Money Matters 14th November 2017

Last week, developed market bonds and equities fell in unison. These moves were of course small and, in the context of a blockbuster year for equities alongside another positive total return for fixed income, of little isolated significance. Nonetheless, given “risk-free” bond yields in many currencies now trade near the zero lower bound, it is a reminder that, in the next crisis, traditional “balanced” asset allocation may not protect a portfolio.
Last week, oil continued its march higher on the basis of uncertainty in Venezuela and unrest in Saudi Arabia (arrests of officials and members of the royal family, as well as the apparent detention of Lebanese PM Saad Hariri in connection with his refusal to confront Hezbollah). US oil inventories however rose, which suggests some ability for US producers to offset any reduction in global supply.
S&P 2,582 -0.21%, 10yr Treasury 2.37% +6.59bps, HY Credit Index 331 +17bps, Vix 11.29 +2.15Vol
Recent excitement around Donald Trump’s tax reform plans was tempered last week, as the Senate Finance Committee put forward a tax reform bill that differed from that proposed by Republicans in the house. Most notable was the suggestion that any cuts in corporation tax should be delayed until 2019.
This discord was enough to snap the S&P 500’s 8 week winning streak, with small caps and financials underperforming and defensive sectors finishing higher.
After Donald Trump’s trip to Asia, the White House announced some USD 250bn in trade deals with China. However, the achievement has been met with much skepticism, as most measures were already announced or not contractual. Still, certain trade barriers (such as on the importation of beef) appear to have been removed.
It appears nobody wants to stay on the FED merry-go-round, as yet another Governor announced his departure – this time NY chief Bill Dudley to early retirement. There must be at least some sense of warning lights flashing as Dudley’s resignation follows only months after vice-chair Stanley Fischer.
The University of Michigan consumer sentiment survey declined modestly from elevated levels.
Screen Shot 2017-11-14 at 17.18.42EUROPE
Eurostoxx 3,599 -2.14%, German Bund 0.40% +4.60bps, Xover Credit Index 243 -19bps, EURUSD 1.164 -0.49%                        
European economic data was mixed last week, as the final readings of the October PMIs confirmed a slight moderation in confidence and German and Italian industrial production declined but German factory orders and French industrial production came in ahead of expectations. Nonetheless, the economy has done much better than expected this year and the European Commission upgraded its growth forecast to 2.2% for 2017 (from 1.7% earlier in the year). European stocks, however, underperformed. With earnings season mostly complete, earnings surprises have come in at the weakest level since Q2 2016.
The EU commission’s bullish perspective on continental Europe, was not shared for the UK – which saw its growth estimate slashed to 1.5%, with a further slowdown next year. Indeed, last week saw further calamity for the incumbent Conservative party, with the defence minister and secretary of state for international development both forced to resign.
The MPC in Poland left rates on hold at 1.50%. 
HSCEI 1,168 +1.23%, Nikkei 2,238.00 + 1.15%, 10yr JGB 0.05% 0bps, USDJPY 113.490 -0.40%    
Japan continued its recent outperformance last week. Whilst the longer-term economic story may be seen as woeful, there is no disputing the positive effects of the recent global upturn on the export-driven country. The PMIs hit a 2 year high and the Economy Watchers Survey “diffusion indices” hit 3-year highs last week, whilst stocks gained for th 9th consecutive week.
In China, consumer price inflation ticked up to 1.9% YOY in October, from 1.6% in September, whilst producer price inflation remained unchanged at 6.9% YOY. Both figures came out ahead of market expectations. Food prices caused the increase in CPI, with the cost of pork and vegetables both rising. Non-food CPI was unchanged at 2.4% YOY.
Trade data in China came in broadly as expected for October. Export growth decelerated, from 8.1% YOY in September to 6.9% in October, whilst import growth printed at 17.2% YOY, down from the revised September figure of 18.6% YOY.
Both data points were largely in line with recent trends, and with the previously reported October PMI data, thus providing little fresh information.
Away from macro data, more meaningful developments in China this week revolved around newly announced financial reforms.
In the afterglow of last month’s National Congress in Beijing, policymakers announced plans to either relax, or remove entirely, foreign ownership limits in commercial banking, asset managers and insurers.
Although analysis of the details announced by vice-minister of finance Zhu Guangyao shows that many of the most meaningful changes are three years or more from full implementation, the move has been regarded as carrying strong symbolism.
Adding a second dimension to the symbolism, these announcements also followed US President Trump’s meeting with Chinese counterpart President Xi Jinping, after which Trump renewed calls for US firms to be granted greater market access in China.
Indonesia’s GDP growth rate accelerated slightly in Q3, to 5.1% YOY from Q2’s 5.0% growth rate. The 7.1% YOY growth rate in the investment component was the star of the show, recording its fastest growth rate since 2012. Consumption, on the other hand, remained a drag, expanding 4.9% YOY and dragging the headline number downward.
Whilst the latest print does represent an acceleration versus the previous quarter, the Indonesian economy is yet to fully bear the fruits of the cumulative 175bps of interest rate cuts delivered by the central bank since December 2015. Until recently, the investment cycle had been one of the largest missing pieces of the growth-puzzle. With the recent pickup in investment, however, it is now the elusive revival of domestic consumer demand that has become the sticking point for policymakers in achieving higher GDP growth rates.
The Philippines’ central bank left interest rates on hold for the 25th consecutive meeting, keeping the overnight policy rate at 3.0%. On the back of a weaker peso and higher oil prices, Governor Espenilla’s statement surmised that inflation risks remain tilted to the upside and announced a higher official inflation forecast for 2018 of 3.4%, from the previous level of 3.2%.
With inflationary tax reforms on the horizon, in addition to the above FX and commodity considerations, the Philippines’ central bank is expected to initiate a monetary tightening cycle in 2018.
Malaysia left interest rates on hold at 3.0%.
MSCI Lat Am 2,755 -0.62%
Colombian inflation came in below consensus at 0.02% MOM in October. The YOY CPI (4.05%) now lies just above the central bank’s target range as a result of an unfavourable statistical base. October’s print conforms the rapid pace of disinflation in the country.
Argentina’s central bank raised the benchmark rate by 100bps, to 28.75%, following a 150bps hike 2 weeks ago. The central bank took a hawkish stance citing consistent increases in inflation expectations and very weak signs of a deceleration in core CPI.
Brazil’s vehicle production was up 42.2% YOY, sales grew 27.6% YOY, and exports surged 52.9% YoY in October.
Peru’s central bank cut its benchmark rate by 25bps to 3.25%, for the 4th time in 6 months. This rate cut came as the October CPI print showed the steepest drop in consumer prices since 2006 and the economy continues to recover from a 3-year investment slump.
Easing Peruvian monetary policy, with still low inflation, is another tailwind for a faster and stronger economic rebound.
Peru’s business confidence reached 64pts in October, its highest level since May 2013.
Business confidence is a leading indicator of investment, which is a major driver of growth in Peru.
Mexico’s central bank maintained rates on hold at 7.0% as October CPI came in at 6.37% YOY, far above the central bank’s 3% target. Annual core inflation was also basically unchanged (at 4.8%).
MSCI Africa 870 -0.11%
In Nigeria, President Muhammadu Buhari presented the 2018 budget to lawmakers, with the following highlights:

