15.08.12 Daily Summary

1) UST 10y yield dropped more than 8bps last night as react the shock of Chinese RMB devaluation in line with tumbled US stock market with about 1% decline.
Market expects Fed should consider this aspect of so-called currency war from China.

2) Oil price turned weak again and BDI tumbled more than recent move after a long time.
Is the end of bullish momentum amplified by seasonal effect including increasing trade of agriculture and in Pacific seas? Had we dreamed for a short time?
How is oil price? (See another attached post today)

3) I was maybe incorrect because I thought this devaluation by PBOC was not so surprising news as market participants expected this change for some time.

4) This is likely correct that "Beijing signals growth fears with surprise move" via WSJ. On this side, market reactions seems somewhat reasonable.
Meanwhile, IMF welcomed the change of China. What is what they really want?

5) PBOC devalued CNY to lower fixing rate against USD by 1.6% to 6.3306 once again.Their comment that they shot the fixing rate rapidly as one-off adjustment reflecting their willingness of restructuring FX system was just bluffing!
While USD/CNY spot was up a further 1.5% above today's fix, USD/CNH jumped 1.9% in response. And then, should PBOC lift fix rate further tomorrow? Maybe yes...

(Additionally, PBOC seemed to intervent FX market to prevent exchange rate from too devaluation further. So, we expect the pace of additional depreciation would be slow, a little bit...)

6) Chinese economic indicators were disappointed in July.
I.P was up 6.0% yoy, less than 6.6% of consensus and 6.8% of last month.
Retail sales increased by 10.5% which is similar with 6.6% of both of consensus and last month's data.
FAI growth was at 11.2%, lower than 11.4% of consensus and 11.5% in June.
July's auto sales was disappointed, either. This contracted by -6.6% yoy following last month's decline and in two consecutive months.

7) In line with additional RMB depreciation, USD/KRW reached almost 1,200 won, ended at 1,190.8 won increased by 11.7 won today. KOSPI was down -0.56% as shape a hang-in man candle.

8) UST 10y rate tumbled further, by about 8bps in Asian futures market. And it was same with Korean treasury market.
However, in Chinese on-shore bond market, the yield is pushed higher following CNY devaluation in terms of the fear about capital outflow. Credit bond is weaker than treasury, especially. Govi 5y was up 8bps yesterday.
If then, how will be in Korean bond marekt? Different from China?
Current long-end yield level seems very low. (see the another post written today)

9) Greece and creditors agreed on bailout deal. Greece could take 86 mil. euro in financing over the next three years. Sadly, however, they seems much far from market interests.

10) Abe adviser sees a need for economic stimulus via WSJ. Does the power remain in Abe, yet?

11) BRL was strong rather than depreciated further. Somewhat interesting... RUB seemed not affected by CNY, neither.

12) Anyway, I bought long-end UST for moderate short-cover...

15.08.12 Short thought of Korean 10 year treasury yield

We are hovering 3Q... Long-end bond yield will likely hover, either, unless my forecast about GDP and CPI fail to follow real data with downside risk.

15.08.12 EUR/USD...it's not my picture, absolutely...

I've believed EUR/USD should start to fly with somewhat volatility after the ramification of convergence in all kind of moving average. And today, EUR is showing strong move soundlessly cracking not only convergence spot of from 5MA to 200MA, but also a negative cloud. The momentum of strengthening EUR seems so strong.

However, it is not my picture, absolutely.

I've seen EUR appreciation as driven by Euro area's fundamental and monetary policy amid improving economic indicators spurred after the end of stress test in European banks and upward inflation. I expected EUR appreciation against USD, albeit I believed US Fed should start monetary tightening earlier than them, seen in 1994's rate hike by Fed.

Contrary to my hope, EUR is moving higher due to weakening expectation of USD appreciation caused by re-start of currency war as China attends. In this circumstance, strong EUR could mean negative impact on the sentiment of economic recovery and inflationary pressure in line with possible additional dovish stance from ECB.

(Additionally, the money flow seemed to turn back to Euro area invested in Asian fund in EUR due to the woes from Chinese event)

So, somewhat frustrated... I should start to buy long-end UST modestly.

On the other hand, how will oil price react on this? Is this mean upside potential for oil?

