The Mexican peso has been one of the better performing currencies against the US dollar YTD (+6.5%). Progress on the renegotiation of NAFTA has helped investor sentiment, and while agreement still needs to be reached on certain contentious issues, US Vice President Mike Pence commented at the Summit of the Americas: ‘I’ll leave this summit very hopeful that we are very close to a renegotiated Nafta’. That said, the Mexican peso has seen some selling into the end of this week perhaps as investors focus on the Mexican Presidential Election to be held on 1st July where the hard-left candidate Andrés Manuel López Obrador (often referred to as AMLO) is leading in the polls.
Along with the Beige Book release yesterday we have had a queue of Fed Presidents/Board Members giving 1, 2 or 3 speeches this week including: Atlanta’s Raphael Bostic, Chicago’s Charles Evans, Philadelphia’s Patrick Harker, New York’s William Dudley, San Francisco’s John Williams, as well as Vice Chairman Randal Quarles speaking and giving testimony to the Senate Banking Committee. Moreover, later today, Board Member Lael Brainard addresses regulatory reform, Cleveland’s Loretta Mester delivers her economic outlook and Quarles continues his testimony… with Evans wrapping up his outlook and the week. And all this whilst long-short term Treasury spreads (take your pick: 2/10-year, 2/30s, 5/30s, 10/30s …) reach their narrowest since 2007.
Yesterday the IMF issued its latest semi-annual World Economic Outlook, in which it kept global growth forecasts unchanged at 3.9% for 2018/19. The report issued upward revisions of 0.2% for the US in 2018/19 (due to fiscal expansion) and Europe in 2018. Looking at the largest global economies, this year the IMF expects China to grow by 6.6% (6.4% ’19), the US by 2.9% (2.7% ’19), the Euro region by 2.4% (2% ’19) and Japan by 1.2% (0.9% ’19). The UK is predicted to grow by 1.6% in 2018, down 0.2% from earlier estimates, and just 1.5% next year.
Last week Moody's upgraded Spain’s long-term rating by one notch to Baa1, this follows S&P’s one step upward revision to A-. Moody’s stated its review “reflects the improvements to the credit profile seen in recent years, in particular enhanced economic resiliency due to an increasingly more balanced growth profile and improved banking sector fundamentals.” Although the nation’s fundamentals have improved, we still calculate the country has a 2 star NFA ranking, so it is therefore not included in our investable universe.
The economic calendar looks relatively light today (before China GDP, retail and industrial output tomorrow) meaning that traders and markets have been focusing on the weekend’s Western sorties in Syria and a number of other geopolitical pressures. The solemn worsening situation in Syria and its multi-faceted and far-reaching aftermath include: US’s further sanctioning (expected later today) on Russian companies tied to the production of chemical weapons; the discord within UK parliament on whether Theresa May’s prerogative to join US and France airstrikes goes against the spirit of the parliamentary process (including 15 years of convention) and undermines UN Security Council procedures; it hampers the likelihood of success for the forthcoming summit between North and South Korea and the potential meeting of Kim Jong Un and President Trump; puts pressure on Brent oil prices to remain around the current ~$70 range; it emphasises the urgency for the Organisation for the Prohibition of Chemical Weapons (OPCW) to be allowed to investigate the locations of suspected chemicals attacks; it opens further possibilities for Iran and Israel to deepen their conflict in the Syria region; and it still does little to support the people of Syria in the near-term (who are themselves split, with large protests over the airstrikes gathering in Damascus).
Bahrain recently announced a large discovery of 80 billion barrels of tight oil in place and 10-20 tcf of deep gas off the west coast of the Kingdom. Estimates put Bahrain’s proven oil reserves at 124.6m bbl. However, with further appraisal wells still needing to be drilled and more information needed to determine how much of the find is likely to be commercially recoverable reserves, an element of caution is warranted. Analysts and commentators have already been voicing caution about the potentially challenging geology, likely low recovery factor and likely higher production costs. Officials in Bahrain are hopeful that the production can begin within 5 years given that it is located close to a fully operational field.
They say an apology can be worth a lot, but in Mark Zuckerberg's case it seems more than most; following his characteristically dry but apologetic testimony and questioning by the Senate his company’s net worth rose $25 billion (and his own share up almost $3bn). So eating ‘umble pie’ and not mincing words seems to have played off quite well, at least in the short term for ‘Mr Sugar-Mountain’. But although the Senate, in some of their questioning, have demonstrated a farcical amount of tech ignorance, clearly their chief concerns remain valid. Now, it seems momentum is building for a ratcheting-up in tech and platform regulation - both enforced by the law and autonomously to appease kvetching users.
With a trend of chemical weapons use in Syria that, if uncontended, could be deemed standard practice by other warring states; and a pivotal moment in the war against Islamic State - it certainly doesn’t seem to be the best of times for the Trump Administration to head down this familiar road that has previously resulted in impeachment. After all, the FBI and Deputy Attorney General Rod Rosenstein must have had significant credence for the nerve to raid the President’s Attorney. As one former FBI agent stated, “I’ve been an FBI special agent for 20 years and have only seen a handful of searches executed on attorneys. All of those attorneys went to prison.”