  • 6trn (USD23.9bn) budget, c.16% higher than 2017;
  • 6tr revenue target, 36% from oil and 64% non-oil revenue sources;
  • Proposed capital expenditure makes up around 28% of the total expenditure; and
  • Debt servicing accounts for 23% of total expenditure.

The budget is predicated on 2.3mn barrels of oil per day, a crude oil price of USD 45 per barrel, an exchange rate of N305/USD, 3.5% GDP growth and N2.0trn budget deficit with plans of finding N710bn by restructuring the government’s equity in JV oil assets and increasing private sector participation.
Staying in Nigeria, Moody’s downgraded the country’s sovereign issuer rating to B2 with a stable outlook, driven by concerns that the ‘country’s balance sheet remains exposed to further economic shocks and that interest payments as a share of total revenues remain elevated’.
In Kenya, the election saga continued, this time with petitions filed against the re-election of President Uhuru Kenyatta at the Supreme Court, and the opposition leader called for an interim government to run the country for a period of 6 months while the constitution is reviewed. Should the court deem the October 26th re-run invalid, a fresh presidential election will be conducted within 60 days of the Supreme Court ruling (deadline January 19th, 2018).
Moving on to data prints, the charged political climate and a credit squeeze driven by a cap on interest rates, saw growth in home prices fall to a three-year low. Remittances from the diaspora however bulked the trend, hitting record highs for two consecutive month and Kenya farmers saw some reprieve from the government’s cancellation of an international tender for supply of 550,000 bags of maize and 20,000 bags of rice in favour of local purchase.
In Egypt, headline inflation moderated to 30.8% YOY in October from 31.6% in September. On a MOM basis, inflation was up 1.1%, driven in part by a 7% MOM increase in communication costs following increases in prepaid card prices, and 20% MOM increase in education prices at the start of the new school year.
In other developments, the IMF reached a staff level agreement for the next installment of the three-year, USD12bn loan programme, while a new 4.2m tons capacity refinery, which will reduce Egypt’s diesel import by about 50% and its gasoline import by 20%, will be completed in June 2018 and full capacity utilization realised by end of 2018.This developments are positive for Egypt’s progress towards self-sufficiency.
Lastly, South Africa’s net foreign reserves fell to USD42.5bn in October from USD42.7bn, business confidence remained subdued with the SACCI monthly business confidence index largely unchanged at 92.9 in October from 93.0 in September, September manufacturing output was down 1.6% YOY and mining output down 0.9% YOY.

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