Money Matters 6th November 2018

Politics has trumped economics, again. However, rather than bullying investors into retreating from risk assets, as is normally the case, political noise has lifted the mood of market players. An upbeat tweet by President Trump claiming that trade discussions between the US and China have been progressing ‘nicely’ was just enough to turn markets around. In reaction to the tweet, the EM universe breathed a sigh of relief and embarked on a remarkable rally, best exemplified by the appreciation of the Chinese renminbi against the USD, which pulled away from the feared threshold of 7 and gained almost 1.6%, finishing the week below the 6.90-level. In a separate event, the US softened its stance on India and South Korea purchasing Iranian oil, which also contributed to an improvement of global market sentiment. If we can believe President Trump’s claim that negotiations with China are indeed going ‘nicely,’ then the EM universe might just face a less challenging November and December and finish this year on a more positive note.
No week has gone by this year without politics influencing global risk appetite. This week will be no exception, as mid-term elections in the US will definitely influence global market sentiment. On Thursday, the FOMC holds its penultimate monetary policy meeting this year. The Committee is not expected to hike the policy rate, but it is highly likely to strengthen guidance that a 25bp hike in December is required. Turning to the other side of the Atlantic, no major data releases are scheduled in the Euro Area, while the UK will release Q3 GDP.
Within the EM universe, Asian markets will be driven by a wide variety of macroeconomic data, such as Q3 GDP in Indonesia and the Philippines, a monetary policy meeting in Malaysia and foreign trade data from a wide range of Asian countries (including China). Latin American markets are going to focus on the unveiling of President-elect Bolsonaro’s Cabinet, as well as on the minutes of the Brazilian central bank’s last rate setting meeting. Additionally, Mexico will release a wide range of high-frequency data on economic activity, while the Peruvian central bank might just keep the policy rate unchanged. In Africa, Kenyan, Nigerian and Egyptian manufacturing PMI data will be announced. 
S&P 2,723 +2.42%, 10yr Treasury 3.20% +13.66bps, HY Credit Index 365 -16bps, Vix 19.51 -4.65Vol
Stock markets in the US bounced and finished the week on a positive note. On a weekly basis, the S&P 500 rose 2.4%, the Nasdaq Composite increased 2.7%, while the Russell 2000 soared 4.3%. From a sectoral point of view, materials clearly outperformed, with their index gaining 6.1%, followed by financials and consumer discretionary which rose 4.4% and 4% respectively. The broad dollar-index (DXY) was flat on the week, while the Treasury curve not only increased, but steepened as well. Consequently, the 10-year yield jumped 14bp and hit 3.21%, raising the 2s10s spread to 31bp.
Core PCE inflation in the US rose 2% YoY (0.2% MoM) in September. Meanwhile, headline PCE inflation decelerated to 2% YoY from August’s 2.2%. Both measures of inflation met the Fed’s inflation target of 2%. Personal income rose 0.2% MoM, while spending rose 0.4% MoM in September. Personal income and spending were both revised higher in August.
The September personal consumption data confirmed what the GDP data in Q3 had already revealed; consumption has been robust, and inflation remains contained in the US. The strong economic momentum will last in Q4. However, in the absence of new policy measures by the Trump administration to stimulate the economy, domestic demand is likely to contribute less to GDP growth, which in turn may slow throughout 2019.
The US jobs report was just about the right temperature, not too hot, not too cold, as labour market data broadly matched expectations. Non-farm payrolls in October rose 250,000, the unemployment rate held steady at 3.7%, while nominal wages grew 3.1% YoY.
The October jobs report was strong enough to reaffirm the market’s belief that there might be just enough room for two 25bp hikes in 2019 on top of the, broadly expected, hike this December. However, the divide between the FOMC projection and the market on a third hike in 2019 remains.
Europe 6 Nov 2018EUROPE
Eurostoxx 3,214 +2.42%, German Bund 0.42% +7.60bps, Xover Credit Index 291 -14bps, USDEUR .879 +0.11%
European markets headed north despite the lacklustre economic data releases and political tensions between Brussels and the Italian government. The stock indices of the big four economies gained between 2.6% and 3.7% (all in USD) respectively. The improved market sentiment was also reflected in yield and spread developments; the German yield curve shifted up and steepened, lifting the 10-year Bund yield 8bp to 0.43%., while the spread over the Italian 10-year yield compressed 17bp to 289bp. Although the risk premium on Italian sovereign debt decreased during the week, the spread matches the levels seen in 2013, when the Euro Area was in a fully-fledged crisis.
