Money Matters January 19, 2017

Waiting for Donald
This week US markets are closed for Martin Luther King Day on Monday, Teresa May outlines her Brexit strategy on Tuesday, there is an ECB meeting on Thursday and Donald Trump is inaugurated on Friday.
S&P 2,275 -0.10%, 10yr Treasury 2.39% -2.29bps, HY Credit Index 351 +6bps, Vix 11.23 -0.09Vol
An the aggregate level, US equity markets were in a holding pattern last week ahead of Trump’s inauguration on Friday. This masked some sector divergence, with the tech heavy NASDAQ rising over 1% to a new all-time high but energy and defensive sectors ending lower. Financials, up almost 18% since the election, were broadly unchanged after Bank of America, JPMorgan and Wells Fargo kicked off earnings season with solid numbers.
The highly anticipated Trump news conference failed to deliver any discussion of fiscal stimulus. Instead, in our opinion, it highlighted the risks to a Trump Presidency:

  • A President lacking self-discipline and driven by ego; Trump compared intelligence agency practices to Nazi Germany, refused to take questions from CNN and called media company “BuzzFeed” (which published the allegations Russia has compromising information on Trump) a “failing pile of garbage”.
  • A focus on protectionism; the building of a wall with Mexico and a “border tax” (broad levy on imports including those by US firms with production facilities abroad).

In another notable moment, the President elect gestured towards a comedy pile of documents, which were apparently “just some” of the files signed by Trump to pass management control of his business interests to his sons.
The President has executive authority to impose tariffs of up to 15%. Moreover, with US exports less than 13% of GDP (lowest in the developed or emerging world), he does not have great fear of retaliation. Border taxes would, however, be inflationary.
Economic data was mixed – small-business optimism touched a 12-year high and Michigan consumer sentiment remained at elevate levels, but retail sales disappointed (particularly stripping out autos).
Eurostoxx 3,301 +0.92%, German Bund 0.32% +4.00bps, Xover Credit Index 290 -2bps, EURUSD 1.059 –1.04%
As suggested by survey data, and we had discussed in last week’s issue, industrial production data across Europe came out well ahead of expectations for November (up 3.2% YOY vs 1.6% consensus estimate for the Eurozone). This contributed to Germany growing 1.9% in 2016 (the fastest pace in 5 years) and achieving a 0.6% of GDP fiscal surplus.
The minutes to the December ECB meeting were generally supportive, but reflected the potential for division going forward:

  • “The scenario of a gradual uptrend in inflation still relied, to a considerable degree, on accommodative monetary-policy support.
  • The council chose between “two broadly equivalent” options to extend QE at EUR 80bn for 6 months or EUR 60bn for 9 months. They selected the latter on the basis of a need to provide support for an extended period and for ease of implementation.
  • A few members could not support either of the two options that had been proposed, while welcoming the scaling-down of purchases and other elements of the proposals, in view of their well-known general scepticism regarding the APP and public debt purchases in particular.”
  • Possible adverse side effects from further sovereign asset purchases, particularly in the medium to long term and related to the interaction with the fiscal domain, needed to be taken into account”.

Rating agency DBRS surprised by downgrading Italy’s sovereign rating from A low to BBC high on Friday. As discussed last week, this will see haircuts on Italian bonds posted as collateral with the ECB increase.
Industrial Production in the UK also experienced a large rebound (albeit at a slower pace than continental Europe, 2% YOY vs. 3.2%). Testifying before the Treasury Select Committee, Governor Carney therefore hinted at upgrades to growth projections. However, futures markets still expect it will take at least 2 years before an interest rate hike. Indeed, GBP weakened to a 31-year low against the USD, as Prime Minister May hinted the country may leave the single market to prioritise immigration control. This prompted the FTSE 100 to close at a new high for 13 consecutive days (the longest winning streak on record).
Tomorrow, PM May will deliver a major speech detailing the government’s Brexit strategy.
The National Bank of Poland left rates on hold at 1.50%, whilst the Turkish Lira continued to decline despite verbal intervention from President Erdogan and the central bank tightening liquidity.
HSCEI 9,666 +1.84%, Nikkei 1,909.00 +0.96%, 10yr JGB 0.05% 0bps, USDJPY 114.150 -2.10%
Two positive data points on the Indian economy caused many investors to re-evaluate their assessment of the impact of demonetisation and their outlook for the economy for 2017. The Indian Nifty 50 index rose 1.90% over the week in response.
Shortly following the government announcement to withdraw the Rs. 500 and Rs. 1,000 banknotes from circulation in November, the Indian stock market sold off in anticipation of a period of prolonged and deep disruption as the economy adjusted.
However, last week we learned that industrial production in India grew 5.9% YoY in November (against expectations of 1% growth or less from many), which along with several corporate earnings announcements, paints a picture of an economy far less damaged than many expected it to be.
One reason for the better than expected adjustment stems from the government’s financial inclusion programme, which opened bank accounts for 200 million Indians in the two years leading up to demonetisation. The prevalence of mobile phone payment systems has also played an important role, with mobile phone penetration in India higher than credit card penetration.
Secondly, consumer price inflation came in below expectations at 3.4% (vs. consensus 3.5% and last month’s 3.6%). Inflation has now stabilised below the central bank’s 4% target (which was introduced in August 2016 during the transition period between outgoing Governor Rajan and incoming Governor Patel), opening the door for an interest rate cut in the coming months.
China’s consumer price inflation slowed slightly, from 2.3% in November to 2.1% in December, whilst producer price growth accelerated to 5.5% YoY from 3.3% the previous month.
The spike in producer prices is a culmination of several factors (in order of significant)

