Eurasia Group have been sending regular updates out on the impact, both economically and politically, of the Russia sanctions, as well as on the various streams feeding into this theme (Ukraine/US election meddling/UK poisoning/Syria). Their latest piece, published late last week, suggests that some of the heat may have come out of the potential further sanctions and resulting retaliation. Eurasia observe that Russia’s State Duma has slow-tracked counter-sanctions legislation against the US, and the government has signaled it will not stop key commodity exports to the US. Therefore, the risk of retaliation from the Russian government has receded, though informal harassment of US businesses remains a danger. the report says. This has been noted by the G7, which meets in Toronto next weekend, where reports suggest that further sanctions are not on the agenda. Click below to request trial access to Eurasia’s service. Also check out Eurasia’s recently launched product, egX . It’s a blend of their qualitative global analysis and some data-driven analysis, presented in a daily format.
The Chinese central bank is no longer in full policy tightening mode, writes Gavekal Dragonomics in this note published today. That’s good news for Chinese bank shares, the report says. Shortly after government statisticians released economic data for the first quarter on yesterday, the People’s Bank Of China announced a 100bp reduction in bank reserve requirement ratios. For big banks, this reduces the proportion of their deposits they are required to lodge as reserves at the central bank from 17% to 16%. In gross terms, that releases some RMB1.3trn in funds, according to Gavekal. Of course, the PBOC denied it was easing policy, stressing it would claw back much of the liquidity injected. Nevertheless, argue Gavekal, the market rightly interpreted the move as signaling an easier stance that will benefit the banking sector. Click here to request access to the full report from Gavekal.
Looking at further potential tariffs beyond merchandise goods, Continuum Economics argues services seem the most likely candidate and may have the next-biggest impact. U.S. services exports to China have grown faster than goods exports over the past ten years. Figure 1 in this report shows the exponential growth which might affect US industries, such as tourism. With China’s significant holding of US treasuries, Continuum believes it is unlikely China will halt or slow its Treasury purchases in the current scenario, only being a tool for a more extreme scenario-remaining just a threat for now. Click here to request trial access to the service to view this piece.
Anne Stevenson-Yang at J Capital Research published this detailed reaction in March to last month’s China’s NPC. Her thesis is that the overall tone of the conference was one of strengthening political control over the country. This shows that when it comes to deciding between political control or economic growth, political control wins every time. In the financial sphere she notes that the merging of banking and insurance oversight with that of monetary management means that banks are no longer independent. It also suggests that the government is preparing for financial crises down the line. She also looks at how recent cases of heavily indebted companies being resolved shows that over-indebtedness is not the crime, rather it is taking money off shore. Taken together with the other reforms, which reduce the ability of local government to raise taxes and beef up the security apparatus, the overall package is ‘something that countries do when they are facing unrest.’ This piece is available for purchase on RSRCHXchange, alternatively contact the provider directly.
Ian Shepherdson at Pantheon Economics reiterates his view that the Fed will hike four times in 2018, especially in light of March’s inflation data. He notes that year on year inflation is now at 2.1% while Month on Month increases are steady at around 0.18%. The base effects in certain categories means these increases will likely continue up to July where inflation will reach 2.5%. The key thing to watch will be when consumer inflation expectations start to rise and what effect that will have on wage growth. Despite a jump in March jobless claims, Pantheon believe the employment market is very tight and the jobless claim was due to seasonal factors. Taken together – higher inflation and higher wages – and the Fed will have to keep on raising this year, although the fourth dot will not appear in the Fed’s forecasts until September. This piece can be purchased on RSRCHXchange. Alternatively contact the provider directly.
