Sat, 27th May 2017

Anirudh Sethi Report


Archives of “emerging markets” Tag

Greenback Consolidates Losses as Yields Stabilize

The US dollar remained under pressure in Asia following the disappointment that the FOMC did not signal a more aggressive stance, even though its delivered the nearly universally expected 25 bp rate hike.  News that the populist-nationalist Freedom Party did worse than expected in the Dutch elections also helped underpin the euro, which rose to nearly $1.0750 from a low close to $1.06 yesterday.  European activity has seen the dollar recover a little, but the tone still seems fragile, even though US interest rates have stabilized and the 10-year Treasury yield is back above the 2.50% level. 
The US premium over Germany on two-year money peaked a week ago near 2.23.  After the US yield fell in response to the Fed’s move, the spread finished near 2.12%, from which it has not moved far.  Initial euro support has been found a little above $1.07.  The first retracement target of the run-up is a little below there at $1.0690.  The other retracement targets are seen near $1.0675 and $1.0655. 
Few expected the Wilders in the Netherlands to have a say in the next Dutch government.  He drew about 13% of the vote and will hold about 20 seats, which is five more than currently.  Prime Minister Rutte’s party appears to have received the most votes and 33 seats, down from 41.  The other coalition partners did worse.  In particular, the disastrous showing of Labor means that Dijsselbloem, the current finance minister and head of the Eurogroup of finance ministers is unlikely to hold his post.  Labor may have less than 10 seats in the new parliament, down from 38.  The other coalition partner, Liberals, lost eight seats.  

OECD Warns There Is A “Disconnect” Between Markets And The Global Economy

In a report released this morning by the Organisation for Economic Cooperation and Development titled “Will risks derail the modest recovery? Financial vulnerabilities and policy risks” the OECD warns the global economy may not be strong enough to withstand risks from increased trade barriers, overblown stock markets or potential currency volatility, and adds that the “disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could derail the modest recovery.

The OECD projects global GDP growth to pick up modestly to 3½ per cent in 2018, from just under 3% in 2016, boosted by fiscal initiatives in the major economies, a forecast which is broadly unchanged since November 2016 and notes that while confidence has improved, “consumption, investment, trade and productivity are far from strong, with growth slow by past norms and higher inequality.

World Bank latest reports says global growth to accelerate slightly

World Bank’s latest Global Economic Prospects report … headlines:

  • Forecasts global real GDP growth at 2.7% in 2017 vs 2.3% in 2016
  • Forecasts advanced economies’ growth at 1.8% in 2017 (vs 1.6% in 2016)
  • Emerging/developing economies’ growth at 4.2% in 2017 (3.4% in 2016)
  • Forecasts US growth at 2.2% in 2017 (vs 1.6% in 2016) … they say their forecast excludes effects of any policy proposals from trump administration


  • Challenges for emerging market commodity exporters are receding, while domestic demand solid in emerging market commodity importers
  • Fiscal stimulus in US could generate faster domestic and global growth, but extended uncertainty over policy could keep global investment growth slow
  • Forecasts China’s growth slowing to 6.5% in 2017 (from 6.7% in 2016)
(Headlines via Reuters)
The World Bank looking at the recovering oil and commodity prices, noting this eases the pressures on emerging-market commodity exporters. Expects the recessions in Brazil and Russia to end.
As always the Bank notes uncertainties in its forecasts (all forecasters should), with upside uncertainty (in the short term at least) on US potential increased fiscal stimulus, tax cuts, infrastructure spending.  Looking further out, though, a surge in debt load, higher interest rates & tighter financial conditions would have adverse effects.
Also downside potential on a more protectionist trade stance.

BIS Warns OF Bouts Of Extreme Volatility, As Market Undergoes “Paradigm Shift”

The Bank of International Settlements is particularly good at two things in its periodic quarterly review update: i) stating the obvious, especially when it comes to summarizing the trader and market participants concerns at any given moment, and ii) having its constituent central bank members – after all the BIS is the “central banks’ central bank” – ignore all of its warnings.

In its just released, latest report, the BIS continues to excel in both, when it lays out what it dubs a “paradigm shift in markets” and points out that unlike previous VaR shock episodes, most notably the 2013 Taper Tantrum, financial markets have been remarkably resilient to rising bond yields and sudden shift in outlook following last month’s shock U.S. election result.

Yuan Not

There were two dogs that did not bark this year.  The Japanese yen, which despite negative interest rates and an unprecedented expansion of the central bank’s balance sheet,  strengthened 15% against the dollar.  The yen has been the strongest major currency, and the third strongest currency in the world behind the high-yielding Brazilian real, recovering from last year’s drop, and the Russian rouble, aided by a rebound in oil.  

The other dog that is not barking is China.  In August 2015, and again at the start of is year, the decline of the yuan and weakness in Chinese equities reverberated around the world.  It was even cited as a factor influencing the timing of the Fed removing accommodation.   Since early this year, the yuan has continued to depreciate, and Chinese shares are among the worst performers. Yet it has not been a disruptive force.  

