Money Matters January 31, 2017

Many questioned whether Donald Trump would follow through with the wide, and often controversial, range of promises made during the election campaign. His first week in office was busy, but leaves much to follow on the key areas of trade and fiscal stimulus.
Over the first 7 days, the new POTUS announced 17 “Presidential Actions”. These included:
5 Executive Orders – the most formal “actions” available to the President, which are recorded in the Federal Register and considered legally binding (subject to legal review).

  • Obamacare Repeal; “Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal”
  • Infrastructure Fast-Track; “Expediting Environmental Reviews and Approvals for High Priority Infrastructure Projects”
  • Immigration Enforcement; “Enhancing Public Safety in the Interior of the United States”
  • Mexican Wall; “Border Security and Immigration Enforcement Improvements”¹
  • Anti-Lobbying; “Ethics Commitments by executive branch appointees”

11 Presidential Memoranda – not legally binding but outlining the administration’s position on a policy issue. These encompassed:

  • Defeating ISIS.
  • Reducing regulatory burden on domestic manufacturing.
  • Restarting construction of various oil pipelines (using materials sourced from within the US)
  • Banning US aid to international health groups that promote abortions.
  • Withdrawal from the TPP trade agreement (NB: this was never approved by congress).
  • A hiring freeze for non-military Federal agencies.

There was also 1 Proclamation recognising January 22-28, 2017 as National School Choice Week.
It should be said that executive orders (where the President uses his personal authority rather than passing a measure through congress) have been implemented by all 45 US Presidents, including Obama on 276 occasions. Indeed, Obama delivered 9 in his first 10 days in office. However, the tone and scope of such orders was starkly different- including closing Guantanamo Bay, equal rights for women and same-sex couples and addressing climate change.² We therefore think the past week’s events confirm a change in paradigm.
However, equally, there was a lot Trump didn’t do. He didn’t impose tariffs or label China a currency manipulator, nor did he provide any clarity on fiscal policy (Speaker Ryan stated the House will have completed a tax reform package by the August recess).
In terms of growth, whilst there is probably a bias towards a short-term growth acceleration, this depends on trade (negative) and fiscal (positive) policy. Longer term, we are sceptical reduced regulation and infrastructure spend can overcome the forces of anti-immigration and structural stagnation.
For the rest of the world, some perspective is useful. In the special cases of Canada and Mexico, exports to the US represent circa 20% of GDP and the impact of any protectionist measures would therefore be extremely significant. The same dynamics could hold for individual companies and sectors in the US supply chain. However, for other major trade partners, the share of US exports to GDP is much lower (2-5% for China, Japan, Germany and the UK). Moreover, most of the rhetoric has been aimed at China rather than broader trade partners; we expect a series of bilateral negotiations with a more muted impact.
S&P 2,295 +1.03%, 10yr Treasury 2.48% +1.75bps, HY Credit Index 341 -10bps, Vix 11.14 -0.96Vol

