As was widely expected, MSCI Inc. announced that it is to include Chinese A-shares on the world's most followed Emerging Market Indices; a symbolic victory for China. According to the statement, 222 of China’s large-cap onshore stocks will be included in the MSCI Emerging Markets Index via a two phase process from May to August next year. MCSI stated: ‘This decision has broad support from international institutional investors ... primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements’.
Saudi Arabia’s Deputy Crown Prince Mohammed Bin Salman was named as the heir to the throne in a palace shakeup yesterday. The king’s decision to elevate his son who is 31, who already controlled the defence, oil and economy portfolios, was supported by 31 out of 34 members of the Allegiance Council, made up of senior members of the ruling Al Saud family. This broadly puts an end to a power struggle between Mohammed Bin Salman and his cousin Muhammad Bin Nayef who reportedly backed the royal decree in a letter to King Salman. This is important as Prince Salman has been the driving force to diversify Saudi revenues from oil, but also gives him more of a free hand in the management of the Kingdom.
Argentina gained independence some 200 years ago, and since then it has defaulted on its external debt seven times, and on its internal debt five times. So one might not be surprised if over the coming century there was one or two concerns with lending to the country, but of course there is ‘a price for everything’.
Yesterday, Argentina issued a 100-year bond, the Argentina 7.125% maturing 28th June 2117. The deal came as a private placement with USD 2.75bn issued at a price of $90.00 which is a spread of +514bps over the US long bond for the B3 expected rating from Moody’s. So this bond has a duration of a little over 20 years.
Finally, almost a year after the UK voted to go its separate way from the EU, Brexit talks are due to begin this morning. However the backdrop of uncertainty on both Theresa May’s future as Prime Minister and what the UK government actually wants from the negotiations is higher now than at any time. Indeed, we seem to have come a long way from the 'no deal is better than a bad deal' rhetoric that May was so fond of, with Philip Hammond, the Chancellor of the Exchequer, now telling us that leaving the EU without a deal would be a ‘very, very bad outcome for Britain’. He added, ‘I believe the view of the majority of people in Britain, is that we should prioritise protecting jobs, protecting economic growth, protecting prosperity as we enter those negotiations and take them forward.’
On Sunday the French voters head to the polls for the final round of the French Legislative Elections. The first stage propelled Macron and his La République en Marche (LREM) into a controlling position: they secured 32.3% of the vote including his allies the MoDem party which secured 4.1% of the vote. Projections have been pretty good indicators in France, and the latest Opinionway poll suggests LREM will get between 440 and 470 of the 577 available parliamentary seats. The major casualty of Macron’s success is the Socialists which are projected to only gain 20-30 seats when they had controlled 331 going into the election. The Republicans are expected to get between 70-90 seats.
As widely expected the Fed increased the Fed Funds rate by 25bp to a 1.00%-1.25% range last night with a 9-1 vote; Minneapolis Fed Chairman Kashkari dissented in favour of unchanged rates.
The central bank noted that inflation ‘has declined recently’ adding that, while the risks to the economic outlook remain roughly balanced, the 'Committee is monitoring inflation developments closely.' The labour market is said to have 'continued to strengthen', and that job gains 'have moderated but have been solid, on average.' The Fed also left its ‘dot plot’ medium expectations unchanged until 2018, moving 2019 slightly lower.
Every month the Bank of America Merrill Lynch conducts a market valuations level survey comprising over 200 institutional investors with $600 billion of assets under management. Since early 2016 the net percentage of responders saying that equity markets are overvalued has risen from 0% (i.e. 50/50) to an overwhelming 44%; this is a record level, just exceeding the survey’s previous peak at the end of the dot-com bubble. Almost 40% of those polled cited ‘Long Nasdaq’ as being the most crowded trade with ‘Long Eurozone Equities’ a distant second at 20%.
As if being knocked out of the ICC Champions Trophy by India wasn't enough, Moody’s has downgraded South Africa’s rating by one notch to Baa3 (with a negative outlook); both Standard and Poor’s and Fitch cut the country’s ratings to sub-investment grade, BB+, in April. Moody’s review, which started at the beginning of April, showed that although there are ‘a number of important strengths that continue to support South Africa’s credit worthiness’, a weakening institutional framework, uncertain policy and slow structural reform, and fiscal erosion are hampering growth.
Hell hath no fury like a woman scorned, so goes the saying. However ex-Chancellors are also able to pour scorn when they think they have been wronged. George Osborne, now editor of the Evening Standard, who was famously sacked by Theresa May after she became leader of the Conservative Party, telling him she ‘did not want him to be part of the Cabinet’ told the BBC yesterday that May was ‘a dead woman walking’ after Thursday’s election result.
So the Conservative party have scored yet another incredible own goal, that’s two in two for the party which appears to take results for granted as soon as they have a lead in the polls. Some feel the result is positive as the government will now be forced to head for a soft Brexit, with a weaker domestic hand than the 75 seat majority the polls had previously indicated, and the expectations of a hard Brexit.
