Money Matters 22nd January 2019

Various risks of political nature linger that drive global market sentiment and thus asset prices.
Just to name a few:

  • Due to the government shutdown in the US, markets are losing visibility on the outlook for US rates and yields, since the publication of relevant macroeconomic data is delayed (such as retail sales last week).
  • No new meaningful pieces of information may be revealed related to the ongoing trade talks between the US and China in the short-term.
  • Nobody knows for sure how to capture the magnitude of Brexit’s economic implications or when Brexit may materialise.
  • Populist parties could upset the frail political landscape within the EU after the elections are over.

Whilst it is difficult to accurately incorporate political risks in asset prices, the uncertainty and unpredictability will sooner or later translate into higher volatility. 
United States 22 Jan 2019UNITED STATES
S&P 2,671 +2.87%, 10yr Treasury 2.78% +8.35bps, HY Credit Index 383 -23bps, Vix 17.80 -.39Vol
US stock markets enjoyed an upbeat week, due to positive US-China trade headlines and a ‘patient’ Fed. The S&P 500 rose 2.9% led by financials (+6.1%) and industrials (+3.3%), while the US dollar strengthened (DXY up 0.7%). The Treasury curve has started to regain its normal upward-sloping shape, as the 5-year yield is finally 1bp above the 2-year tenor (2.62% vs. 2.61%). The 10-year yield rose 8bp to 2.78% on the back of rising inflation expectations led by higher oil prices (WTI for the February delivery up 4.3%; Brent for the March delivery up 3.7%).
Industrial production rose 0.3% MoM in December. Manufacturing production was one of the strongest components, as it increased 1.1% MoM, well above consensus. Manufacturing strength was broad-based across categories. The overall production number was weighed on by a large decline in utilities, due to the unusually warm weather.
Producer price inflation (PPI) fell 0.2% MoM in December, while in an annual comparison remained at 2.5%. Excluding food and energy prices, PPI was stable at 2.7%YoY.
The trajectory of PPI suggests that there are no strong underlying price pressures in the US’ domestic economic for the time being.
Looking forward: The government shutdown led to the delay of a potentially market-moving retail sales figure, which are scheduled to be released this week. However, it remains highly uncertain if any relevant macroeconomic data will be revealed. Consequently, the market will need to rely on gauges by private sources, such as the Markit Manufacturing PMI as long as the government shutdown persists.
Europe 22 Jan 2019EUROPE
Eurostoxx 3,127 +1.00%German Bund 0.25% +2.30bps, Xover Credit Index 324 -14bps, USDEUR .879 +1.08%
Risk appetite strengthened in the European space, and as a result, the majority of stock indices gained during the week. Within the Eurozone, the German DAX delivered one of the best performances, as the index rose 1.8% in USD. Meanwhile, the UK’s FTSE 100 lagged behind, since the index climbed to a lesser extent, by 0.9% in USD. And in the fixed income space, German Bund yields slightly rose, the 10-year tenor increasing 2bp to 0.33bp, while the risk premia on the Italian sovereign debt assets compressed, as the 10-year yield eased by 12bp to 2.73%, due to the abating fiscal concerns.
The UK’s lower house of Parliament rejected the EU Withdrawal Treaty by a margin of 432-202, which PM May negotiated with the EU. Following the rejection of the EU Withdrawal Treaty, the government won a confidence motion in the House of Commons by 325-306. PM May invited the leaders of all parties in Parliament to work on a compromise with her, and at the same time rejected the idea of a permanent customs union with the EU. Labour leader Corbyn declined the PM’s offer.
Various officials of the European Central Bank gave speeches during the week. Their message was uniform in terms of the outlook for monetary policy, i.e. they see the withdrawal of monetary stimulus justified, despite weakening macroeconomic data in the Euro Area.
Looking forward: All eyes are going to be on the European Central Bank’s rate setting meeting on Thursday. The monetary authority will need to address the softer-than-expected macroeconomic indicators in the Euro Area, which make the justification for the withdrawal of monetary stimulus more difficult than before.