The team at Economic Perspectives recently published their flagship Global Inflation Perspectives report, which looks at the drivers of global inflation. They make the point that US central bank orthodoxy is that inflation isn’t inflation unless it is US led and driven by wages. The current uptick in inflation (up 150 bps since 2016) has been led by Europe and Asia not the US. Moreover, global labour costs have only risen by half that amount by their calculations. They believe that the disintegration of the traditional labour contract can keep wages low for a time, but that they are catching up. Meanwhile there is a ‘multifaceted and multi-year global inflation process’ underway. They further go on to a detailed analysis of labor market inflation trends in the UK, Germany, France, Spain and Japan, to show that this is a co-ordinated rise in wages. While making no comment on likely Fed action, they nevertheless show that inflation is rising and coming from labour. This piece can be purchased on RSRCHXchange. Alternatively contact the provider directly.
Luke Groman of Forest for the Trees has been writing some detailed research on China and the path to the ”internationalisation” of the CNY over the past year, and we highlight some of his recent work here. In a note published 3 weeks ago Groman writes about the imminent launch (March 26) of CNY oil contract in Asia where he observes that the consensus seems to expect the impact of this contract to be muted. While that view may be correct near-term, says Groman, there are hints that the second-order geopolitical and FX market implications of this contract could be enormous. The essence of Groman’s view here is that the development and growth of oil contracts being priced in a CNY could turn the USD’s status as a reserve currency on its head, and this ultimately the dollar could, as things currently stand, be massively overvalued. Recommended reading. Click below to request access, as a sample, from FFTT directly.
Since the end of 2015, the Fed has been raising interest rates. In a normal economy, overall financial conditions would have tightened, but according to Julian Brigden of MI2 Partners, they have continued to ease. The reason he believes is largely to do with QE, which has broken the transmission mechanism between official policy tightening and financial conditions. Behind QE is also the notion of the Fed put, whereby owners of risk assets believe the Fed will come to the rescue if there are large falls in asset prices. This has left the Fed dangerously behind the curve in the current environment as they let the markets run hot as they just increase rates in line with GDP growth. This will lead either to a spike in inflation, and thus much higher rates which will push asset prices down, or asset prices will fall due to a VaR shock. MI2 believe this means ‘stocks and credit are living on borrowed time. This piece can be purchased on RSRCHXchange, alternatively contact MI2 to trial the service.
Philip Grant at Grant’s Interest Rate Observer had a note out last week examining the twin effects of the rising inflation and disintegrating fiscal situation in the US and its impact on bonds. Firstly, he notes that the CPI is the highest it has been for a year, while the core PPI is at the highest level since 2011. He also cites the National Federation of Independent Business Survey which found almost a quarter of respondents were planning on hiking prices, the most since 2008. On the fiscal side he notes that the CBO report makes grim reading. The US government is set to borrow an amount equal to 4.2% of GDP next year, the most since the end of World War II. But will this mean bond markets will collapse? Not necessarily. Firstly, bond prices are moved by the current mood of the market as much by underlying data and supply/demand dynamics. Also, the US is still the benchmark for a risk free return, which creates its own dynamic. He cites a fascinating study to support this view, which goes back to the 13th century. GIO doesn’t do free trials, but they’re happy to provide samples, if you’re looking at an subscription. Click below.
Back in January we highlighted BAML’s Bull/Bear Indicator, which has worked as a highly effective indicator for market turning points so far this year. BAML’s chief investment strategist Michael Hartnett was pointing out to clients back in December that markets were very close to a turning point according to the bull bear indicator. Then he wrote: ”We forecast a H1 top in risk assets as the last flames of QE, US tax reform and robust EPS incite full capitulation into risk assets….Volatility…peak positioning, profits, policy = peak returns and trough volatility; 50-year low in stock volatility, 30-year low in bond volatility likely to be followed by flash crash (à la ’87/’94/’98) in H1. At the time he reminded readers that his indicator was 11/11 when it comes to these sell signals), and he used the Bull-&-Bear-o-meter to drive the point home. Then came the February sell off, which was at extreme bullish levels, and which preceded the February sell off. Last week Hartnett’s team published the latest edition of their flagship research note, The Thundering Word, entitled: ”The Fed, the Full Bull Detox & Occupy Silicon Valley,” which included the latest update on their bull bear indicator. Of course the extremes have now passed, but what’s the latest signal now telling equity investors? BAML clients can access the latest report on BAML Mercury to find out.