Investment Rating - The report indicates a mixed investment rating across various sectors, with 38% of stocks rated as Overweight, 46% as Equal-weight, and 16% as Underweight [12]. Core Insights - The report highlights significant volatility in global equity and fixed income markets, with the S&P 500 index dropping over 6% and Japan's Nikkei 225 index experiencing a 20% decline before recovering [2][3]. - The changing narrative around US economic growth is identified as a core factor driving market volatility, with recent employment data raising concerns about a potential hard landing [3][4]. - The Federal Reserve's monetary policy outlook has shifted dramatically, with market expectations now pricing in over five rate cuts this year, compared to under two a month ago [3]. - The Bank of Japan's recent hawkish stance has contributed to global market fluctuations, indicating a divergence in monetary policy between the Fed and BoJ [5][6]. - In credit markets, the report suggests that recent weakness in spread products is justified, particularly in high-yield single B bonds, and recommends hedging against hard-landing risks [6]. Summary by Sections Market Overview - The S&P 500 and Nikkei 225 indices experienced significant declines in early August, with subsequent recoveries of about half of those losses [2]. - Market volatility remains elevated, with measures such as the VIX and MOVE indices reflecting ongoing uncertainty [2]. Economic Outlook - Economists maintain a base case for a resilient economy achieving a soft landing, expecting continued declines in inflation and three 25bp rate cuts in 2024 [4]. - Labor market data will be closely monitored, with a need for positive indicators to support the soft-landing thesis [4]. Monetary Policy - The Fed's path for monetary policy is under scrutiny, with a notable shift in market expectations regarding rate cuts following recent employment data [3][4]. - The BoJ's hawkish comments have led to a significant unwind of JPY carry trades, impacting global markets [5][6]. Credit Market Analysis - The report suggests that investors should consider hedges against hard-landing risks rather than liquidating cash portfolios, particularly in high-yield credit [6]. - Emerging market sovereign credit is expected to outperform high-yield credit, leading to a shift in preference [6].

Investment Rating - The report maintains a defensive stance and suggests staying with UST curve steepeners [1] Core Insights - Better-than-expected US data has improved global risk sentiment, reversing some repricing in central bank policies and exchange rates [1][5] - The upcoming US general election is expected to impact the US dollar, with a potential Republican victory likely to strengthen the dollar [1][15] - The report emphasizes the importance of monitoring US unemployment claims data as it approaches the reference period for the US establishment survey [5][11] Summary by Sections Interest Rate Strategy - In the US, the strategy includes maintaining UST 2s20s steepeners and re-entering September/November FOMC OIS flatteners [1][30] - The report anticipates a 25bp rate cut by the Fed in September, with discussions around a potential 50bp cut [1][49] Currency & Foreign Exchange - The report expects the USD to strengthen if global growth risks become a focus, particularly related to Republican campaign policies [1][15] - It discusses the implications of upcoming central bank meetings in Sweden and Norway, predicting a cut from the Riksbank and a hold from Norges Bank [1][12] Global Macro Strategy - The report highlights the significance of the US general election polling and its potential impact on market dynamics [1][8] - It notes that the breadth of weakness across industries challenges optimism regarding the labor market, as indicated by the private payroll diffusion index [5][11] Short-Duration Strategy - The report discusses the recent decline in RRP balances and the implications for funding conditions in the money markets [1][182] - It suggests that the risk of reserve scarcity is low into year-end, with expectations for higher reserves [1][191] Market Positioning - The report recommends maintaining short CAD/JPY positions and highlights the potential for further JPY appreciation if US economic data weakens [1][94][157] - It also discusses the positioning of various currencies in response to global economic conditions, emphasizing the bearish outlook for EUR and CAD [1][181]

