The Daily Update - Steak or fajitas?

In 1824 Argentina issued a bond with a maturity of 46 years, four years later they defaulted; it took 29 years for the standoff with creditors to be resolved. Since then Argentina has defaulted on its debt a further seven times with the last episode back in 2001 which was resolved in 2016, allowing Argentina once again access to the bond markets.

There are a number of positive influences assisting Argentina in the bond market today. Moody’s as recently as March this year changed their outlook to positive from stable highlighting an improved policy stance leading to ‘faster’ economic growth, also JP Morgan, in February this year, included Argentina in their EM local indices bucket; so two favourable factors already over the last few months.

The Daily Update - The Long Road to Healthcare Reform and Growth Stimulus

With the Fed now expected to stay a somewhat slow but steady course towards monetary policy normalisation, hopes and attention are increasingly directed towards Capitol Hill and the Republicans’ deliberation of Trump legislation: with today’s focus being healthcare. ‘Now good friends’ President Donald Trump and House Speaker Paul Ryan have been lobbying and negotiating hard to convince enough House Republicans to approve their Affordable Care Act. Momentum does seem to have gained in recent weeks.

The Daily Update - One week until Article 50

Just one week until Britain is expected to trigger Article 50, sterling at a three week high, UK inflation highest since 2013, leaked EU documents suggesting Britain could be kicked out EU and fined £50bn, Bank of England (BoE) Chief Economist Andy Haldane postulating a base rate rise to 4.25% that could wipe out 1.5 million jobs but boost productivity in the long run, Scotland pushing harder for another independence vote, and the BoE predicting a further retail slowdown: all in all perhaps enough commotion to burrow yesterday’s embarrassing infighting of the Labour Party. Or perhaps not.

The Daily Update - Venezuela’s calamity

According to the 2017 World Happiness Report released yesterday Norway raced ahead three places to be declared the world’s happiest nation, while the Central African Republic is apparently the most unhappy: in a measure of 155 countries. One country rapidly becoming increasingly unhappy is Venezuela, jumping from 44th to 82nd in one year, despite President Nicolás Maduro’s creation of the ‘Vice Ministry of Supreme Social Happiness’ back in 2013. In fact, Venezuela has held the top spot on Bloomberg’s world misery index for three years running, and the country has also caught up with North Korea on the 2017 Index of Economic Freedom, taking its place just ahead of the Democratic People's Republic at 179th place.

The Daily Update - G20 / Trump / Merkel

Over the weekend G20 Finance Ministers dropped their long-standing pledge to ‘resist all forms of protectionism’, instead stating in a communique that they are ‘working to strengthen the contribution of trade to our economies’. The change of wording comes after the Donald Trump’s new US Treasury secretary Steven Mnuchin insisted that the traditional line of opposing protectionism was no longer relevant and said the new administration in the US was now looking for balanced trade over lower border tariffs, in line with Trump’s ‘America First’ statements.

The Daily Update - Dutch and French elections

On Wednesday the Dutch voters went to the polls in the first of a series of elections across Europe this year.  France follows with the first round of the Presidential election in April and a runoff between the two leading candidates in May and then the German election takes place in September.  Given the rise of populist politics, the UK voting for Brexit and the Trump Presidential election victory, markets have been paying more attention to politics.

The Daily Update - Fed

In a clear case of ‘sell the rumour, buy the fact’, the FOMC raised the Fed's funds rate target by 25 bps last night sparking a rally across the US Treasury (UST), stock, emerging market forex, Latam, Middle East and Far East bond markets.

The rate hike was followed by a much more dovish Fed statement than was previously expected. In the post announcement press conference Fed Chair Janet Yellen stated, ’It is likely that target policy rates will go up in line with their forecast.

The Daily Update - US rising rates but lower long term growth and creditworthiness

With a Federal Funds Target Rate hike expected later today, futures markets have already priced in a 25bp rise following recent strong data, hawkish official comments and waning of external risks. Indeed with USD10bn already shorting Blackrock bond ETFs, announcement swings (if any) could go either way. Focus instead will be on the trajectory of future hikes and any words on future balance sheet reductions. Given that 3-4 hikes were expected in 2016 (and considered gradual back then) a rate rise today supports a similar expectation for the Fed for this year. Three rate rises this year still look more likely than four and we expect any balance sheet reductions will come with the next hike; downplaying their significance.

The Daily Update - China's sustained growth momentum

The Chinese economy has kickstarted 2017 on a positive note, with economic data releases adding impetus to the country's growth momentum. February’s industrial production (IP) release beat market expectations, accelerating 6.3%yoy; boosted by manufacturing and utility sectors. Fixed asset investment (FAI) also exceeded expectations coming in at 8.9%yoy, from 8.1%yoy in January. Meanwhile, retail sales fell short of the market consensus (although still stood at 9.5%yoy) driven by a fall in auto sales; this was possibly due to overbuying of cars in 2016 ahead of the reduction in tax incentives on low-emission cars this year.

The Daily Update - Brexit / Turkey, Netherlands relationship

On Friday at a meeting in Brussels the remaining 27 European Union members were told to expect notification as early as tomorrow that UK Prime Minister Theresa May will trigger Article 50: the starting gun to begin the divorce proceedings for the UK to leave the EU. Donald Tusk, the EU Council president said the EU was already well prepared for all the procedures necessary and could in fact issue draft guidelines to negotiations within 48 hours of any announcement. He went on to tell the remaining members that they will reconvene in the first week of April to respond to the trigger.

