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Top-down macro confirmation

This week is all about confirmation of our top-down macro views.

ECB
Source: Bloomberg

The biggest two releases and announcements will be tomorrow and Thursday, with Chinese GDP data and the ECB expected to start quantitative easing.

However, we also see the World Economic Forum meet in Davos this week, as well as interest rate decisions from the Bank of England, Bank of Japan and Bank of Canada. We have economic and business sentiment releases from Germany, France and Italy and manufacturing data from China. There are also inflation reads and speeches by central bank officials to keep an eye on. 

This week is likely to be the biggest week in terms of economic news since the announcement of QE3 by the Federal Reserve in September 2012.

I think that locking in your macro assumptions this week will be key to developing a market strategy in 2015. With unconventional monetary policy here to stay, all investment decision making needs to include the following factors as a basis before constructing a strategy.

We (and likely most of the market as well) continue to see  these macros themes as key market drivers in 2015:

  1. The USD. I’d look to be long the US dollar, USD-exposed equites and the US economy, as it remains the stand-out growth prospect. Its economy continues to power ahead.
     
  2. The rise of European ECB stimulus. The DAX is particularly prone to an upside move on an ECB stimulus package. The Swiss National Bank’s (SNB) admission that they expect the ECB to enact a QE program will likely see the DAX heading back towards record highs and back above 10,000 points.
     
  3. China growth fears. This has been a regular theme in macro strategy over the past four years. However, more so than ever, China’s central government has been showing signs it is willing to let the economy slow to mitigate the hard landing fears and reduce debt burdens in the economy. Make no mistake, China has a plethora of macro leavers it can pull to stimulate the economy and maintain a medium-sized growth trajectory. However, its willingness to let the economy slide would suggest Chinese growth is heading towards the lower end of 7% rather than a high-7% to low-8% level.
     
  4. Global growth to remain benign. Unconventional monetary policy (outside of the US) has so far failed to drive real economic growth. I think a baseline strategy in this current macro environment should centre on growth staying lower for longer. This means high-yielding equities that mimic bonds should once again demand a premium.

Ahead of the Australian open

The volatility in the markets at the end of last week is likely to continue this week in both positive and negative directions. The actions by the SNB sent currency markets to a-once-in-a-lifetime tailspin. While the macro events of this week will not have the same level of volatility, they will have larger-scale effects. I plan to be nimble and ready for both surprises and disappointments in the prints. 

The futures markets closed substantially higher on Saturday as the US broke out of a five-day losing streak. Oil added over 5% and Europe jumped on ECB QE bets. Asia saw risk dumping on Friday as no one in Asia wanted to be holding positions over the weekend after the SNB’s shock decision. This will reverse this morning and we are calling the ASX higher by 55 points on the back of the trading in the US and Europe over the weekend.

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