The Bank of England (BOE) voted unanimously to keep the policy Rate at 0.75%. The ‘gradual and limited’ guidance on rate hikes remained intact. Although the BOE noted that global growth has softened, it left its GDP growth forecast for the UK broadly unchanged, at 1.5% in 2018 and 1.7% in 2019. Governor Carney pointed out that the timing and the intensity of rate hikes greatly depend on the nature of the Brexit deal reached by the UK and the EU.
The flash estimate of French real GDP growth showed that the pace of economic expansion hit 0.4% QoQ in 2018 Q3, slightly slower than in Q2. In annualised terms, GDP increased 1.7%. Domestic demand contributed 0.5ppt, as household consumption, public expenditures and gross fixed capital formation strengthened in an annual comparison. Net exports were virtually flat.
Italian real GDP was flat in a quarterly comparison in 2018 Q3. In annualised terms, growth was just 0.1%, the slowest pace since 2014 Q4. Italian growth has been slowing sharply in the first three quarters of 2018. According to the comment released by the Statistical Office, the slowdown was mainly driven by a decline in industrial output, while services activity strengthened. From the demand side, both domestic and external demand were flat.
Asia 6 Nov 2018ASIA
HSCEI 10,506 +6.46%, Nikkei 21,898.99 + 3.84%10yr JGB 0.13% +0bps, USDJPY 113.190 +1.12%
President Trump’s tweet ‘nicely’ lifted Asian stock markets, with the majority of them gaining substantially during the week. The broad MSCI Asia Pacific ex. Japan index rose 6.7% in USD. The Hang Seng index, Chinese ‘H’ shares and the Taiwanese market were among the outperformers, as they rose 7.4%, 6.5% and 5.7% (all in USD) respectively.
Japanese industrial production decreased 1.1% MoM in September, after increasing 0.2% MoM in August. As a result, industrial output declined 1.6% QoQ in Q3 (+1.3% QoQ in Q2 and -1.3% QoQ in Q1). The lacklustre performance was mainly due to adverse weather conditions.
China’s official manufacturing PMI fell 0.6ppt to 50.2 in October. The measure projects slowing manufacturing output growth in the coming months. Medium-sized enterprises reported the most pessimistic outlook, as the PMI in their case was 47.7 (below the 50-point mark that separates expansion from contraction). Sliding export orders was the primary cause of the sharp decline in the headline PMI. Non-manufacturing PMI declined as well, to 52.1, but continues to signal a strong expansion of non-manufacturing output, which is primarily dependent on domestic demand and largely insulated from external developments.
The politburo economic meeting in China, which usually discusses recent economic challenges, delivered a message consistent with recent statements by various Chinese authorities, namely that fiscal policy will remain pro-active and monetary policy supportive. Policy objectives remain the same, i.e. stabilising employment, the financial sector, exports, etc. The statement underlined that authorities will put greater emphasis on the implementation of supportive policies in the future.
Chinese President Xi, during a meeting with a group of prominent private entrepreneurs, emphasised the need for private enterprises in China’s next stage of economic development. President Xi denied that private firms will need to exit China to allow more room to state-owned enterprises.
Vietnamese exports and imports in October were USD 20.8bn (-1.5% MoM) and USD 20.7bn (+6.1% MoM) respectively, resulting in a small trade surplus of USD 100mn. Year-to-date, trade surplus amounted to USD 6.4bn vs a trade surplus of USD 2.6bn in the same period last year.
Vietnamese CPI inflation in October rose 3.9% YoY, down from 4% YoY in September. The upside pressure on inflation stemming from various factors mitigated in October, such as transportation, domestic retail gasoline prices, education, housing and construction materials, and food.
Pakistani CPI inflation spiked to 7% YoY in October. The acceleration in inflation was primarily due to increases in consumer energy prices, including the prices of gas and fuel. Furthermore, the impact of the recent currency devaluation also fed through to consumer prices, exhibited by products such as imported food.
Thai headline CPI inflation was 1.2% YoY in October vs. 1.3% YoY a month before. Core inflation also lowered, to 0.8% YoY. The deceleration, from a peak in August (at 1.6%), was mainly to the base effect related to energy prices and tobacco and alcoholic beverages prices.