The Daily Update - NFPR

Today’s February non-farm payroll release showed 235,000 jobs added which was above expectations of 200,000 jobs created and the prior month’s reading was revised up by 11,000 jobs to 238,000.  The construction sector, helped by the mild winter weather, saw strong job gains of 58,000, the largest gain since March 2007; while the manufacturing sector saw robust gains at 28,000 jobs, the most since August 2013.  The unemployment rate edged lower to 4.7% from January’s reading of 4.8% although the participation rate edged higher to 63 percent as more people entering the workforce found jobs.

The Daily Update - Further China government bond inclusion

This week Citigroup Inc announced that China’s onshore bonds will be included in three of its government bond indexes from February 1 2018. This news follows the announcement last month from the Bloomberg Barclays Fixed Income Indices of new parallel global indices which include China renminbi (RMB) denominated securities. The assets under management for funds tracking Citi’s indices may be relatively small, however, the new weights will surprise many investors who have neither been following the RMB internationalisation story nor are aware of the scale of the Chinese bond market. According to Citibank, the weight of China in their existing Emerging Markets Government Bond Index will rise from zero to a huge 52.5%.

The Daily Update - A budget of constraints

As expected, Philip Hammond’s first and last Summer Budget delivered numerous but all modest adjustments to overall government spending. This has been reflected in markets with both sterling and Gilts little changed from before his speech. Beyond the peppered insults towards the leader of the opposition, the most notable mentions were the changes to the OBR’s forecasts.

The Daily Update - UK budget precursor and economic signals

With the first post-Brexit budget to be delivered tomorrow, the Chancellor of the Exchequer, Philip Hammond, clearly has a lot of priorities to juggle as well as numerous unknowns to try and accommodate for. Preparing a ‘war chest’ for Brexit alongside supporting ailing public sectors (like the prisons and NHS which have received lots of negative press recently) will be challenging enough. Achieving this whilst, ‘making steady progress in eliminating the deficit’ will be significantly more challenging. Yet this is what The Chancellor has promised, also warning that ‘there are still some voices calling for massive borrowing to fund huge spending sprees.

The Daily Update - China National People’s Congress / Australian Car production

Over the weekend the Chinese Premier Li Keqiang acknowledged the government’s efforts to steer the world’s second largest economy to a ‘new normal’ of slower but better quality growth, that is more geared towards domestic consumption and less debt dependant. Such a transition is not an easy one; as Mr Li put it ‘Like the struggle from chrysalis to butterfly, this process of transformation and upgrading is filled with promise but also accompanied by great pain’.

The Daily Update - Brexit / Hammond / Snapchat

Since the Brexit vote most financial commentators have been surprised by the strength of the British economy, with the economic figures constantly outperforming expectations. However, this morning figures show that consumer spending may be starting to slow. In February the UK Services Purchasing Managers' Index (PMI) was below the market consensus of 54.1 at 53.3, down from 54.5 in January. This will be food for thought for the Chancellor of the Exchequer Philip Hammond as he prepares for both his and the UK’s first post Brexit budget.

The Daily Update - From Oman to Mexico

Yesterday Oman came to the market with a multi-tranche USD5bn bond issue that was close to four times covered but with the 30 year issuing at a generous yield of 6.549%, even for a Baa1 rated credit (Moody’s), it is easy to see why investors were keen to get exposure, ourselves included.  That said, we still see the greatest valuation upside in the quasi-sovereign space.

Most quasi sovereign bonds trade at wider spreads than their own governments and globally quasi sovereigns pay roughly 0.9% more than their sovereign owners. That is a lot of extra compensation for the modest additional risk.

The Daily Update - A renewal of American doubts

Yesterday President Trump delivered his first speech to Congress. In what was a much more crafted and rousing speech than we have become recently accustomed to, he sought to garner further support for his policies which include (in approximate order of planned implementation): repealing Obamacare, tax reform, deregulation and infrastructure investment. Of course, he hopes the 'Great Great Wall' of America can jump the queue to help speedily address the drug and perceived immigration issues that are threatening the safety and wellbeing of American families and workers.

The Daily Update - EU / Trump

In light of the UK triggering Article 50 to begin the process of leaving the European Union, Jean-Claude Juncker, the Chief Executive of the EU is said to be looking at options to bring closer together the remaining states as he fears there could be pressure for further unravelling. Juncker believes that while some states want to deepen co-operation faster and further than before, others are not so keen. In a White Paper, Juncker will argue for a ‘multi-speed Europe’ because as he sees it ‘This is no longer a time when we can imagine everyone doing the same thing together.’ Junker will ask for responses to his ideas by the autumn, by which time the German and French elections would have taken place.

The Daily Update - Fed

With just over two weeks to the next Fed meeting on the 15th March, it is noticeable how all the Fed speakers continue to stress that March is indeed a live meeting. It is also noticeable how the market continues to be unconvinced and is still just pricing in a 40% chance of a hike. Five days before the meeting we get the next Non-Farm Payrolls release and inflation data will be released just hours before they announce their decision; the market thinks this data is far too close to the Fed meeting and any action could cause untold volatility. Cleveland President Mester was quoted last week as saying ‘We certainly never want to surprise the markets’.