15.08.12 Chinese Carry Trade

to be written...

15.08.12 Oil Price, Falling Knife? or Possible Rebound with Triple Bottom and Divergence of MACD?

Oil price looks like a falling knife in terms of fundamental issues including lackluster Chinese imports demand, foreseeable oil exports by US as early as start of next year, and possible continuous of USD appreciation as Fed would likely turn to be dovish under stressful circumstance in EMs.

Albeit most materials in oil market have signaled secular bear market, the chart of WTI is going with divergence of MACD for more than 1 month meaning possible rebound soon. If then, the trajectory would be with triple bottom on the technical side.

A little more than 40 dollar per a barrel seems so low in terms of historical level in oil price...
What would this mean?

15.08.04 S&P500 Earnings vs. Sales

US Corporations' earnings showed weakness since USD turned to be strong, mid of 2014, and recent earnings growth rate yoy reached negative boundary.

On the other hand, the sales growth from a year earlier has remained above 2% for recent some years, and showed somewhat solid.
Moreover, recent data in 2Q is showing firm sales growth, further.

And then, what is the point that US governors really want? Strong USD? or Weak USD?

15.08.05 US Real disposable income growth vs. consumption growth

Since mid-2014, both real income growth and real consumption growth increased continuously maybe due to tumbled oil price and lowered inflation. But, in terms of the pace of real consumption, it was somewhat disappointed, while economists argued that US spending would increase to follow soaring real disposable income eventually. Moreover, since start of this year, both of income and spending in real term, started to decline moderately, albeit the growth level remain high, more than 2% as maybe additional USD appreciation was limited recently.

If then, US officers want strong USD more than now? But, companies earnings have been deteriorated since then...

15.08.06 US Trade Deficit since late 1960s

EUR/USD market arose in line with the increased US trade deficit since late 1960s, because the foreign investors holding USD in on-shore market in US had became afraid US government to prevent to bring out to overseas for USD soon.

And then, who were foreign investors made and spurred EUR/USD market in London? They seemed somewhat oil-power related someone.

Indeed, OPEC countries' imports consumption expenditures were paid on EUR of about 70% of total imports demand.

15.08.12 Chinese "Real" Imports

*calculated by main counterparts' trade data, US, EZ, Japan, Korea and Taiwan.

Is the Chinese economy really serious?

2015.08.11 Daily

US treasury yield rose about 6~7bps and curve was steepened as I expect the range market during 3Q and this level seemed the short-term trough in both of 10yr rate and 10s30s spread. Interestingly, Stanley Fisher, the vice chairman of Fed, showed dovish stance to upcoming Fed monetary policy as he looked like somewhat afraid about low inflation and wage pressure, so he did not think that now is not adequate timing to raise policy rate. Under this circumstance, the bond yield should have declined further with curve flattening. However, yield curve was bear steepened in line with increasing risk appetite as US equity market price was up depending on dovish stance of Fisher and Chinese stock market robust yesterday. That said, the bond yield did not react to possible future’s monetary policy, and I think it means that the bond market is within a range now and the price or yield shows only technical movement.

On the other hand, USD turned to be depreciated as Fed’s vice president was dovish, and commodities price somewhat gains although copper price declined to 6 years low in LME market due to disappointed imports data in China announced in last weekend. Yes. All of movements look like a range trading.

But, there was a big event today. In fact, I’m so curious it is a real surprise event because market players have betted on it for some time. It was CNY depreciation against USD. PBOC raised the USD/CNY exchange rate’s mid-point by 1.9%, a historical high increasing rate, to 6.2298. Although, PBOC announced it was one-off adjustment reflecting the willingness of restructuring the system of suggesting CNY fixing rate, the width of depreciation a day seemed huge as market expected other policies would come earlier, including RRR cut or widening daily width of volatility. Additionally, market participants continue to expect further depreciation of CNY. In on-shore Chinese FX option market, the bet on CNY weakness has increased. And as July’s trade data showed very weakness and IMF suggested more market-friendly FX policy, this CNY depreciation is not too surprising event, I think, it would be only small event. However, anyways, many markets moved rapidly reflecting this event. KTBF prices and USD/KRW were soared, while KOSPI tumbled. Market looks likely reflect both of currency war and negative impact on Korean exports economy. On US treasury market, the yield declined maybe as this ghost of currency war weigh on the Fed’s decision of monetary tightening to delay later this year, not September.