Investment Rating - The report maintains a cautious stance on the A-share market due to rising global volatility and uncertain domestic policies, indicating a negative sentiment shift [2][5][12]. Core Insights - A-share investor sentiment has significantly declined, with the MSASI dropping to 36% (weighted) and 28% (simple), reflecting a 12ppt and 13ppt decrease respectively compared to the previous cutoff date [3][6]. - Northbound capital flows have experienced accelerated net outflows of US$2.4 billion during the first week of August, while Southbound flows have continued to show positive inflows for 24 consecutive weeks, totaling YTD net inflows of US$56.8 billion [4][11]. - The report highlights the weak export data from China, with nominal exports growing at 7.0%, below the consensus estimate of 9.5%, and a month-on-month contraction of -3.2% [5][11]. - Domestic deflationary pressures persist, particularly in the housing market, where contracted sales of major developers fell 38% year-on-year and 28% month-on-month in July [5][11]. Summary by Sections Market Sentiment - The weighted and simple MSASI indicators have dropped to 36% and 28%, indicating a notable decline in investor sentiment [3][6]. - Average daily turnover for ChiNext decreased by 12%, while A-shares and Northbound flows saw increases of 8% and 3% respectively [3][4]. Capital Flows - Northbound net outflows reached US$2.4 billion in early August, while Southbound inflows amounted to US$3.3 billion during the same period [4][11]. - Year-to-date net inflows for Northbound have declined to US$0.9 billion, contrasting with the robust Southbound inflows [4][11]. Economic Indicators - China's nominal exports data missed expectations, with a growth rate of 7.0% and a month-on-month decline of -3.2% [5][11]. - The housing market remains under pressure, with significant declines in sales and prices across major cities [5][11]. Investment Recommendations - The report suggests focusing on single stock ideas and thematic investing, particularly in SOE reform beneficiaries and high-quality dividend plays [13]. - A-shares are preferred over offshore investments, with a cautionary note on valuation premiums that have risen to 26% compared to MSCI China [13].

M Idea Japan Macro and Equity Strategy | Japan August 8, 2024 06:46 PM GMT Japan Equities and the Yen We update our JPY and equity views on the back of the recent market volatility. We also answer frequently asked questions from both fixed income and equity investors. Key Takeaways Incoming economic data may drive a further unwinding of JPY carry trades/FX- hedged activity from overseas equity investors. We retain a bullish JPY skew. We believe roughly 60% of JPY carry trades unwound, but acknowledge wide e ...

Investment Rating - The report maintains a positive outlook on Japan's equity market, suggesting that the recent correction has been overdone and expects a rebound in valuations [2][26]. Core Insights - The report indicates that Japan's reflation journey remains on track, with expectations for the Bank of Japan (BoJ) to raise rates at a measured pace [2][4]. - The recent appreciation of the yen is expected to have implications for Japan's inflation outlook, with forecasts suggesting a moderation in headline CPI [9][10]. - The report highlights that corporate wage growth is likely to be supported despite yen appreciation, as corporates have room to sustain wage increases [11][12]. - Consumption growth in Japan is anticipated to improve, driven by positive real wage trends and temporary income tax cuts [12]. - The sensitivity of yen movements to corporate profits is noted, with a weak yen supporting corporate profitability [13]. Summary by Sections Recent US Data - The report assesses that recent US economic data points to a slowing economy, but the base case remains that the US economy is resilient [3]. BoJ Policy Outlook - The BoJ's recent hawkish communication is viewed as potentially excessive, with expectations for a gradual rate hike rather than rapid increases [4][7]. FX Appreciation and Inflation - The report incorporates FX forecasts, suggesting that sustained yen appreciation could lead to a moderation in inflation forecasts, with headline CPI expected to reach 2% in Q4 2024 [9][10]. Corporate Sector and Wage Growth - Corporates are assuming an average USDJPY of 144.8 for FY2024, indicating sufficient room for wage growth despite potential risks from yen fluctuations [11]. Consumption Growth Outlook - Private consumption momentum is expected to improve, supported by rising nominal wage growth and tax cuts [12]. Sensitivity of Yen Movements - The report notes that a 1 JPY depreciation against the USD or EUR would boost operating profits across all industries by approximately 0.4% [13]. Equity Market Volatility - The report discusses the recent volatility in the equity market, indicating a record-fast bear market and high levels of margin-financed equity ownership [21][22]. Implications for Equity Market View - The report suggests that the recent correction in Japan's equity market is overdone, with expectations for a rebound in valuations driven by structural market drivers [26][27].

