LEFT BEHIND OR LED ASTRAY
After sweeping into power on the promise of stimulus, reform and “Making America Great Again”, during his first 190 days in office, one could well judge Donald Trump has tried to do everything but improve the trajectory of the American economy.
First, there has been no progress on tax reform as Trump has repeatedly failed to pass healthcare reforms. Indeed, his leadership has become increasingly fractious – on Friday he accused the 3 Republicans who failed to support his latest amendment (including Senator John McCain) as having “let the American people down”. Following up on Saturday with the threat “”if a new HealthCare Bill is not approved quickly, BAILOUTS for Insurance Companies and BAILOUTS for Members of Congress will end very soon!” Trump is in part referring to government subsidies to insurance companies, which make health cover accessible to poorer Americans. The next such payment is due on the 21st August.
Second, he has often batted from left field, pursuing personal rather than popular agendas on topics such as immigration, the environment and, last week, transgender soldiers. In the latter case, he announced by tweet “please be advised that the United States government will not accept or allow transgender individuals to serve in any capacity in the US military” – a measure taken with apparently no prior notice to the Pentagon and concerning an agency that currently employs more transgender people than any other organization in the world.
S&P 2,472 -0.02%, 10yr Treasury 2.28% +5.14bps, HY Credit Index 321 -2bps, Vix 10.44 +0.93Vol
There was no press conference following last week’s FED meeting and therefore attention was restricted to changes in the FOMC’s statement.
Specifically, the committee made 2 key amendments:
- The assessment of measures of inflation was downgraded (dovish)
From: “declined recently” and “running somewhat below 2%”.
To: “have declined and are running below 2%”.
- The timing for balance sheet normalisation was brought forward (hawkish)
From: “the Committee is maintaining its existing policy” and “expects to begin implementing its balance sheet normalisation program this year”.
To: “For the time being the Committee is maintaining its existing policy” and “expects to begin implementing its balance sheet normalization program relatively soon”.
As bond yields rose but the USD weakened (trade weighted USD is now more than 8.5% lower YTD), the result could be seen as a wash.
Moves in equity markets were largely unrelated to the outcome of the FED meeting. Instead, stocks took their lead from politics, corporate earnings (with 74 firms reporting on Thursday alone) and the oil price. The result was very little change at the overall index level, but some important sector divergences once again:
- Healthcare lagged after Donald Trump again failed to repeal Obamacare (3 republican’s voting against a so called “skinny repeal”) and AstraZeneca soured sentiment following disappointing test results for its new lung cancer drug and a 14.9% one-day fall in its share price.
- Energy surged as oil posted its best week of the year after Saudi Arabia vowed to cut exports in August and a sharp drop was recorded in U.S. crude and fuel stockpiles. Moreover, Venezuelan President Nicolas Maduro announced he would hold a vote on Sunday to potentially rewrite the 1999 constitution, which could lead to sanctions including banning US imports of Venezuelan oil. Venezuela represents 2% of the global petroleum market.
- Technology was slightly lower after mixed results from “FAANG” stocks; Amazon disappointing but Facebook beating expectations.
Economic data was a mixed bag. The Conference Board’s gauge of consumer confidence surprisingly increased, with durable goods also improving. However, capital goods orders and existing and new home sales all came in below expectations. Real GDP growth for Q2 was more or less in-line at a 2.6% annualised pace (up from 1.2% in Q1).
Elsewhere, the Senate voted by an overwhelming majority (98 to 2) in favour of new sanctions against Russia. These measures effectively restrict Russia’s ability to do business with American entities and are based on US intelligence agencies concluding that Russia interfered in the 2016 US presidential election, as well as punishing Russia for its annexation of the Crimea in 2014. In retaliation, Moscow has ordered the US to cut diplomatic staff and will seize 2 US diplomatic properties.
This week we have the employment report, which may shed more light on the timing of FED policy changes.
Eurostoxx 3,478 +1.11%, German Bund 0.55% +3.60bps, Xover Credit Index 232 -2bps, EURUSD 1.173 -0.73%
Whilst remaining at high levels, Eurozone PMIs for July declined (composite at 55.8 from 56.3), as both the manufacturing and services readings moderated. Confidence in Europe, however, remains high; the German IFO and the French INSEE surveys recording blockbuster gains (the INSEE Business Climate index at the highest level in 6 years). Indeed, Q2 GDP growth in Spain and France printed solidly at 0.9% and 0.5% QOQ respectively.
Greece returned to the capital markets for the first time since 2014, selling EUR 3bn of 5-year bonds at a yield of 4.625%. The deal priced inside original guidance, was 2x oversubscribed and involved swapping around EUR 1.5bn of bonds maturing in 2019 (thus lengthening the country’s maturity schedule).