Chinese measure that they try to depreciate their currency would lead the additional USD strength and downward pressure in commodities market first, but Chinese economy and commodities price could rebound at last. Under this thought, I should maintain the market view that all of movements will be within in a range. But, I am somewhat afraid because of the possible US treasury rate down additionally. Should I buy long-end bond, right now? Economic indicators even in EZ, have showed vulnerable signals and inflationary pressure is same. So, I am somewhat embarrassed.

On the other hand, with technical analysis, WTI price chart shows the MACD divergence for a month which means upside potential for the price soon. The chart looks like triple bottom, either. If then, why? And, under this lower pressure of oil price environment, why US Congress try to allow oil exports from as early as start of next year? I really want to know the reason.

2015.08.04 Daily

I planned to increase duration position in the global aggregate fund in this week with the expectation that the yield could increase pass-through bought due to portfolio adjustment in end of last month. Contrary to my hope, US treasury rates were down further last night as economic indicators showed mixed signal about fundamentals. Shout I have bought bonds last night? It’s somewhat difficult question because current rates seem very low level. In fact, the 10 year treasury rate was down to the level seemed significant, cross spot of 120MA and 200MA. In addition, its lag span met three points at the same time, which was 60MA, 120MA and the top of positive cloud.

Current rates must be critical level with these perspectives. So, if current bond market is in range movement, the bond yield would robust tonight. I see the global market as the procedure of convergence toward its one point with preparing to make a new big trend. It would continue until 3Q this year, I guess, so the timing of buying bonds should be delayed on this low level. Oil price tumbled yesterday further as Brent oil price declined toward under 50 dollar per barrel. The expectation of inflationary pressure started to deteriorate rapidly and this concern has been influenced in recent flattening bond market. But, oil price is nearby last trough, so we expect short-term rebound from this number and if then, the oil market means the range movement, either. BDI increased yesterday further, although Chinese manufacturing PMI data was very disappointed. Main analysts in this market argue recent rebound of BDI would continue for some period, but they see the only short-term bullish market with the seasonal effect in summer from agricultures and pacific areas. This sounds almost reasonable, but the momentum to increase seems too strong.

If 10 year US treasury yield is down under current critical level, the possibility of short-term trend to bull market would increase. Nevertheless, there are some hurdles in the chart, and the yield should rebound to meet this critical level at last. The problem is that we do not know when the yield re-meets that level. So, if the yield is lower than current level, I would be very frustrated and I have to buy some bonds to add duration. If not, hopefully, I will earn some time to think about an adequate level to buy.

2015.08.03 Daily

In terms of the short-term market view, global bond market could try to be bullish in 3Q, under the range movement basically. I had concerned about intensifying inflationary pressure toward end of this year and this could push the market yield higher rapidly in line with Fed’s fund rate hike. The expectation of improving economic growth would be delayed, I thought, while it would robust at last. However, it will be likely more delayed rather than given expectation due to Chinese economic slowdown and lower wage growth in US than expectations. I trusted Chinese economy should turn to improve in 2H this year because recent import data, which is calculated by own using main Chinese trade partners including US, EZ, Japan, Korea and Taiwan, had shown the signal of being at the trough and recent upward pressure of BDI and upturn of Chinese residential market mean the possible economic fundamental improvement, I believe. Optimists about Chinese economy argued May’s exports data from Taiwan recorded high since end of last year and this could signal Chinese trade volume or global volume started to be turned to upside. This was in line with my argument. However, June data declined again back to its low level in Taiwan and Chinese HSBC manufacturing PMI indicated downward pressure in economy further. Under the downside risk in Asian economy including China, and subdued inflationary pressure under low commodities price and moderate wage growth in US, US Fed doesn’t seem to be hawkish from now on. So, the opportunity for capital gain in US bond market would be in long-end tenor. It would be somewhat efficient strategy in the environment that Fed increase rate in September, because long-end rate could maintain current level despite policy rate hike, under the woes about long-term growth and inflation.

