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Daily Intelligence Briefing

Monday, January 6, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

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I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Long Emerging Market Equities as a New MRP Theme? →

Summary: A confluence of factors has us thinking that the US dollar could weaken this year. That is, of course, if the recent flare up in US-Iran tensions dissipates enough to prevent full-blown military action in the Middle East. The prospect of a weaker dollar creates an interesting opportunity for asset allocators with an eye on emerging markets. Aside from the dollar effect, emerging markets are at a rare inflection point these days with multiple crosscurrents in their favor. Read more +

Source material for today’s market insight…

DIBs reports from the past week.

Currencies: The Dollar’s Losses May Just Be Getting Started

Currencies: China’s cut of US dollar weighting in key index will boost global fortunes of yuan, economists say

Currencies: CBDCs may commence the ‘decade of De-dollarization’

Emerging Markets: PBOC Sets Policy Pace for 2020 With Reserve Cut to Aid Credit

Emerging Markets: Latam stocks gain with Brazil leading after China stimulus

Emerging Markets: These Countries Had Bigger Stock-Market Gains Than the U.S. Here’s Why – and Whether You Should Buy

Emerging Markets: Russian Oil Production Hits New Records Despite OPEC+ Deal

Emerging Markets: Latin America’s ‘Oasis’ Descends Into Chaos

II. Updates of Themes on MRP’s Radar

Follow-up analysis of key market drivers monitored by MRP.

Currencies: A revolution in Africa’s relations with France is afoot

Pensions: Congress Saves Coal Miner Pensions, but What About Others?

Private Equity: Private Equity Is Starting 2020 With More Cash Than Ever Before

Gaming: British regulator could ban gambling firms’ VIP programmes, shares fall

Aviation SHORT / Plane Parts: Boeing 737 MAX Problems Hit Supplier Triumph Group’s Stock and Bonds

Oil & Gas: How much damage could Iran actually do to the global oil industry? — A lot

Oil & Gas: Energy Producers’ New Year’s Resolution: Pay the Tab for the Shale Drilling Bonanza

Pharma: Vaccine for dementia to enter human trials after successful tests on mice

III. Joe Mac’s Viewpoint

Founder Joe McAlinden’s big-picture analyses of macro issues. More about him here.

December 23, 2019: A Review of MRP’s Change-Driven Themes →

November 27, 2019: Emergence of Divergence →

October 31, 2019: Receding Recession Fears →

September 30, 2019: Verbal Intervention →

August 30, 2019: The Booming Buck →

IV. Active Thematic Ideas

MRP’s active long and short themes, with an archive of follow-up reports.

See Them Here →

V. Macroeconomic Indicators

Key data releases relevant to MRP’s Active Thematic Ideas.

See Them Here →


Long Emerging Market Equities as a New MRP Theme?

Summary: A confluence of factors has us thinking that the US dollar could weaken this year. That is, of course, if the recent flare up in US-Iran tensions dissipates enough to prevent full-blown military action in the Middle East. The prospect of a weaker dollar creates an interesting opportunity for asset allocators with an eye on emerging markets. Aside from the dollar effect, emerging markets are at a rare inflection point these days, with multiple crosscurrents in their favor.

The U.S. dollar recently experienced its worst monthly performance in 2 years, sliding 2% in December. Moreover, the Bloomberg Dollar Spot index, which tracks the U.S. currency against a basket of its peers, has failed to make new highs since hitting a peak in early 2017. This, after surging about 40% between 2011 and 2017. The buck has weakened just 7% since that 2017 peak, however, we believe conditions are in place for further depreciation over the course of this year due to a confluence of factors.


This view is predicated on current US-Iran tensions cooling down enough for investors to turn their focus back on traditional market drivers, rather than seeking refuge in haven currencies, as they have since Friday.


Return of the Risk-On Trade


Two events that took place in December can be interpreted as bearish for the US dollar. First came news that the US and China had reached a phase-one trade agreement, and plan to roll back some tariffs after the deal is signed on January 15. Then came Prime Minister Boris Johnson’s landslide electoral victory in the UK, which opened up a clearer path forward for Brexit.


Improved visibilty on those two items was enough to lower the fear gauge and improve investor sentiment, as confirmed by the powerful rally we witnessed across global equity markets at year-end. When the “risk-on” trade is back on the books, demand for haven currencies like the dollar tends to fall. That’s exactly what happened until the escalation of conflict in the Middle East last week ushered in a fresh set of worries.