Latin America 6 Nov 2018LATIN AMERICA
MSCI Lat Am 2,724 +1.37%
Latin American markets delivered a mixed performance and, as a result, the MSCI EM Latin America index rose a mere 1.4% in USD. Argentina soared, as the country’s stock index gained 11.3% in USD, followed by Brazil, increasing 3% in USD. In contrast, the Mexican stock market lost 4.2% of its value in USD, due to President AMLO’s interventionist policies.
Markets’ focus shifts to the reform agenda of President-elect Bolsonaro. According to the local Brazilian press, Bolsonaro may consider proposing a series of “high impact” reforms in an attempt to send a positive signal to markets. According to local reports, formal central bank independence could be a key part of the package.
One of the concerns related to the Bolsonaro administration is not the willingness to pass a credible reform agenda, but rather the government’s ability to execute that agenda given its limited support in Congress.
The MPC of the Brazilian central bank unanimously decided to keep the policy rate stable at 6.5%. Members reiterated that stimulus will be gradually removed in the event that the outlook for inflation worsens.
Mexican President, AMLO, announced the cancellation of the new airport in Mexico City after having consulted with the public. In the aftermath of the decision, credit rating agency Fitch worsened the outlook attached to the country’s credit rating from ‘stable’ to ‘negative,’ while keeping the credit rating unchanged at BBB-. In addition, Fitch claimed that broader downside risks which do not bode well for the fiscal stance have prevailed.
The news sent tremors through Mexican financial markets, with markets extrapolating from this incident how AMLO may approach implementing future policies. In other words, AMLO’s policies may be adverse to the business environment, potentially hindering asset price gains in the future.
Mexican GDP growth surprised to the upside in Q3, as it hit 3.6% in seasonally adjusted annualised terms. In a quarterly comparison, real GDP rose 0.9% after contracting 0.2% in Q2. Details revealed that quarterly growth of the primary and service sectors was 0.8%, while industrial output increased by 0.5%.
Latest GDP data confirmed that Mexican GDP may expand somewhat faster than 2% in 2018.
The Colombian unemployment rate increased to 9.5% in September. The increase in the rate was mainly due to rising labour force participation, now at 64.4%. This is affirmed by the fact the employment ratio edged up to 58.3%
Chilean President Piñera presented the pension reform plan, which aims to increase the system’s pay-out by raising the mandatory contribution rate 4.2ppt to 14.2% and increasing fiscal spending. The reform may be implemented in the next 8 to 9 years, with the bulk of the higher mandatory contribution concentrated in the 2022-2028 period.
Africa 6  Nov 2018AFRICA
MSCI Africa 759 +9.00%
African markets benefitted from the improved global sentiment, as the broad MSCI EFM Africa index rose 9% in USD. South Africa’s stock index was a clear outperformer, gaining 9.4% in USD, while the Ghanaian and Nigerian indices lagged behind, as they decreased 3.5% and 2.4% in USD respectively.
The unemployment rate in South Africa rose 0.3ppt, compared to the previous quarter, in 2018 Q3 according to the country’s quarterly labour force survey. The rate stands at 27.5%, which translates to 6.2mn jobless people.
The expanded definition of unemployment, which includes those, who stopped seeking jobs, rose to 37.3% in Q3. The report claims that while employment in the formal sector shrank, employment in the grey and black economy expanded.
South Africa’s foreign trade deficit amounted to ZAR 3bn (ca. USD 200mn) in September, due to falling exports (-2.6% MoM), while imports rose (+8% MoM).
According to the biannual policy report released by the central bank of South Africa, inflation might remain ‘uncomfortably’ high in the foreseeable future, while economic growth may disappoint. The governor of the central bank claimed that the MPC will take rate hikes into consideration to address faster-than-desired inflation dynamics but added that rate hikes will not be steep.
The Kenyan finance minister claimed that the country has not taken a final stance on the planned amount of foreign borrowing in FY2018-19 (between July 2018 and June 2019). According to the budget for this financial year, Kenya’s budget deficit may amount to 5.7% of GDP, half of which (ca. USD 2.8bn) would be covered by net external financing. CPI inflation in Kenya slowed to 5.5% YoY in October, from September’s 5.7% YoY.
The International Monetary Fund (IMF) and Egypt reached an agreement for the disbursement of USD 2bn from the USD 12bn extended fund facility. According to the IMF, Egypt’s implementation of the economic reform programme helped the economy to grow and to reduce unemployment. The IMF also claimed that the government’s commitment to further fiscal discipline remains credible.
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