I focused on ECI rather than hourly average wage, because the main rationale that wage growth pressure is lower against payroll data was proposed that the weight of low wage job have been increased relatively. Someone who is dovish argue this as the structural problem in labor market and secular downward pressure in wage, but another one who is dovish argue that the wage should increase rapidly at most and the ECI, which is consist of fixed weight of industries and jobs, showed rapid robust in 1Q, +2.6% on yearly base, and this meant the likely the possibility of increase of wage soon. That was ECI, but this ECI was very, very disappointed in 2Q, it was only 2% growth. Someone criticizes ECI as one of vulnerable data to interpret because the sample numbers is very small, and this low level was influenced by specific, sales job’s wage and the change of definition about retirement costs. But, including these perspectives, ECI was very low, apparently.

On the other hand, the commodities price would continue to face headwind due to a lack of demand led by Chinese economic slowdown and supply pressure from OPEC and US oil firms. Oil price had increased in 1H this year in line with the decline of US oil supply mainly, but investors were very disappointed to EIA’s report because they revised up the amount of supply from January to June this year. The faith on supply data in US diminished because of this upward revise. The oil price would continue to be pushed toward downside for longer time. This factor would make the inflationary environment more moderate, especially in 3Q and early 4Q this year.

2015.07.30 Daily

FOMC in last night was within market expectation that they should open the door to first rate hike in this year and the possible hike in September. I believe FOMC could afford to increase it soon although market expects December or next year. Not only US economy but also US financial market looks somewhat stronger than emerging countries’. The corporate earnings and sales were very solid rather than market expectation, so equity price could arise further. USD was appreciated maybe under the confidence of both of economy and equity market.

Apparently, US economy seems to be so firm with positive labor market and corporate profits, while pending home sales slipped last month which could mean subdued asset market not the inflection point. Contrary to US, today, Korean companies’ profits were very disappointed and cause the weak equity market. Korean economy looks very gloomy especially with Chinese economic slowdown. KRW turned to be depreciated against USD in 4 days again. In bond market, foreign investors sold their position in 2 consecutive days and yields were up by 1-2bps, today. That said, Korean financial market showed triple weakness.

Many strategists argue more weakening for Chinese equity market because they believe Chinese government has manipulated the market as using huge supports. They expect the unwinding of this in line with a suggestion from IMF who could decide whether Renminbi would be selected in SDR or not. They unlikely see recent upturn in residential market and Baltic dry index because they only focus on tumbled trade volume caused by Chinese economic slack. But, I want to advise them to think about the cause and ramification.

What is prior? Economic downside pressure or restructuring which have led the contraction in consumption from governors? Pessimists would likely or want to believe in first thing. But, we all know that the true is second one. It looks somewhat clear that Chinese government could handle their economy and financial markets at all, but pessimists have argued the panic market, maybe with their short-sell position for Chinese equity and would pray for this.

Today, SHCOMP was down -2.2%, and they likely are very pleasure with this. I see further volatility in markets not only in Shanghai but also other global financial markets. Likewise, in KTB futures market, the foreign traders seemed to be nervous today, but they could smile tomorrow.

We would meet the GDP data in US tonight, and this may decide the short-term direction in markets. But, it would be just one material under the market fluctuation at most. Anyway, pessimists could continue to dream the end of the world further. I much wonder the end of them, not of world. Deteriorated economy was just past event, from now on, the more important thing is to view the future after unprecedent monetary easing globally. As they continue to dream, almost markets price has been convergence to prepare big explosion. It would be much interesting.

2015.07.29 Daily

I missed to write the daily yesterday due to early finish up the work. From now on, let’s talk about KTB futures market and foreign traders, who I don’t call them for the investors.

I thought they deserved to buy KTB futures because they could gain from one of two sides, capital gain in futures price or KRW appreciation, or both of them. Meanwhile, they accelerated to buy futures in both of 3 year and 10 year market toward historical maximum position, and this seemed somewhat unacceptable for the market because it means they may have conviction that BOK should cut the policy rate soon or Fed might be dovish in coming FOMC. I think, they consider this aspect with technical analysis which is their main weapon in KTB futures market. Many markets in global including KTB futures and FX markets such as EUR, BRL, and etc have moved on a big volatility recently in line with the convergence of moving average lines. Continued convergence should lead explosion toward one direction commonly. And foreign traders maybe bet on strong KTB futures, I guess.

