Money Matters 24th October 2017

Money Matters 24th October 2017

Money Matters 24th October 2017 1280 847 AMA Team

SCANNING THE HORIZON
As the bull market rages on, many investors are “scanning the horizon” for reasons to sell the rally. From a technical perspective, we have already highlighted the (almost never before seen) low levels of realised volatility across asset classes. Also of note are average cash balances which have reduced over the last year and (according to the Merrill Lynch fund managers’ survey) are now at 4.7% (the lowest since May 2015).
This week sees an ECB meeting at which it is expected that a change to the current quantitative easing program will be made. As a reminder, the current commitment is to purchase EUR 60bn per month until December 2017. Given recent messaging from the governing council, we could expect a market friendly outcome that balances a reduction in size of purchases against a longer time horizon. This is likely to be between EUR 20bn-40bn per month for between 6-12 additional months.
United States Senate OfficeUNITED STATES
S&P 2,575 +0.86%, 10yr Treasury 2.38% +11.15bps, HY Credit Index 308 -10bps, Vix 9.97 +0.36Vol


US equities recorded their 6th consecutive weekly gain, with most of the move coming on Friday after the Senate passed a fiscal year 2018 budget resolution by a wafer thin 51 votes to 49. This is a first step towards Donald Trump’s promised tax reform, however there is still a long road to travel; the Senate (working on the basis of USD 1.5trn of cuts) must reach an agreement with the House (seeking a deficit-neutral arrangement). Moreover, this same budget resolution mechanism has failed to lead to Affordable Care Act reform.
At the S&P 500 level, 88 companies have reported earnings so far, with a further 183 due to release numbers over the next 5 days. Following double-digit earnings growth in the first half of the year, expectations are for a more subdued, hurricane affected quarter (YOY increase of around 2%).
In terms of economic data, the better tone continued. “Soft” measures such as homebuilder confidence, Empire State and Philly manufacturing all rose, whilst weekly jobless claims fell to their lowest absolute level since 1973 (when the labour force was 60% smaller). However, housing starts were weaker and the Conference Board’s index of leading economic indicators declined for the first time in 12 months (related to hurricanes). Meanwhile, the FED’s Beige Book highlighted a stable economy and the tightest labour markets in years, but only modest inflationary pressures.
As highlighted in recent weeks, the composition of the Federal Reserve’s Board of Governor’s is due to change materially over coming months. The most important part is the nomination of a new Chair (Yellen’s initial 4-year term ends in February) – and this could come before the end of the month. According to “PredictIt.com”, the current favourite is Jerome Powell (58%), followed by the re-election of Janet Yellen (20%) and then John Taylor and Kevin Warsh (14% and 11% respectively). This suggests no material change in the committee’s reaction function as Powell and Yellen would be considered as leaving the “status quo” unchanged. Conversely, Taylor and Warsh should be seen as more hawkish. It would be worth noting to investors, that of Trump’s penchant for left-field hires.
EuropeEUROPE
Eurostoxx 3,607 -0.35%, German Bund 0.43% +4.90bps, Xover Credit Index 242 -0bps, EURUSD 1.176 +0.31%
3 weeks after the region voted for independence, PM Rajoy of Spain invoked Article 155 of the constitution on Saturday to impose direct rule by the central government over Catalonia. Subject to approval by the Senate (in which the ruling centre-right party has a majority and is therefore expected to gain support without issue), the entire Catalan government will be removed from office and new regional elections will be held within 6 months. Naturally, Catalan president Carles Puigdemont has condemned the move stating this is the “worst attack on the institutions and people of Catalonia since the decrees of the military dictator Francisco Franco abolishing the Generalitat of Catalonia”. Given the inability of the Spanish government to prevent the vote going ahead in the first place (two-thirds of the region’s mayors defied court orders and helped organise voting), the transition in power is unlikely to be smooth.
In the UK, testimony by the MPC’s 2 newest members (Ramsden and Tenreyo) to the Treasury Select Committee highlighted what most observers already knew; despite the highest inflation print in 5 years in September (3% YOY), there is no clear-cut basis for a rate hike cycle. Wage growth is lacklustre and the economy is weakening given the pressure on real incomes (retail sales came in below expectations at 1.6% YOY) and Brexit related uncertainty. It is therefore most likely a single rate increase in November could ensue, with the MPC forced to move from a position of weakness. In terms of Brexit, the EU summit again concluded with little progress. However, feedback was perhaps a little more constructive than previous sessions as progress was made regarding Ireland and citizen’s rights. In particular, PM Theresa May confirmed that there would be no physical border implemented. The UK is still facing an uphill battle to avoid a “no-deal” or “bad deal” scenario.
In the Czech Republic, Europe’s “Donald Trump” (billionaire Andrej Babis) swept to power in Saturday’s parliamentary elections. Running on an anti-corruption message (despite the fact he is facing fraud charges and accusations of conflicts of interest), his ANO party secured 29.7% of the vote (almost 3 times more than any other party). More generally, the result was a strong message of protest as a record 9 parties won seats in parliament, most running anti-establishment campaigns. These included the Pirate Party (3rd 10.8%) and the anti-migration, anti-Muslim, anti-EU “Freedom and Direct Democracy” party (4th with 10.7%).
The BOI in Israel again left rates unchanged at 0.10%, with a forecast that this continues until at least Q3 2018.
AsiaASIA
HSCEI 1,151 +0.41%, Nikkei 2,169.00 +0.08%, 10yr JGB 0.07% +0bps, USDJPY 113.810 +1.49%
