Brexit’s running for the most fruitless trade talks seems to have a contender in the Tratado de Libre Comercio de América del Norte - or more commonly known, to those of us not in the Spanish speaking world, as the North American Free Trade Agreement (NAFTA). The good news for Mexico (and for the US and Canada) is that at least NAFTA negotiations can be extended - as they were yesterday, to the first quarter of 2018. On news of this, the Mexican peso has rallied almost 2% from its weak point a couple of days ago.
As the excitement builds ahead of the opening of the 19th China Party Congress tomorrow, we hear that President Xi Jinping’s austerity drive will see the menu consist of only ‘four dishes and one soup’. Unfortunately for some, sea cucumbers and prawns will not be served this time round, complimentary fruit baskets will not be found in hotel rooms, and free haircuts and beauty treatments will no longer be on offer.
30 years ago today, London and the South East of the UK was hit by what is now known as the Great Storm, a 1 in 200 year event. Michael Fish, the BBC’s weather man, famously said before the storm had hit ‘Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way... well, if you're watching, don't worry, there isn't!’ Within hours the storm had caused record damage with the loss of 19 lives. Six of the seven oak trees - after which the town of Sevenoaks is named - were blown down. Overall 15 million trees were felled by the storm.
Ahead of today’s CPI data in the US, Federal Reserve Governor Lael Brainard was speaking at an event in Washington yesterday. She warned that ‘There does seem to be a very important, persistent, underlying trend in inflation, and there, a lot of the time-series work would suggest that we have actually seen a reduction in the underlying trend rate of inflation that’s material.’ Governor Brainard, who sits on the dovish side of the FOMC, has been a governor since June 2014.
Wall Street stocks rose, the dollar (DXY Index) touched a two week low earlier today and US Treasury 10-year yields shaved a couple of basis points following the release of the Federal Reserve’s September meeting minutes. These further confirmed expectations that interest rates could still be increased once more this year despite the notable dovish tone.
Although “staff continued to project that inflation would edge higher in the next couple of years and that it would reach the Committee’s longer-run objective in 2019”… “The risks to the projection for inflation were also seen as balanced.”
Today the US dollar seems to have halted the decline it had endured for the past few days. Treasury yields struggled to find their equilibrium yesterday, ending the day mostly flat, and are a touch lower today ahead of the forthcoming Fed meeting minutes. We should be able to see a little more detail on the discussions around unwinding the balance sheet and perhaps some important insights into the Fed’s view on the recent low core inflation figures. In any case, enjoy the finer points from what could be Yellen’s penultimate “full” Fed meeting (November and January meetings omit Economic Projections and Chair press conference).
The ‘petrodollar’ economy, set up in the 1970’s is coming under increasing pressure due to the expansion of the Chinese renminbi (yuan) usage in settling crude trades. The ‘petroyuan’ dates back only as far as 2012 when China signed a USD5.5bn currency swap agreement with the UAE whereby oil imports from Abu Dhabi would be settled in renminbi. Then in 2015, as a result of western sanctions, Russia began accepting yuan payments for all its oil exports to China; also considered an incentive to attract Chinese business away from Saudi Arabian oil imports which are priced in dollars. This trade works in both economies’ favour as Russia would rather purchase goods and services from China than go to the market and exchange the yuan.
The UK Prime Minister has been warned that her government only has 6 months to secure a transition deal or start to rapidly lose jobs to the EU. Sir Howard Davies, chairman of RBS said that companies, including his own, would start the process of moving jobs, warning ‘If there are no details by the first quarter of next year, the number of moves of people out of London will accelerate’. The warnings come on the back of what is looking like a failed attempt by some senior Tories to oust May. There are now reports that May will reshuffle her cabinet after meeting European leaders Oct. 19-20; with the possible big loser in the reshuffle being Boris Johnson.
It would appear that US domestic energy companies are issuing massive amounts of debt. However, unlike in previous years where oil was above $80 per barrel (until 2014) and proceeds from debt were used to expand production and fund ambitious growth strategies, companies are instead refinancing debt.
High yield US energy debt issued during September totalled $7bn which is about 31% of all high yield debt issued in the US during the month. In the energy sector, $15.2bn worth of investment grade debt was issued via 19 deals.
In what is the first state visit to Russia by a Saudi ruler, King Salman bin Abdulaziz today will meet Vladimir Putin to discuss oil markets, investment deals, the Syrian war and to deepen the nascent friendship between the two largest oil producers in the world. The delegations are tabling $3bn worth of energy deals with the possibility of a collective $1bn energy investment fund and a $1bn Sibur plant in Saudi Arabia; there’s talk of Gazprom Neft and Saudi Aramco establishing joint research projects; and interminable rhetoric on the “promising areas for bilateral co-operation.”
