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5 Macro Fundamentals of Economic Data Driving Volatility

October 19 - October 31

Macro themes tend to eclipse the high frequency economic data in the coming days. PMI baseline between first survey data for a new month, and the month of October are on tap next week. The main reason that there may be a risk of a decline in the US and Europe, especially in services, is the resurrection of the virus and the new restrictions.

Judging from the private sector forecasts as well as the new IMF World Economic Outlook, the economic contraction in the US, EMU, Japan, Britain and Canada this year somewhat less than projected in June. However, better 2020 IMF forecasts are basically borrowed from the 2021 event. Canada is the only one that the IMF expects stronger growth in 2021 than in June (5.2% vs 4.9%). IMF forecasts emerging and developing countries will shrink by 3.3% this year, slightly more than projected in June (-3.0%), but not completely shifted to 2021 (6.0% vs 5.9%). Cost growth in terms of social protection relaxation too early (death and disease) and in terms of deficit and debt worth considering. The deficit can be expected to be lower next year, but the US is projected to be more than 8.5% before the next stimulus measures.

1. US Presidential Election

What looked like a close contest a few weeks ago has turned into what many refer to as the blue wave, swept the Democrats both houses of Congress and the White House. There is still a risk after an uncertain sound because of a large number of paper ballots possibility. Given the differences in the use of paper ballots, it is possible that the voting machine shows one of the results, and with paper ballots, show otherwise. However, investors appear to be more comfortable as the spread between October and November VIX Futures have almost halved last week as the blue wave seems more likely.

Some argue that the Democrats tax and spending policies will be inflation. It is possible, but the argument seems to be based on the assumption that the suspect, such as knowing the size of the deficit or the debt allows one to forecast inflation. Knowing the size of the deficit in 2020 would not be very helpful in forecasting inflation or interest rates. The non-partisan Congressional Budget Office projects a deficit next year to around 8.6% of GDP, and it is before another stimulus package. The median forecast of economists surveyed by Bloomberg see the deficit slightly below 10% of GDP. By a few percent, is likely to be the largest in the G7. Recall that in 2018 and 2019, while the mature expansion drove the unemployment rate to its lowest level in a generation, the United States had a deficit above 4%. It has become popular in some circles to blame the countries current account surplus for the US current account. Goosed deficit economics may play a greater role. Although some observers played up 10.3% year-on-year rise in the price of a used vehicle, the driver measured inflation, especially core measures, is shelter and medical care (goods and services).

Alignments and personality, and the significant differences in domestic policy, may obscure the similarities in foreign policy. Biden and Democrats is critical of government policy toward China is not because it was too hard but because they have not been effective. A Biden administration approach may be more multilateral, but get a member of NATO, for example, to increase spending and intolerance of NATO members (Turkey) purchase and test the anti-air defense systems from Russia, is likely to continue.

The urge to avoid using Chinese equipment 5G for security reasons will endure, as will the pushback against the digital tax, which France has indicated that it intends to use in mid-December. Policy toward Iran and Venezuela are unlikely to change substantively. The US is likely to reengage the World Trade Organization, including no longer block the appointment of judges of appeal. The US and the European Union may still have a trade dispute (eg, Boeing (NYSE: BA) and Airbus), and Washington will remain opposed to the Nord Stream pipeline II, even if the rhetoric spicy avoided. At the same time, Biden “Made in America” ​​is just as much an economic program of import substitution policies as Trump “Make America Great Again” effort. Economic nationalism appears to enjoy bipartisan support.

2. UK Brexit

It has become an issue almost constant since the run-up to the referendum in June 2016. The protracted divorce almost at hand. This issue remains as always: what trade relations estranged couple have after separation. A hard-out is understood to be one in which the WTO rules replace the intimacy that has been enjoyed for nearly half a century. However, for political purposes, 10 Downing Street would like to call the Australian-style trade agreements. This remains a distinct possibility. Reports from both sides showed little progress over the past few weeks since Johnson and von der Leyen spoke earlier this month. A mini-climax is reached before the weekend as high drama, and ostensibly because the EU statement did not do so explicitly to intensify efforts, Johnson shows that there is no purpose of further negotiations if the EU does not change its position.

The market will still evaporate because the talks might be held next week, and the sterling managed to close slightly higher, and slightly above the $ 1.29 even after Moody’s cut the sovereign rating to Aa3 (same as Fitch AA- and a notch below S & P). Until last weekend, the pattern was evident. Sterling sold on the news made no deal out more likely.

The reason that there is no agreement was that no party is willing to compromise. However, given the size differential and trade composition, the UK is at a distinct disadvantage, as the President of France macron frankly stated. There is a considerable cost in leaving the European Union even by agreement. custom checkpoints where there was previously no and additional rules and regulations will increase the costs of goods and services even if there is no agreement.

While the way out is disturbing apart, resort to the basic rules of WTO is projected to hit a fast growth but also lower the road ahead. Simultaneously, the government is pushing a bill that would allow it to relax foreign acquisitions of the past, especially by state-owned enterprises (obviously, China is top of mind), and the Bank of England is widely expected to ease policy next month (November 5). Transmission of the surge clear challenge to public health reasons, but also poses a political challenge for Prime Minister.

3. China Economy

There is an emerging contradiction. First, the US and the EU, and others took action against China on trade, including broad enough to include Huawei and applications, as India appears to have been more aggressive than United States. On the other hand, China is becoming increasingly integrated into global financial markets. This is important in itself, but can also have a significant impact.