Japanese stocks rose 1% as trading commenced this week and as Prime Minister Shinzo Abe claimed a resounding general election victory. Abe took over two-thirds of seats, giving him the supermajority required to make constitutional changes, as well as a strong powerbase from which to launch a new phase of Abenomics.
The victory comes after Prime Minister Abe gambled on calling a snap general election while his personal approval ratings were low. Abe capitalised on the disarray of the opposition, which culminated in the Democratic Party splitting in two just weeks before the election, and Tokyo governor Yuriko Koike refusing to stand as a prime ministerial candidate for the newly splintered opposition.
The Nikkei rose on the back of renewed expectations for fiscal stimulus from the Prime Minister, while the Yen dropped 0.2% in early trading shortly after the results came in. Whilst Abenomics has so far managed to deliver Japan’s lowest unemployment level since the 1970s, this has yet to satisfy policymakers’ thirst for higher inflation.
China’s 19th Communist Party Congress began in Beijing, with the policymaking communication coming in largely in line with the government’s previously stated objectives.
President Xi Jinping delivered a 30,000 word Party Work Report, the key messages of which largely matched closely with the President’s previous remarks made during his first five years in office, with a small handful of exceptions.
As he has done fairly consistently for the last few years in one guise or another, President Xi commented on the need to focus on the quality rather quantity of growth, with the increase in quality to be driven by innovation, supply-side reform and development of the services sector.
In terms of the key changes in rhetoric, President Xi tweaked the government’s definition of the “principal contradiction facing Chinese society”. Since 1981 the Chinese Communist Party had left this wording unchanged: “the principal contradiction in our society is still between the ever-growing material and cultural needs of the people, and the backwardness of social production”. Xi however refreshed the 36 year-old statement, offering the definition that; “the principal contradiction facing Chinese society has evolved to be that between unbalanced and inadequate development, and the people’s ever-growing needs for a better life”.
The other noteworthy announcement was Xi’s comments on a broad policy direction for the Chinese economy between now and 2050, which described a two-stage strategy designed to develop China in to a modern socialist economy.
Stepping away from the political arena, China’s GDP growth rate slowed marginally in Q3, coming in at 6.8% YOY, edging down from 6.9% in Q2. The growth rate remains above the “around 6.5%” official target for 2017, as well as being significantly ahead of what markets were pricing in for this year back in 2016, when calls for a hard landing in China were firmly in vogue.
September’s monthly data batch for China was essentially uncontroversial, with accelerations seen in retail sales (from 10.1% YOY in August to 10.3%) and industrial production (from 6.0% to 6.6%), while fixed asset investment (from 7.8% to 7.5%) and CPI inflation (from 1.8% to 1.6%) both slowed.
The Reserve Bank of India released the minutes of its October meeting, which revealed that 5 out of 6 voters (the meeting featured one dissenting vote) remain cautious on the inflation outlook, consistent with our view that the RBI will remain data dependent in the short term.
Indonesia’ central bank left rates on hold at 4.25%, having cut rates by 25bps in each of the last two meetings. Policymaker comments were largely positive on the economy, with the market currently pricing in a further rate cut before the end of the year.
Bank of Korea left rates on hold at 1.25%, though turned more hawkish in the tone of its statement, raising the prospect of a hike before the end of 2017.
Pakistan’s attempts to manage the capital account took another turn, with the government imposing import controls on 731 items. The government continues to pursue a ‘head in the sand’ approach to managing the economy, rather than tackling the obvious issue of an overvalued currency.
Latin America FlagsLATIN AMERICA
MSCI Lat Am 2,929 -1.24%
Mexico’s economy created 136k new jobs during September bringing the YTD number to 812k (+9.4% vs. 2016). There are only 19.4Mn formal jobs in Mexico out of a 127.5Mn population, underlying the big weight of the informal sector in the economy. During the present administration the Mexican economy has created 3.1m new jobs or 2.3x the former administration in the same period.
Peru’s GDP grew 2.28% YOY in September, the 97th consecutive month of growth. This was mainly driven by an increase in exports (+13.01% YOY, due to higher shipping of copper, gold, and fishing products) and in the construction sector (8.94% growth YOY, being its highest rate in the last 42 months). The unemployment rate fell to 6.4% in September from 6.7% the previous month. President Kuczynski’s approval rating rose 8pp to 30% this month after tensions with the opposition-ruled Congress subsided and congress approves Kuczynski’s new cabinet led by Prime Minister Mercedes Araoz.
Argentina CPI inflation increased to 1.9% MOM in September, surprising once again to the upside. The stickiness of inflation implies a continuation of a restrictive monetary policy, with high real interest rates in order to anchor inflation expectations.
Colombia’s trade balance in August recorded a USD 930Mn deficit. The rolling 12-month trade deficit continued to inch down, as it came in at USD 9.2Bn (USD 9.7Bn as of June and USD 11.5Bn in 2016). Although the trade deficit is narrowing, this adjustment to a lower currency is happening too gradually. Current-account deficit is expected at around of 3.5-3.7% of GDP this year (vs. 4.3% in 2016). These improvements are contingent on commodity prices and portfolio flows. The fiscal reform passed in December 2016 and the austerity budget voted for 2018 (many doubt about its feasibility) should gradually help reduce the primary fiscal deficit. Colombia will continue to borrow heavily abroad. These developments are not enough to alleviate concerns about the vulnerability of the Colombian economy and the COP to external shocks.
Africa ContinentAFRICA
MSCI Africa 883 -2.62%
Another week of political turmoil in two of the biggest capital markets in Africa:

  • Kenya – the chairman of the electoral commission casted doubt on the credibility of this week’s repeat presidential election, citing divisions in the commission and interference from politicians, while a leading electoral commissioner resigned, also citing concerns about the credibility of the process.
  • In South Africa, the rand weakened 2.5% against the dollar in the week following reports that President Zuma is considering sacking Cyril Ramaphosa, the business communities’ favoured candidate for ANC leadership, and a cabinet reshuffle (Zuma’s second in seven months) which saw close associates of the president in charge of key ministerial role, in place of his critics.
  • On data releases, South Africa’s headline inflation increased to 5.1% YOY in September, 0.5% MOM (vs. 0.1% in August). Core inflation was unchanged at 4.6% YOY. The revised retail sales for August beat market expectations, rising to 5.5% (vs. 2.3% expected).

Nigeria’s inflation eased for the eighth consecutive month, from 16.01% to 15.98% YOY in September while the international reserves rose to USD33.1bn, a 3 year high. MOM, inflation rose at the slowest pace since November 2016, 0.78%. Food inflation however bulked the trend, increasing to 20.32% YOY from 20.25% in August.
Lastly in Egypt, tourism revenue doubles in the 9 months to September, to USD5.3bn driven by a 55% increase in the number of tourists to 5.9mn, primarily from Europe. Tax revenue is also up, 55% YOY in 1Q17/18, driven by a 79% increase in revenues from a new VAT regime and 36% YOY increase in income taxes.
 

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