Dovish Fed Policy


Barring an inflationary scare, U.S. interest rates are unlikely to rise in 2020, judging by the FOMC minutes from the Fed’s December 2019 meeting. Additionally, the Fed’s pledge to buy $60 billion of Treasury bills a month through the second quarter of 2020 is essentially a form of monetary easing, regardless of what Chairman Powell chooses to call it. Those purchases could bring the Fed’s balance sheet back to record high levels by mid-year. The combined impact of a hold on interest rates and Fed balance sheet expansion should create a drag on the US dollar, everything else being equal.


Falling US “Real Rate” and Shrinking Yield Premium on Treasuries


MRP has argued repeatedly that exchange rates are driven by shifts in inflation-adjusted interest rates, with a lag of several months. As it turns out, “real” U.S. rates have been falling due to the Fed’s dovish pivot, three rate cuts, and a bottoming of domestic inflation.


At 1.79%, the 10-year US Treasury yield is 91 basis points below where it was 12 months ago. In the meantime, U.S. inflation has climbed from 1.6% in January 2019 to 2.1% per the most recent CPI report. Applying that 2.1% inflation rate to a 1.79% yield puts the “real” yield for the 10-year Treasury at -0.31%.


In comparison, the Euro area’s inflation rate of 1% and average 10-year yield of 0.37% produces a “real” yield of -0.37%, which is just slightly above its US counterpart.


Also consider the fact that the US Treasury yield advantage over similar-maturity sovereign bonds from other developed markets has shrunk as well. Comparing US and German 10-year government bonds, for instance, shows the Treasury yield advantage narrowing signficantly over the past four months, according to this chart from


The decline in real US rates and the shrinking yield premium on US Treasuries together presage a softening of the dollar versus the euro in the months ahead.


Dollar Weakness Makes Emerging Market Assets More Attractive


The prospect of a weaker dollar creates an interesting opportunity for asset allocators with an eye on emerging markets.


When the dollar strengthens, it becomes more expensive for foreign borrowers to service and repay their dollar-denominated debt. This creates a burden on emerging economies as investors begin to sell these assets and the respective currency. To defend their currencies, foreign central banks are forced to raise their own interest rates, making domestic borrowings costlier too, and puting even more strain on the economy.


Conversely, a depreciating dollar brings relief to emerging market economies and makes their assets more attractive to investors. That’s the scenario we see unfolding this year.


Rare Emerging Market Inflection Point


Finally, as pointed out by Manraj Sekhon of Franklin Templeton, emerging markets are at a rare inflection point these days ,with multiple crosscurrents in their favor. The markets, he says, are just beginning to recognize the vast opportunities that technological disruption and new business models will open up in emerging economies.


The chips are already in place. Brazil stands to benefit from structural economic reforms and a new commodity market boom. India, as one of the largest and fastest-growing markets for digital consumers, can expect a jump in productivity thanks to massive public and private sector investments in digital infrastructure. China, meanwhile, has emerged as the frontrunner in 5G, artificial intelligence, robotics, and electric mobility, all of which will drive the country’s new economy, allowing it to operate more independently from the United States.


Pondering a New MRP Theme: Long Emerging Market Equities


Emerging market equities have drastically underperformed the S&P 500 since the March 2009 trough. But MRP believes EM equities will shine this year, propelled by a downward slide in the US dollar. For now, market sentiment is dominated by fears of further instability in the Middle East. If/when that situation diffuses, we will seriously consider adding Long Emerging Market Equities to MRP’s active list of themes.


The iShares MSCI Emerging Markets ETF (EEM) had already started to break out before the US-Iran hostilities put that rally on pause last week. Even after Friday’s market plunge, EEM with its 4.9% gain is still ahead of US and developed markets equities on a one-month basis. That rally should resume once the tensions in the Middle East de-escalate.



Nelly Nyambi

Managing Director, Research

McAlinden Research Partners

Emerging Markets (EEM) vs Developed Markets Ex-US (IDEV)

vs S&P 500 (SPY)

Source material for today’s market insight…


The Dollar’s Losses May Just Be Getting Started


The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 global peers, slid 2% in December, the biggest monthly decline in almost two years. Things may only get worse, according to a growing number of fund managers and strategists. A truce in the U.S.-China trade war, improving global growth and a shrinking yield premium on U.S. Treasuries will undermine the currency, they said.