Moving swiftly on.
The U.S. and Mexico look to have averted a trade crisis with a preliminary agreement earlier this week that staves off import tariffs (as high as 80%) on Mexican sugar. Although the deal looks to clear the way of a contentious issue between the two governments before the upcoming NAFTA talks, it may provide confidence that those talks will find some middle ground on a range of issues.
With all the wet ‘summer’ weather we have been having in the UK it seems as good a time as any to discuss the sunnier shores of the Maldives. The archipelago's economy is largely based around a competitive travel and tourism industry, which directly and indirectly contributed just under 80% to the country's GDP in 2016; nominal GDP stands at roughly USD 3.8bn. Although the country has maintained robust growth in recent years, around 5%, with such an undiversified economy, growth is susceptible to shocks.
Given the recent spat between Qatar and other Gulf states we’ve summarised some of our analysis of recent and ongoing events within a broader economic and geopolitical context. We continue to monitor the developments but signs increasingly point towards constructive dialogue between the states. Also motivations for a peaceful resolution exist on all sides including Western countries with vested energy and military interests in the region. Moreover, it’s important to consider the country’s risks both on a stand-alone basis but also relative to the market’s pricing - where it continues to offer stand-out value. Qatar’s 30-year bonds yield in excess of 4.4% for AA rated credit from what is the wealthiest country in the world; which according to our models are as much as 5 notches cheap.
The next Mexican Presidential Election takes place on 1 July 2018 and the one term of six years limit means a new candidate will replace the incumbent President Peña Nieto. Thus, the 2017 gubernatorial election results, particularly in the State of Mexico which voted on 4 June, are of interest as a gauge of public sentiment towards the different political parties.
The State of Mexico or Edomex result is important as the state is one of the most populous (~14 percent of the population) and largest contributors to Mexican GDP. Plus, it has always been a power stronghold for the Institutional Revolutionary party (PRI) and it is the state where incumbent President Peña Nieto also served as State Governor.
Time does fly ‘when you’re having fun’, as we await yet another US Non-Farm Payrolls (NFP) release, and yes it really is the start of June. Market calls today are for a increase of 182k jobs with a stable 4.4% unemployment rate and just 0.2% gain in average earnings which equates to 2.6% y-o-y. However, May data has a history of being well away from the calls due to unexplainable calendar influences.
On Tuesday evening Federal Reserve governor Lael Brainard, a well-established dove, who of late has been rather more centralist than dovish, added her thoughts on the current situation the FOMC finds themselves in. On the funds rate she said that 'it will likely be appropriate soon' to adjust the Funds rate. She did add that if soft inflation data persists that it 'would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.' So still data dependent but the concerns for the inflation outlook have helped US Treasury yields lower.
Moody’s has downgraded Qatar’s long-term issuer and senior unsecured debt ratings rating to Aa3 from Aa2 but changed the outlook to stable from negative. It cites ‘a weakening of Qatar’s external position and uncertainty of the sustainability of the country’s growth model’ as the key reasoning. Qatar still remains rated AA by S&P although they have it on a negative outlook.
One of Moody’s concerns is Qatar’s increase in its total external debt which reached 150% of GDP in 2016 and showed a significant increase from 111% in 2015 which they note was the highest rate of increase amongst the Aa2 to Aa3 rated sovereigns.
On Friday the People’s Bank of China announced further technical fine tuning on the renminbi fixing mechanism; with the inclusion of a ‘counter-cyclical factor’. The reason for this additional tweak is off the back of continued dollar weakness, the DXY (dollar) Index has fallen almost 4.5% so far this year (at time of writing). If the dollar does weaken, the counter-cyclical factor should in fact limit daily renminbi volatility and according to China Foreign Exchange Trade System (CFETS) could lessen ‘herd effects’; in effect speculative bets against the renminbi.
Yesterday, at the 172nd OPEC meeting in Vienna, OPEC and some key non-OPEC countries announced the extension of production cuts for 9 months through to 31 March 2018. The earlier agreement had looked for a 1.8 mb/d reduction in production. Khalid Al-Falih, the Saudi Energy Minister, noted that oil inventories are expected to fall below five-year averages before the end of the year but as Q1 is seasonally weak it made sense to push the cuts out until the end of March. Little was said in terms of an exit strategy other than the situation will be reviewed at the end of November and into 2018. Brent crude sold off on the back of this news trading around USD51.75 per barrel the time of writing but oil had rallied strongly ahead of the meeting already factoring in a lot of upside and the announcement did not exceed expectations.
Last night we received the minutes from the FOMC meeting in May which proved to be a little more ‘dovish’ than expected regarding interest rate policy. While most voters still saw tightening as likely to be appropriate 'soon,' other voters felt it was prudent to wait for further evidence that the first quarter slowdown was transitory. The Fed expected consumer spending to rebound in coming months, however, a few members voiced their concerns that the progress towards the Fed’s inflation goal had slowed.