The Shanghai Composite has fallen 11.5% this year.   MSCI Emerging Market Index has gained about 14%.  MSCI Asia-Pacific Index has advanced roughly 6% this year.   MSCI’s World Index (developed markets) is about 4% higher on the year.  

China’s reserves have fallen by about $134 bln in the first nine months of the year. This understates the capital outflow as China also recorded a $134 bln current account surplus in H1 16 and a trade surplus of $146 bln in Q3.    Brad Sester of the Council on Foreign Relations, estimates that China may have experienced outflows of $95-$100 bln in Q3.   As China sells reserves, it is selling US Treasuries.  The latest country breakdown covers the month of August.  US data, which is not necessarily comprehensive, estimates that China sold $33.7 bln of Treasury Securities in August after selling a combined $25.2 bln in June and July.  

The IMF Sounds An Alarm As Global Debt Hits A Record $152 Trillion Or 225% Of World GDP

Another record for the history books.

In addition to reporting on the dangers facing global banks as a result of declining profits in the current low rate environment, today the IMF also released its latest Fiscal Monitor report which sounded a loud alarm when it revealed something disturbing: at 225 percent of world GDP, the global debt of the nonfinancial sector, comprising the general government, households, and nonfinancial firms, is currently at an all-time high of $152 trillion.

Add financial debt and you will need a far bigger chart.

Fitch: US is slowing, UK is growing, China is reaping what its sowing

Rating agency Fitch has cut its US economic growth forecasts for this year, warning “downside risks to advanced country economic growth have risen in recent months”.

Fitch has cuts its 2016 US growth forecast to 1.4 per cent from the 1.8 per cent pace it predicted in July.

Brian Coulton, chief economist, said:

This year is likely to see the lowest annual growth rate for US GDP since 2009 as oil sector adjustments, weak external demand and the earlier appreciation of the dollar take their toll on industrial demand.

The report also highlights worrying trends in other key developed markets across the globe.

It says that eurozone growth likely peaked in early 2016, and there have been no improvements to the outlook for the UK and Japan “despite significant monetary policy moves”.

It concludes:

The outlook for the advanced countries is best described as a low-growth, muddle-through path.

Global economic growth ‘sliding back into the morass’

The global economy is faltering again with growth rates “sliding back into the morass [they have] been stuck in for some time”, according to the Brookings Institution-Financial Times tracking index.

In a publication ahead of this week’s annual meetings of the International Monetary Fund and World Bank, the results will reinforce fears that many countries have become caught in a vicious circle of low growth, popular discontent and a backlash against trade and openness, resulting in more economic weakness.

The annual meetings will encourage policymakers to pursue inclusive and faster global growth as international organisations, finance ministers and central bank governors seek to reassure the public they can co-operate and that they have the necessary tools to break five years of economic disappointments.

Hanging over the meetings is the fear that the failure to improve living standards in advanced and emerging economies was important in the UK’s vote to leave the EU, may propel Donald Trump to the US presidency and will strengthen the hands of populists such as Marine Le Pen in France.

YTD -European funds drained of $76 Billion

horror halloween wtf psychedelic weirdThe sprint out of European equity funds has stretched to almost six months, draining portfolios of $76bn since the start of the year as uncertainty over the implications of the Brexit vote and a crisis in the Italian banking sector weigh on investors.

The past week saw more than $4bn pulled from portfolio managers invested in European stocks, a moderate deceleration from a week before when a record $6.2bn was yanked, according to fund flows tracked by EPFR, the Boston-based fund monitor.

Surveys of business confidence and activity in the manufacturing and retail sectors have weakened in the UK, as nerves fray over the long-term effects of the country’s exit from the EU. New data from market research company GfK on Friday showed British consumer sentiment suffered its sharpest monthly fall in July since 1990.

Investors have become wary of the prospect of further monetary policy easing as $13tn of bonds trade with a yield below zero. Fund managers say they are hoping for fiscal stimulus in the wake of the downbeat figures.

“There really is a fear and it is getting worse,” said Brad McMillan, chief investment officer of Commonwealth Financial Network. “US investors are getting less confident about the rest of the world. We are also seeing globally fixed income investors move into the US. It’s a rational move for them to chase yield.”

World Bank set to name Paul Romer as chief economist ,To replace Kaushik Basu

The World Bank is set to appoint Paul Romer, a longtime advocate of the economic power of human capital and student of urbanisation, as its new chief economist, bringing arguably the highest-profile name to the role since Nobel winner Joseph Stiglitz. 

Mr Romer, a US economist who teaches at New York University, is expected to replace Kaushik Basu later this year. A spokesman for the bank would not confirm Mr Romer’s appointment but others within the institution did. His name is expected to be presented to the World Bank’s board as soon as Monday and announced publicly later in the week. 

The move would put an important and occasionally provocative voice in economics in charge of the bank’s research department. 

His 1990 paper arguing the case for “endogenous growth” — the theory that knowledge and innovation can spur growth — is considered one of the most influential papers in economics of the past 30 years. 

“It’s an impressive choice,” said Scott Morris, a former US Treasury official who follows the World Bank for the Centre for Global Development. “It’s more in the [Larry] Summers and Stiglitz mold of picking an American superstar economist.”