Asia 22 Jan 2019ASIA
HSCEI 10,713 +1.70%, Nikkei 20,719.33 + 0.18%, 10yr JGB 0.01% 0bps, USDJPY 109.630 +1.32%
Most of the emerging Asian stock indices went sideways expressed in USD. The South Korean market delivered one of the best performances during the week, as the index rose 1.9% in USD, followed by Chinese ‘H’ shares (+1.7%) and Chinese ‘A’ shares (+1.4%). In contrast, the Thai (-0.3% in USD), Indian (-0.2% in USD) and Vietnamese (-0.1% in USD) markets underdelivered.
Nationwide CPI inflation in Japan rose 0.7% YoY in December, down from 0.9% YoY in November. The inflation gauge excluding the impact of fresh food and energy prices was flat at 0.3% YoY; indicating a lack of domestic inflationary pressure.
Chinese foreign trade data disappointed in December, as both exports and imports in US dollar terms contracted: exports decreased 4.4% YoY (vs. 3.9% YoY in November), while imports shrank 7.6% YoY (vs. 2.9% YoY in November). As a result, the trade balance widened to USD 57.1bn in the last month of 2018. Despite the disappointing figures in December, foreign trade performed strongly in 2018 as a whole, as annual exports growth hit 9.9% and imports growth rose to 15.8%. Consequently, the annual trade surplus eased to USD 358.1bn (vs. USD 509.7bn in 2017).
Overall, the fact that trade figures were weak in December did not come as a surprise as PMI figures have been consistently implying that export demand for Chinese products had been gradually softening throughout 2H18. In addition, the so-called ‘front-loading’ effect (to avoid tariffs) could have also bloated trade figures up until 4Q18.
M2 money supply growth in China remained stable at 8.1% YoY in December, matching the median market estimate. Growth of total outstanding loans marginally rose, to 13.5% YoY in December, as lending to the corporate sector is yet to pick up.
Recent monetary easing steps ensure that money supply growth and lending dynamics will remain solid in the coming months. Although an outright policy rate cut by the People’s Bank of China is not expected, the monetary authority can continue to reduce the reserve requirement ratio, deliver targeted liquidity injections and take administrative steps to ease lending constraints should the macroeconomic environment require it.
The Indonesian central bank held the policy rate at 6%, in line with the median market estimate. The Governor’s post-decision speech implied that the MPC has shifted to a more neutral stance, as the policy rate ‘almost peaked.
The MPC will shift to a more data dependent stance, or in other words, the policy rate might be further hiked should the current real interest rate not be sufficient enough to keep Indonesian financial markets stable.
Looking forward: This week begins with a flurry of macroeconomic data from China that have the potential to move financial markets. Such data includes retail sales, industrial production, fixed assets investments and GDP growth. In the second half of the week, South Korea and the Philippines post GDP growth figures, Vietnam may publish its usual set of monthly macroeconomic figures and the Malaysian, South Korean and Pakistani central banks decide on their respective policy rates.
Latin America 22 Jan 2019LATIN AMERICA
MSCI Lat Am 2,869 +1.82%
Investors’ risk appetite in the Latin American space visibly improved, as the majority of the indices rose in USD terms. The broad Chilean stock index outperformed its Latin American peers (+2.9% in USD), followed by Argentina (+1.8% in USD) and Brazil (+1.7% in USD).
The monthly GDP proxy index in Brazil increased by 0.3% MoM SA in November. In an annual comparison, the index rose 1.9%. The annual GDP proxy slowed compared with October’s 2.1% YoY. Meanwhile, retail sales volume growth (that captures a significant portion of the domestic economic momentum) bounced to 1.5% YoY.
The monthly economic activity indicator in Peru posted an outstandingly strong figure in November, as growth strengthened to 5.3% YoY. The detailed breakdown showed that output by the primary sector expanded 8.5% YoY, while the non-primary sector’s activity rose to 4.5% YoY due to higher activity in the construction and services sectors.
The latest data implies that Peru’s economic growth momentum will most likely remain exceptionally strong, between 3.5-4% YoY in the coming quarters.
