The markets are almost as quiet as the Big Ben (which is now under restoration for the next 4 years). Even with a couple of blips in the equity rally earlier this month and increasing tensions surrounding North Korea impacting every major economy the Vix has still remained below 16 for over 10 months now (after spiking briefly during Trump’s election news). The 1 or 2 day sell offs in equities did not (yet) materialise into anything more, and it seems that there’s very little out there that is able to move markets in a significant way. Of course we all know that this is too good to be or remain true. But one thing we’ve noticed is that this dampened volatility is also increasingly present on upside surprises.
Last week Amazon.com Inc. came to the market with a USD16bn multi-tranche bond deal; proceeds of which are said to be used to fund the USD13.7bn Whole Foods Market Inc acquisition. Demand came in at USD 48bn (3x oversubscribed), just shy of Belarus’ nominal GDP! Appetite for such a deal was no surprise to the market as Amazon is afterall a household name and its stock is worth five times as much as it was just over 5 years ago; while the S&P has barely doubled. However, despite the apparent appeal of lending to the e-commerce giant, the bonds did not make it to our portfolios due to the relative unattractiveness at issue.
With holiday mode prevalent and little in the way of tier 1 economic data releases, markets all appear to be looking forward to the Jackson Hole symposium which starts on Thursday. Both Fed Chair Janet Yellen and ECB President Draghi, amongst officials, will be addressing the summit.
The symposium is held annually at Jackson Hole Wyoming, a resort with the Grand Teton mountain in the backdrop. It has been hosted by the Kansas City Fed since 1978 and is attended by central bankers from around the world as well as leading players from the investment community, academics and finance ministers. The theme this year is ‘Fostering a Dynamic Global Economy.’
Fitch recently lowered its long-term foreign currency rating for the Republic of Chile by one notch to A from A+ and adjusted the outlook to stable from negative. The move reflects a ‘prolonged period of economic weakness and lower copper prices, which are contributing to a sustained deterioration in the sovereign balance sheet.’ They note ‘per-capita income convergence’ with its A-rated peers has weakened and while government debt to GDP remains below the A median it has risen from the low levels that underpinned the A+ rating. Fiscal policy remains prudent as spending has been pre-financed with tax increases but weaker copper revenues have eroded some of the fiscal space.
The Fed minutes from the 26th July meeting, released yesterday evening, were taken as dovish by the market; as the members expressed some concerns over the inflation outlook. The minutes highlighted that while many participants felt much of the recent decline in inflation had reflected ‘idiosyncratic factors’ many saw ‘some likelihood’ that inflation may remain below the 2% target for longer than expected. Some members stressed that there was room to be patient while ‘some others’ were concerned the labour market had already reached full employment, and a delay could lead to ‘an intensification of financial stability risks’.
There are certainly reasons to be appreciative of being British today; from those on Portsmouth dockside welcoming home the HMS Queen Elizabeth Carrier to those wading through the latest data from the ONS showing, for instance, that employment rate (75.1%) has hit its highest on record and unemployment (4.4%) is at its lowest in 42 years. But less so in regards to the first in a series of detailed Brexit position papers setting out the ‘Government’s vision… to build a new, deep and special partnership with the European Union’. Guy Verhofstadt, former Belgian MP, current MEP, EU Brexit negotiator and author of ‘Europe's Last Chance’, sums up the central stance of the papers as ‘a fantasy’.
Nafta talks are set to take centre stage in Washington tomorrow; where representatives from the US, Canada, and Mexico are expected to discuss the likes of: cutting the US’ trade deficit with Mexico, Canada’s wish to retain the ‘essential’ Chapter 19 panels, ‘rules of origin’, ‘Buying America’, climate talks, the digital revolution... amongst others. Some pretty high profile and strongly opinionated figures including Wilbur Ross and Bob Lighthizer will be pushing for both Canada and Mexico to increase their US imports, for example.
After Friday’s inflation numbers in the US, Dallas Fed President Robert Kaplan said he wants to see more confirmation that the Fed is making progress towards its inflation target. He stated, ‘I actually want to now see more evidence that we’re making progress in reaching our inflation objective’, and at the moment he is comfortable with the level of interest rates believing that they are ‘the perfect place for us to be’. On Friday, the inflation numbers missed for the fifth successive month. Both month-on-month and year-on-year were 0.1% lower than expected, coming in at 0.1% and 1.7%, respectively. Minneapolis Fed President Neel Kashkari also thinks that there is a good argument for a wait-and-see policy.
The U.S. government's Countering America's Adversaries Through Sanctions Act was signed into law by Donald Trump on August 2. For S&P it ‘has no immediate implications for Russia’s sovereign credit rating’ of BB+ positive on a foreign currency basis. Moody’s see the codification of the sanctions into law as credit negative for Russia as their reduction or removal will require congressional approval and may discourage FDI, although they have made no change to their Ba1 (stable) rating. They also see sanctions law as credit negative for Russia’s energy sector and Gazprom (Ba1 stable). The market has also taken a pretty sanguine view of events; at the time of writing US dollar denominated Russian Federation 4.25% 2027 and Gazprom 8.625% 2034 are trading higher on a month to date basis.
