Money Matters April 24, 2017

On Friday GDP data for the US in Q1 will be released. We expect this to show a “passing of the baton”, as US growth moderates (to around 1% annualised) but Europe and Emerging Markets continue to improve. Some asset re-allocation has started, but we expect this to continue. The oil price sunk below USD 50 per barrel again (both WTI and Brent more than 7% lower for the week) on evidence that US production and inventory growth is offsetting OPEC’s attempts to reduce supply.

S&P 2,349 +0.85%, 10yr Treasury 2.30% +1.06bps, HY Credit Index 346 +2bps, Vix 11.68 -1.33Vol

The S&P 500 managed its biggest weekly gain in 2 months as 76 members of the S&P 500 reported numbers, 75% beating estimates. This week sees a further 190 firms releasing results, with expectations for an aggregate 11.1% rise in earnings for Q1 (7.3% ex-energy) – the fastest rate of growth in over 5 years.
The FED’s “Beige Book” (the central bank’s commentary on current economic conditions released 8 times per year) noted anecdotal evidence of a strong labour market: modest wage pressures “broadening”, most districts reporting “difficulty filling low-skilled positions” and stronger demand for higher-skilled works. Conversely, inflation was modest, with selling prices climbing “only slightly”. Overall, the report therefore painted a slightly more positive picture than recent data suggests, albeit with the potential that a tight labour market forces firms to swallow higher costs. Futures markets now only price 1 additional rate hike before the end of the year.
Economic data was a little weaker, core CPI inflation printing negative for the first time since 2010, retail sales declining and Empire State and Philly Fed manufacturing indices falling sharply.
We now see US equities as expensive with potential margin pressure ahead and rotation towards more attractive asset classes possible – net share purchasers by company insiders were negative in Q1 by USD 38bn (largest in 4 years).
As tensions in the Korean peninsula continue, North Korean media warned the United States that “In the case of our super-mighty pre-emptive strike being launched, it will completely and immediately wipe out not only US imperialists’ invasion forces in South Korea and its surrounding areas but the US mainland and reduce them to ashes.”
President Trump signed an executive order to “Buy American and Hire American”, whereby “it shall be the policy of the executive branch to maximize, consistent with law . . . the use of goods, products, and materials produced in the United States.”
Eurostoxx 3,551 +0.44%, German Bund 0.34% +6.60bps, Xover Credit Index 274 -4bps, EURUSD 1.085 -1.08%
In the first round of the French Presidential election, Emmanuel Macron and Marine Le Pen won 23.9% and 21.4% of the vote respectively and will now face off in a second round on May 7th.
The result is the most market friendly outcome that was realistically possible. Macron has won the first round more conclusively than expected and holds an approximately 20% lead in polls for the run-off. Moreover, Mélenchon, who would have posed a more real threat in the second round, trailed in 4th place and is therefore eliminated. Nonetheless, this will be the first time in 50 years that no candidate from an established mainstream party will be eligible for Presidency.
The composite PMI for the Eurozone came in at a 6-year high as confidence continues to permeate through the Eurozone. The ECB meets on Thursday, where no policy change is expected, but continued strong sentiment (and the French election result) could stimulate a change in tone. More likely, the governing council will wait until their June meeting to deliver guidance on tapering of their recent stimulus.
British Prime Minister Theresa May surprised markets by calling snap elections for the UK –M leading to a sharp jump in GBP to a 6-month high. The logic is that, given a 20% lead in most opinion polls, the Conservative party will be able to strengthen its majority (currently only 17 seats) and therefore its bargaining position during Brexit negotiations.
Meanwhile, retail sales for March were much weaker than expected, registering the first negative quarterly growth since 2013. This supports our view of a slowdown in consumption for the UK over the coming months.
HSCEI 1,011 -1.53%,, Nikkei 1,887.00 +1.23%, 10yr JGB 0.03% +0bps, USDJPY 110.080 +0.45%
Despite stronger than expected economic data releases for the Chinese economy in Q1,H shares fell -1.6% last week.
Sentiment on Asia turned more negative on geopolitical concerns, as Trump continued to fan the flames of tension on the Korean peninsula. Over the weekend, two Japanese vessels joined the USS Carl Vinson on the way to the peninsula, while Chinese Foreign Minister Wang Yi pledged his country’s full support for the denuclearisation of North Korea.
In Pakistan, the ongoing investigation in to the finances of Prime Minister Nawaz Sharif and his family, after the Panama Papers leak suggested his children hold a large amount of undeclared offshore assets, continues to rumble on after reaching a pseudo-conclusion. This week the Supreme Court voted 3-2 that there was insufficient evidence to remove Sharif from office, though that there remains a need to further investigate the finances of his close family members and that this should be carried out over the next 60 days. The two judges opposing this motion voted for the immediate removal of Sharif.
The key implication of the ruling is that Sharif has now been effectively cleared to stand in the 2018 general elections. 

