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Posted Jan 17, 18:02

5 Near-Term Themes

5 Near-Term Themes Chart
Jan 17: 

You probably had your fill of "2020 themes", so why not another? The one spot to watch for a jolt to global growth in ... China. The US-China trade deal removes a major worry for Beijing, which may take action as soon as early next week to enact some stimulus ahead of a week of holidays starting on Jan 24.  Officials strongly hinted that another RRR rate cut isn't coming, but they are expected to cut the loan prime rate soon and may take additional stimulus measures on the fiscal side. That would be powerful -- and if they do, I see bright days ahead for the Australian, Canadian and New Zealand dollars.

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Inflation watch

A pair of US inflation reports this week were on the low side of expectations but there is a clear trend higher in core measures and wage growth (to a lesser extent). The Fed has confined itself to the sidelines but there is life in inflation. Heading into next month, we roll over some tough comps and that sets a lower bar. I think there's a chance that at some point this year, inflation is a major theme in markets and that sparks talks about central bank hiking.

Housing

Central banks haven't been able to spark broad based inflation, but they've been remarkably successful at creating asset inflation. With all the rate cuts last year, an underrated risk is a surprise rise in house prices globally. We're already starting to see signs of tighter market in New Zealand which just posted a 12% rise in house prices. Thursday's home builder sentiment numbers in the US were a bit stronger as well.

Oil

US shale oil is not what it appears to be. Every budget that comes out points to less spending this year and the market is laser-focused on return of capital rather than production expansion. Natural gas is worthless in many parts of the US and is being burned off at unprecedented rates. On top of that, the risks for the US election are higher in energy than anywhere else. The market is overly comfortable around $60 but a fall below $50 would create a real reckoning in shale and that has a multitude of knock-on effects, particularly in junk bond.

Iran

A week ago we were on the brink of war and now the world has forgotten about Iran. Geopolitics are impossible to price in. You can't price in half-a-war. The thinking now is everyone got to flex their muscles, but a report on Friday said that 11 US soldiers were concussed in one of the blasts. That puts to bed the theory that Iran was knowingly dropping bombs that wouldn't hurt anyone (assuming the report was true). The chance of Iran or Iran-sponsored militias launching attacks remains high and the situation could quickly spin out of control from them.

US election

The election is the one risk that everyone can point to and it's undeniable. The world will change on Nov 3 but it's a binary risk and that's tough to price in. At some point there will be a pre-election de-risking but it's tough to say whether that comes in the autumn or sooner. The following remains valid...so far: Trump is staying in the White House as long as a recession or a stock market crash are ruled out.

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