And then, their winning looks possible? It is maybe not. I expect range movement in many prices would continue further under two opposite factors, possible reflation and remaining deflation woes. Foreign traders in KTB futures market tend to follow the trend, and they usually won in the strong trend. But they sometimes failed to gain when market price moved in a box. I see this pattern as the second one. Yesterday, their recent profit was thrived by the weakened market with not special materials. I think they were embarrassed on it because UST yield dropped last day and Chinese stock market was down further although shaped a positive candle. They should feel the possibility that they could fail this time.

But, today KTB futures market was strong despite of the weak UST market and strong SHCMP. It makes me embarrassed. But I understand this as a simple volatility ahead of FOMC and a stupid short-cover by domestic investors. About coming FOMC, It seems not easy that Fed reveals the hawkish stance or signals first hike in next meeting yet. They should consider recent somewhat negative data, such as today’s consumer confidence index that recorded about 1.5 year low in labor market expectation especially and recent woes about Chinese equity market. On the other hand, they would be not easy to turn to be dovish, neither. They are afraid to be too late to start monetary tightening in terms of possible inflation. They would maintain data dependent stance and financial markets would move in recent ranges as well.

In short-term, all of market participants focus on the Chinese equity market and today is very strong spurred by capital injection by government. Does this mean the market trajectory should be downward soon? I have no idea. In fact, some colleagues already bet on Chinese equity market burst. People consider the excessive margin position only, although they see that position shrank rapidly. They do not seem to consider net short position to China.

2015.07.27 Daily

Let’s talk about three subjects, disconnected correlation between EUR and oil price, today’s tumbled Chinese equity market (black Monday?), and heavily stocked long position of foreign investors for KTB futures in both of 3yr and 10yr.

First, we saw the disconnected correlation between EUR and commodities price last week. What is implied in this? I understand this just as the volatility. EUR/USD faces the convergence of all of moving average, so it could be connected to too high volatility soon. Last week’s strengthen EUR would be in line with this volatility, I think. Dropped commodities price seemed somewhat odd as not only EUR appreciated against USD, but also BDI was high last week. Someone said this divergence could mean that market starts to focus on the economic fundamental, not on the monetary policy further. Combination of depreciated EUR and plunged oil price was driven by the power of some governments such as US and Euro area, he thinks. But for now, market recognizes these themes as be separated from each other under he argues. It’s possible, surely. But, I think this analysis seems somewhat hasty, because we experienced this only for one week under the recent market has moved with big volatility. I maintain my view that EUR would go to strengthen versus USD with improvements in Euro area’s economies and possible diminishing importance about ECB’s QE in 2H this year. And this would lead commodities price to be pushed higher at last in line with global economic rebound. Until then, all of markets would move with huge volatilities, I expect.

Second, Chinese equity market, especially in Shanghai market contracted rapidly by -8.5%, so someone called this black Monday. It’s somewhat regretful because today is the day that our project team about Chinese equity market published the material about the forecast of equity market and economic influences and would announce in the team meeting. We expected the movement in Chinese equity market and economic impact would be moderate under restricted negative wealth effect and willingness of control by government. But, the market is not easy. Anyway, we would face the headwind that global economy could be in downside risk with deflationary pressure in line with dropping commodities price. Recent adjustment in US equity market is affected by the expectation that 3Q would be hard to gain further earnings than 2Q that was showed firm or solid earnings. And on the economic fundamentals, it would be same. Under subdued inflation in 3Q, and with Chinese equity’s uncertainty, global players would want to see the world as the fear of deflation. Maybe they would be pleasure in 3Q, but their gain would be very restricted, I guess, because the big picture already is drawn on the opposite side. As someone argued, Fed seems afraid of 1966’s case which former Fed missed to start tightening policy. At that time, the projections about inflation failed to forecast the trajectory of CPI and wages. That said, the inflation could not move toward on linear path, if it starts to move. We would face the inflationary pressure soon, maybe in 4Q this year, I expect.

Third, how is KTB futures market? But, I don’t have adequate time to write… I will continue my article following this, tomorrow…. Sorry...

