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The Short View is primarily about recent, short term market movements in key asset classes (equities, bonds, rates, currencies, commodities and volatility). Much of the thinking in the product is based on positioning and sentiment shifts. The product draws upon the Commodities Futures Trading Commission’s (CFTC) ‘Commitments Of Traders’ report (COT), which is published each week. We use the data in this report that relates to speculators, and include it as part of our analysis of recent market price action across key asset classes (and then outline our conclusions in the Short View publication).

"Copper: LONG Trade Brewing"

"Over the next year or so, copper prices face multiple headwinds. In particular, the key drivers of Chinese copper demand should deteriorate further (in both the power and property sectors), while copper supply growth is likely to reaccelerate, as we highlighted last week. 

Markets, though, don’t move in straight lines. Indeed, on a 1 - 6 month time frame, there's room for a copper rally (potentially counter trend) given our technical, positioning, and sentiment models. In particular, price action has been bullish in recent weeks and months, with copper (i) holding above/rallying from its key support level ($3.51/lb); (ii) breaking above its downtrend line (which has now become a key support level); and (iii) following China’s 50 bps RRR cut overnight*, rallying from its 200-day moving average.

The copper price is also performing well from an order flow perspective, having rallied significantly from its ‘point of control’ (that is, the price at which volumes have been at their highest in the past 50 trading days, shown as the red line in FIG B below) to the top of its ‘value area’ (represented by the blue lines, where 70% of copper futures volumes have been traded in the past 50 days)."

The Quarterly Global Asset Allocation is a recommendation for a global portfolio comprised of equities, bonds, commodities, credit and cash with a six to twenty four month investment horizon. The recommendation is based on our assessment of the global economic cycle, the current key investment/macro themes, our assessment of market valuation and analysis of other key factors which drive medium to long term investment cycles. Each quarter there is a section with a detailed analysis of the economic cycle in the USA, Eurozone and China. There is also a section dedicated to valuation across all key asset classes, as well as a front section with detailed recommendations and rationale.

"Positioning Ahead of a Summer SELL-off"

"Risk assets have performed well in recent months. Global equities are up 25% since their October low; several country indices have made new record highs; and credit spreads/other risk premia have tightened (in some cases dramatically, e.g. see BTP spreads over Bunds). Elsewhere volatility across certain major asset classes has fallen/trended lower (e.g. with FX vol falling to a two year low).

Unsurprisingly, therefore, consensus thinking in markets is reasonably bullish. There’s no longer talk of a US/global recession, cash levels in portfolios have fallen to low levels, and sentiment towards equities has risen to a 20 year high (e.g. see fig 1 below)1.

In December last year, we moved from meaningfully underweight risk assets (primarily equities) to modestly OW risk. In recent months, we’ve been adding to the OW risk position. We’ve increased weightings, for example, in gold and Chinese equities and have reiterated the case for staying OW Japanese and Spanish equities. 

The key question, therefore, is: Given such strong gains in global markets in recent months, has the risk reward changed? And, how should asset allocators, with a 6 – 24 month time horizon, position their portfolio?"

Longview Letters look in depth at key long term themes which relate to the outlook for global financial markets & the global economy. These thematic pieces aim to provoke thinking and often form the basis for podcasts and newspaper editorials.

“US Fiscal Indebtedness: Carry on Regardless”

“The world is awash with debt. As laid out in the IIF’s latest press release above, most of the growth in global debt has come from a few key countries (including the US).

For investors in government debt (and related currencies and equity markets), that raises a number of critical questions. In particular, does it matter? Do investors need to worry about the rapid accumulation of US government debt in the past 15 years (fig 1)? Does it matter that France is electing a left leaning government with (fiscal) plans to spend more? How has Japan managed to run fiscal deficits for 30 years without a crisis? Is that a signal that investors don’t need to fret about the US fiscal position? But if it does matter, then when? And what are the triggers/signs to watch out for?

Indeed, whether or not it matters, it is certainly one of the key concerns of investors around the world/usually brought up in meetings (but also one about which nothing is done). 

Given the size of the debt, that concern is not surprising. Single-handedly US government debt accounts for 14% of world non-financial debt. On last count there was $34.8 trillion of outstanding US government debt, up from $23.2 trillion immediately prior to the pandemic, $12.3 trillion just after the financial crisis, and as low as $5.7 trillion at the turn of the millennium (fig 1). With that, US government debt to GDP is now running at 122% of GDP (fig 2) – above its 1946 post WWII peak (although below the UK’s WWII peak of over 250%). With fiscal deficits set to stay high, that ratio will continue to trend up. According to the IMF’s projections it will reach 133.9% of GDP by 2029. The US’s CBO longer term projections forecast a ratio of 166% by 2050. The outcome of the November election, naturally, could accelerate that move higher (with the 
Trump camp, for example, talking about more tax cuts)."