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Editor's Note: Hamish Risk | November 4, 2019
In today’s Macroeconomic Briefing Absolute Strategy Research highlight one of the potential outlier risks that could come from the upcoming UK parliamentary elections, Economic Perspectives highlight their latest thesis on global credit, where they see a bifurcation between the very highest quality credits and a much larger core of poor quality zombie credits, and BCA Research highlight how a global inflation rebound will provide support for equities through 2022. The state of the US consumer is a hot topic currently as we head into the holiday season, and Cowen Research Group highlight the emerging trends in how they are spending and which companies are likely to benefit. Lastly, Macro Insiders sound the alarm bells on US funding markets as we head into year-end, where they see liquidity issues in the repo market having global consequences.
Global liquidity Us repo market Macro Insiders
1. Repo market problems to re emerge into year-endTightening liquidity, as evidenced by soaring repo rates, is indicative of chronic problems in US money markets, writes Raoul Pal from Macro Insiders. Although the Fed appears to have plugged the gap for now, says Pal, it is likely that funding pressures will increase again as we move closer to year-end. These problems won’t threaten the system’s viability, adds Pal, but weaker credits may have problems meeting their financing needs. The report also highlights how funding pressures will likely manifest in weaker US equity markets, which will also have to cope with the forced selling of older IRA holders who have to meet the Required Minimum Distribution before December 31st. Pal then explains how this will also likely manifest itself in the international markets which rely on US banks for access to dollar funding. A number of countries including Turkey, Hungary and Poland all have precarious financial positions, either in terms of their foreign currency debt to GDP positions or their absolute USD financing requirements.
US consumer US equities Cowen Research Group
2. Robust US consumers keen to buy trends and trade down for better valueUS unemployment at trough levels suggests that hourly earnings rates will continue to climb higher and close the gap to the 4%+ growth that was seen in 2007, Cowen says on October 31. Both disposable personal income and nonfarm payrolls trended positively in the third quarter, though slowing relative to 2018. Consumers are becoming more discriminatory as to how they spend that income, with a lower-end trade-down that seeks value coupled with sharp consumer awareness of “on trend” products. McDonald’s is seen as a beneficiary of trade-down, with its blue-chip, and defensive characteristics boding well against an uncertain economic backdrop.
Equities Inflation BCA Research
3. Global inflation rebound to provide support for equities through 2022Stronger global growth is likely to lift inflation over the next few years, making the debate around negative rates increasingly irrelevant, BCA Research says on October 25. There is scant evidence that structural forces related to globalization, automation, weak trade unions, and demographics are holding back inflation, the piece argues. BCA recommends an overweight position in global equities during the next 12 to 24 months, and a short duration bias in fixed-income portfolios. Not until 2022 is a more defensive position in equities likely to be needed.
global credit Economic Perspectives
4. Central banks powerless to prevent wider spreads, global slowdownThe pricing of corporate credit, in the US and elsewhere, is bifurcating, according to Economic Perspectives. Strong companies will continue to price off, and sometimes under, their respective government yield curves. The debt of a fat tail of vulnerable, unprofitable, or over-indebted corporate borrowers will price according to idiosyncratic risk and illiquidity. Neither cuts in short-term rates nor the resumption of QE will prevent this bifurcation. Widening credit spreads will signal the end of the global economic expansion, with aggravated impacts on capital spending and employment over the next two years, the piece argues.
Brexit UK elections Absolute Strategy Research
5. Tactical voters could force second referendum, prompting populist backlashThe chances of a soft Brexit or no Brexit have increased, Absolute Strategy Research says on October 31. The Conservatives are very likely to win the most seats in the election, but a majority is more touch and go. The election is likely the last opportunity voters have to secure a second Brexit referendum. The national split in the remain vote may prove less significant if remainers band together behind the most popular second referendum party in individual constituencies. But if that leads to Brexit being canceled, there could be a populist backlash with unpredictable consequences for investors.