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Selasa, 21 Juni 2011

It's all about QE3 - CLSA

Not much news flow here today. Market continue to be soft with shrinking volumes. Despite data continue to show strength in the domestic economy, negative sentiment in the regional markets has been dragging down resource names across the board here.

Have spent some more time reading Napier's report over the weekend, I have to agree that his overall thesis is very solid. The structural distortion we have witnessed in the US Treasury Market is about to unwind as he thinks the almost 2 decades long of recycling in current account surpluses in EM into US treasuries will end as most of these markets will now focus on a stronger exchange to combat inflation. So in the absence of foreign central bank buying, the private sector will need to step-up to fund the US$370B of Treasury Issuance per quarter to cover net issuance which is higher unlikely without a higher yield and/or lower inflation expectations.

However, the key differential of this very bearish report compare to previous one is based on the timing of QE3. He now believes there will be restrictions on launching QE3 until we see a big deflationary shock given the condition of the FEDs balance sheet and the extreme political pressure.

I am obviously no Napier but given the deteriorating data points coming out from the US (esp employment and home prices - both key focus for Bernanke) my guess would be some sort of money printing program will come sooner rather than later. Interesting to note Bill Gross from Pimco wrote last week that "QE3 is likely to take form of "extended period" language or interest rate caps on two-three year treasuries." The Fed could enforce these interest rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with target yields.

Worth to note that the current Fed balance sheet holds securities to less than 18% of GDP. This compares to 30% of GDP for the BOJ. For the Fed to match Japan, that would be another $1.8 trillion in securities.

Beaten up resources plays looking increasingly compelling.

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