Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
Speaker: This podcast was recorded on Thursday, the 19th of January, 2023.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello and welcome.
Speaker: After a challenging 2022, markets have started the new year with a much more positive tone.
Speaker: Can this continue?
Speaker: We look at how artificial intelligence and machine learning models can help us peer into the future.
Speaker: And we look at what's behind a big price correction in the oil and gas markets and ask whether the worst of Europe's energy crisis is now behind us.
Speaker: Hello, I'm Aline Van Dyne.
Speaker: And I'm Piers Butler.
Speaker: Markets have started 2023 in an upbeat mood with most major asset classes making gains.
Speaker: The big question is whether the worst is indeed over or is this simply a blip in a longer bear market for risk assets?
Speaker: In their latest report, our data science team used machine learning techniques to find out whether this shift in sentiment is justified.
Speaker: Mark McDonald, Head of Data Science and Analytics, joins us to talk through the findings.
Speaker: Mark, welcome to the podcast.
Speaker: Hi, thanks for having me on.
Speaker: So, Mark, very interesting that your models are pointing to a more positive tone ahead in the markets.
Speaker: Well, yeah, I mean, obviously the markets have started 2023 on a much more positive tone than many people were expecting.
Speaker: And the big question is, is this likely to continue or is it just a blip, a flash in the pan?
Speaker: And when we look at our predictive machine learning models, these are all trained with a sort of one month ahead look ahead window.
Speaker: So they're very tactical, but they're all pointing in the same direction at the moment.
Speaker: There's a great deal of positivity.
Speaker: So for example, our global equities pullback model that assesses how likely it is that equity markets will fall over the coming month, that sees currently only a 33% probability of equities falling.
Speaker: And we have a variety of different country level models as well.
Speaker: For example, the mainland China equity pullback model sees only a 7% probability of equities falling over the coming month.
Speaker: And these are very, very positive numbers.
Speaker: And the way that we use these models, you know, it's that the classic criticism of machine learning has always been that they're black box models.
Speaker: Data comes in and predictions come out and who knows why.
Speaker: But that's not valid anymore.
Speaker: So we don't just look at the probability that comes out of the model and the prediction.
Speaker: We look at the prediction plus the explanation.
Speaker: And we can see that for some of our models, like the pullback models, almost all the categories of inputs to the model are actually pushing the model in the direction of being bullish.
Speaker: It's a very broad-based signal.
Speaker: And the drivers of our various other models as well, they all make sense as drivers.
Speaker: So often it's things like, you know, macro data is coming in better than expected, particularly in the Eurozone.
Speaker: And I think it's really this expectations component that...
Speaker: that is quite an importance of the current market positivity.
Speaker: Is it unusual to see so many of the models pointing in the same direction?
Speaker: Like, just give us some historical context in terms of how strong these signals are that you're getting from these models.
Speaker: These are some very strong signals at the moment.
Speaker: We have a variety of different models.
Speaker: I'll talk about the different categories.
Speaker: One, we have a family of pullback models.
Speaker: These are models that assess equity markets on an absolute return basis.
Speaker: They're just asking the question, is a specific equity market going to fall over the coming month or not?
Speaker: Those models, different equity markets are correlated to each other and they have similar inputs to the models.
Speaker: So those models moving together is not that unusual.
Speaker: Although you will normally find in any typical week that you update the model that some markets are showing a high risk and some markets are showing at low risk.
Speaker: At the moment there are no models, there are no country level models showing a high risk of a pullback.
Speaker: So that's fairly extreme.
Speaker: We have our other models that are more relative return models.
Speaker: So we have Marvin, which looks at the trade-off between equities and bonds, and Remy, which looks just within equity markets, but our EM equity is going to outperform DM equities.
Speaker: Those two models are also showing very bullish.
Speaker: And the combination of all three of them lining up in the same direction is relatively unusual.
Speaker: It's noteworthy as well, given the expectations many people had coming into this year.
Speaker: And what about the risk on risk off signals?
Speaker: Yes, I mean, these, we look at a variety of sort of classic indicators of market stress based on, you know, analysis of volatility or correlations in the case of our risk on risk off indicator.
Speaker: We look at that really as a way of trying to assess what's the slightly longer term prognosis because these models of ours, they're trained with a one month horizon.
Speaker: So they're very tactical and them all lining up in the bullish direction is quite strong underpinning for the recent positivity to continue for the short term.
Speaker: But for the longer term, what we really need to assess is, are things improving?
Speaker: Are we over the worst?
Speaker: And so with our risk on risk off indicator, this measures the sort of aggregate strength of correlations amongst asset classes.
Speaker: And at the moment, we measure this over a six month window.
Speaker: And that correlation is currently very high over the last six months.
Speaker: And this is a typical sign of market stress, because what it's really telling you is these are very disparate asset classes.
Speaker: And if they're all super correlated with each other, then that means that they're really being driven by the same factor.
Speaker: And that is atypical and it's not a healthy market situation.
Speaker: If we look over much more narrow timeframes, let's say over the last three months, you can see that these correlations are really starting to dissipate.
Speaker: That stress is starting to weaken.
Speaker: And that is a good sign.
Speaker: It's a healthy sign for markets that markets are, individual assets are starting to respond
Speaker: to their own idiosyncratic drivers.
Speaker: And so that is definitely a positive tone.
Speaker: And there are other similar signals that we look at in data matters that track these kind of indicators.