Treasury 10-year yields dropped almost 80 basis points over the course of the year. The Fed’s dovish pivot has seen the U.S. two-year yield advantage over similar-maturity German debt shrink to 217 basis points from around 350 basis points in late 2018, according to data compiled by Bloomberg.


Not everyone is convinced the dollar is poised to keep weakening, including Citigroup and Goldman Sachs.


Read the full article from Bloomberg +


China’s cut of US dollar weighting in key index will boost global fortunes of yuan, economists say


China’s decision to cut the weighting of the US dollar in a basket of foreign currencies used to determine the strength of the yuan will help Beijing’s long-term efforts to weaken the international dominance of the American currency, economists said.


The China Foreign Exchange Trade System (CFETS), a unit of the Chinese central bank, trimmed the weighting of the US dollar on Wednesday to 21.59 per cent from 22.40 per cent in a key yuan exchange index to make it “more representative” of current trade conditions. The new version of the index will be based on 2018 trade data, rather than data from 2015, when the CFETS was first established. China’s trade with the US shrank 11.1 per cent in yuan terms in the January-November period, according to Chinese customs data released last month.


The US dollar still has the heaviest weighting in the CFETS index, while the value of the euro has been expanded to 17.40 per cent from 16.34 per cent. The weighting of the Hong Kong dollar fell to 3.57 per cent from 4.28 per cent.


Read the full article from South China Morning Post +


CBDCs may commence the ‘decade of De-dollarization’


We are entering a decade that will be defined by central bank digital currencies [CBDCs] or a digital equivalent of a domestic fiat currency. A glaring omission, or maybe a late-comer in this new age, will be the United States of America. Gripped by fierce domestic political turmoil, the US will fall short in the CBDC race as China and Europe are already pulling ahead.


If Washington does not get its act together soon, 2020 could well be the start of the decade of de-dollarization, according to Mati Greenspan, founder of Quantum Economics. In his January 3 newsletter, Greenspan stated that “We believe that within the next 10 years, the Dollar’s status as the global reserve currency will be drastically eroded.”


He also traced this eventual downfall to the decline of the petro-dollar, one which Greenspan termed “laughable at best.” In his opinion, these oil-receipts will cause erosion of the U.S dollar’s status due to the energy independence of the US, causing a drop in oil supply and secondly, because other countries are beginning to exchange oil in other countries [SIC ‘currencies”], decreasing demand.


Read the full article from AMB Crypto +

Emerging Markets

PBOC Sets Policy Pace for 2020 With Reserve Cut to Aid Credit


China’s central bank trimmed the amount of cash that lenders must hold in reserve, and signaled continued action in 2020 to reduce borrowing costs for companies. The required reserve ratio for commercial lenders will be lowered by 50 basis points from Jan. 6, releasing about 800 billion yuan ($115 billion) of liquidity into the financial system. The cut aims to help banks reduce their lending rate to businesses, the PBOC said in a separate statement. Currently, the required reserve ratio is 13% for big banks and 11% for smaller ones.


The move, flagged in advance by Premier Li Keqiang late last month, shows the central bank is sticking to its practice of keeping domestic liquidity conditions relatively supportive amid a broader government drive to shore up the private sector. At the same time, small firms still face hurdles in raising funds, and a recent revamp of the interest rate system is still bedding in, making further efforts likely.


Read the full article from Bloomberg +

Emerging Markets

Latam stocks gain with Brazil leading after China stimulus


Brazil stocks began the new year with a 1% rise on Thursday, leading Latin American stocks higher, and regional currencies also rallied despite a strong dollar as trade optimism and policy easing by China lifted global sentiment.


The People’s Bank of China said it was reducing the cash that banks must hold as reserves. Sao Paulo’s commodity-heavy Bovespa index stayed near record highs as investors cheered the central bank’s move in China, a major destination for Latin America’s commodity exports.


The Brazilian stock index also got a lift from financial exchange operator B3 after the company said it is introducing a new pricing structure that will reduce and simplify fees investors pay to trade stocks and over-the-counter products.


Read the full article from Reuters +

Emerging Markets

These Countries Had Bigger Stock-Market Gains Than the U.S. Here’s Why – and Whether You Should Buy


Last year U.S. bonds delivered more than 8%, while U.S. stocks returned more than 30%. But the stock markets of some other countries did even better. Russian stocks were up around 50%. Chinese A-shares were up more than 40%, as were Greek stocks. It’s hard to know why a particular country’s stock market does well in a given year, but here are some guesses.


