Review of Macro Charts 2013 05 06

7/30/2019 Review of Macro Charts 2013 05 06

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Chart Review Can we rotate back to EM? Macro Economic Research May 2013

Please refer to the disclaimer at the end

Poor economic data continues to be ignored by US equities in this policy-driven market

Economic activity seems to be slowing rapidly the charts below show trade volume indices for the US

and for Asia. YoY changes very rarely fall negative in a normal economic environment.

The divergence between the S&P500 and the change in trade volumes is striking, emphasizing what we

already know monetary policy is by far the dominant factor in risk asset pricing.


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The Eurozone is under particular pressure, although the currency has been relatively resilient of late.

The CESI Eurozone USA differential (directionally shaded area) has shown a sharp move lower, also

with a near-term divergence to EURUSD (gold line).

The net speculative open interest on the EURUSD is slightly negative, but positioning is a fraction of

what prevailed in 2012.


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Recent economic data has been weak across both developing and emerging markets. The Citigroup

Economic Surprise Index (CESI) for EM is at the lowest levels since 2009 (shown directionally shaded

on the chart with the MSCI EM Equity index). In the short term equities and CESI are diverging. The

question is, how will this divergence be resolved?

Market sentiment towards EM appears to have stabilised, with the shares in issue in the two big US-

listed ETFs (Vanguard and iShares) having stabilised following a 6% decline from the Q1 peak.


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Could a further rotation into EM, the Basic Materials sector and commodities drive the market?

A weakening US economy guarantees continued QE, and also relieves pressure on the USD, a key factor

for both EM equity and commodity prices. The chart below shows the USD index (inverted) as a gold line

together with EM equities (blue area) and the copper price (green line). One can hypothesize that the

deleveraging & repatriation flows implied by strong dollar periods are difficult for the EM/commodity

complex to weather.

Focus should remain on the Fed

Stronger US economic data, apart from its flow implications as discussed above, would in due course

require the market to start pricing in reduced monetary accommodation. I believe this is the crucial

factor in risk asset price formation, so the current data weakness is broadly supportive. How far ahead

will market participants look when evaluating how to price in a withdrawal of accommodation? At the

moment the benefit of the doubt is given to the Federal Reserve, whose members have given

consistently dovish guidance. However all that could change with stronger economic data &/or higher

inflation. With the dominance of academic members, what may be perceived as interesting theoretical

discussions on how to withdraw accommodation in due course could quickly impact risk assets given

how policy-driven prices are. EM and the commodity complex would not favour that environment.

Kevin Cousins is a portfolio manager at Brait Capital Management Limited. ("BraitCM"). This article is prepared byKevin as an outside business activity. As such, BraitCM does not review or approve materials presented herein. Theopinions and any recommendations expressed in this article are those of the author and do not reflect the opinions orrecommendations of BraitCM. None of the information or opinions expressed in this article constitutes a solicitationfor the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice andany recommendations that may be contained herein have not been based upon a consideration of the investmentobjectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in anysecurities or other instrument should be based upon your own analysis and conclusions. Either BraitCM or KevinCousins may hold or control long or short positions in the securities or instruments mentioned.

Review of Macro Charts 2013 05 06

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