A new trade paradigm is emerging in North America, with the US administration having a large say in shifting the foundations of a system that has existed for more than 20-years, and from which Mexico has benefited enormously, writes Cristobal Arias from TS Lombard. It is becoming increasingly likely that the negotiations over amending NAFTA are a long game. With little time left before the Mexican elections, Arias says if a final agreement is not reached before March (increasingly unlikely), uncertainty will remain over Mexico’s trade relationship with it North American neighbours until early next year, when renegotiations start again. Arias suggests the the success of the negotiations probably rests with the whims of the US political mood, rather than by its own negotiating stance. But Mexico is unlikely to accept any deal offered to them. Arias cites various polls taken that show a large percentage of the public would be prepared to walk away from NAFTA. This wouldn’t be the end of the world for Mexico though, because the country has a diversification strategy already in place and has sometime, the report says. Parallel to the NAFTA renegotiation, the Mexican government has been actively negotiating trade deals with other regions of the world. The seventh round of negotiations on updating an existing EU-Mexico trade deal took place in December; informal talks continued in January and will extend to February. There have also been trade talks between Mexico and South American countries as well as with officials from the TPP-11 countries. Click below to request trial access to read this report.
Timed to coincide with IP Week, SG’s oil strategy team released this oil special report where they revised their oil price forecasts higher, with 2018 Brent at $66 (+$4) and WTI at $62 (+$4). Firstly, looking at fundamentals, SG see them stronger than previously expected, mainly due to bigger OECD stockdraws in late 2017. On Non-fundamentals, or positioning. SG say managed money may be more resilient than previously thought. As for geopolitics, they see elevated risk levels being more persistent than previously thought. Still, these revisions are very focused on the shorter term. SG have made no revisions to the crude and product price forecasts for 2019-2022. They continue to have Brent returning to a sustained $65 (annual average basis) by 2022. However, the price profile is depressed in 2019 and 2020, due to the global macroeconomic growth slowdown as forecast by SG’s economics team. SG clients can view the note on SG’s research portal.
Assets which are not risk efficient should be sold, writes Simon Goodfellow from Harlyn Research. He points out that US and EM equities particularly are still far more risk-efficient than any of the mainstream US fixed income categories. Through a risk efficiency lens (using required return ie return greater than return on cash plus excess volatility vs actual return of assets) US 7-10 Treasuries are a bad asset and would have to stage a large recovery just to get back to neutral; US High Yield and US Investment Grade don’t fare much better. By contrast, US equities are still in positive territory even after the correction and EM equities are more risk-efficient than US. Eurozone equities are less risk-efficient than US equities but again better than any dollar denominated fixed income category. Harlyn’s latest work can be purchased on RSRCHXchange. Alternatively contact the provider directly.
Danielle DiMartino Booth was Richard Fisher’s analyst and sometimes his speechwriter when he was president of the Dallas Fed. She’s runs her own independent consultancy. She is also the author of ”Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America”, where she is very critical of the way the Federal Reserve has conducted policy since 2008. She has reasons for optimism with the new Fed Chairman, Jerome Powell however. She claims he represents a change from the Yellen method, in which she would request that the FOMC Meeting Minutes be manipulated to massage the intended message of the FOMC with the benefit of hindsight. If investors had misread the statement, or if the world had changed in the three weeks since the statement was released, well then just change the verbiage of the Minutes to reflect the Fed’s new and improved outlook. How convenient, says DiMartino Booth. She thinks Powell’s approach will be much more reflective of what really is said around that mammoth table in the Eccles Building. This would be the first step to restoring decency, decorum and dignity to the institution. DiMartino Booth thinks that Powell understands every single aspect of what’s to come in the new job. His CV suggested as much, but it wasn’t until she dove into the freshly-released 2012 FOMC transcripts that she was sure. Especially after reading his words, she reiterates her contention that Powell is no clone of any of his successors. To view this note entitled: ”POWELL ON POWELL — A Deep Dive into 2012’s FOMC Transcripts,” click below to take a free trial to access this note. DiMartino Booth is a must read on the Fed.
The widening of various spreads (Libor) to OIS is an indicator of rising credit risk. In this note, Thomas Tzitzouris of Strategas assesses the impact of the recent widening in Libor-OIS on high-yield spreads and their ability to compress after the sell off earlier in the month. Referencing that Barclays HY OAS, Tzitzouris thinks the current index spread level of 341 bps trades more than 30 bps too cheap, but is reluctant to call for spreads to narrow as the 2-year Treasury note trades above 2.60, which effectively implies that a 4th 2018 rate hike, and possibly 6 within the next 2 years. It’s difficult to envision HY spreads tightening into a rate hike path that’s that aggressive, concludes Tzitzouris. Click below to request to trial access to view the full note.
