The Daily Update - The Tinder is Still There

The Daily Update - The Tinder is Still There

Last year, on the 19th October, we wrote a daily entitled 30 years ago today, stating that 30 years earlier we had Black Monday. Whilst re-reading that daily I found the last paragraph particularly interesting. We wrote /-

So, are we going to see a repeat anytime soon? (of Black Monday) US equities have been on a multi-year bull run, money has been cheap, there are asset bubbles globally, North Korea, Brexit, Italian Banks, Greek debt, the rise in populism, consumer debt, the leader of the free world…

The Daily Update - Balance Sheets, Net Foreign Assets and The Bigger Picture

The Daily Update - Balance Sheets, Net Foreign Assets and The Bigger Picture

By now you’re likely to have already seen the bashing of Britain’s balance sheet by press – citing the latest IMF Fiscal Monitor Paper. Indeed a minus two trillion pound net worth (3tn in assets minus 5tn of liabilities) is a great headline and a terrifying prospect for those likely to bear this future tax burden. It’s also an embarrassment for many governments (including the UK’s) that have weakened their country’s long-term financial health significantly since the Global Financial Crisis: privatising illiquid assets to create the illusion of lowering public debt and assuming corporate liabilities (UK by 189% of GDP from 2007-08).

The Daily Update - Italy and budgets, Presidents and cream

The Daily Update - Italy and budgets, Presidents and cream

Italy's 2019 budget approved by the cabinet on Monday includes a basic income for the poor, lowers the retirement age and offers a partial amnesty to settle tax disputes. (Here’s a question, is Italy the only country in the world to be lowering the retirement age?). Prime Minister Giuseppe Conte and his top ministers told reporters on Monday. Speaking after the cabinet signed off on the budget bill, Deputy Prime Minister Luigi Di Maio said the basic income to relieve poverty would kick off within the first quarter of the year.

The Daily Update - Powell's anchored inflation belief

The Daily Update - Powell's anchored inflation belief

In a speech earlier this month, Federal Reserve Chairman Jerome Powell said he believed that inflation remained anchored and did not see any signs that it would spike despite the low unemployment rate, adding that he was not worried the Phillips curve ‘will soon exact revenge’. Talking at the National Association for Business Economics, Powell puts a strong emphasis on the anchored nature of inflation expectation in his thinking about the “dormancy” of the Phillips Curve.

The Daily Update - Pemex Oil Discoveries

The Daily Update - Pemex Oil Discoveries

President elect Andrés Manuel López Obrador (aka AMLO) is not due to take office until December creating an element of uncertainty about changes to Mexico’s energy reform programme.  However, AMLO does seem to be taking a pragmatic approach, particularly given the government’s goal to drastically increase oil production: it is targeting to boost Mexico’s oil production to 2.48 m b/d by 2024.  Rocio Nahle, the incoming energy minister, stated ‘We will respect the rule of law and the agreements that have been made with the outgoing government’.

The Daily Update - Are We Safer? IMF Global Financial Stability Report

The Daily Update - Are We Safer? IMF Global Financial Stability Report

Are we safer a decade after the Global Financial Crisis? This is the heading and theme of this month’s IMF Global Financial Stability Report which marks 10 years since the GFC. The very fact that question needs addressing seems troubling in itself after a decade of financial engineering and regulatory reform.

The hundred pages of useful charts, data and commentary are focused on two key themes.

The Daily Update - IMF and a Default Within a Default

As the IMF and sister institution, The World Bank, prepare to meet next week in Bali for the annual meeting of the 189 member nations they warn of the impact of the current trade war between the US and China. They downgraded world growth by 0.2% to 3.7% for this year and next, but the big change comes in 2020 where they think a continuation of trade tensions could knock global growth by 0.8%. They also warn that if President Trump carries out all his threats of escalation that as soon as next year output could fall 1.6% in China and 0.9% in the US according to their models.

Further, IMF concerns are for a ‘sharper rise in interest rates’ which would accelerate capital flight from emerging economies and therefore they have cut their growth outlook for Argentina, Brazil, Iran and Turkey due to a number of factors including continued tightening credit conditions.

In the UK they also moved growth down now expected to be 1.4% for 2018 and 1.5% in 2019 but included the caveat that ‘Tariffs on trade with the European Union are expected to remain at zero, and nontariff costs will likely increase moderately.’  More faith in PM May than the British press then.

Moving swiftly along, Puerto Rico over the years has issued billions of dollars’ worth of bonds and currently is trying to reschedule around $17bln in sales tax-backed bonds (COFINA). According to reports Puerto Rico had $74bln in bond debt and $49bln in unfunded pensions liabilities as at May 2017.

However, the criteria applied by the government and the Financial Oversight and Management Board created by Congress is coming in for criticism as some observers  suggest they seem to be ‘saddling Puerto Rico with escalating debt payments for the next 20 years by an unrealistic assessment of the economy’s ability to pay’. Sounds like a country to continue to avoid, unless you are in the market for defaults within an existing default.

The Daily Update - PBoC Cuts RRR Again

The Daily Update - PBoC Cuts RRR Again

For the fourth time this year,  the PBOC cut the required reserve ratio (RRR), this time by 100 basis points, hence releasing funds to help bolster the economy and repay maturing debt. The cut will come into effect on the 15th October. According to the PBoC, the result of the cut will inject nearly USD110bn into the banking system, however, the central bank maintained the move in monetary policy is still prudent and neutral — not accommodative. The RRR for large commercial lenders will be reduced to 14.5% and for smaller banks to 12.5%.