All major US equity indices hit new all-time highs on Wednesday and the US 10-year briefly traded above 2.50% yield (albeit finishing almost unchanged). Relatedly, the VIX fell to a 2.5 year low (albeit the VIX futures curve remains extremely steep). Data was somewhat mixed – durable goods, existing and new home sales weaker but consumer sentiment continuing to improve.
This week there is a FED meeting at which no change in policy is expected, but the market will focus on the extent to which the committee changes its messaging. This could include a discussion of balance sheet run-off, commentary on the labour market (explicitly stating it is at or near full employment) and guidance on the timing of rate hikes. It is probably too early to signal an imminent policy move (market prices a hike by July and there is still little visibility on Trump policy), but we think there is a hawkish bias.
Eurostoxx 3,291 +0.19%, German Bund 0.48% +4.10bps, Xover Credit Index 295 -6bps, EURUSD 1.070 +0.02%
The build up to elections across Europe was in focus this week, with politics hitting the front page across the continent.
In Germany (election on 24th September), the centre-left SPD party announced Martin Schulz, ex-President of the EU, as their new leader. Schulz has a stronger approval rating than Chancellor Merkel and is staunchly pro-Europe. Nonetheless, Merkel’s centre-right CDU/CSU still retain a healthy advantage in the polls.
In France (elections on 23rd April and 7th May), there was an unexpected result in the first round of the socialist primary election; Benoît Hamon topping polls to face outgoing Prime Minister Manuel Valls in yesterday’s second round – which he also won. This is seen as increasing the possibility of independent candidate Emmanuel Macron reaching the second round in the Presidential elections proper – although the base case remains a runoff between Marine Le Pen and François Fillon.
In Italy, the Constitutional Court struck-down a provision within former Prime Minister Renzi’s election law reform, which would lead to a second round if no party reached 40% in a first round. This means Italy now has a clear electoral process and increases the probability of snap elections in Q2 of this year (parliamentary term currently runs until May 2018).
The ESM and EFSF (The EU vehicles to support banks and sovereigns) announced “short-term debt relief” measures for Greece. This is a misnomer, with no debt relief, but adjustment of coupons to reduce interest payments. Leaks from an IMF report painted a truer picture “even with the full implementation of policies agreed under the European Stability Mechanism program, public debt and financing needs will become explosive in the long run.”
In the UK, the Supreme Court ruled that parliament must vote to initiate the triggering of Article 50. However, no approval is required from the devolved governments of Wales, Scotland and Northern Ireland. Prime Minister Theresa May thus presented a bill to Commons to allow Article 50 to be triggered in late March. Later in the week, May travelled to the US to meet with President Trump.
The CBT in Turkey raised the Overnight Lending and Late Liquidity Window, but left the 1-week rep rate (seen as the main policy rate) unchanged. This may have been politically motivated, to appease President Erdogan who is fiercely opposed to tighter policy. The Turkish Lira weakened again. Elsewhere, the National Bank of Hungary kept its policy rate on hold at 90bps.
HSCEI 9,804 +0.92%, Nikkei 1,936.00 +1.43%, 10yr JGB 0.09% +0bps, USDJPY 114.860 +0.38%
The People’s Bank of China made its latest tweak to monetary policy by raising the Medium Term Lending Facility by 10bps, the first time the central bank has increased the MLF rate since the launch of the scheme in 2014. This followed increases in SHIBOR and 7 day repo rates over the last two months.
The Philippines economy remained strong in Q4 2016, growing 6.6% YoY. This is slightly slower than the 7.0% growth rate recorded in Q3, though still among the fastest rates of economic expansion in emerging markets. The subsiding of the higher government spending and private consumption around the presidential election in May 2016 contributed to the slower growth rate. The overall growth rate for 2016 came in at 6.8% YoY for the Philippines, versus 5.8% in 2015.
The outlook for the Philippines economy over the next few years will be dictated by the interaction of the two key elements of President Duterte’s policy agenda – isolationism and infrastructure spending. Whether the President’s pledge to upgrade the country’s creaking infrastructure and raise the productivity of the population of over 100 million people can override the detrimental potential impact his foreign policy objectives could have on business process outsourcing and remittance flows will dictate the path of the Philippines’ economy in the coming years.
Despite the disruptions of political upheaval, Korea’s economy still posted a respectable 2.3% YoY growth rate in Q4, down slightly from the 2.6% rate in Q3. The central bank had been guiding for weaker growth, following the impeachment of President Park and slowdown already observed in private sector spending.
Taiwan’s GDP grew 2.6% YoY in Q4, the fastest quarterly expansion since 2014. This is the fourth consecutive quarter of increasing growth rates, following a short recession in 2015. In the face of an uncertain global trade outlook, Taiwan’s President has promised a fiscal stimulus package and economic restructuring programme to support growth and reduce dependence on exports.
MSCI Lat Am 2,548 +3.79%
Trump trade policy puts Mexico in difficult terrain, according to the IMF. The MXN depreciation and liberalisation of petrol prices is exacerbating inflationary pressures. To keep inflation under control, and anchor the currency, the central bank has already started hiking interest rates and is expected to continue, which should weigh on activity. 2017 will be a year of slowing growth and high inflation. All this combined with previously stretched valuations and uncertainty shouldn’t be supportive for asset prices.
Despite the chaos of diplomatic relationship with the US, the MXN strengthened 3.4% last week. President Pena-Neto cancelled his trip to Washington and said he would refuse to pay for “The Wall”. Trump responded by threatening to finance it through a 20% tax on Mexican exports to the US. There was no an apparent reason for this FX move except maybe some short covering (after the MXN depreciated 14.8% in the last 12 months) or central bank intervention.
Brazil’s industrial and consumer confidence rose 3.7% and 8.5% MOM respectively in January.
We still expect industrial production to pick up before consumption indicators, helped by inventory rebuilding, while consumers should still suffer from unemployment (currently around 10% but has yet to peak) and the need to deleverage.
FDIs to Brazil reached USD 78.9Bn in 2016 (4.4% of GDP). They fully covered the current-account deficit (USD 23.5 Bn in 2016 or 1.3% of GDP vs 3.3% in 2015).
Argentina posted a primary deficit of 4.6% of GDP in 2016 (vs. 4.8% targeted and 5.4% in 2015), supported by the unexpected success of the tax amnesty program.
2017 will be a make-or-break year for Argentina and President Macri. His credibility for investors and voters depends on economic growth, inflation control, public and private investments.
Argentina recorded USD 65Mn trade surplus in December. The weaker currency led exports to rise 34% YOY to USD 4.6bn, and imports were unchanged at USD 4.5bn.
Weak currencies in Argentina, Colombia and Brazil explain improvements in their respective trade balances. Argentina recorded a USD 65Mn trade surplus in December. Colombia’s imports contracted for the 22nd month in a row during November. Brazil trade surplus also jumped to USD 45Bn from USD 17.7Bn, as imports fell much more than exports.
MSCI Africa 793 +0.41%
Despite its 19% appreciation in a year, the ZAR ranked the 4th cheapest currency on the “Big Mac Index” by the Economist. The most undervalued currency is another African currency: the EGP, following a 60% depreciation since its float in November 2016.
Egypt issued USD 4.5Bn in Eurobonds last Wednesday. The pricing stood at 6.125%/7.5%/8.5% for the 5Y/10Y/30Y issues. On Friday, all bonds were trading above par and the 30y yield fell to 8.27%, a major vote of confidence for structural reforms implemented after the IMF USD 12Bn loan was granted. International investors are still hungry for yield.
Ghana’s public debt has increased to GHS 119.9bn (USD 27.5Bn) or 71.9% of GDP as at November 2016. 55% is denominated in foreign currency and therefore implies an increased debt burden for the country following the sharp devaluation of the cedi. In addition, the budget deficit reached 7% of GDP in the Jan-Nov period (vs 1.7% targeted). The IMF program helped Ghana to rebalance its accounts but it remains vulnerable to external shocks.
Kenya’s total debt hit KES 3.6Tn (USD 34.6Bn) in the fiscal year ending in June 2016, a 27% increase compared to year before. This represents 54.8% of GDP, of which 50% is denominated in foreign currency.
Even if only 11% of this debt is maturing within 4 years, Kenya appears extremely vulnerable on many fronts: fiscal deficit target at 9% of GDP, only 60% recovery rate of tax revenue in 2H16, current account deficit expected at 5.5% of GDP. Reserves are running low and the currency remains under pressure. Information sourced from Alquity
Information sourced from Alquity


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