Bill Gross on what is in store for markets in 2017
Bill Gross takes on the big questions in his latest investment outlook. He says the election enthusiasm will flounder if it’s not followed by +3% growth.
“We shall see whether Republican/Trumpian orthodoxy can stimulate an economy that in some ways is at full capacity already. To do so would require a significant advance in investment spending which up until now has taken a backseat to corporate stock buybacks and merger/acquisition related uses of cash flow,” he wrote.
He notes the headwinds from high debt, automation and an aging workforce but concedes that Trump could stimulate short-term growth.
He believes that yields will continue to move higher in the year ahead and bases it as much on on technicals not fundamentals. He highlights the decades-long downtrend in yields that is suddenly under threat and that 2.60% is the key level.
The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
The head of the International Atomic Energy Agency (IAEA) said Iran has shown commitment to its end of the nuclear deal struck last year while visiting Tehran December 18.
Iran has complained about the US extending a sanctions package for another decade. The US says these sanctions are unrelated to the deal; Iran disagrees.
“We are satisfied with the implementation of the [nuclear agreement] and hope that this process will continue,” IAEA Director General Yukiya Amano told the press in the Iranian capital, Reuters reports, citing the IRNA news agency.
“Iran has been committed to its engagement so far and this is important,” he said. Amano was in Tehran to meet head of Iran’s Atomic Energy Organization Ali Akbar Salehi. After the White House said earlier this week that the sanctions bill would become law even without President Barack Obama’s signature, Iran requested a meeting of the Joint Comprehensive Plan of Action (JCPOA) commission to discuss the situation and ordered its scientists to start developing nuclear systems to power ships. Salehi presented the maritime nuclear propulsion project to Amano and said the country would provide more details on it in three months, according to the Islamic Republic News Agency (IRNA). The initial outline did include what is so far the most controversial issue of the project: the level of uranium-enrichment powering the ships will require.
China will raise the sales tax on small cars to 7.5% in 2017.
New methodology used by Turkstat to measure Turkish GDP has led to significant upward revisions.
Turkish authorities are growing more concerned about the weak lira.
Fitch moved the outlook on Chile.
Chile’s central bank shifted to an expansionary policy bias.
Colombia selected Juan Jose Echavarria to be the new central bank governor.
Fitch revised the outlook on Mexico’s BBB+ rating from stable to negative.
Banco de Mexico hiked rates by a larger than expected 50 bp.
In the EM equity space as measured by MSCI, Hungary (+4.3%), Russia (+3.2%), and Turkey (+2.3%) have outperformed this week, while Brazil (-3.8%), China (-3.6%), and Chile (-3.5%) have underperformed. To put this in better context, MSCI EM fell -2.3% this week while MSCI DM fell -0.1%.
In the EM local currency bond space, Poland (10-year yield -15 bp), Korea (-4 bp), and Czech Republic (-4 bp) have outperformed this week, while the Philippines (10-year yield +41 bp), Indonesia (+32 bp), and Hong Kong (+32 bp) have underperformed. To put this in better context, the 10-year UST yield rose 12 bp this week to 2.59%.
In the EM FX space, RUB (+1.4% vs. USD), HUF (+0.9% vs. EUR), and PLN (+0.7% vs. EUR) have outperformed this week, while CLP (-2.7% vs. USD), EGP (-2.7% vs. USD), and ZAR (-1.7% vs. USD) have underperformed.
China will raise the sales tax on small cars to 7.5% in 2017. The tax will be increased further to 10%, according to the Finance Ministry. The government cut this tax rate from 15% in October 2015 after lobbying from China’s auto association. Automakers had asked for the tax cut to be made permanent.
It is probably a coincidence that one day after we commented on what is emerging as “the market’s next headache”, namely China’s (not so) stealth tightening, which in the last few weeks has led to a creep higher across the curve, the yield on China’s sovereign 10Y bond jumped 6.5bps to 2.94% on what Bloomberg dubbed were “liquidity fears.” This was the biggest one day spike for the benchmark bond since Jan. 25, according to ChinaBond data.
As a result of the selloff, the most actively traded 10-year govt bond futures were down 0.72%, while five-year futures dropped 0.74%.
The tightening was broad-based, with 1-year rate swaps rising 13bps to 19-month high at 3.17%; additionally the overnight repo rate also rose to 2.31%, the highest level this month.
Quoted by Bloomberg, Wu Sijie, bond trader at China Merchants Bank said “tightening interbank liquidity and the expectation of even higher short-term borrowing costs are driving up swap costs and affecting sentiment on the cash bond market.”
Meanwhile, signalling no change at all in its posture, overnight the PBOC drained funds in open-market operations for the fourth consecutive day, bringing the total withdrawal to 130 billion yuan.
Ray Dalio was in the news overnight, and picked up by the Aussie press here
Says Trump’s policies would have a “broadly positive” effect on the US economy
Bond prices have likely made a “30-year top”
“There is a good chance that we are at one of those major reversals that last decade”
“We want to be clear that we think that the man’s policies will have a big impact on the world. Over the last few days, we have seen very early indications of what a Trump presidency might be like via his progress with appointments and initiatives, as well as other feedback that we are getting from various sources, but clearly it is too early to be confident about any assessments”
Dubai’s national carrier Emirates airline saw net profit drop 75 per cent in its first half, hit hard by the strong US dollar and a “challenging environment for the airline and travel business.”
The fast-growing airline said the first half of its 2016-17 financial year net profit was Dh786m ($214m), 75 per cent lower than the same period last year, which was one of its best half-year performances
Revenue was down one per cent at Dh41.9bn as the US dollar – to which the United Arab Emirates dirham is pegged – strengthened against major currencies, while competition drove down average fares. Demand for travel has also been dampened by economic and security concerns, it said.
Sheikh Ahmed bin Saeed Al Maktoum, Emirates’ chairman and chief executive, warned that “the bleak global economic outlook appears to be the new norm, with no immediate resolution in sight.”
Emirates carried 28m passengers between the beginning of April and the end of September, an increase of 9 per cent, but passenger seat factor – an indication of how many seats are filled on flights – dropped to 75.3 per cent compared with 78.3 per cent in the same period last year.
British Prime Minister Theresa May warned lawmakers on Sunday not to block Brexit, after the High Court ruled that she cannot start the process of leaving the European Union without parliament’s approval.
The Conservative government has said it will appeal Thursday’s court decision and May told EU leaders on Friday that she believes she has a strong case.
But in a statement published ahead of a trade mission to India, May cautioned members of parliament against using the ruling to undermine the result of the June referendum.
“The result was clear. It was legitimate. MPs and peers who regret the referendum result need to accept what the people decided,” she said.
Supporters of Brexit responded angrily to the court’s decision, amid speculation that pro-European lawmakers would seek to water down the break with the EU and derail May’s plans to begin formal exit talks by the end of March.
“Now we need to turn our minds to how we get the best outcome for our country,” the prime minister said.