Investment Rating - The report does not explicitly state an investment rating for the industry Core Insights - The report discusses the need for fiscal reforms in China to address local government funding pressures and the challenges posed by debt, demographics, and deflation [2][4][9] - It outlines a five-year reform plan aimed at rebalancing central-local fiscal relations and increasing revenue sources for local governments [3][19] - The report presents three scenarios (base case, bull case, bear case) regarding the potential economic impacts of these reforms [31][40][42] Summary by Sections Fiscal Challenges - Local governments in China are responsible for over 85% of fiscal spending but face significant funding constraints due to a structural housing downturn and a 40% decline in land sales [2][9] - The augmented fiscal deficit has narrowed by 6 percentage points to 11.1% of GDP over the past two years [9][13] Proposed Reforms - Key measures in the reform plan include increasing central government spending responsibilities, allowing more flexible use of local government special bonds (LGSB), raising local governments' share in shared taxes, and expanding local tax sources [3][19][21] - The central government has allocated Rmb300 billion in ultra-long special treasury bonds to support economic initiatives [19] Economic Scenarios - **Base Case**: Real GDP growth is expected to remain subdued at 4.8% in 2024 and 4.5% in 2025, with a GDP deflator projected to rise from -0.5% to 0.2% [4][31] - **Bull Case**: A Rmb10 trillion stimulus could boost real GDP growth to 5% in 2024 and 5.2% in 2025, with the GDP deflator turning positive [5][40] - **Bear Case**: Premature tax hikes could lead to a decline in real GDP growth to 4.3% in 2024 and 3.2% in 2025, with the GDP deflator falling to -1% and -2% [5][42] Local Government Revenue - Local governments have increased the collection of non-tax revenues to address funding gaps, which may exacerbate deflationary pressures [10][18] - The report highlights the need for reforms in consumption tax to improve local government fiscal conditions, although the effectiveness of such reforms remains uncertain [48][51]

Investment Rating - The report suggests a positive correlation between a potential Republican administration and the strength of the US dollar, indicating a favorable investment outlook for USD-related assets [1][3][14]. Core Insights - The expectation is that the US dollar would strengthen if the Republican Party is perceived to have a higher chance of winning the presidency, reflecting historical trends from the 2016 election [3][5]. - Policies proposed by the Republican campaign, such as higher tariffs, could lead to a depreciation of foreign currencies, making US assets more attractive [1][3]. - Rising geopolitical uncertainty may drive investors towards US assets as a safe haven, further supporting the dollar [1][3]. Summary by Sections Economic Policy Uncertainty - Elevated trade policy uncertainty under a Republican presidency may support the US dollar, while regulatory and fiscal policy uncertainty under a Democratic administration may act as headwinds [15][34]. - The report discusses how various policy areas, including fiscal and trade policies, impact market expectations for US growth and the outlook for US financial assets [15][16]. Trade Policy and USD - Trade policy is identified as a central avenue through which the 2024 US election may influence exchange rates, with historical data showing that trade policy uncertainty has been associated with USD strength [36][37]. - The report highlights that US tariffs could negatively impact US growth expectations but may also lead to a stronger dollar if they result in reduced foreign competition [40][42]. Geopolitical Implications - Anticipation of renewed trade confrontations under a Republican administration may introduce a positive risk premium into the US dollar due to geopolitical considerations [65][66]. - The report notes that geopolitical risks are increasingly cited by firms as significant challenges, which may further bolster demand for the dollar as a safe haven [66].

Investment Rating - The report maintains a base case expectation of the Bank of Japan (BoJ) raising rates at a measured pace, with the next anticipated rate hike of 0.5% expected in January 2025 [2]. Core Insights - Deputy Governor Uchida emphasized that the BoJ will not raise policy rates while financial and capital markets remain unstable, indicating a dovish stance [1][3]. - The BoJ's interest in the US economic outlook has increased, with Uchida suggesting that the US economy is likely to experience a soft landing, which may influence BoJ policy discussions [3]. Summary by Sections Monetary Policy Stance - Uchida clarified that the BoJ's decision-making process remains consistent, stating that the bank will not raise interest rates during periods of financial instability [1]. - The conditions for policy revision include stable financial markets, with Uchida noting that significant movements in stock prices and foreign exchange rates are relevant [1][2]. Economic Outlook - Sustained wage growth is expected to improve, which could align with the BoJ's projections for the economy and prices if financial markets stabilize [1][2]. - The report suggests that the ongoing structural improvements in the domestic economy could satisfy the conditions for policy revision in the future [2].