The EUR hit a 30-month high against the USD on Thursday, indeed, the single currency put in one of its strongest weekly performances against the Swiss Franc in decades. It is unclear, whether the Swiss National Bank directly intervened, but after Chief Thomas Jordan spoke about the currency being significantly overvalued on Monday, the Swiss Franc weakened for 4 days in succession, losing over 3% versus EUR. The currency remains expensive on the basis of its perceived safe haven virtues.
In the UK, consumer confidence weakened to its lowest level since immediately after the Brexit vote. Q2 GDP growth printed at 1.7% YOY. This week there is a Bank of England meeting at which no policy change is expected, but GDP forecasts are likely to be downgraded. Qualitative guidance will be key – either preparing the market for a “pre-emptive hike” or becoming more “data dependent”.
In Poland, President Duda vetoed 2 of 3 new bills that would have allowed the government to terminate and appoint judges at all levels. This came after significant pressure from the European Commission (with the threat of a suspension of voting rights and EU structural funds) and a groundswell of public protest. The EC maintains its negative view of the 3rd bill, concerning lower court judges.
The Central Bank of Russia left rates on hold at 9% on Friday, citing increased inflation in June and potential weakness in the RUB post US sanctions. The CBT in Turkey, also left policy unchanged.
HSCEI 1,083 -0.29%, Nikkei 1,992.00 -0.48%, 10yr JGB 0.08% +0bps, USDJPY 110.670 -0.40%
Japanese PM Shinzo Abe’s popularity has declined precipitously over recent months following a number of scandals. Indeed, his approval rating has plunged to a record low 26%, according to a Mainichi Shimbun poll. Last week, defence minister Tomomi Inada was forced to resign over an alleged cover-up of documents from UN peacekeeping operations. More importantly, there is an increasing probability that Abe will lose the LDP election in September 2019 and that the Governorship of the BOJ (also due for renewal in 2019) could pass from Kuroda to a less “Abenomics friendly” candidate. Abe is likely to announce a Cabinet reshuffle this week.
Japan’s economy, however, has showed some resilience this year. Last week, unemployment fell to 2.8% (23-year low) with the jobs/applicants ratio for full-time workers exceeding 1.00 for the first time since records began. The tightness in the Japanese labour market reflects a shrinking working age population. In 2016, the working age population fell by 700,000 people and it will shrink by a further 800,00 in 2017. Nonetheless, for now, wage inflation remains elusive.
On 24th July China’s President Xi Jinping presided over a Politburo meeting charged with setting the country’s economic policy for the second half of the year. There was minimal new content emanating from the conference, with the now boilerplate rhetoric of “proactive” fiscal policy, “prudent” monetary policy and SOE-led supply side reform being rolled out once more.
The latest batch of macro data in China came out; Manufacturing PMI fell but remained expansionary at 51.4 in July (versus 51.7 in June), while industrial profits were strong at +19.1% YOY.
In India, the wheels of the Modi juggernaut continue to turn, as the astonishing ascent of the BJP continues.
The Chief Minister of Bihar, India’s 5th largest state, resigned on Wednesday, paving the way for Modi’s BJP to form a government in a state where it suffered an embarrassing election defeat in 2015.
The BJP’s failure to win Bihar in 2015 was seen as a major setback. Opposition parties had joined together, despite stark ideological differences, with the sole purpose of preventing the BJP from taking yet another state. The fear for Modi was that if this proved successful, it could be replicated across India, halting his progress towards control of both the upper and lower houses.
However, with the Bihar government falling, with the Chief Minister Nitish Kumar’s resignation driven by allegations of corruption against his coalition partners, this model of unified opposition has been exposed as unsustainable. Essentially, the Chief Minister’s conscience got the best of him, and with the BJP waiting in the wings to form a ‘cleaner’ partnership, Mr Kumar now finds himself part of a government much more consistent with his own party’s values.
The formation of a new government in Bihar is positive for the BJP on many levels. Immediately, the government gains new seats in the upper house of parliament. Longer term, the evolution of state politics in Bihar over the last two years sends a message to the rest of India that political obstructionism and underhand tactics are insufficient to deter the progress of a government with such a strong body of public support.
On Friday, Pakistan’s Supreme Court disqualified Prime Minister Nawaz Sharif from holding office.
The five judges of the Supreme Court voted unanimously to prohibit the Prime Minister from holding public office on charges of dishonesty when speaking in parliament and to the courts. This follows a split decision back in April, whereby two judges voted for disqualification and three voted for further investigations. The charges centre around information that came to light as part of the Panama Papers leak, which suggested that the Prime Minister and his immediate family had a significant amount of wealth held offshore which could not be accounted for based on his official income declarations.
With general elections scheduled for next year, Shahid Khaqan Abbasi has been appointed as interim Prime Minister. Given the government’s strong majority, Abbasi is expected to easily secure enough votes when the assembly meets next week in order to assume the post for the next twelve months.
