Money Matters 25th November 2019


Although the economic diary was relatively light on relevant data releases, headlines related to the renewed strains between the US and China, left investors scratching their heads. During the week, President Trump claimed that Washington and Beijing were very close to making the largest trade deal in history. However, the POTUS added that he stood with Hong Kong protesters. The US Senate passed a bill that requires certification of Hong Kong autonomy and warned China against suppressing protestors violently. The US backing of Hong Kong demonstrators fuelled Chinese anger and officials called upon the US to stop interfering with internal Chinese affairs.

These renewed strains come after news that the US and China were in final negotiations over how much tariffs should be rolled back. Since we may or may not receive new relevant pieces of information related to the trade negotiations this week, macroeconomic data releases could return to the focus.

United States 25th Nov 2019UNITED STATES
S&P 3,110 -0.33%, 10yr Treasury 1.78% -6.02bps, HY Credit Index 338 +10bps, Vix 12.34 +.29Vol

US President Trump sent mixed messages during the week, as the President reiterated that a deal with China was very close and added that he stood with Hong Kong. Furthermore, the US economy showed signs of strength, with Markit PMI readings exceeding expectations which rose relative to the previous month’s readings. In this environment, most of the major stock indices declined (the S&P500 index decreased 0.3%), the Treasury curve flattened (the 2-year Treasury yield rose 2bp to 1.63%, whilst the 10-year yield eased 6bp to 1.77%), and the greenback strengthened (the trade-weighted DXY index rose 0.3%). 


Eurostoxx 3,710 -0.92%, German Bund -0.35% -2.50bps, Xover Credit Index 232 -1bps, USDEUR .907 +0.29% 

Further weakness in macroeconomic data in the Euro Area weighed on investor sentiment. In this context, the major stock indices of the four largest economies in the Euro Area declined by the end of the week. As investors were increasingly seeking haven assets, government bond yields in the core Eurozone countries somewhat eased (the German 10-year yield decreased 2bp to -0.36%), whilst periphery spreads slightly compressed (the Italian 10-year yield declined 5bp to 1.18%).

Asia 25th Nov 2019ASIA
HSCEI 10,629 +0.81%, Nikkei 23,292.81 -0.73%, 10yr JGB-0.08% 0bps, USDJPY 108.860 -0.09%

Mixed signals on trade from Washington and Beijing whipsawed Asian stock markets, as US President Trump said a trade deal with China was close, but that protests in Hong Kong complicated the matter. Meanwhile, Chinese Vice Premier He, was said to have invited US Trade Representative Lighthizer to Beijing for further talks later this month. In this environment Chinese “H” shares rose 0.8% in USD followed by the Pakistani stock index (+0.9% in USD). In contrast, the South Korean stock market was among the poorest performers, as the country’s benchmark declined 4.1% in USD.

GDP growth in Thailand accelerated in 3Q19 and reached 2.4% YoY after bottoming out in 2Q19 at 2.3% YoY. Private consumption grew 4.2% YoY, whilst government spending growth rose to 1.8% YoY. In addition, both private (+2.4% YoY) and public investment activity (+3.7% YoY) picked up in 3Q19.

The Indonesian central bank decided to keep the policy rate stable at 5% after a cumulative of 100bp rate cuts in the period between July and October. Although the authority left the key interest rate unchanged, the reserve requirement ratio was reduced by 50bp to 5.50% to boost credit growth in the economy.

The Pakistani central bank held the key policy rate at 13.25%. The central bank argued that in the context of the prevailing inflation dynamics (CPI inflation at 11% YoY in October), it is appropriate to maintain current monetary conditions. According to the central bank’s forecast, inflation is unlikely to moderate below 11-12% YoY before June 2020. The Monetary Policy Council expressed its intention to bring down inflation into that range of 5-7% YoY on a 2-year horizon.

Latin America 25 Nov 2019LATIN AMERICA
MSCI Lat Am 2,712 +0.84%

The Brazilian stock index was one of the best performing Latin American benchmarks during the week, as it rose 2% in USD, bringing the year-to-date gains to 11.4% in USD. In contrast, the weakness in the Chilean market persisted due to adverse idiosyncratic developments and consequently the country’s stock index declined 5.8% in USD.