So, with free markets and competition rife, not to mention clean air policies and carbon footprints, West Virginia Governor Jim Justice, an interesting name for a politician, has requested Donald Trump to consider his proposal to subsidise coal from the Appalachian Mountains as a matter of national security. Mr Trump is reported to be considering the idea
10 years ago today, in the midst of US subprime mortgage market uncertainties and lingering ignorance, BNP Paribas blocked withdrawals from three hedge funds citing ‘The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating.’ Basically, we don’t know what these assets are worth, if anything. Many now see their move as the straw that broke market confidence, halted interbank lending and brought the extent of bad sub-prime assets hastily and plainly into sight. Also on the 9th August 2007, the ECB reacted to their concerns over the euro money markets launching a so called ‘fine-tuning’ operation injecting €95 billion into the banking system (followed by €61bn the next day, €358bn the next and so on). This and other central bank measures across the world clearly helped lessen the blow but weren’t enough to stop the snowball effect and within six weeks people were camping outside UK’s Northern Rock branches, fearful for their savings. We all know the rest of the story too well, which is perhaps not a bad thing.
With North Korea flexing its muscles, the first 100 days in office for South Korean President, Moon Jae-in have been testing. Despite the obvious distractions, Moon’s administration has already driven forth with some election promises, including a shift to an ‘income-led economy’; by way of introducing his five-year economic policy blueprint to address income inequality and encourage job creation. The presidential administration has also: had a supplementary budget (KRW 11.03tn) approved, introduced further policies to tackle speculative activities in the housing sector (including tightening mortgage rules), and unveiled a tax overhaul proposal.
When Federal Reserve Chairman Janet Yellen and her colleagues at the Fed meet to discuss inflation, one word that may have been adding to the discussion alongside oil, health and housing is Amazon. With Amazon’s ability to cut prices and pummel its rivals into submission there is now a growing feeling that, as Ed Yardeni, economist and president of Yardeni Research puts it, ‘Amazon is killing lots of businesses. In the process, it may also be killing inflation’. He went on to say, ‘Amazon arguably has done as much as the Chinese to kill jobs and keep a lid on inflation by enabling fast and easy price discovery for anyone with a cellphone’.
Today’s July non-farm payroll release showed 209,000 jobs added which was above expectations of 180,000 jobs created and the prior month’s reading was revised up by 9,000 jobs to 231,000. The unemployment rate edged lower to 4.3% from June’s reading of 4.4% although the participation rate edged higher to 62.9% from 62.8%. Average hourly earnings grew 2.5% yoy in line with last month’s reading of 2.5% yoy: this follows on from a muted Q2 employment cost index report which registered a 0.5% quarterly gain and a year on year rate of 2.4%.
Regular readers will know that at Stratton Street we are value driven, and often look at the world in a different way from many. One of our favoured regions over the past 10 or so years has been the Middle East. From a Net Foreign Asset perspective alone, most investment grade nations in the region have NFA ratings of 5 stars and above, or, NFA above 25% of GDP. Also until around five years ago, the Middle East was untouched by many indices, and local markets previously only held paper up to 10 years in maturity.
In addition to the continued political uncertainty in Washington, the North American Free Trade Agreement, NAFTA, negotiations start in a couple of weeks, on 16th August. Trump, who had threatened to rip up the agreement ahead of the presidential election last November has since decided to renegotiate the deal. However, as he describes the deal as ‘the worst trade deal in history’ his starting point may be fairly different from the other members, Mexico and Canada.
President Xi Jinping recently called for China to open its market further by improving the investment and market environment for overseas companies at the Central Leading Group on Finance and Economic Affairs meeting. He went on to say that China should look to ‘create a stable, fair, transparent and predictable business environment, and speed up efforts to build an open economy in a bid to promote the sustainable and healthy development of the Chinese economy.’
So another weekend goes by, and of course here in the UK things would not be the norm if the government had not made some sort of U-turn or had a cabinet split over the last couple days.
Last week, Chancellor of the Exchequer Philip Hammond had proposed a plan to allow European Union citizens to live freely, travel and work in the UK beyond the March 2019 cut off point, possibly until 2022. However, this idea was rebuked by the international trade secretary Liam Fox in an interview with the Sunday Times newspaper over the weekend, with Fox believing such a deal would ‘not keep faith’ with the result of the Brexit vote.
Earlier this week, the Saudi Government issued its first riyal denominated sukuk which comprised 3 tranches (3, 5 and 7 year maturities) and raised SAR 17bn (USD4.5bn). The issue was well received with SAR 51bn of orders: last year the government had focused its domestic fund raising in the conventional bond segment and the April issue of USD9 bn was an international sukuk so there was a lot of pent up demand for a domestic sukuk.
As widely anticipated, the FOMC left interest rates unchanged with all nine voters in agreement. Some comments were of note, on the balance sheet the central bank said, ‘the Committee expects to begin implementing its balance sheet normalisation program relatively soon, provided that the economy evolves broadly as anticipated’. This is a small change from ‘later this year’ which was the previous language. Essentially, this leaves the consensus market view that a ‘tapering of investment’ announcement will be made at the September 20th meeting, the next time the Fed meet.