Russian and Greek stocks are cheap, and it is possible they are beginning to trade at prices more in line with the rest of the world. Greece’s stock market trades at 0.7 times the sales of the underlying companies. Russia trades at a price/sales ratio of 0.8 and a cyclically adjusted price/earnings ratio of 7.6, according to Star Capital.


The CAPE metric takes the current price and divides it by the past decade’s worth of average real earnings. CAPE levels for the U.S. stock market have been near 7.6 only in the early 1920s, the early 1930s, and the late 1970s.


Chinese A-shares were included in emerging-markets indexes in the middle of 2018.

Before then, and to some degree since, the A-shares market was dominated by small investors and experienced wide fluctuations. Chinese stocks trade at an unremarkable CAPE ratio of 14.6 despite the desire among Western investors to access China’s fast-growing companies.


Read the full article from Barron’s +

Emerging Markets

Russian Oil Production Hits New Records Despite OPEC+ Deal


Crude oil and condensate production in Russia hit a record high for the post-Soviet era in 2019, despite Moscow’s key role in supporting the ongoing production cuts of the OPEC+ coalition.


According to figures from Russia’s energy ministry, carried by Reuters, Russia pumped 11.25 million barrels per day (bpd) of crude oil and condensate in 2019—up from 11.16 million bpd in 2018, which was the previous production record in Russia’s post-Soviet era.


The new record oil production shows that one of the key parties to the OPEC+ deal, and certainly the key party in the non-OPEC camp of producers in the agreement, did not comply with its share of the cuts for most of 2019.


Russian oil companies have long balked at continued production cuts, arguing that the cuts give more market share to U.S. shale and hinder Russian firms’ production expansion plans.


Read the full article from Oil Price +

Emerging Markets

Latin America’s ‘Oasis’ Descends into Chaos


Chile—Latin America’s freest, most stable and richest nation—is in free fall. Public order has collapsed, violence is rampant, and populism is the new creed of the political class. There is a recession, characterized by capital flight and rising unemployment. Income inequality could increase to levels not seen since the 1990s, according to a recent statement by Chile’s Central Bank.


It took a mere 40 days for the Latin American “oasis”—as President Sebastián Piñera called Chile not long ago—to vanish. The immediate cause of the crisis was the small increase in the price of public transportation tickets in Santiago. On Oct. 18, two weeks after the price increase was announced, the country exploded. A few weeks later the consequences are everywhere: more than $2 billion in losses and damages, more than 1,200 looted retail stores, an estimated 300,000 new unemployed, 25 dead, more than 2,000 injured police officers, and a political and economic crisis with no end in sight.


How a stable and prosperous Chile fell so dramatically in such a short period is a lesson for every Western democracy.


Read the full article from The Wall Street Journal +


Select a theme to see when and why we added it. Also included is a link to all recent Market Insight reports we’ve written about that theme, allowing you to track its progress.






Robotics & Automation






Electric Utilities




U.K. Equities


Vietnam Equities



Week Ahead


The economic calendar will get busier in the coming week, as the US release its December jobs report, alongside foreign trade data and ISM Non-Manufacturing PMI. Elsewhere, important data to follow include: China Caixin Services PMI, and consumer and producer prices; Eurozone inflation; Germany factory orders; and India industrial output. Japanese markets reopen on Monday as investors return from New Year’s holidays.


Click here to access the data +


Fed to Keep Rates on Hold for Some Time: Minutes


Fed officials agreed that the current interest rate stance is likely to remain unchanged for some time, despite raising concerns that low interest rates could exacerbate imbalances in the financial sector, minutes of the last meeting showed.


Click here to access the data +


US Factory Activity Shrinks the Most in 10-1/2-Years: ISM


The ISM Manufacturing PMI in the US fell to 47.2 in December, the lowest since June 2009, from 48.1 in November and well below market expectations of 49. The reading pointed to the fifth straight month of decline in manufacturing activity as new orders, production, employment and new export orders shrank at faster pace and price pressures increased.


Click here to access the data +


Mexico Hikes Minimum Wage by 20%


The Mexican government raised the country’s minimum daily wage by 20% to MXN 123.22 starting January 1st 2020. It is the biggest wage hike in the last four and half decades. In the northern border region, where wages are higher, the minimum salary was increased by 5% to MXN 185.56. In 2019, wages increased by 16%.