Speaker: And many of these sort of signs of market stress are, they're high, but when you dig under the surface and look on a sort of shorter time frame or look more carefully at the analysis, then you can see that actually the
Speaker: the signs are that the stresses are beginning to dissipate.
Speaker: Mark, thanks so much and hopefully you'll be giving us more updates as we try and figure out how long the positive tone can last.
Speaker: Yes, of course, we'll be updating these frequently.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Newman.
Speaker: And you can find us under the banyan tree.
Speaker: Join us weekly on our new podcast where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
Speaker: Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
Speaker: Enjoy the rest of your podcast and we'll see you under the banyan tree.
Speaker: This week, we published a 2023 HSBC House Views Report, where our economists and strategists present their views for the year ahead.
Speaker: That's right, Piers.
Speaker: It brings together all the different asset classes.
Speaker: And just to highlight a few key trends for this year, in economics, China's reopening is clearly key and is expected to lead to a recovery, but it won't prevent a global downturn in early 2023.
Speaker: On the inflation front, we do expect a slowdown, but we aren't expecting rate cuts from the Fed or the ECB.
Speaker: in the coming year.
Speaker: And as for FX, we remain bearish on the dollar.
Speaker: And that's despite the uncertainties around the Fed, the outlook for the US economy and China's recovery, because we still think that the growth inflation mix will continue to improve.
Speaker: Yes.
Speaker: And in terms of fixed income views, we do think the peak in developed market bond yields was established last year.
Speaker: We expect bond yields to fall this year and curve steepening will be a key theme.
Speaker: And as a section on energy markets.
Speaker: And actually, that's what we're going to focus on now with Kim Fustier, head of European Oil and Gas Research.
Speaker: Kim, welcome to the podcast.
Speaker: Glad to be here.
Speaker: So, Kim, it wasn't that long ago that one was sitting at the kitchen table looking at our utility bills and thinking, gosh, this is really going to hurt with predictions of significantly rising gas prices and energy prices generally.
Speaker: Things are looking better now.
Speaker: What's happened?
Speaker: Yeah, you're right.
Speaker: Everybody was worried and rightly so.
Speaker: But it's been an extraordinary turn of events for gas markets in Europe.
Speaker: I mean, gas prices have more than halved since mid-December.
Speaker: So Europe, to be fair, had prepared itself for a tough winter, but it's also been lucky.
Speaker: So we've been effectively bailed out by a mild winter so far.
Speaker: We've had higher than average temperatures for nearly four weeks, and that's reduced gas demand for heating quite significantly.
Speaker: So gas demand for heating has been 30% down or more during that period.
Speaker: So that's helped a lot.
Speaker: But there's also been a market response driven by high gas prices.
Speaker: So Europe has attracted record levels of LNG, liquefied natural gas, and the high prices have also caused very steep demand reductions, both in the industrial segment and in household demand too.
Speaker: So what we've seen is storage going from what I would call comfortable levels in December to really plentiful levels right now.
Speaker: So we're actually at record highs for this time of year, despite the loss of Russian gas, which is remarkable.
Speaker: And that's actually good news, not only for what we're experiencing currently in this winter, but for next winter.
Speaker: I think that's right.
Speaker: I think we can say that in just about any scenario, Europe is definitely out of the woods for this winter, even if it gets cold again.
Speaker: Now, next winter does look better too, because high storage at the end of this winter will make it easier for us to refill.
Speaker: ahead of the following season.
Speaker: There's just one wild card to keep an eye on.
Speaker: And that's how quickly China's gas demand will bounce back.
Speaker: China's LNG imports fell last year for the first time ever.
Speaker: And so if demand bounces back quicker than we expect, then China will compete with Europe for very scarce gas resources.
Speaker: And that could pull up gas prices again in the second half of this year.
Speaker: Now, before we get too comfortable, it's fair to say that the situation on gas in Europe is still very tight and will be so for a number of years.
Speaker: That's right.
Speaker: So on the positive side, it does look quite likely that the worst of Europe's energy crisis and the peak in prices are now behind us.
Speaker: However, wholesale gas prices are still much higher than usual.
Speaker: They're still at two to three times higher than normal.
Speaker: And we think that they're unlikely to normalize for a number of years because there's very little new supply from the LNG side that comes online before 2026.
Speaker: And just to finish off, what's the outlook on the oil price?
Speaker: Are we expecting any further announcements from OPEC?
Speaker: I think there's many moving parts, as always, in the oil market.
Speaker: But the two key uncertainties for the oil market this year are China demand and Russian production.
Speaker: So OPEC doesn't really feature because they've already cut production a couple of months ago.
Speaker: So really, it's about China and particularly how quickly, again, Chinese oil demand rebounds.
Speaker: I think in the short term, Chinese oil demand is unlikely to immediately return to its previous highs because of high COVID cases.
Speaker: The other big wild card is what happens to Russian oil output.
Speaker: We're just a few weeks into the first round of EU sanctions on Russian oil.
Speaker: Russian production hasn't yet been impacted much, but there's a second round of EU sanctions kicking in in just two weeks' time, and this time on Russian oil products, specifically diesel.
Speaker: We are expecting this to significantly tighten the market.
Speaker: Kim, thank you very much.
Speaker: Thank you.
Speaker: So that's all from us this week.
Speaker: Thanks to our guests, Mark McDonald and Kim Fustier.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