Investment Rating - The report indicates a moderate investment rating for the Chinese economy, with expectations of a slight growth improvement in the second half of FY24, tracking GDP growth at 4.6-4.7% [2][4]. Core Insights - The Politburo meeting highlighted the urgency for more easing measures in response to the growth deceleration, with a pledge to reach the FY2024 growth target of 5% [4][25]. - There are mixed perspectives on China's economic outlook, with bullish arguments focusing on potential support for consumption and resilient exports, while bearish arguments emphasize ongoing downward growth momentum and weak domestic demand [2][7]. Summary by Sections Policy Easing - The report emphasizes the need for faster implementation of announced policies and preparation for incremental stimulus measures [5]. - The focus of policy easing is shifting towards household consumption, particularly in services, to promote urbanization and unlock consumption potential [5]. Consumption - The Politburo has called for more support for consumption, indicating a shift in policy focus [5]. - The report suggests that the effectiveness of these measures will depend on the implementation of predetermined policies [4]. Property Market - The impact of the "517 Housing Stimulus" has largely faded, with home sales returning to early May levels and a noted decline in prices [25]. - The report indicates that price adjustments alone may not stabilize the housing market, as they could lead to weaker consumer sentiment and higher risks of mortgage delinquency [25]. Industrial Capacity and Inventory - There is a noted involuntary buildup of industrial inventory due to weak domestic demand, which could negatively impact industrial production [13]. - The report highlights that the YoY growth of inventory has accelerated, indicating passive restocking amid insufficient demand [13]. Tax Revenue - Both corporate and personal income tax revenues contracted YoY in 2Q, reflecting a divergence between real GDP growth and sluggish sentiment [20]. - The decline in tax revenue is constraining government spending capabilities, potentially leading to a deflationary loop in the economy [20]. Construction Activity - Demand for rebar and cement remains at multi-year lows, reflecting ongoing deleveraging in local government financing vehicles and the housing sector [29]. - Infrastructure investment growth is primarily driven by electricity production, while local government construction activity has decreased [29].

Investment Rating - The report maintains a positive outlook for certain Quantitative Investment Strategies (QIS) while being less constructive on FX DM Carry and Equity Momentum [1][4][28]. Core Insights - The report highlights a shift in the investment hypothesis characterized by lower monetary policy rates in many countries and a soft landing for the global economy, although uncertainty has increased [1][4]. - QIS strategies expected to perform well include Rates Trend, Rates Long Straddle Replication, Equity Value, Equity Quality, and Equity Relative Value with VIX Volatility Carry [1][4][13]. - Strategies anticipated to face challenges include FX DM Carry and Equity Momentum due to recent market volatility and economic uncertainties [1][4][28][29]. Summary by Sections Backdrop - Recent market volatility was driven by soft US employment data and disappointing ISM Manufacturing PMI, leading to increased uncertainty about economic growth and a higher expectation of a Fed rate cut [4][5][9]. Fundamental Outlook - The Chief Global Economist at Morgan Stanley expects a soft landing for the US economy, with policy rates projected to end 2024 at 4.625% in the US, 3.25% in Europe, and 0.25% in Japan [10][11]. Performance of QIS - Year-to-date performance of key QIS strategies averaged +2.2% annualized, outperforming the long-term average of +1.8% [10][11]. - Despite recent volatility, QIS strategies generally delivered positive returns, although some strategies like Trend Following and FX DM Carry underperformed [10][11][16]. Specific Strategies - **Rates Trend**: A constructive outlook for medium-term rates Trend-Following strategies is noted, with signals turning flat to positive for US and European rates [16][20]. - **Long Straddle Replication**: This strategy is expected to benefit from current market volatility, providing convexity to portfolio returns [22]. - **Equity Value and Quality**: These factors are favored for their defensive characteristics in market corrections, with a combination of both recommended [22][23]. - **Equity Volatility Carry**: Implied volatility is above its historical average, indicating a substantial volatility risk premium, presenting an entry point for volatility strategies [22][23]. Challenges for Certain Strategies - **FX DM Carry**: This strategy has underperformed due to a strong JPY and is expected to continue facing negative returns [28]. - **Equity Momentum**: The strategy is anticipated to deliver below-average performance due to reduced signal intensity and heightened market volatility [29].