Whilst the country now faces a period of political uncertainty, and anti-corruption investigations are ongoing against remaining members of the government, several commentators have focused on the positives for Pakistan. The successful removal of a sitting Prime Minister by due process and judicial investigation, rather than mass protests or military intervention, speaks to much stronger institutions than many would have expected.
The local stock market took the news well, finishing slightly up on the day. Whether equities will continue to react so positively to developments in Pakistan however, particularly if what feels like a one-sided bet against the currency begins to come to fruition, is quite another matter.
Taiwan’s GDP growth came in slightly lower than expected in Q2 (2.1% YOY vs. consensus expectations at 2.2% and Q1’s growth rate of 2.6%). Gross capital formation and manufacturing activity were the drags.
South Korea’s economy grew in line with expectations in Q2, at 2.7% YOY. Domestic consumption improved, though exports were lacklustre.
MSCI Lat Am 2,746 +0.27%
Emerging Markets equities recorded their 19th consecutive week of net inflows as investors have poured in USD 47.6Bn YTD. Among those, Latin American equities received net USD 9.6Bn as investors are reduce their underweight position.
Colombia’s central bank cut the benchmark rate by 25bps to 5.5%, highlighting that the temporary supply shocks that led inflation above the target range have continued fading as signalled by the slowdown in food inflation.
Brazil’s central bank cut the SELIC rate by 100bps to 9.25%, as expected. The monetary policy committee highlighted the decline in inflation expectations for this year and next year.
Brazil received USD 80.7Bn FDIs in the 12 months to May-2017 and was the 7th largest global FDI receiver in 2016, despite its political challenges. This was partly driven by mergers and acquisitions (USD 37Bn were invested by foreigners out of USD 46.6Bn) because:
- Brazilian companies and assets were more attractive following a 50% devaluation of the BRL (vs. USD) from its 2011 peak.
- Valuations were attractive as local shareholders and companies were also keen to offload assets because of financial distress caused by the recession or due to the corruption investigations.
Another part of those FDIs were inter-company transactions to benefit from the high nominal and real interest rates.
Mexico retail sales continue on their decelerating path coming in at 3.3% YOY in May, pulling down the 3-month moving average growth rate to 3.7% year-over-year (from 5.1% in April). This shouldn’t come as a surprise and is consistent with less supportive fundamentals like the fall in real wages by 1.4% YOY in June (the sharpest contraction in more than 7 years).
Maduro may have captured what was left of Venezuela’s democracy earlier this week. Venezuelans had to elect 545 members of a newly created Constituent Assembly; an institution that will have the powers to bypass the opposition-controlled National Assembly and to re-write the Constitution (and so, give free-reins to Maduro). Among the 6,000 candidates, none were from the opposition parties. 7mn people went to the polls on July 16th and voted against the creation of a Constituent assembly in an unofficial referendum held by the opposition. The repression of opposition-led protests killed 110 people over the past 4 months, with at least another 10 killed yesterday.
This might be the last straw for the main buyer of Venezuelan oil, the United States. The capture of democracy and independent institutions could lead the Trump administration to impose more sanctions on Venezuela (having already imposed restrictions on 13 top officials since last Wednesday). With their own shale gas production, the US can afford not to buy Venezuelan oil (8% of US crude oil imports as of April). 95% of Venezuela’s budget relies on the 2.1mn barrels produced daily (800k of which are exported to the US), a number that is quickly falling due to a lack of investment.
Assuming no one would replace the US in buying oil from Venezuela, a blockade would probably plunge the country into a deeper economic crisis than the one currently underway: shortages of food, medicines and other staples, 700%+ annual inflation, thousands of migrants fleeing the country.
MSCI Africa 892 +0.87%
South Africa’s PPI eased to 4% YOY in June (from 4.8% in May), its lowest levels since September 2015, owing to a slowdown in increases of food and fuel prices in the period. MOM, the headline PPI decreased by 0.3% in June compared to a 0.5% increase in May.
The Central Bank of Nigeria left the benchmark policy rate unchanged at 14%, driven primarily by the need to maintain a stable exchange rate, and also in light of slowing headline inflation and continued volatility in the price of crude oil.
Nigeria agreed with OPEC to cap oil output at 1.8mbpd. This compares with an output of 1.7mpd in June. Getting to 1.8mbpd won’t be easy however, with reports of militants vandalising the Trans-Niger pipeline in the Niger Delta region, leading to a 150,000 barrels per day reduction in production.
An FT article puts Nigeria’s debt to GDP (adjusted to strip out the informal/untaxable part of the economy) at 54% compared to a headline rate of 19%. Further, given the low tax take (federal government revenue amounts to only 5.3% of GDP), gross government debt equates to 320% of annual federal revenue. This highlights the indebtedness and the high cost of servicing the debt (Nigeria is said to be paying 67 naira in interest for every 100 naira it raises in tax), and the importance of crude oil revenue which represents much of the formal sector.
The Bank of Ghana cut rates by 150 bps to 21%.
Source: Alquity Global Market Update www.alquity.com