2015.07.23 Daily

Although I see yesterday’s KRW appreciation would be the inflection point to turn around toward appreciation with the pattern of named hanging man candle, USD/KRW exchange rate turns to increase rapidly today as Korean GDP number was disappointed and USD was moderately strong against EUR last night. Discouraging GDP data led the bull bond market in line with continuous buying KTB futures by foreign investors. I expected the peak point of KRW against USD would be the range from 1,160 to 1,170 under monthly candle analysis, but today’s exchange rate is 1,165.1 won. As further, today’s candle type is the big positive candle which signals possible appreciation further and strong momentum toward higher. Maybe the level in FX market would somewhat meaningless, I feel. If I am a FX trader, I was short on USD/KRW and would loss-cut today and initially get the new position to be long on USD. But, the amount of position would be somewhat small because I’m a little bit skeptical about some arguments expecting to be depreciated toward 1,200 won soon. Nevertheless, the momentum to be high seems very strong now.

In Wall Street Journal, there are some interesting articles today. One is about Chinese bond market opened to specific foreign investors recently. The third largest bond market in the world was opened to oversee central banks and sovereign wealth funds, but they seem to hardly feel attractiveness about that. WSJ points four reasons. First, the history in Chinese bond market is very short. This market hasn’t been through the whole cycle from current easing cycle to unforeseen tightening cycle that could cause the credit crunch, so market participants feel some afraid about this. Second, the on-shore yield is lower than off-shore yield. Main investors including money managers already invested in off-shore market’s bond and if the expected yield of this is higher than on-shore’s, they do not need to buy on-shore bond. Third, turnover ratio is very low. WSJ compare this with US and Japanese bond market, but I do not agree with this, because Chinese financial market is developing and would be more liquid at all. And last, there are too many securities in Chinese bond market. Foreign investors feel some difficult to study and select good securities among them.

Another one is some hedge funds to prepare for a liquidity drought. They see a kind of bubble in junk bonds market because too many retail investors were in this market through many vehicles such as ETFs that could lead the rapid outflow of hot money if US Fed starts monetary tightening. So, they increase cash position in their portfolio, buy CDS premium on some junk bonds, and buy put option against some ETFs. I think they see the junk bonds market as the bubble. But, as think further, it would mean whole bond market bubble in line with recent woes about drain liquidity in the market. I think we would face the strong headwind from irrational monetary easing like QE as this printing money starts to play in anywhere and thus inflation arises soon. If then, bond market sell-off could be realized and we would be so painful. But, I hope this inflation would come with reflation, not with stagflation. The opportunity could come that pessimists, the majority in the world now, would be blown out of the world.

2015.07.22 Daily

Let’s talk about Korean bond rate today. USD strengthening movement unwound yesterday and KRW appreciated a bit today. I saw its peak as 1,160~1,170 and I think it starts to turn around since today. Yesterday and today are maybe the inflection points in FX market. Foreign investors buying KTB futures seems so convenient because they saw this picture that the divergence of monetary policies between US and Korea deepen further as Korean officials pursue to easing stance in both of fiscal and monetary conditions despite Yellen, US Fed’s chairwoman seems to want to hike the rate quickly. On the other side, if Korean government has to increase policy rate despite the burden of household debt, foreigners could earn gains from KRW appreciation and this would be bigger than the loss from downward price of KTB futures. Or US fed could turn to be dovish on its policy stance. If then, foreign investors gain on both of capital gain from KTB futures and FX position. So, they seem to be very encouraged on their position.

In stock market, especially in US, after closing the market and announcing earnings of main firms including MS, stock price declined rapidly despite their earnings beat the market expectation. This point seems to be very meaningful. In US equity market, participants do not expect other good news further as I think. So, it would be the inflection point in short-term in equity markets. And if this scenario is realized, Fed’s stance for monetary policy could change to be dovish. That said, in short term, the opportunity to gain returns is on short USD and long bonds, I think.

2015.07.21 Daily

US treasury yield curve flattened last night in line with the expectation of Fed’s rate hike and short-end bond price was down. In terms of US rate hike, USD continued to strengthen and oil price was down, either. Contrary to bear market in US treasury, German bund rate rallied further following last week in line with the procedure of Greece’s deal with creditors.

