Money Matters 17th September 2019

The last two weeks were promising as global political tensions have finally eased through a more constructive tone between the US and China, the withdrawal of the bill that sparked riots in Hong Kong, the decreasing probability of a no-deal hard Brexit, and more. However, the developments on early Saturday re-introduced a degree of risk-aversion, when Saudi Arabia’s crude oil processing plants were attacked. The attack was disruptive with about 58% of the Saudi oil output being affected. As a result, the price of WTI crude spiked from USD 55/bbl and consolidated around USD 60/bbl in the early Monday morning trading. With the magnitude of the abrupt price reaction, some believe it implies that a political risk premium has been integrated into crude oil prices, since the disruption of supply will likely be fast overcome.  There have also been reports that the Saudi production could recover and a large amount of production could come back in a matter of days, with the US stating that it stands ready to act if needed (i.e. tap its strategic reserves) and the OPEC+ countries can opt for the relaxation of production cuts. Overall, the disruption in the oil market could be viewed as a transitory phenomenon.
United States 4 SeptUNITED STATES
S&P 3,007 +0.96%, 10yr Treasury 1.87% +33.56bps, HY Credit Index 317 -10bps, Vix 14.96 -1.26Vol
As global political tensions gradually eased during the week, risk appetite substantially increased.  As a result of the increasing investor confidence, Treasury yields spiked, as the whole yield curve shifted upwards and steepened. By the end of the week, the 2-year yield rose 26bp to 1.80%, whilst the 10-year yield soared 34bp to 1.90% bringing the 2s10s spread back to the positive range, to 10bp. Signs that tensions between the US and China might not escalate further gave investors confidence that the probability of a policy mistake have markedly decreased, which in turn reduces the chances of a recession. This idea is also underpinned by the repricing of the Fed funds futures, which scaled back the expectations for the degree of rate cuts by the Fed. Currently, the Fed funds futures imply 75bp worth of cuts to the range of 1.25-1.50% by 3Q20 (as opposed to the previous week, when futures implied that the end of the cycle could be at 1.00-1.25%). The improvement in investor sentiment translated into gains in the US stock market where the majority of the indices increased by the end of the week: the Nasdaq Composite rose 0.9%, whilst the S&P500 was up 1%. 
Europe 17th September 2019EUROPE
Eurostoxx 3,533 +1.95%, German Bund -0.45% +18.90bps, Xover Credit Index 242 -2bps, USDEUR .903 -0.36% 
President Draghi announced that the European Central Bank (ECB) lowered its deposit rate to a historical low of -0.50% and restarted its asset purchase programme. The small-scale asset purchase programme is open ended, i.e. there was no exact date announced when it could end, as the Governing Council wants to have a significant and sustained improvement in the Eurozone’s macroeconomic environment. The combination of the ECB’s measures and the gradual easing global political risks contributed to a stronger risk appetite in the European markets, which in turn raised sovereign yields (the 10-year German yield rose 19bp to -0.45%) and compressed spreads on the periphery.
However, the market is not convinced that the stimulus by the ECB will be enough to resuscitate the ailing economy in the Euro Zone, as market-based gauges for inflation expectations remain extremely depressed, whilst rate instruments imply further rate cuts by the ECB. Ultimately, such an environment supported stock indices during the week, and as a result the majority of the Eurozone benchmarks gained: the French index increased 1.3%, the Italian benchmark rose 1.4%, the Spanish market edged up 2%, whilst the German index was up 2.7% (all in USD). The UK’s stock market also benefitted from the improvement in investor sentiment, which drove the stock market 2.6% in USD.
Asia 17th Sept 2019ASIA
HSCEI 10,589 +2.65%, Nikkei 21,988.29 +2.50%, 10yr JGB- 0.15% +0bps, USDJPY 107.840 +1.19% 
As the US-China stand-off became somewhat more constructive two weeks ago and the Hong Kong government withdrew the bill that sparked riots, investor sentiment improved during the week, which in turn translated into stock market gains in the emerging Asian space. Consequently, the majority of the stock indices increased. The pack was led by Pakistan (+3.2% in USD), India (+3.2% in USD) and Chinese “H” shares (+2.7% in USD).
Consumer price inflation in China was 2.8% YoY in August, due to elevated food inflation (10% YoY). Food inflation was primarily driven up by pork price inflation, which accelerated to 23.1% MoM in August due to the supply constraints brought about by the African swine flu. In contrast, non-food prices continued to suggest that the broad inflationary environment remained benign. Meanwhile, M2 money supply growth (a proxy for credit) strengthened to 8.2% YoY in August. Other money supply metrics reflected improvement as well.