In the days and weeks running up to the announcement, the Pakistan stock market featured many sideways trading sessions on low volumes, as investors awaited the Supreme Court’s verdict, with the worst-case scenario being the removal of the Prime Minister followed by a messy transition possibly involving the army moving further towards the centre of the political system. A relative underperformer year to date (+3.5% in USD), Pakistan was one of the world’s top performing markets in 2016, returning 46% in USD.
Sharif is now likely to remain a lame duck Prime Minister until next year’s general election. Since the Panama leaks when the government’s hold over the country began to recede, the army has taken an increased role in maintaining law and order. The army has been credited with much success in this area in recent years, and the associated improvements in the domestic security situation have been crucial in the progress achieved in the $50bn worth of investment projects being executed under the China Pakistan Economic Corridor initiative.
Inflation continues to tick upwards in Malaysia, rising to 5.1% YOY in March. This is a meaningful increase from February’s print of 4.5% and is the highest rate of inflation seen in Malaysia since November 2008. Higher fuel prices and a low base effect were the key drivers. Ignoring the impacts of the most volatile components, core inflation remains stable at 2.5%. On this basis, the central bank remains dovish, with little expectation in the markets for rate hikes before the end of the year.
shutterstock_492594970LATIN AMERICA
MSCI Lat Am 2,603 -0.11%
The Peruvian economic growth slowed down to 0.74% YOY in February from 4.8% a month before due to the impact of the Coastal El Nino phenomenon and resulting widespread flooding and landslides. These exceptional circumstances should weigh on 1H17 growth but fiscal stimulus provided by the reconstruction work is expected to bring back the Peruvian economy on track to grow at its potential of 4.5%+.
Retail sales in Colombia contracted 7.2% YOY due to a calendar effect and the VAT implementation (price sensitivity and consumers front loaded spending in 4Q16).
The Colombian economy should remain sluggish in the next few quarters, until general elections of May 2018. After the strong devaluation of 2014-15, the economy has adjusted (trade balance, current account) and is now bouncing around the bottom of the cycle. Structural reforms (tax reform, peace treaty) passed in 2016 bring short-term headwinds but should be supportive in the longer-term.
The pension reform bill has been sent to the Brazilian lower house. The goal of the government’s plan is to stabilise social security spending as a percentage of GDP, as the ballooning deficit would not be compatible with the overall spending cap approved last year. In its initial version savings in the order of BRL 680Bn over 10 years were expected. However, the government introduced last minute changes to try and gain enough support for the reform to be passed. The revised version could reduce this number by 20-30%, but it is the price to pay to pass the reform at all. Readings at the lower house floor should start by May 8th, the first round vote may happen later in that same week. The second round may start by May 22nd. If approved, the reform goes to the Senate still in May, and the Senate could finish the process before its mid-year recess, in July.
This social security reform is critical to lay a sound macroeconomic ground. It is the sine-qua-non condition for the Brazilian economy to flourish over the next decade.
MSCI Africa 822 -0.03%

The World Bank sees sub-Saharan Africa GDP growth rebounding from 2017 onwards (+2.6%, 3.2% and 3.5% in 2019) after a poor 2016 performance of 1.3%, the lowest in 2 decades. Lower commodity prices have slowed growth, slashed government revenues and weakened several of the currencies on the continent. The assumption of a rebound reflects improvements in commodity prices, a pickup in global growth, and more supportive domestic conditions. However, a more secular positive outlook cannot be achieved without structural reforms to increase productivity, boost per capita income and create jobs.
Nigerian headline inflation fell for a second straight month from 17.8% to 17.3% in March. This reflects a favourable base affect over 2016 prices, stabilizing food and non-food prices, and an appreciation of the NGN in the black market.Nigeria remains in a dire situation and companies on the ground are in survival mode, trying to weather storm and wait for better days.
The IMF forecasts Egypt GDP growth of 3.5% in the fiscal year ending in June 2017. The Fund argues that “comprehensive reforms are expected to deliver sizable growth dividends, lifting growth from 3.5% in 2017 to 4.5% in 2018”. Growth is also set to accelerate in FY17/18 as the economy benefits from higher natural gas production as well as a recovery in investment.
South African headline CPI fell from 6.3% to 6.1% in March, vs. expectations of a flat 6.3%. Core inflation fell from 5.2% to 4.9%. If this disinflationary trend remains and inflation falls back into the central bank’s target band of 3% to 6%, a rate cut should materialize in 2H17. However the latest shenanigans of Zuma and their impact on the economy (through confidence, investment and FX markets) make economic forecasting quite uncertain.

Source: Alquity Global Market Update


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