump’s new tariffs, caused quite a bit of market indigestion, a clear reminder of how quickly things can change.

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Our Risk Aversion Index fell in June but stayed on the “Higher Risk” signal generated in May.

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The pattern of sharp sell-offs followed by equally sharp rallies continued in June. Most risky assets recouped nearly all the losses suffered in May, and then some.

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While the 10Y-3M curve inversion does warrant extra attention, movements in other parts of the curve also need to be taken into consideration.

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Our Risk Aversion Index rose sharply in May and generated a new “Higher Risk” signal. We continue to monitor EM assets closely, given their leading tendency. Both Chinese stocks and the Yuan have stabilized a bit lately, which is encouraging... but they are not out of the woods yet.

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Banks’ lending standards for C&I loans (typically to large businesses) tightened quite a bit in Q1, which bodes ill for both investment and overall economic growth going forward.

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Our Risk Aversion Index ticked lower in April and stayed on the “Lower Risk” signal. Most risky assets participated and the rally was broad-based. The only fly in the ointment is EM assets. The recent weakness in both Chinese stocks and the Yuan is certainly worth paying attention to.

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The Fed not only signaled no rate hike for the rest of 2019, but also committed to unwinding its balance-sheet reduction program, starting in May and ending in September. The market took it one step further and priced in a rate cut in the second half of 2019.

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With most major central banks now turning dovish, our view on credit is more constructive. We still view pull-backs in EM assets as better entry points. Investment grade corporate bonds are also attractive, and we maintain a neutral view on Munis and High Yield bonds.

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The biggest near-term wild card is the infinitely confusing and hopelessly unpredictable Brexit.

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While global central banks’ dovish turn provides a supportive backdrop for the risk rally, short-term overbought conditions are everywhere too.

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A significant policy move by China’s People’s Bank of China (PBoC) has gone largely unnoticed.

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With the Fed now pausing its rate hikes, and the PBoC recapitalizing banks and reactivating lending, our view on credit has turned from defensive to neutral, with a more constructive bias. One of our biggest concerns, global central bank liquidity withdrawal, has been eased by the recent policy moves.

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Many were caught off guard by the relentless drop in stock prices and bond yields, but we think the real problem is that most people have underestimated the twin threats of central bank tightening and the ongoing trade war with China.

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We are heading into a pre-election year that boasts one of the best time-cycle patterns. Most markets, Developed and Emerging, show good patterns for 2019, even with different election cycles.

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Despite some near-term oversold conditions in risky assets, we continue to recommend defense and expect higher volatility to remain across all asset classes.

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Liquidity reduction (QT) by global central banks is already showing up in slower M1 growth in all G3 countries. Slower M1 growth has led economic slowdown by about twelve months.

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