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Wednesday, October 12

Two major market themes are dominating analysts attention at the moment. The dramatic collapse in the pound, and the question of whether its gone too far, and the global reflation theme. As for the pound, analysts say that the news which suggests UK PM Theresa May is willing to negotiate – with parliament, if not with the rest of Europe on the terms of Brexit has come as some relief, but whether that debate and scrutiny is going to come with any ability to change the terms of the Government negotiations is a completely different question. FX strategists reckon the pound will be in for a bumpy ride as the market tries to find a new range after the dramatic fall of recent days. A fall which has taken it to extreme levels. Looking at a chart of the real effective index for the pound from pre-1992 to now, shows it is now at extreme levels. As for the reflation theme, some strategists say the evidence of reflation momentum rather that deflation tail risk has left consensus asset allocation exposed. Heading into the home straight of 2016, the question is how much of that consensus positioning will be unwound.

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  1. FX Global macro real rates Deutsche Bank

    1. What’s Driving Markets? The Return of the (Oil) King

    Jerome Saragoussi, a rates, volatility, inflation, and relative value strategist at Deutsche Bank in New York consistently produces excellent analysis across the fixed income space. In his latest piece he seeks to identify the main drivers of global markets in the context of news flow in the past month, such as fear of potential CB tapering, potential systemic risk in the banking sector, and OPEC production cuts. To do this he asks 2 key questions; 1) Can we confirm the switch away from a repricing of global QE expectations a month ago towards a reflation story currently as being the driver of the rates sell-off? And 2) Can we infer which assets have underreacted or overreacted to the recent recovery in energy prices and which of them look rich/cheap? Saragoussi uses uses DB’s cross assets PCA (Principal Component Analysis) framework to answer these questions.
  2. Fed policy US growth Wells Fargo

    2. Rates and Economic Recoveries: Flattering to Deceive

    Back in the early summer Wells Fargo’s Chief Economist, John Silvia presented a modeling framework to distinguish the probability of alternative rate/recovery combinations. In this week’s edition of his Interest Rate Weekly, Silvia provides an update which supports the likelihood that the recovery will remain weak and that rates will remain low.
  3. corporate turnover US jobs Hindesight Letters

    3. Stress in US Jobs and Westminster Abbey-nomics

    In the lastest edition of the Hindesight Letters, Sean Corrigan takes a closer look at the US jobs market, alongside his analysis on how US business revenues are faring. His findings suggest that a little stress might be building. He illustrates the developing battle between the tightening supply of skilled employees, and a general inability on the part of employers to increase turnover, no matter how they many new hands they set to the wheel. Corrigan also turns his attention to the Pound, where he says there is a sense that no-one (BoE, or politicians) has very much at stake in arresting its decline. Indeed, the BoE itself seems wedded to the prevailing fallacy that a little inflation is a good thing, despite the experience of Japan in trying to do the same thing.
  4. Global reflation India Samsung Entext

    4. Global Reflation Theme Dominant

    Sean Maher from Entext writes that the evidence of reflation momentum, rather than deflation tail risk has left consensus asset allocation exposed, and the over-owned bond proxy sectors like staples are now underperforming as expected. Indeed this year has been the year of the contrarian, he says. This report is choke full of evidence-based factors that Maher says is driving the reflationary theme. As always, he covers alot of ground in this weekly report, but as a macro generalist, Maher does an excellent job, providing technical insights on Samsung’s smart phone crisis and some fascinating first-hand reporting from his recent trip to India, where his anecdotes demonstrate why the country’s structural economic issues will hamper it from achieving the an economic miracle.
  5. South Africa Eurasia Group

    5. Can Gordhan Still Prevent a Downgrade to Junk

    Eurasia Group’s Darias Jonke has produced a couple of updates in the past 24 hours on political developments in South Africa after reports that the South African public prosecutor was once again investigating the Minister of Finance Pravin Gordhan which saw the rand collapse yesterday. Jonke writes that Gordhan will dismiss the fraud charges against him as a political campaign by the patronage network around president Jacob Zuma and will refuse to resign voluntarily. He adds that the Zuma faction, which lacks sufficient support within the ANC to force Gordhan out at this stage. How sustainable is Gordhan’s tenure and can he prevent a ratings downgrade? Jonke says he will Gordhan will use the medium-term budget policy statement on 26 October as an opportunity to dismiss the campaign against him and to argue fiercely against a ratings downgrade.