The Daily Update - Non-Farm Payrolls

The Daily Update - Non-Farm Payrolls

This week’s stronger than expected September ADP report and a strong September non-manufacturing ISM report in conjunction with Fed Chair Powell’s comment that policy was ‘a long way from neutral’ has put bond markets under pressure.  The glass has definitely appeared half empty rather than half full of late. All this has not been helped by a continued heavy Treasury issuance schedule to fund the burgeoning fiscal deficit. US fiscal stimulus at this stage of the cycle has significantly increased the risk of a policy mistake while trade tensions represent a significant risk to the global growth outlook.

The Daily Update - Borders and Unions

The Daily Update - Borders and Unions

Ireland has come out in support of British Prime Minister May’s plan to sidestep a hard border cutting through the island of Ireland. Ireland want to avoid needing to enforce customs in €65bln in trade with Britain each year, and May is fighting to avoid the same between NI and Britain (hopefully bringing the DUP back on side) and of course any outcome better than a no-deal Brexit.

The Daily Update - Pre-Crisis Junk Premiums Signals Caution

The Daily Update - Pre-Crisis Junk Premiums Signals Caution

Today marks a new low, not just for Aston Martin share prices and US Presidents’ tax scandals, but also for speculative bond risk premiums. US junk bond spreads have fallen to their lowest level since before the global financial crisis. With US 10-year treasuries ebbing between 3.03% and 3.11% following the latest Fed rate hike and ongoing inflows more than filling the supply of sub-investment grade debt, yesterday the difference in yields reached its narrowest since July 2007.

The Daily Update - The FED and R-Star

The Daily Update - The FED and R-Star

New York Fed President Williams was speaking yesterday and we thought his comments needed further investigation, he was speaking about the Fed neutral rate:

‘In addition, as we have moved far away from near-zero interest rates, it makes sense to shift away from a focus on normalizing the stance of monetary policy relative to some benchmark ‘neutral’ interest rate, often referred to as ‘r-star.’ …

The Daily Update - New NAFTA / Blinkered Italians

The Daily Update - New NAFTA / Blinkered Italians

Late last night, the United States, Mexico and Canada reached a new tri-lateral trade agreement that will replace the North American Free Trade Agreement (NAFTA) it was announced. Talks on the new deal have been ongoing for more than a year to replace the 24-year-old NAFTA agreement, which Trump famously called ‘the worst deal ever’. The new pact, which is being called the U.S.-Mexico-Canada Agreement (USMCA), will come up for review in six years, which, according to a senior American official, will give the US a ‘significant new form of leverage’ to make sure the agreement continues to be to the US’ liking.

The Daily Update - ECB Warnings and Displeasure

The Daily Update - ECB Warnings and Displeasure

Peter Praet, the European Central Bank chief economist yesterday said that the ECB’s  policy of holding interest rates at a record low level over a prolonged period of time could have the potential to endanger stability. Although he does not believe the eurozone is yet at risk from asset bubbles, he believes individual countries need to sanction local measures to head off problems. As it stands Praet believes the eurozone still needs ‘significant stimulus’ and he can see no discernible risk apparent, however that is not to say things can change.

The Daily Update - FOMC Rate Decision

The Daily Update - FOMC Rate Decision

As expected last night the FOMC raised the federal funds rate 25 bps to 2.00-2.25%, with the forecasts for the dot medians unchanged at 2.375%, 3.125%, and 3.375% for 2018, 2019, and 2020 respectively and the 2021 median now coming in the same as 2020 at 3.375%. The Fed also revised up from their June forecast of GDP growth for both 2018 and 2019, however generally retained their view that the growth rate will drop back to 2% in 2020 and 1.8% in 2021.

The Daily Update - Trump Vs Rouhani

The Daily Update - Trump Vs Rouhani

Ever the shrinking violet, Donald Trump declared in a speech to the UN yesterday that ‘I stand before the United Nations General Assembly to share the extraordinary progress we’ve made. In less than two years, my administration has accomplished more than almost any administration in the history of our country’. He later claimed that the statement was tongue in cheek, however given that he has a history of self-admiration, may we suggest a pinch of salt?

The Daily Update - Leverage Lending

The Daily Update - Leverage Lending

The Bank of International Settlements (BIS), widely known as the central bank for central banks, in its latest report warns about high-risk lending. They are ringing the alarm bells not just about the total amount of debt but the fact investors appear less and less concerned about protecting themselves against losses.

According to the BIS the total of leveraged loans and high yield bonds outstanding in the US and Europe has doubled to $2.65 trillion since the financial crisis and while high yield accounts for more than half of the amount, leverage loans now account for around 45%.

The Daily Update - OECD Downgrades Growth

The Daily Update - OECD Downgrades Growth

On Thursday last week the Organization for Economic Co-operation and Development (OECD) downgraded its 2018 and 2019 forecast for economic global growth, warning the lower growth prediction was in a large part due to increased global uncertainties. In its latest interim economic outlook report, the OECD stated that ‘Global growth is projected to settle at 3.7 percent in 2018 and 2019, marginally below pre-crisis norms, with downside risks intensifying’ adding ‘Policy support and strong job growth continue to underpin domestic demand, but some emerging market economies are facing significant headwinds from rising financial market pressures’.

The Daily Update - Saudi Arabia & Oil

The Daily Update - Saudi Arabia & Oil

Brent crude continues to look to test the USD 80 per barrel level helped by the US sanctions on Iran which are due to take effect in November but are already hitting crude export volumes out of Iran. Thus, the market is starting to look to the OPEC and non-OPEC producers’ 23 September meeting in Algiers for guidance: given potential supply constraints from Iran and Venezuela and seeming pressure from the US to avoid a spike in prices ahead of the midterm elections some action or talk to maintain prices in the USD 70-80 range looks likely.

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