Click here to access the data +


Iran Inflation Rate Rises to 27.8% in December


The annual inflation rate in Iran increased to 27.8 percent in December 2019 from 27.0 percent in the previous month. Prices went up faster for: transport (50.2 percent vs 33.4 percent in November); miscellaneous goods & services (25.7 percent vs 24.9 percent); communication (2.8 percent vs 1.7 percent); health & medical services (24.7 percent vs 24.2 percent); and tobacco (6.0 percent vs 1.5 percent). On a monthly basis, consumer prices rose 3.2 percent in December.


Click here to access the data +


Oil Soars Again After Trump threatens Iraq sanctions


Oil prices rose in Monday morning after US President Donald Trump issued a threat to impose sanctions on Iraq amid escalating tensions with Iran in the Middle East. Brent crude oil jumped over 6 percent to $70.30 a barrel. Also, US West Texas Intermediate (WTI) crude futures increased by 5.3 percent to $64.39 a barrel. The gains extended Friday’s more-than-3 percent surge after a US air strike in Iraq killed top Iranian commander Qassem Soleimani.


Click here to access the data +




A revolution in Africa’s relations with France is afoot


You could call it west Africa’s Brexit. In what amounts to be the biggest shift in the region’s relations with France since independence, eight west African countries will in 2020 ditch the CFA franc in favour of a new currency to be called the eco. It cannot be long before the six central African states, members of a separate CFA franc union, follow suit.


The countries concerned — Ivory Coast, Senegal, Mali, Burkina Faso, Benin, Niger, Togo and Guinea-Bissau — no longer have to keep half their reserves in France or have a French emissary occupying a seat on their central bank. Although the eco will remain pegged to the euro and guaranteed by France, fiscal and monetary discipline by African states alone will preserve the peg.


Read the full article from The Financial Times +



Congress Saves Coal Miner Pensions, but What About Others?


For the first time in 45 years of federal pension law, taxpayer dollars will be used to bail out a fund for workers in the private sector. And now that there’s a precedent, it might not be the last.


The $1.4 trillion spending bill passed by Congress last week quietly achieves what a parade of select committees and coordinating councils could not: rescue a dying pension fund that is the lifeblood of nearly 100,000 retired coal miners. The coal miners belong to one of about 1,400 pension plans that cover a large group of workers in a single industry or trade. These so-called multiemployer plans cover more than 10 million workers in unions.


But nearly three-quarters of the people with this type of pension are in plans that have less than half the money they need to pay promised benefits, according to the Pension Benefit Guaranty Corporation, the federal agency that insures pension plans. And the guaranty corporation’s program backing up these plans would be wiped out by the failure of just one of the major pension pools.


Read the full article from The New York Times +

Private Equity

Private Equity Is Starting 2020 With More Cash Than Ever Before


Private equity firms are ready to pounce in 2020, armed with a record level of cash. Firms led by Blackstone Group and Carlyle Group have amassed almost $1.5 trillion in unspent capital, the highest year-end total on record, according to data compiled by Preqin. While last year saw roughly $450 billion worth of private equity deals, M&A activity this year could be on a scale not seen since the financial crisis.


One reason why firms can keep so much cash on hand ready for the right moment is because their investment options are expanding, according to Kewsong Lee, co-chief executive officer at Carlyle. Asset classes such as private credit and regions including Japan are opening up to private capital flows, he said at a conference in December.


Read the full article from Bloomberg +



British regulator could ban gambling firms’ VIP programmes, shares fall


Shares of British gambling companies fell on Friday after an industry regulator proposed curbs on programmes and incentives targeting habitual gamblers. GVC (GVC.L), William Hill (WMH.L) and gambling software maker Playtech (PTEC.L) fell between 2% and 4%.


The British Gambling Commission said in a report that it could ban VIP accounts, which typically offer bigger rewards for frequent gamblers, and limit deposits, while encouraging the industry to adopt a code of conduct. Betting companies rely on VIP customers for the bulk of their deposits, although they form a small percentage of their total customer base, the regulator said. The Gambling Commission report comes two months after a cross-party group of lawmakers called for a raft of measures to overhaul online casinos and protect vulnerable people.


Read the full article from Reuters +

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