“Today a new moon is in the sky”, these were the newsreel reports 60 years ago, when on the 4th October 1957 Sputnik was launched into orbit by the Soviet Union. The shiny beach-ball sized radio transmitter, built in just 2 months, certainly ignited the space race and inspired many: the US formed NASA in its wake and less than 4 years later the USSR used the same R-7 missile to put cosmonaut Yuri Gagarin into space, in another 4 years Neil and Buzz would put American footprints on the Moon.
The new issue market has been a lot more active over the past couple weeks. There have been a number of interesting ones, including the Kingdom of Jordan’s USD 1bn offering, launched yesterday at 496.6bps over Mid-Swaps. The 30-year 7.5% 2047 deal is rated B1/BB-. Using the best rating, i.e. BB- we calculate the current risk-adjusted expected return and yield at 17.16%, and the bond offers only one notch of credit cushion. As regular readers will know, we would not look to add this issue to our portfolios, even if it does offer very attractive expected returns
Mariano Rajoy, Spain’s Prime Minister, this morning faces the Iberian Peninsula’s biggest constitutional crisis in living memory after the referendum in Catalonia overwhelmingly voted in favour of independence. According to Jordi Turull, the Catalan regional government spokesman, 90% of the nearly 2.3m Catalonians who voted yesterday (about 42% of those eligible) chose to vote for a separation from the rest of Spain. The number of ballots did not include those confiscated by Spanish police during the violence that erupted after Madrid declared the referendum unconstitutional and banned it. Nearly 850 people and 33 police are reported to have been hurt.
On 22 September Fitch affirmed its rating on Russia’s long-term foreign debt at BBB- and upgraded its outlook to positive from stable.
One of the reasons cited for the positive outlook revision is the improvement in the policy framework underpinned by the flexible exchange rate, ‘strong commitment to inflation targeting’ and a ‘prudent fiscal strategy’ reinforced by the recently approved budget rule. The budget rule uses a conservative oil price of $40 (real) and one positive aspect is that revenues in excess of the budget will be used to rebuild Russia’s fiscal buffers. The external and fiscal position is robust, Fitch estimate the net foreign asset position at a healthy 28% and the economic backdrop has improved: Fitch forecast 2% GDP growth for 2017 and 2.1% for the 2017/2018 period. Although he is still to affirm his candidacy, Vladimir Putin is expected stand for another term as President in the March 2018 elections implying policy continuity.
It would appear that both Hong Kong and Singapore are set to benefit from the Brexit situation and the onset of MiFID II through the global derivative market. The market is valued at around $483 trillion with the majority of transactions booked on balance sheets in Europe and the US. But with the onset of the new regulations in Europe the benefits of economies of scale and favourable Western regulations will be diminished.
Today the dollar continued its rally along with US equity indices whilst 10-year Treasury yields rose 5 basis points. The DXY Index is now up more than 1.4% so far this week; at 93.4 at time of writing, it is now back to where it was this time last month. Some of this may be due to profit taking from the recent rally in the euro (which is still up around 12% versus the US dollar year to date). The rest of the dollar rally and sell-off in Treasuries stems from hawkish comments from Fed Chair Yellen (and New York Fed President William Dudley) as well as market optimism over the anticipated tax proposal from President Trump later today.
Citing an increasing debt burden, S&P downgraded China’s long-term rating by one notch to A+ (stable), bringing it in-line with the other two main rating agencies (A1 and A+); this is the rating agency’s first downgrade to the country since 1999. Although Chinese authorities have taken huge steps in reigning in financial risks, particularly within the ‘shadow banking’ sector, debt has continued to grow, albeit at a slower pace more recently. The S&P move was no surprise, as such, market reaction was muted post the announcement, which suggests that asset classes had already priced in the downgrade.
One must wonder how the German chancellor Angela Merkel is feeling this morning, after her overwhelming, yet ultimately disappointing election result yesterday. Although Merkel’s conservative party took the largest share of the vote at 33%, this was down nearly 9% from the 2013 election, and the lowest percentage of the vote since 1949. Merkel’s coalition partners, the Social Democrats (SPD), also slumped to a postwar low of just over 20%, and have announced it will go into opposition.
Another bailout of a private Russian bank, this time of B&N, the 12th largest bank by assets, has been on the newswires. On Thursday the Central Bank of Russia announced that it will bailout B&N Bank although details are limited at this stage. This is perhaps interesting as B&N was not, unlike Otkritie, on a list of banks deemed as systemically important in Russia. But the Central Bank was keen to avoid a ‘domino effect’ and has intervened.
As expected, the Fed left the Federal Funds rate unchanged at 1-1.25% and announced that it would begin the balance sheet normalisation program in October. The move to begin normalising the balance sheet was already outlined in June’s ‘Addendum to the Committee’s Policy Normalization Principles and Plans’. Between October and December the Fed will reduce its Treasury and Agency securities by USD6bn and USD4bn per month respectively and the caps will gradually rise over the next year to a maximum of USD30bn and USD20bn per month.