In Chile, GDP grew 3.3% YoY in 3Q19 (up from 1.9% YoY in 2Q19), predominantly led by investments, due to stronger construction activity. In addition, mining and services were also positive contributors.

Looking ahead, despite some encouraging monthly macro data, recent disruptions could weigh on the persistence of the economic recovery in 4Q19. The heightened uncertainty would likely weigh on investment and consumption decision-making. 

The Peruvian economy expanded 3% YoY in 3Q19, accelerating from the sluggish growth of 1.7% YoY in 1H19. The acceleration registered in 3Q19 may correspond to some extent to a weak reference point a year ago. Domestic demand (+4.0% YoY) supported headline economic growth, as private consumption rose 2.9% YoY, whilst gross fixed investments grew 5.2% YoY.

The nationwide protests in Colombia addressed a wide range of issues, such as opposing the pension and labour reforms, students demanding higher spending on education, etc. Although the number of protesters was large, the marches were generally peaceful. The need for pension reform in Colombia has already been widely acknowledged (i.e. to expand coverage and ensure sustainability), but so far has lacked political will.

Fitch reaffirmed Colombia’s credit rating at BBB (the second lowest investment grade notch) and sustained the ‘negative’ outlook. Fitch changed the outlook from ‘neutral’ to ‘negative’ in late May. According to Fitch, the retention of the outlook reflects continued risks to fiscal consolidation and the trajectory of government debt, the weakening of fiscal policy credibility, and increasing external vulnerabilities derived from higher external imbalances and rising indebtedness. The credit rating by Moody’s is at a comparable Baa2 (with ‘stable’ outlook), whilst S&P’s rating is one notch lower (BBB-) with a ‘stable’ outlook.

Argentine President-elect Fernandez met with IMF Managing Director Georgieva. The two parties discussed the President-elect’s ‘intention to put in place an economic plan which allows Argentina to grow, in order to reach a repayment agreement that we [Argentina] can meet without further adjustment on the Argentines.’ according to a tweet by Mr Fernandez. Later, the IMF published a short statement in which Georgieva described the call as ‘very constructive.’ According to local media reports, economic advisors of the Fernandez-led incoming government will meet large creditors to Argentina, to start a conversation on debt repayments and restructuring. 

Africa 25th Nov 2019AFRICA
MSCI Africa 777 +1.19%

African stock markets delivered a mixed performance during the week: the Moroccan (+1.7% in USD) and South African market (+1.4% in USD) outperformed most of their regional peers. In contrast, the Egyptian (-2.7% in USD) and Kenyan index (-1% in USD) declined.

South Africa’s central bank kept the key policy rate unchanged at 6.50%, despite a sustained drop in headline inflation (3.7% YoY in October). The decision was not unanimous, as three members of the Monetary Policy Council wanted to see inflation expectations closer to the midpoint of its target range (4.5% +/- 1.5%), whilst two members voted for a 25bp reduction. The central bank lowered its forecast for economic growth 0.5% for this year and reduced its forecasts for the next two years to 1.4% and 1.7%, respectively.

Economic growth in Nigeria slightly accelerated in the third quarter of the year, as the rate of real GDP growth reached 2.3% YoY vs. 2.1% YoY in the previous quarter. According to the Statistics Office, economic activity was supported by crude oil production, which rose to a three-year high, accounting for 90% of the country’s exports. Separately, the Statistics Office reported that consumer price inflation – unexpectedly – accelerated to 11.6% YoY in October. The government’s crackdown on smuggling caused disruptions in the food supply, which in turn pushed up prices.

Given the increase in inflation, the central bank is even less likely to deliver rate cuts to support the domestic economy. In this context, full-year GDP growth is likely to be as high as 2.2-2.4% in 2019. Unless the government passes the 2020 budget soon, it could prove to be challenging to exceed the 2% growth rate next year.

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