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Sat, 22nd July 2017

Anirudh Sethi Report

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Posts Authored by: “Oliver Mirza”

Bank of England unveils new £10 note featuring Jane Austen

With her keen ironic eye for the foibles of her age, Jane Austen would have appreciated the launch of the new banknote featuring her likeness and how it has drawn out modern Britain’s own insecurities.

The new £10 note was unveiled by the Bank of England in Winchester Cathedral on Tuesday, the 200th anniversary of Austen’s death. It will be made out of plastic, like the new £5 note, which features Winston Churchill, and will be in circulation from September 14.

Jane Austen was chosen to replace Charles Darwin on the £10 note following a campaign from the feminist activist Caroline Criado-Perez after Churchill replaced the prison reform campaigner Elizabeth Fry, the only woman featured on the currency other than the Queen.

The decision to review the representation of women on banknotes was one of the first made by the governor when he took over from Mervyn King in 2013. Currently no women appear on any of the UK’s banknotes.

Dollar Tumbles, Euro Soars After Obamacare Repeal Dies; China Intervenes To Halt Rout

  • The USD-index dropped to 10 month lows amid fading hopes of US reforms after Obamacare repeal effectively died last night.
  • Soft CPI from the UK and NZ weigh on both currencies
  • Looking ahead, highlights include BoE’s Carney and the API Crude report

The Dollar Index sank to its lowest level since September, a fresh 10-month low, after two more Republican defections on Monday night doomed the proposed GOP healthcare plan in the Senate. And while Treasuries rose on concerns about inflationary pressures and the viability of the Trump stimulus agenda, S&P futures rebounded gingerly from session lows, and were up 0.01% after posting nominal declines earlier in kneejerk reaction to the Senate news.

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Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.

Trade zones out, tough bargains in for 2017

A reversal in U.S. trade policy could make 2017 the year that efforts to build multinational trade zones crumble, returning the focus to tough, bilateral dealmaking.

In October 2015, officials from 12 nations including the U.S. and Japan gathered in the American city of Atlanta to ink the historic Trans-Pacific Partnership, confident of the dawning of a new age of trade governed by such high-level, multilateral agreements. Yet that dream lies all but dead just over a year later, not least due to Donald Trump’s presidential victory and his pledge to pull the U.S. from the agreement upon taking office Jan. 20.

 Many bilateral free trade agreements, which reduce or abolish tariffs and set rules for trade in goods and services between two nations, have been struck over the years. Multilateral agreements extend this notion to the regional level and improve security in the areas they cover, further greasing the wheels of commerce.

Yet Trump prefers his trade pacts one on one — the better to drive hard bargains, leveraging U.S. economic and diplomatic might to secure the most advantageous terms. Multilateral pacts involve far more careful compromise and require each nation to give and take small concessions rather than pushing for an unambiguous win.

Us first

Toyota-Suzuki alliance may help both ride out changes

An alliance between Toyota Motor and Suzuki Motor could be a boon to both sides, helping the former gain ground in emerging markets such as India and giving the latter the engineering needed to compete in an increasingly high-tech industry.

Can’t go it alone

 The two automakers said Wednesday they were discussing collaboration on environmental, safety and information technology. 

Although Toyota President Akio Toyoda told a new conference that the idea of an alliance came together in just two business days after Suzuki Chairman Osamu Suzuki got the ball rolling, there is more to the story. Suzuki’s next partner had been the subject of speculation since August 2015, when the Japanese maker of economy cars ended a capital and business relationship with Germany’s Volkswagen over management conflicts.

Though Chairman Suzuki had said publicly that his company would look to remain independent going forward, another senior executive had acknowledged that collaboration was “necessary” in some fields. Even in India, a successful market for Suzuki, environmental regulations are growing tougher, making investment in technology like hybrid drive systems essential. Rising incomes have also stoked demand for higher-end vehicles in such countries.

Finding a big automaker ally was seen as essential for Suzuki to ensure a presence in self-driving cars. While a Toyota or a Volkswagen has the financial strength to counter the challenge posed by Google and other tech giants in this field — Toyota’s annual research and development budget comes to around 1 trillion yen ($9.59 billion) — Suzuki, which spent just 130 billion yen on R&D in the year ended March 31, hardly stands a chance alone.

Making connections

Russia Pumped a Record Amount of Oil Last Month – 11.1 Million Barrels Per Day

Amid negotiations about a reduction of oil production between members of the Organization of the Petroleum Exporting Countries (OPEC), Russia reported its highest post-Soviet record oil output.

Russia’s ministry of energy announced Saturday that in September it pumped a record 11.1 million barrels per day (bpd), the most since the demise of the Soviet Union and 4% above the previous output of 10.7 million bpd, according to preliminary estimates. Russia, as well as OPEC members, has struggled with the long recession as oil prices stay below $50 a barrel. In 2008, as a result of the financial crisis, oil prices plunged from $147 a barrel to less than $35.