In their latest edition of the Mexico Monthly Monitor, Eurasia Group assess all key facets of the Mexican story, The political, economic, trade and energy outlooks. On the political front Eurasia expect that Lopez Obrador is still favoured to win the general election but the whole process is very messy, and Eurasia explain the unique complexities of Mexico’s electoral machinations. From an economic and trade point of view, there’s a greater level of uncertainity and there are concerns that much of the hard work done to improve Mexico’s fiscal balance will be undone during the election campaign as vote winning strategy. Overhanging this are NAFTA risks, which are being further complicated by the elections, with Eurasia arguing that if, as expected, Obrador wins, this could derail any new NAFTA agreement. Finally on the energy outlook Eurasia review the big push being made to build fuel storage and transportation infrastructure where much of the demand is being driven by domestic demand. Click below to request trial access to Eurasia’s extensive global coverage of geopolitics, politics, the economy and energy markets.
Diapason produce a monthly report called The Capital Observer. Within this, their research on the recent sell-off suggests that in the short-term markets should stabilize, as long as prices can hold about certain levels. In the medium term they say that US equities are still a high risk for another potential correction, while European equities may be undervalued. The forecast the DAX and CAC to outperform in coming weeks, with their Dynamic Europe portfolio (Greece, Portugal, Italy and Austria) out performing after that. EM equities look solid for now, given the macro support for the asset class. But if the US dollar strengthens on the back of higher rates, then EM equities could suffer in the second half of the year. On the sectoral front, defensive sectors look weak, while financials looks strong. Click below to request samples from Diapason to request sections of this report.
Has the recent upsurge in volatility changed the outlook for EMs in any meaningful sense? No, says Gavekal in a report from last week. Looking at the underlying causes for the market gyrations they say that a rising risk-free rate rarely poses problems in itself for EMs, as long as the rate is below that of EM growth. Moreover, valuations in previous rising rate cycles did not get compressed. The increase in volatility itself, could be passed through to EM’s who tend to be even more volatile than DMs. But in this case, they argue it feels like a shake out of weak positions, which should pass smoothly. Moreover, EM equities are less reliant on foreign flows than in the past and should be able to weather this squall. They reiterate that economic fundamentals are all still positive for EM equities. Moreover, EM corporates tend to have high operating leverage than DM companies, and as such tend to enjoy significantly higher profit growth during periods of GDP growth. GaveKal hold to this projection today. Click below to request rial access to this report.
The prolonged drought in South Africa was recently declared a national disaster. In the report South African research firm ETM Analytics look specifically at the city of Cape Town and its surroundings, which has been suffering a severe drought, and with many predicting less than 90 days’ worth of water in its reservoirs, Russell Lamberti, ETM strategist, revisits his initial assessment to see how likely the city is to reach “Day Zero”. Lamberti, expects Cape Town to enter the rainy season around May/June before dam levels reach critical lows. However, he argues agriculture allocation is absolutely key to the whole project of avoiding a catastrophe. If these two elements occur, he expects a high probability of avoiding ‘Day Zero’. Any panicked market reaction to a Cape Town water system failure should, on this view, be used as a buying opportunity, writes Lamberti. Click here to request access to the report, and the latest coverage from ETM on the South African budget.
Capital Alpha, the Washington DC based policy research firm held a conference call last Friday to discuss the 2018 and beyond outlook for infrastructure. The the call was timely given that the Trump Administration had just released its “Legislative Outline for Rebuilding Infrastructure in America” document on Feb. 12, as well as the FY19 budget request, and a related ten-year spending plan. Capital Alpha say that after something of a false start in 2017, infrastructure is getting a major push from the Administration in 2018. Analyst Byron Callan discusses some of the budgetary aspects of the plan and what might be accomplished this year by Congress, while his colleague James Lucier addresses some of the regulatory and permitting aspects of the plan, particularly as they pertain to pipelines, ports and other energy-related infrastructure. Lucier also discusses some of the tax-advantaged approaches in innovative financing. The two also discuss what’s new in the Administration’s approach and what could Congress support or oppose? If you’d like access to the recording, click below to request directly from CapitalAlpha. They would be happy to provide access to interested parties as a sample of the work they do in this area.