Welcome to the FXDD Research: On the Daily newsletter. This publication provides readers with a sliver of our research process to help contextualize daily economic and market developments across the globe. We designed FXDD’s research process to be intuitive and actionable; therefore, you can expect regular call-outs on risk-reward scenarios we think are lucrative. We typically follow global macro markets, particularly the US, UK, EU, Japan, China, alongside the aggregate World economy. We also follow global assets, i.e., stocks, currencies, commodities, and fixed income (though to a lesser extent). We quantitatively do all this; therefore, you can expect most of our analysis to be standardized, consistent, and repeatable. Finally, while we will offer some call-outs and trading signals, we reserve our most granular work for our clients, so if you like what you see, please head over to our website (click here)to gain access to the arsenal of tools we have built.
Before we dive into our updates, here’s a sneak peek into our quantitative portfolio allocation model. Our model allocated exceptionally well over the last month and has been up considerably due to its allocations to risk-on assets:
Our portfolio strategy was up this morning, 0.1%, somewhat mitigating yesterday’s down day, taking the one-month rolling performance to 4.1%. We continue to think the quantitative strategy is well-allocated to the current market trend, i.e., INFLATION. Here are the most recent developments in global macro:
Global Economic Momentum: In the US, durable goods orders and capital goods orders came in stronger than expected. In general, global momentum has been moderating to the upside, after once again flirting with the lowest quintile of economic surprises. After a moderation in economic growth indicators, it is entirely possible to see a reacceleration into year-end.
Global Policy: We’re still waiting on updates from the BOJ, but we broadly expect them to stay on the path of “QE-forever”, a path that will somewhat be followed by the ECB. Both these economies have structural issues far beyond COVID-19, which have left them in deflationary spirals for decades. We don’t think that the COVID-19 recovery should be conflated with the emergence of secular stagnation. Summarily, our view is the the BOJ & ECB will both stay extremely accommodative to respective economies. The ECB could potentially have a slightly more timid approach, and we will touch on this in tomorrow’s note.
Global Market Trends: The risk-on sentiment we have seen over the last few weeks took a hit today, with the commodity complex retracing after a jubilant few days. While shocks like these will come and go, we don’t see any major reason for strategies to pivot. The pass-through from supply shortages and high commodity prices will likely keep global inflation elevated, alongside strong economic growth and governments’ attempt to normalize economic activity. Therefore, it makes sense at this junction to stay tilted towards risky assets, despite shocks like these. In fact, our Trading Tools Report will alert you of buying opportunities created by these trends.
Having addressed the significant changes over the last 24 hours, let us look at our monitors and models. For those of you wishing to get “to the point,” here are our top trend signals on the long side:
Now, for those looking for more detail, let us look at the underlying models. We start by tracking economic data relative to consensus expectations, as the impact of financial data on markets depends on whether its surprises the upside or downside. We standardize this data and call this indicator Economic Momentum, i.e., higher values are positive and lower values are negative. The color-coding in the table represents higher/more downward momentum for a given country:
Next, we show our estimates for global growth through the lenses of our forecasts for Japanese growth & CPI indices from the OECD. While the outlook from the BOJ has deteriorated, we expect growth to remain strong relative to its historical cycles, albeit modestly:
Next, we show our Global Policy Monitor, which tracks the broadest measures of private-sector monetary aggregates (M4 money supply, credit impulse, etc.) along with our tracking of effective-central bank balance sheets (monetary base). The measures are normalized and standardized, with values above 50 implying rising monetary aggregates and below 50 reflecting slowing growth. The color-coding reflects increasing monetary base relative to its 5-year history for a given country:
Next, we turn to how this combination of policy and economics reflects in markets. Below, we show our Market Trend Monitor, which tracks changes in global investment markets to classify market pricing as expansionary, inflationary, deflationary, or stagflationary. We typically prefer allocations in line with the current market trend. The current market trend is INFLATION, i.e., favoring commodities:
Next, we look at our Currency Bloc Monitor, which aggregates exchange rate moves across 20+ currency pairs into significant regions or Blocs. We use this method to estimate the flow of capital in the global economy. The color-coding in the table reflects the strength of a Currency Bloc versus others for a given time frame. We show the evolution of these Currency Blocs over time:
Finally, we show our Trading Tools Report, for the Nikkei, given the recent BOJ policy changes. We display our various screens to assess risk and reward:
We look forward to sharing our extensive library of content with you over the months to come. If you enjoyed these materials, feel free to share this with friends or colleagues, and don’t forget to subscribe for more!
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