Range movement in global bond markets would be continued with somewhat volatility and it would be underpinned by weak inflation expectation with low oil prices. Some analysts including Barcap argued that the inflationary pressure would be subdued in this summer with seasonal effect. Someone sees the Iranian deal with US as the willingness of US that does not want oil prices to be accelerated further. In this case, the oil market could lose the upside momentum for some time and this could cause the disinflationary pressures.

However, unless oil price moves toward much lower than current level, main focus would be on the effect on consumption side. Maybe in line with Yellen’s thought, earlier step in lowering oil price, people used to increase their saving, not consumption because the volatility means uncertainty for economic and sentimental factors. After lowering movement, however, if the momentum is moderate, individuals could increase their consumption demand due to expended disposable income from lower energy prices. This means reflation or possible demand side pressure to inflation. So, I expect global yield curve to steepen quickly at the end of this year.

On the other hands, how is the Korean bond market? Recently, KRW depreciation against USD is the hottest spot in the market. In currency market, fair value could be hardly calculated by fundamental analysis, so market players see the momentum mainly. They often see the three factors and say if those all factors indicate same direction, the momentum would be very strong. Those factors are the willingness of government, consensus by foreign investors, and supply and demand factor. And now, Korean government pursues to accelerate external investment from domestic capital and recently announced the policy to boost capital outflow despite the effectiveness of this is somewhat skeptical. And foreign investors focused on USD appreciation now. They seem to use short position in KRW because the yield spread between US and Korean treasury would continue to be narrowed ahead of Fed funds rate hike, and carry cost using KRW is relatively cheap. And last, supply of USD would somewhat limited because the export economy has been deteriorated recently and demand side of USD could increase in line with investment abroad and temporary demand for FX hedge in Chinese equity fund. In Chinese equity fund, if the price tumbles seriously, the demand for buying USD should increase.

Considering those three factors, KRW faces headwind against appreciation. Market players likely want to see the peak of the price. While the downward pressure of KRW, the bond sell-off by foreign investors is not strong yet. This is main different point in case of last currency shock. Some foreigners sold the KRW bond, but it seemed not as the trend yet. Rather, in KTB futures market, foreign investors started to buy both of 3 and 10 year futures. They seem to think current KRW depreciation would not mean a sort of crisis in Korea, and should get the chance for the timing to buy Korean assets.

How is the level? In a chart, the ceiling seems to open much higher, so it would be difficult indicate the target level accurately. But, in longer term chart, for example in the monthly chart, we could see the negative and thick leading span, and the lagging span meets the main moving average line and negative and thick leading span as well. So, I forecast the peak price of USD/KRW would be about 1,170 won. Now, it is about 1,159 won, so it seems very close to peak-out. If then, the winner would be the foreign traders who are buying KTB futures recently. Although Korean bond rate could be pushed higher, they could gain from FX positions with KRW appreciation, I guess.

2015.07.20 Weekly

Global Weekly Strategies

Drop in oil prices caused by Iranian event led long-end rate decline last week. For longer-run, global low potential growth rate is consensus in line with so called secular stagnation, so long-end rate has implied this prospect since last year. And what is the key risk factor? It would be the inflation risk sooner and market started to consider this expectation or woes depending on upturning oil price from its trough at about 40 dollar per barrel. And then, what is affecting oil price mainly? It is likely EUR currency. In terms of demand power, main consumption demand of OPEC countries is decided by EUR, not USD mainly because their almost import came from euro area. That said, EUR is likely a key factor on global inflation or long-end rates.

Before Greece deal with its debtors, I expect Grexit and its impact would be very limited because huge investment banks such as JP Morgan and Barclays Capital argued the possible Grexit already. The main risk of Grexit is not an impact on Greece’s economy, but a contagion risk to peripheral countries including Spain and Italy. As European economy started to robust since late last year, the contagion risk in them would be very restricted, so it is a timely good chance to throw out the old risk from Greece, I thought. If then, ECB would consider whether they have to remain QE program started on the woes from Greece problem, and then bond rate could be pushed higher like the case of 2013, so called US QE taper tantrum. QE tapering by ECB could lead EUR appreciation against USD, and this affect oil prices to increase. Long-end bond rate would be much volatile in line with both of tapering and inflation woes.