Chile’s total factor productivity (TFP) increased by 1.3% YoY in 2018. Excluding the mining sector, the TFP grew by about 2.3% YoY. In comparison with TFP figures before, TFP bounced in 2018, as it decreased by 0.5% YoY and 0.2% YoY in 2016 and 2017, respectively.
Colombian retail sales growth was strong in November, as volume growth hit 10.8% YoY. The acceleration of retail sales growth was mainly due to higher auto sales growth. Excluding the spurring effect of auto sales, retail sales expended 6.7% YoY. Meanwhile, manufacturing grew briskly, by 4.7% YoY in November, led by oil refining.
Macroeconomic data from November implies that the output gap is closed in Colombia, which may support the central bank’s stance to hold the policy rate as long as inflationary pressures remain contained.
Argentina’s government met its primary fiscal deficit target in 2018 (the primary balance excludes interest payments by the government). The Treasury released an estimated primary deficit of 2.7% of GDP (ARS 374.3bn), matching the official target. The headline budget deficit was 5.2% of GDP in 2018, down from 5.6% in 2017.
Looking forward: Brazilian President Bolsonaro will deliver a speech at the World Economic Forum in Davos, where he might reinforce his administration’s commitment to the reform agenda. Various high-frequency macroeconomic indicators will be revealed later this week, such as the Mexican unemployment rate, inflation rate and retail sales figures, Colombian economic activity index and the inflation rate in Brazil.
MSCI Africa 803 +0.69%
Investor sentiment was positive within the African universe, as the majority of the African stock indices gained in USD. Nigeria’s stock market led with a 4.4% return in USD, while lagged its other major African stock markets, as the Egyptian stock index went sideways in USD terms.
In a unanimous decision, the South African central bank kept the policy rate stable at 6.75%, following a 25bp hike in November 2018. The tone of the MPC was less hawkish than before, as members struck a more balanced tone. Furthermore, within the macroeconomic forecast released by the central bank the estimate for CPI inflation in 2019 was significantly reduced, by 0.7ppt to 4.8% on the back of lower oil prices. In contrast, core inflation forecast for 2019 was revised down only by -0.3ppt to 5%.
Retail sales volume in South Africa rose 3.1% YoY in November, confirming that one of the key domestic drivers continued to boost an economy that emerged from recession in 3Q18. In addition, manufacturing output showed signs of recuperation in October and November. Despite this, the economic recovery is far from being broad-based, as mining production contracted 5.6% YoY in November or 1.3% on a 12-month rolling basis.
High-frequency macroeconomic data imply that domestic drivers of South Africa’s economic growth further strengthened in 4Q18. However, overall growth prospects remain frail and highly dependent on the external environment.
Headline CPI inflation in Nigeria rose to a seven-month high in December, to 11.4% YoY, from 11.3% in November. Food price inflation accelerated by 0.3ppt to 13.6% YoY.
Inflation continued to hover above the central bank’s target range of 6-9% with no signs of abating in the short-term, as underlying inflationary developments are pushed up by increased government spending before the elections.
Morocco’s GDP is expected to grow by 2.9% in 2019, according to the country’s Planning Agency. Compared to 2018, when GDP growth was 3%, the Moroccan economy may slightly slow, since agricultural harvest yield was exceptionally strong last year. Furthermore, inflation is expected to cool, to 1.2% in 2019 vs. 1.6% the year before. Meanwhile, current account deficit could remain stable, around 4.3% of GDP in 2019, 0.2ppt lower than in the previous year. Overall, in such a macroeconomic environment, the budget deficit could decrease 0.2ppt to 3.7% of GDP. Despite a narrower budget deficit, the total public debt to GDP ratio could increase to 82.5% this year.
According to Finance Ministry officials, Egyptian authorities have been preparing for hard currency bond issuance(s). The cabinet an amount of USD 3-7bn. The issuance may take place in 1Q19, however, no official date has been announced yet.
Looking forward: African markets will mainly focus on the Nigerian central bank’s monetary policy meeting and the December CPI inflation release in South Africa.
This week’s global market outlook is powered by Alquity
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