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Multi-Asset Team

Chris Turner
Head of Multi-Asset Strategy
Dorothee Deck
Multi-Asset Strategist
David McBain
Head of Technical Strategy
Stefano Di Domizio
Head of Fixed Income Strategy

Multi-Asset Research

Multi-Asset Products: Absolute Strategy Weekly, Absolute Essentials, Multi-Asset Strategy Monthly, Sentix Survey Essentials, Trade Alerts.

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Absolute Essentials: Metals relatively stretched; FX implications; Bad US equity breadth
21 Aug 2017
: David McBain

US: NASDAQ breadth especially bad; SPX overbought vs Unweighted (P5)

METALS: Industrial/Precious Metals stretched; big rise in Gold longs (P3/15)

FX: USD/CLP oversold and vulnerable to any Industrial Metals pull-back (P3)

Stretched sentiment may take shine off Metals and FX-plays

In light of the recent sharp spike in a number of metals, the Industrial Metals SBI has hit stretched optimism territory. SBI levels of 98+ have in the past 10Y been followed by falls in the spot index on 71% of occasions over the next 30D (by average -2.6%). This has FX implications, given industrial metals’ 70% inverse correlation with Chilean peso vs. the dollar. Especially given that the USD/CLP SBI has dropped below 5, to levels which have in the past 10Y seen the cross-rate rise over the next 30D on 81% of occasions, by an average 1.7%. Sentiment is consistent with a contrarian rally in USD/CLP on 1-2M view.

Last week the Industrial Metals versus Precious Metals SBI also reached 94: notable given SBI levels of over 93 have in the past 10Y been followed by falls in the relative on 77% of occasions over the next 30D (by average -3.0%). While China news has provided a big boost to industrial metals, sentiment suggests notable risk of a near-term reversal vs. precious metals. See charts p3.

Chart of the Week: In the past month, a large performance gap has opened up between US bonds and Industrial versus Precious Metals, despite their 74% historic inverse correlation (see chart 4a, p3). Sentiment measures suggest it may be relative metal moves that begin to close the gap over the coming weeks.
Multi-Asset Trade Alert - Hedging European policy rates normalisation risks
21 Aug 2017
: Stefano Di Domizio

 • The ECB tapering story is getting stale. Instead we think EUR policy rate normalisation could be the next market mover in Euro fixed-income, especially given a pancake-flat EONIA curve. A pick-up in core-HICP inflation could work as a potential catalyst.

• Curve steepening positions in both EUR and GBP Libor futures could offer a hedge to such risks, with the latter providing better roll. We recommend Mar-18/Mar-19 Short-Sterling futures curve steepeners
ASR Sentix Survey Analysis - 21th August 2017
21 Aug 2017
: David McBain
ASR Investment Weekly - Signs of Weaker Growth to Stress HY and Basic Materials
17 Aug 2017
: Dominic White, Raphael Olszyna-Marzys, Ben Blanchard, Michael Hessel, Philip Isherwood, Ian Harnett, Zahra Ward-Murphy, Chris Turner, Stefano Di Domizio, David McBain

Please see below for full contents

Economics: Early signs of a peak in growth
A second-half slowdown in global growth has been one of our central views this year. To what extent are the data starting to confirm that forecast? We think the business surveys and other timely indicators suggest annual global trade growth peaked in the second quarter of the year. Though the recent easing of Chinese financial conditions and rebound in US M1 growth present something of a challenge to our view, the monetary data presently look consistent with some further slowing in the second half. Significantly, there are signs that the inventory cycle is turning again. Rising inventory levels could signal a peak in pricing power and corporate earnings growth.

Multi-Asset: Why we stay cautious on US HY (and US small cap equities)
US High Yield bounced back quickly from last week’s wobble but we remain cautious. Notwithstanding slightly positive net returns over the past three months, HY spreads have edged higher. This has been concentrated in sectors suffering pricing pressure. The downtrend in US credit spreads that began in Q1 2016 was facilitated by accommodative central banks’ policies but was not supported by trends in corporate credit quality. As ECB QE is reined in, US credit spreads have room to adjust higher. Consistent with this, we retain a negative medium-term view on US small cap equities versus large cap, although in the short-term our Sentiment Barometer Indicator suggests a relative bounce for small caps.

Equity Strategy: Underweight Basic Materials as H2 decelerates
Basic Materials have picked-up with commodity prices since mid-June, but remain flat vs. the market ytd. Our Underweight stance rests on our Very Underweight Basic Resource stance (vs. Modest Overweight for Chemicals) and our view that China and Global growth will decelerate in H2. This isn’t good news for commodity prices or Basic Materials. The 13% discount is there for good reason: EPS growth is past ‘as good as it gets’.
 PODCAST: Click to hear Phil’s accompanying podcast

• A peak in global growth? We assess the evidence, by Dom

Key Views & Forecasts

• Why we stay cautious on US HY (and US small cap equities), by Chris

Sentiment extremes and markets on the move, by David

Multi-Asset open trade recommendations

Underweight Basic Materials as H2 decelerates, by Phil

Watch: ASR Investment Weekly - Signs of Weaker Growth to Stress HY and Basic Materials
Absolute Essentials: Volatility spike offers relative opportunities
14 Aug 2017
: David McBain

VOL: VIX optimism stretched; Bond/Equity vol ratio oversold on SBI (P3)

EQUITIES: Russell 3000 pessimism stretched versus AC World ex-US (P1)

THEMES: US small-caps close to oversold on sentiment vs. large-caps (P5)

Volatility spike offers relative contrarian opportunities

Last week’s spike in volatility has thrown up several relative opportunities. While even at current elevated SBI levels there is room for VIX to go higher near-term, SBIs are more clearly pointing to a rise in US bond vs. equity vol over the 1-2M.

In equities, the Nikkei Stock Volatility versus VIX SBI also dropped below 3 late last week. This is a notable development given such polarised relative volatility has regularly provided near-term support for US equities versus Japan. Sub-3 SBI levels have in the past 10Y been followed by a rise in the US/Japan ($) relative over 30 days on 84% of occasions, by an average +3.5%. Relative vol sentiment is consistent with a near-term revival in US vs. Japan. See charts p3.

Chart of the Week: This chimes with wider sentiment on US equities versus the rest of the World, given the Russell 3000/AC World ex-US SBI has reached stretched pessimism territory for the first time in a number of years. Sub-4 SBI levels in the past 20Y – which included a sustained period of US underperformance – were followed by a rise in the relative over the next 30D on 64% of occasions, by an average +1.4%. In the past 10 years, the hit rate rises to 72%, with an average +1.8% over the next 30D. While trend and momentum are now firmly negative, the Russell 3000 is oversold on sentiment vs. World ex-US, pointing towards increased potential for a near-term relative rally.

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