  • Higher global commodity prices
  • Domestic supply side reforms (for example, restrictions on how many days a year coal mines can operate, effectively reducing annual mining capacity)
  • A strengthening of the Chines economy during 2016, on the back of higher government spending and investment

China’s December trade data came in weaker than expected, slowing down sequentially from November. Exports shrank -6.1% YoY in December, with a month on month growth rate of 0.0%, versus a 2.9% month on month expansion between November and October.
The headline figures are reported in US dollars. In RMB, exports actually grew 0.6% YoY. Unfavourable base effects added to the headline negativity.
On a trade weighted basis, the RMB has appreciated since the beginning of the year, which, combined with domestic inflationary pressures, implies January’s export data could also come in soft.
The Bank of Korea Monetary Policy Committee kept interest rates on hold at 1.25% at its January meeting with a unanimous decision, in line with expectations. The accompanying statement struck a dovish tone and became more pessimistic on the growth outlook for the economy. The official 2017 GDP growth forecast for the Korean economy was revised down from 2.8% to 2.5%.
The Australian Dollar continued its strong year-to-date performance on the back of better iron core and commodity prices.
MSCI Lat Am 2,424 +1.74%
Brazil’s central bank cut the SELIC rate by 75bps to 13%, whilst consensus expected only a 50bps cut. The easing cycle started last November is accelerating. Inflation is decreasing sharply and reached 6.3% YoY in December, below the central bank ceiling for the first time in years. Inflation expectations are also anchored in the middle of the target range from 2018 onwards. In its statement the committee assesses that domestic activity has been weaker than expected and concludes that the recovery may be even slower and gradual than anticipated – as we’ve been arguing for the past few quarters. Indeed, industrial production is bottoming but retail sales and employment rate haven’t stop falling yet.
December car production in Brazil increased by 40% YoY and truck production by 64%. New car sales and exports were marginal in this change; the bulk of the increase comes from inventory replenishing after 2 years of massive reduction. Stocks have been depleted by circa 300,000 cars and 30,000 truck units since beginning of 2015.
FDIs to Brazil reached USD 75Bn in 2015 and 78.8Bn in the 11 months to November. Over the past 2 years, international investors have been benefiting from a 30%+ devaluation of the Brazilian currency and from bargain-basement valuations of distressed assets suffering from the crisis. International investors have been especially active in the infrastructure sector, which has been offering yields unmatched across the rest of the world.
For 5 of the last 6 months, Chilean pension funds have been net buyers of Chilean Equities. Chilean institutional investors had the lowest allocation to local equities in more than a decade back in mid-2016. 11 months ahead of the presidential election and a likely change in political leadership, pension funds are re-allocating their portfolios. It should be supportive for equities.
MSCI Africa 802 +2.97%
Inflation hit 23.3% YoY in Egypt in December. Core inflation came in at 25.9% and food inflation at 28%, driven by the devaluation of last November.
Egypt’s central bank must urgently raise interest rates to stop the currency from depreciating further and to fight hyperinflation. This would be a further step in the right direction, showing goodwill to international investors from whom the government expect to raise USD 2-3Bn over the coming weeks.
Kenyan tax collection came in 14.5% short of government’s target for the first 5 months of the fiscal year (from July to November).
This should further increase the fiscal deficit planned to reach 9.8% of GDP this year. The country’s reserves are declining, as well as its ability to pay-down debt (as measured by government revenue). Kenya has been postponing the issuance of a USD 1-2Bn Eurobond for more than 4 quarters now hoping for better international market conditions, whereas global interest rates are now increasing and the USD rise increases Kenya risk profile in the eyes of global investors.
The Kenyan stock index NSE 20 broke its lowest level since 2009, falling below 3,000. In USD, the index is back to its 2003 level. This index, gathering the 20 largest companies listed in Kenya, has lost 53.5% in USD since March 2015. The main detractor was the banking sector.
Source: Alquity Global Market Update


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