Consumer price inflation in India was largely unchanged at 3.2% YoY in August, whilst core inflation fell to 4.2% YoY. Inflation remained contained, as food price inflation continued to be contained.
As long as inflation remains below the Reserve Bank of India’s (RBI) inflation target of 4%, the Monetary Policy Council can comfortably carry on with its rate-cutting cycle.
Meanwhile, industrial production in India strengthened in July, as the rate of growth bounced to 4.3% YoY (vs. 1.2% YoY in the previous month).
Industrial production showed the first signs of recovery in July. Should industrial activity further strengthen throughout 3Q19, a more meaningful pickup in the underlying economic activity could prevail.
The Indian Finance Minister announced a set of measures to support exports and the housing sector. These measures follow the policy steps that were taken to aid the auto industry and the financial sector.
The latest round of measures will aid the Indian economy in the medium-term, as they aim to unlock the inherent growth potential of India.
The Vietnamese central bank cut the policy interest rate by 25bp to 6%, the first time since October 2017. The decision was a surprise, as the broad market did not factor in a rate move. The Vietnamese central bank’s decision to ease domestic financial conditions mimics the shift in the stance of major global central banks (such as the Federal Reserve and the European Central Bank).
Latin America - ChileLATIN AMERICA
MSCI Lat Am 2,709 +1.07%
The vast majority of Latin American stock markets enjoyed the improved investor sentiment, which drove asset prices higher in the region. Chile was among the best performing markets, which rose 4.3% in USD by the end of the week. The Mexican (+1.2% in USD) and the Peruvian market (+1.1% in USD) also delivered strong returns during the week.
Brazil released a set of economic indicators. Retail sales volume rose 4.4% YoY in July, driven by a broad-based improvement in domestic demand for goods (including vehicles). The monthly survey of services showed an increase of 0.8% YoY in services activity. Meanwhile, the monthly economic indicators (i.e. proxy for GDP) grew 1.1% YoY in July.
Retail sales growth in Colombia rose 8.5% YoY in July, the strongest pace since September 2015. The strengthening of domestic demand within the retail sector was broad-based. Meanwhile, manufacturing activity increased 3.5% YoY in July.
According to the macroeconomic data in July, Colombian economic activity is likely to maintain a similar pace in 3Q-4Q19 to the previous quarters.
The Peruvian central bank held the policy rate stable at 2.50% citing that inflation measures remained within the target range, whilst the weakness in non-agricultural activities have started to revert. As a result of the positive economic developments, the Monetary Policy Council refrained from reducing the interest rate but decided to maintain an accommodative monetary policy stance to aid the recovery in non-agricultural activities.
Industrial production in Mexico decreased 1.7% YoY in July, due to weaknesses in mining (primarily oil output, which fell 10.6% YoY) and construction activities.
Africa 17th Sept 2019AFRICA
MSCI Africa 797 +3.93%
Investor sentiment have become more risk-seeking during the week, which in turn lifted stock markets in Africa. The South African market was delivered one of the strongest performances during the week, as it gained 4.4% in USD, followed by the Nigeran (+2.1% in USD) and Egyptian market (+1.3% in USD).
Credit rating agency Moody’s reduced the GDP growth forecast for South Africa to 0.7% for 2019 (down from 1%) citing a slowdown in global and regional growth. Moody’s added that weaker economic activity would lead to lower government tax revenue. The agency left its GDP growth forecast at 1.5% for 2020. Furthermore, Moody’s emphasised that a delay and lack of clarity about a plan to break up ailing state-owned power utility company Eskom to make it financially viable is one of the main examples of policy uncertainty hampering the country’s turnaround. Moody’s is the last major credit rating agency, which classifies South African debt as investment grade (Baa3 with ‘stable’ outlook). In a separate event, during the week South Africa’s manufacturing statistics were released, which marked that the country’s manufacturing activity contracted 1.1% YoY in July. Forward-looking indicators, such as business confidence further fell to a 20-year low in 3Q19 marking a protracted period of slump in the South African economy.
Consumer price inflation in Egypt decelerated to 7.5% YoY in August, the lowest in six years. The drop in inflation was partly due to the high base a year ago and partly driven by structural forces. Meanwhile, the core gauge (a metric that strips out volatile prices, such as food and energy) also declined, to 4.9% YoY.
A sustained period of broad-based disinflation will allow for the central bank to carry on with cutting the interest rate, which is currently at 15.25%.
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