An important part of the Phase 1 trade agreement with the United States called for several specific market opening measures. Beijing is on track to fulfill these, as the mercantilists us rarely recognize. In a way, this direction China has accelerated already seemed to be moving. The proof is that the bond market in China and the stock was included in global benchmarks for asset managers. China data shows that foreign investors have bought about $ 90 billion of Chinese bonds in the first eight months of this year and about $ 13 billion of Chinese stocks. This entry up foreign bond holdings and China stocks at about $ 420 billion and $ 150 billion respectively.

In industry surveys, reserve managers say they are looking to expand their yuan assets to approximately a 5% share. According to the latest report of the IMF COFER, overall, it was about 2% at the end of June. It represents an increase of $ 16 billion in value in the first half of the year. Value adjustments have probably played a role as bonds rallied strongly during this period, even if the yuan depreciated approximately 1.5% against the dollar in H1. Central banks as an allowance reserve gradually shifting around, and year to June 30, the share of allocated reserves due to the yuan rose.

In the first eight months of the year, Chinese investors bought nearly $ 21 billion of Japanese bonds, the highest since the Ministry of Finance (Japan) time series began in 2005. Some believe that this could be the central bank diversification away from the bonds of the US Treasury. It could be, but so far this year, and ICT data is that by July, China has a little more now Treasuries ($ made it to the end of last year ($ 1,070). Some of the Chinese interest in the good of Japanese T Treasury may be linked to the exchange activity, where dollars are traded against the yen at a premium.

Moreover, it seems that some of this may seem to be the sales of Treasury in a given month can be entrusted to bodies. The dollar value of the yen in global reserves fell slightly in H1. Over the past four years, 102 Chinese companies had initial public offerings in the US, increasing from $ 25.5 billion, according to Dealogic. Over the past eight years, 105 IPOs raised $ 41 billion, of which $ 25 billion was accounted for by a company (Alibaba (NYSE: BABA), 2014).

Because the yuan is tightly managed, even if no direct intervention, its assessment must mean that Beijing sees it in his interest. However, the mercantilists are wary because a yuan amount is supposed to be bad for exports. The appreciation of the yuan is not a commercial function when it needs to purchase agreement on the dollar-amount of American goods and if to store certain products if it fears a global growing hostility. A yuan appreciation is also consistent with its efforts to integrate into the global financial markets. It encourages foreign investment, and part of that request one yuan reflecting higher interest rates, relatively and which may prove to be the fastest growing major economy this year and next.

4. Europe Economy

Another development that can be ignored if you do not concentrate on is the dramatic decline in interest rates in Europe, especially in the periphery. This is related to several factors. Chief among them is the support of the ECB under the purchase program emergency pandemic. However, purchases under the PEPP have slowed, and can not be dismissed simply as a summer break. In June, about 120 mln euro bond is purchased under its auspices. Last month, it bought 70 bln euros of securities. Japanese investors purchased a record number of Italian bonds (~ $ 5 mln), both July and August. Last week, the peripheral European yields had fallen to record lows (Italy and Greece) or near them (Spain and Portugal).

The Greek performance is a surprising story. In early 2016, the 10-year yield was above 11%. It fell below 6% in mid-2017 and has been performing below 4% (except for a peak in March) as Q1 19. approached 80bp last week. Italy sold its first bond, a tenor of three years with a zero coupon, and was higher than the starting bid. On the same day, bonds are sold to seven and 30 years with historically low yields. Premium demands of the market in Italy over Germany was about 160 bp at the end of last year and last week that about 120 bp, the lowest since Q2 18.

The same can not be said of Spain. Its premium over Germany has edged up to about 75 bp 65 bp at the end of last year. Italian Spanish bonds are outperforming may first be a function of your starting point higher performance. To this must be added that the Italian data has surprised to the upside. Consider composite PMI last month. It was raised to 50.4 (from 49.5), while Spain was reduced from 44.3 to 48.4 from. After the regional elections, Italy is enjoying a period of relative political calm, while the tension between the regional and central government in Spain is high.

Federal Reserve announced its approach means inflation target at the end of September and has made it clear in word and deed that does not require further action. To the Like other central banks, the Federal Reserve has been encouraging the government to use fiscal policy. The ECB expanded and extended its bond-emergency program in June, and many hope it does again in December. The increase in the virus is being carried out at the same as the pace of recovery appeared to be moderating. In addition, a rate cut and new long-term targeted operations (ECB loans tied to bank loans) can not be ruled out refinancing. And no record excess liquidity circling Eurosystem and the overnight borrowing rate unsecured has fallen below the deposit rate minus 50 basis points, which formerly served as the floor.

The point is that despite the adoption of the target average inflation of the Fed, the market expects the ECB to move again before the year ends facing the materialization of downside risks and deflation. The premium of the United States (over Germany) has been increasing for five weeks. In late August, the premium two-year US were below 80 bp, and last week it was above 90 bp for the first time in four months. In understanding and predicting the currency often focus on interest rates in the short term, but sometimes seems to influence long finish. However, the story is the same. The raw 10-year US over Germany rose to about 135 bp, most last week since March, and above the 200-day moving average (~ 131 bp) for the first time since early 2019.

5. Virus Pandemic

One-third of US states reported a record number of cases, and in Europe, from Portugal to Poland, is getting hit harder than many do earlier this year. Optimism about the near-term vaccine blunt last week as two pharmaceutical companies to stop testing because of security concerns.

Virus and second mounting evidence of suffering, which also makes the herd-immunity even in relatively small communities, such as the environment, more elusive, will continue to frame the macro-economic forces and policies. It seems that more and more businesses are preparing social restrictions and the need for PPE to extend well into next year. It will hold back economic recovery and continue to justify the support of the central bank and the government.

In the context of the worst pandemic in at least a century, four macro themes straddle economic and political shape the investment climate: US elections, Brexit, the integration of China into the global market even trade tensions remain high, and the strong rally of European bonds.


October 19
October 31
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