On Wednesday, during the informal meeting in Algiers, for the first time in eight years, OPEC agreed to outline a deal that limits oil output. “We decided the range of production for OPEC of 32.5 to 33 million barrels a day should be divided between OPEC member countries,” Iranian minister Bijan Namdar Zanganeh said after the meeting. Working out an output freeze as well as the levels of production by each country is the goal of the next formal meeting in Vienna slated for November. However, some doubt whether OPEC will follow through on the commitments made at Algiers.

Russia’s oil minister, Alexander Novak, said after the Algiers agreement was announced, that “Russia will carefully consider those proposals which will be eventually drawn up”, but “our position is keeping the volume of production at the level that has been reached.” Nevertheless, Russia is flexible and is open for joint OPEC efforts to stabilize the oil market.

Emerging Markets -An Update

  • The IEA forecast that the surplus in global oil markets will last for longer than previously thought.
  • Philippine President Duterte called for US troops to leave the southern island of Mindanao.
  • Relations between Poland and the EU are deteriorating.
  • Former head of Brazil’s lower house Eduardo Cunha was expelled and banned from public office for eight years.
  • Brazil’s central bank cut the amount of daily reverse swap contracts sold to 5,000.
In the EM equity space as measured by MSCI, Thailand (+2.2%), Qatar (flat), and Indonesia (-0.1%) have outperformed this week, while Colombia (-4.0%), Brazil (-3.4%), and Taiwan (-3.0%) have underperformed.  To put this in better context, MSCI EM fell -2.7% this week while MSCI DM fell -0.9%.

In the EM local currency bond space, South Africa (10-year yield -6 bp), Czech Republic (+1 bp), and China (+1 bp) have outperformed this week, while Hong Kong (10-year yield +20 bp), the Philippines (+18 bp), and Russia (+16 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 1 bp this week to 1.69%.

 
In the EM FX space, ZAR (+0.8% vs. USD), PLN (+0.7% vs. EUR), and CNH (+0.6% vs. USD) have outperformed this week, while MXN (-3.7% vs. USD), KRW (-2.1% vs. USD), and MYR (-1.4% vs. USD) have underperformed.

Deal on Oil Output Freeze Can Be Worked Out at Algeria OPEC Meeting

Image result for oil rigOn September 26-28, representatives of 73 member states of the International Energy Forum (IEF) are set to meet in the Algerian capital to discuss oil-related issues. OPEC members are expected to hold informal consultations on the sidelines of the IEF summit.

“In regard to the discussion of the situation in general, within its framework different proposals could be worked out,” Novak said speaking about the possibility to freeze oil output during the upcoming meeting.

“This issue would be worked out in the course of monitoring.” The minister said that Russia was open for proposals to coordinate its efforts with other oil producing states.

No timeline for Greek inclusion in ECB QE – Draghi

The European Central Bank is not set to take any immediate decision on including Greece in its bond buying programme as it awaits further clarity on the country’s debt sustainability from eurozone governments, Mario Draghi has said.

Following the ECB’s move to allow Greek banks to access the ECB’s cheap loans earlier this year, Mr Draghi said there was no “precise timeline” on the more significant move to include Greek bonds under the ECB’s stimulus measures that began last March.

Writing in response to a question from a Greek MEP, the ECB president said any moves towards inclusion in the programme could not be “specified at the current juncture”.

He noted that finance ministers in the Eurogroup were still considering what measures to take to ensure the country’s debt pile is sustainable. In May, the Eurogroup and IMFagreed on a broad but imprecise set of measures to reduce the country’s debt pile after its current rescue programme ends in 2018.

There are also big questions over the IMF’s participation in any new bailout as the fund will be carrying out its own debt sustainability analysis later this year before deciding whether it will commit any new funds to Greece.

Record-High Global Production

While the central bankers are increasingly getting most of the credit for the current bull market in stocks, let’s not forget that workers are still going to work and managers are still managing their businesses every day. Central banks have responded to slow global economic growth by flooding the global economy with liquidity. Business managers have responded by working harder to bolster their revenues, to cut their costs, to increase their productivity, to boost their profit margins, and to grow their earnings. A recession is always a good excuse for not doing any of these things beyond slashing costs. In a slow-growing business environment, there are no good excuses for not at least trying to do better.

On a global basis, all these efforts continue to pay off in growth, albeit slow growth. However, it is mostly slow growth to record-high territory. Consider the following:

(1) Global industrial production. Global industrial production (excluding construction) rose 2.0% y/y to a new record high during May. That’s not much growth, but it has a positive sign rather than a negative one, and it is happening in record-high territory.

(2) Advanced vs. emerging economies. I am not as pleased by the industrial production index for advanced economies. It has been flat-lining for the past couple of years roughly 5.5% below its record high during January 2008.

On the other hand, the index for emerging economies jumped 4.2% y/y during May to a new record high. Production is at or near a record high for the following EMs: Indonesia (up 6.4% y/y through June), China (6.0%, July), Poland (6.0%, June), Malaysia (4.6%, June), Czech Republic (4.6%, June), India (2.3%, June), and Mexico (0.3%, June).