am enthusiastic on any and all inflationary efforts
in the mean time, just in in-tray
· Asian stock markets remain, in the short term, as geared as ever to where the price of oil is heading. GREED & fear's fundamental view remains that oil is near a medium-term correction, given the slowdown in global growth. But there remains a risk of a further parabolic spike before a temporary top is reached. Such a parabolic spike becomes more likely if the US dollar index fails to break above the 75 level.
· The US dollar's expected countertrend rally is more likely to happen when other central banks start cutting interest rates, as GREED & fear still expects later this year, rather than when the Fed starts raising them. There remains scant evidence in America of the wage rises that would lead to real concerns that inflationary impulses were becoming cemented within the system.
· GREED & fear is still not prepared to press the panic button on "inflation" even though a further parabolic move in oil will undoubtedly be nasty for Asia and probably cause it to break the intraday low of 479 on the MSCI AC Asia ex-Japan Index. The view here remains that the ultimate resistance level for Asian equities in this year of extended sideways consolidation should be around the 430-450 level on the same regional benchmark index.
· The China A-share market has this week broken below the 3,000 level on the Shanghai Composite Index where local investors, and indeed GREED & fear, would expect the authorities to start taking more supportive action. The equity damage has taken H share valuations back to reasonable levels. This provides investors with an opportunity to add to positions in the big domestic demand themes, though it should be noted that H shares have bottomed in the past two corrections 13% below the present level.
· Sentiment towards the Indian stock market remains extremely fragile so long as oil refuses to correct significantly. The government's token cut of the "hidden subsidies" is not going to protect the stock market or the currency from a further upward spike in oil. Longer term, however, there will be some positive consequences from this year's speed bump in India. This is that the Indian central bank has pre-emptively headed off the risk of a climatic speculative bubble.
· The 10-year JGB yield is approaching the key 2% level. A successful break out would be positive for the Tokyo stock market and in particular bank stocks. GREED & fear maintains the view that Japan will be a relative outperformer this year. But GREED & fear is less convinced that the JGB is about to break the 2% level imminently.
· Ten-year US Treasury bond yields are now up 84bps from the low reached in March at a time when the Fed chose to bailout Bear Stearns bondholders. This is a big move at a time when the US consumer remains weak and when there is an intensifying credit contraction. GREED & fear suspects that the "pain trade" for most macro traders would now be a Treasury bond rally rather than a further sell-off.
· There is a view around that the recent distress in Vietnam could herald the beginning of another Asian crisis, with the Vietnamese dong serving as the negative catalyst, just as the Thai baht did 11 years ago. GREED & fear does not accept this view.
· Betting on the dong now offers macro traders an interesting contrarian macro speculation given that the non-deliverable forward market still assumes a 33% depreciation in the next 12 months. The main reason GREED & fear likes the dong is that the currency was already competitive before the latest scare. It is also the case that the country's macro data does not suggest the imminence of a classic balance of payments crisis.
· Long-term investors should add to position in Vietnamese equities now, though it should be noted that there is a greater risk now of a banking crisis in Vietnam than a balance of payments crisis. If there are problems in some of the more aggressive private-sector banks, the easiest solution for the authorities would be to increase the amount foreign strategic investors can own of these banks.
· GREED & fear has little doubt about the macro potential of Vietnam, with the single biggest positive the dynamic work ethic of the population. The present benign FDI trend should be expected to continue. Indeed, the biggest single constraint to FDI is not macro stability but a lack of physical infrastructure.
· The food and energy related inflationary scare has had the short-term effort of diverting attention away from the long-term bull case for Asia; namely the secular growth in the number of discretionary middle-class consumers with the personal balance sheets to support their growing spreading habits. But this long-term story, and the related asset-reflation theme, remains as fundamentally valid as ever.
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