According to sources, Chinese policymakers have been evaluating a number of policies including the potential risk of a renminbi devaluation; as concerns over a trade spat remain elevated. According to the article published on Bloomberg yesterday, “Senior Chinese officials are studying a two-pronged analysis of the yuan that was prepared by the government.” The one side examines the effect of using the currency as a trade negotiation tool, while the other evaluates the outcome of a RMB devaluation to counter any potential impact on exports resulting from proposed US trade tariffs. The obvious knee-jerk reactions followed the reports, which saw the RMB immediately depreciate against the dollar yesterday, but the offshore currency eventually closed 0.20% stronger.
After China launched a formal complaint to the World Trade Organization against the US, the spat continued in the ongoing tit-for-tat tariffs and declarations between the world’s economic superpowers. The state media in China took the bold step in calling for the commercial and industrial industries in the US to push back against Trump's plans for more tariffs on imported goods, warning the US ‘of getting burnt in the end by playing with fire’.
Today’s March non-farm payroll release showed 103,000 jobs added which was below expectations of 185,000 jobs created although this follows a strong report in February where jobs added were revised up by 13,000 to 326,000. Historically, March has tended to come in below consensus and there could be some weather related impact. The unemployment rate was unchanged at 4.1% from the prior month’s reading and the participation rate edged lower to 62.9% from 63%. Average hourly earnings grew 2.7% yoy, a touch higher than last month’s reading of 2.6% yoy.
In what is expected to be Russia’s most ambitious and pricey (USD 55bn) energy project in modern history, we heard this week that state-owned global energy giant Gazprom is 75.5% the way into completing the 3,000km Power of Siberia gas link to China. The project is expected to be completed “on time” with Russia supplying China with natural gas through the East-Route by December 20, 2019.
China has hit back hard today with retaliatory tariffs in a move that demonstrates their desire to draw a line in the sand for the US-Sino trade war and expose the US’s hubris detour into protectionism. Although the ~$50bn value of imposed tariffs from both sides looks comparable, the items and industries that China has targeted, including aircrafts, chemicals, cars and soybeans, will inflict much higher social and political pain than the high-tech focus of the US tariffs (for both countries).
So here we are in Q2’18, and we start with cries of horror that the Standard and Poor’s stock index has had its worst April start since 1929. Come on chaps it has been one trading session, and with a quarter of the investable world on holiday; although the concerns looking forward appear quite real.
We have often raised questions regarding the current Fed posture; broadly, it took six years of aggressive QE and historically low interest rates to get US growth up to around 2.5%. With the withdrawal of QE and the process of reducing the balance sheet, while at the same time tightening monetary policy through interest rates, this strategy has always caused us some concern, although the tax cuts will help in the near-term.
Bloomberg recently announced that it will add Chinese RMB denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index. The addition is expected to be phased in over 20 months starting from April 2019 and once ‘several planned operational enhancements’ are implemented by the PBoC and Ministry of Finance. Bloomberg note that enhancements such as ‘the implementation of delivery vs. payment settlement, ability to allocate block trades across portfolios, and clarification on tax collection policies’ still need to be made by the inclusion date to avoid any delays.
Monday’s stock market rally looks a little like a dead cat bounce (if that) with the S&P 500 rebounding off of its 200-day moving average (~2587) only to fall within striking distance again yesterday, touching 2596. Asian and European stocks furthering this decline today may mean that this floor gets tested again later this afternoon.
Beginning this week, the S&P 500 was flat ytd but the NASDAQ’s FANG+ Index of tech behemoths was up over 16%: mostly on the back of Netflix, Amazon, Twitter and Nvidia rocketing this year (+67%, +33%, +33% and +26% respectively). But with yesterday’s performance the S&P is now down -1.85% ytd and the FANG+ Index trimmed its 2018 gains to below 10% after falling over -5.6%: its largest hit on record.
Yesterday the first ever Yuan denominated oil futures began trading in China on the Shanghai International Energy Exchange. The launch of the oil futures is the first time foreign investors can trade commodity derivatives in China due to being registered in Shanghai’s free trade zone, and has attracted some of the world’s biggest commodity traders. However, it’s not the first time China has tried to introduce an oil futures market. The previous attempt in 1993 failed after just a year when the unmanageable levels of volatility made hedging impossible.
Abu Dhabi is set to continue further government related industry (GRE) consolidation this year as the Emirate strives to diversify its economy. This news follows the merger between strategically important sovereign wealth fund (the International Petroleum Investment Company (IPIC) and Mubadala Development Company) in January last year, and state-owned banks, National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) in 2016. The former merger is known as Mubadala Investment Co., with the latter better referred to as FAB.
One of Stratton Street’s core beliefs is that secular trends such as demographics are constraining growth rates: declining growth has been matched by declining inflationary pressures and lower interest rates. We do not see a reason for this trend to be derailed.
Japan is often pointed to as being one of the most advanced along this path. Nao Sudo and Yasutaka Takizuka’s January 2018 Bank of Japan Working Paper ‘Population Ageing and the Real Interest Rate in the Last and Next 50 Years’ makes some interesting observations in this respect. This study looks at past and future aspects using an overlapping generation (OG) model calibrated to Japan’s economy.
As has been well publicised and priced in by the market, the Fed hiked rates by a further 25bps yesterday, to 1.50-1.75%. As we mentioned yesterday, with this being Jerome Powell’s first FOMC address, markets were clearly keen on hearing what he had to say, especially after the latest core PCE and core CPI releases disappointed. Also, other key data points have remained mixed; retail sales, building permits and personal consumption have all surprised to the downside. Also of interest is the Atlanta Fed’s Q1’18 GDPNow estimate which has fallen to 1.8%; from as high as 5.4%, on February, 1.