· GREED & fear continues to view the Ukraine situation as one likely to trigger more stress for markets since there is, so far as GREED & fear can tell, no concrete evidence that Russian President Vladimir Putin has backed down.
· The incremental reduction in tapering represents a rising risk for US equities as does the fact that the US Treasury bond market is still not confirming the narrative of the consensus, namely an assumed cyclical acceleration in the American economy. Still the coming days of central bank speech making at Jackson Hole should make markets even more sanguine as Chairwoman Janet Yellen is likely to remind investors further that she is the uber-dove.
· GREED & fear views the recent US dollar strength as primarily driven by changing perceptions elsewhere. In the case of the euro, the probability is growing that Flexible Mario will be embarking on quanto easing sooner rather than later. As for sterling, the forex markets are having second thoughts about the imminence of Bank of England tightening given recent inflation and wage data.
· The other development which has been helping the dollar of late is rising government bond yields relative to European counterparts. If this is a signal that the Eurozone is heading in the deflationary direction of Japan, it also raises the potential that US Treasury bond yields have the potential to decline significantly from current levels if the hopes for accelerating cyclical momentum are dashed.
· The biggest risk to GREED & fear’s recommended short JGB trade has been a rally in the US Treasury bond market. This is why the best way to play the JGB trade, for those like GREED & fearsceptical about US cyclical momentum, is to hedge the JGB short by being long the 10-year Treasury.
· The fact that the JGB yields are still so low is not exactly sending a signal to Japanese institutional investors that there is an urgent need to reallocate from bonds to equities. The BoJ will need to allow the yield curve to steepen gradually by incrementally reducing its purchases at the long end, if and when it becomes convinced that its policy is working.
· The best reason for Japanese institutional investors to raise equity allocations, aside from cheap valuations, is mounting ‘evidence’ of a change in corporate governance in terms of a growing focus on return on equity. It is also encouraging, from a retail investor perspective, that the number of NISA accounts have been growing though it is far from clear if all the accounts have invested in equities.
· With the military firmly in charge for now in Thailand, public sector investment will be relied upon to drive GDP growth in 2015. Still the key variable for the macro outlook will be whether the private sector is sufficiently confident to increase its own investment. The evidence is initially encouraging in the sense that business confidence has bounced in recent months. Still it would be naïve in the extreme to assume that Thailand’s political issues are behind it.
· Thailand’s renewed cyclical momentum is far from guaranteed. Reported domestic demand data remains weak as does credit growth. The current account surplus has also been improving sharply, and the baht has remained strong, precisely because domestic demand has been weak.
· The country in Southeast Asia where the current account has not been improving is Indonesia which remains far too reliant on the export of commodities. It remains critical that President-elect Jokowi implements energy reform given that Indonesia is on course to become a net importer of energy in three years.
· GREED & fear is hoping Jokowi will address energy reform, just as GREED & fear is also hoping that he will phase out energy subsidies and implement infrastructure programmes. If Jokowi phases out the fuel subsidy over three years as he has advocated, it will provide savings on the budget of more than US$50bn over a three-year period, freeing up funds to be spent on infrastructure.
· The issue of land procurement, not money, is the key hurdle that needs to be overcome if Indonesia is to address properly its infrastructure problem, with all the resulting benefits in terms of improved logistics and the like. GREED & fear is hopeful given Jokowi’s evident intention to prioritise the infrastructure issue. Still successful execution cannot be taken for granted.
· What is perhaps most positive about Jokowi is that he is a new face in a country where politics has for too long been dominated by the same old elite but one with a proven track record in local government.