How about US? Fed chair, Yellen signaled the possibility of the first rate hike in this year last week. She revealed somewhat woes about the timing of fist rate hike. If Fed hike rate earlier, they could increase rate slowly, but in opposite case, maybe they have to hike the rate quickly and this would be a bigger risk than first one. That said, Fed wants to increase funds rate earlier, but market implied rate does not consider the dot table by Fed. So, like a former case, EUR appreciation, could make markets plunge to frustration in US bond market as well.

However, Greece seems to remain in Euro area for some time on a deal with credit debtors, especially with Germany. Depreciated EUR and bullish peripheral bond was the ramification of this, I think. ECB commented they would remain their QE program in last week’s meeting.

Whether EUR against USD appreciate or not could be affected by the economic cycle in Euro area, after all. So, my base scenario would delay to be realized.

The market will show fluctuations, especially in yield curve and breakeven in TIPS. The inflation risk or exit from deflation fantasy would be subdued for 2 or 3 months. But, if spread between short-end and long-end rate moves wider or breakeven decline, increase the steepener position or buy TIPS against 10 yr straight bond. On the other hand, UST 5-30 or 10-30 spread seems somewhat wide. I recommend betting curve steepeners on 10yr rate and short or mid-end rate, not on 30yr rate.

And about China, the hottest spot in global markets? I’m somewhat frustrated about this, but in my base line, the fundamental in China would be solid in 2H this year showed by some data of exports to China of their main trade partners and property market prices. Anyway, last week’s data such as GDP, FAI, IP and retail sales seems bluffing.

15.06.03 daily

US Treasury yield soared last night despite of struggling economic indicators including factory orders. While current indicators has not deteriorated, some investment banks forecast 2q gdp in US would be subdued at 2.5%. Market players see that last Yellen's comments started to pinch the market, especially in bond market, following bond yield to re-start to increase.

Since late last month, after Yellen's comment, US dollar turn around to appreciate and oil price to somewhat tumble and these caused emerging market assets to be dismal. But, last night was different. Though bond yield soaring seems to be caused by rate hike tantrum, US dollar appeared depreciation against euro in line with weakness at German bunds. Otherwise, oil price did not decelerated.

However, this picture is not abnormal in light of the case of 1994's. When Greenspan hiked fed funds rate rapidly, US dollar was not appreciated. Consumer prices maintained at low level and the economy excluding US, especially in Euro area, accelerated more than US, so EUR could be appreciated against US dollar.

And now? It looks like that case. Despite ECB continue QE, the economic indicators including inflation already started to improve since late last year when stress test for euro area's banks ended.

In this environment, it's sure that emerging market sovereign credit shows strong movement. In eastern europe, my coverage area now, the sovereign spread narrowed last night despite of US treasury yield increase under the burden of Fed rate hike that could drain liquidity from emerging market. The reason would be two. One is other liquidity conditions depends on ECB or BOJ should underpin global liquidity conditions. Another one is emerging markets' fundamentals are somewhat solid contrary to market consensus from bearish oil market views. If bear market of oil was already done, short-cover in oil-related countries would continue further. And without oil matters, we should re-valuate emerging countries' economic environments.

Geopolitical problems especially in Russia seems to be weakening since mid-last month, and about Greece woes, governors in Euro area could find clues, I think.

If then, market conditions since last year could turn around from deflation to inflation. And in this ample liquidity conditions, even if Fed start to hike the rate, should spur global economy toward reflation not secular stagnation.

In this environment, the condition for investment to emerging sovereign credit bond could be improved, I think.

In some countries in eastern europe, however, have some political problems.
It includes Turkey and Poland. But in Turkey, after this week's vote, capital inflows could be possible contrary to market consensus because this issue has been recognized in financial market for too long time. And in Poland, this could provide the opportunity for relative value trading, for example against Hungarian assets.

The worst country was Ukraine rather than Turkey or Russia. But, the sovereign spread in Ukraine narrowed recently and rapidly. It could provide a chance to get profit further.

In Russia and Turkey, from mid last month, financial market including fx, sovereign credit and local bond market show short-cover ended and bear market restarts.

But, I don't think this kind of bear market to be continued further. This is the chance to invest in emerging market, I think.