Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “Central bank” Tag

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.




Emerging Markets: An Update

National Bank of Hungary meets Tuesday and is expected to keep policy steady.  The bank has been loosening policy quarterly via unconventional measures, which it just did at its June meeting.  Further easing is possible at the September meeting.  CPI rose only 1.9% y/y in June, the lowest since December and below the 2-4% target range.
Malaysia reports June CPI Wednesday, which is expected to rise 3.8% y/y vs. 3.9% in May.  Although the central bank does not have an explicit inflation target, falling price pressures should allow it to keep rates steady into 2018.
South Africa reports June CPI Wednesday, which is expected to rise 5.2% y/y vs. 5.4% in May.  If so, this would be the lowest rate since November 2015 and would remain in the 3-6% target range.  SARB then meets Thursday and is expected to keep rates steady at 7.0%.  However, we think the weak economy will lead the bank to start an easing cycle in H2 2017.  That leaves September 21 and November 23.
Poland reports June industrial and construction output, real retail sales, and PPI Wednesday.  Consensus for y/y readings are 3.9%, 9.8%, 6.0%, and 2.1%, respectively.  The economy remains robust, but price pressures are falling and so there is no urgency to hike rates.  CPI rose only 1.5% y/y in June, the lowest since December and at the bottom of the 1.5-3.5% target range.
Taiwan reports June export orders Thursday.  Exports and export orders have slowed a bit in recent months and so bears watching.  The mainland economy appears to be holding up well, which should be reflected in Taiwan data.

All Eyes on ECB

The focus shifts in the week ahead from Yellen’s testimony and disappointing data to the ECB meeting which is expected to result in a further modest adjustment in its risk assessment.  While the focus shifts, the pressure on the dollar will likely remain.  It fell to new lows for the year last week against the euro, sterling, Swedish krona, and the Canadian and Australian dollars, among the majors.   
Among the emerging market currencies, the dollar fell to new lows for the year against the central European currencies (forint, zloty, and koruna) as well as the Singapore dollar and Mexican peso, among the actively traded emerging markets.  The dollar recorded its lowest close for the year against the Chinese yuan ahead of the weekend.   
The markets have doubted the Fed’s commitment to raising interest rates since the start of the year.  Perhaps it reflected, in part, the disappointment after the dot plots had suggested four hikes in 2016, only one was delivered.  The markets were skeptical of the March hike until officials launched a full court press to convince it otherwise.   Officials needed less of a campaign about the June hike.  It is a possible third hike this year that the market is now skeptical  
On June 15, a day after the last FOMC meeting, the September Fed funds futures contract implied about an 18% chance of a hike, according to the CME.  It had fallen a little below 10% before the retail sales and CPI reports before the weekend.  There is now almost an 8% chance of a hike priced into the September futures contracts.  
The market is skeptical of a December move but less so than after the June hike.   A month ago, the market had discounted about a 41% chance of a hike.  The pricing implied a 47% chance before pre-weekend data, which spurred a reassessment that brought the odds down to almost 43%.  

Global Capital Markets Have Added Over $11 Trillion Since Trump’s Election

Since President Trump’s election, global equity markets have added more absolute value than at any time in history (around $12 trillion) – surpassing the front-running exuberance that started when Bernanke hinted at QE2 in 2010.

The value of global equity markets reached a record high $76.28 trillion yesterday, up a shocking 18.6% since President Trump was elected. This is the same surge in global stocks that was seen as the market front-ran QE2 and QE3

Of course, some might say this is driven by animal spirits. Still others will proclaim this is all Trump as Obama’s suppressive boot on the throat of business is lifted.

However, there is another explanation… a $1.4 trillion addition to global central bank balance sheets seems to have a curiously strong correlation to the gains…

Upcoming Next Week :ECB, China GDP, US earnings

US banks remain under scrutiny next week as Bank of America and Goldman Sachs report results, while overseas, investors are likely to watch the latest growth figures out of China and the European Central Bank’s monetary policy meeting.

Here’s what to watch in the coming days.

China GDP

However, growth is expected to have cooled to 6.8 per cent year-on-year, compared to 6.9 per cent in the first quarter.

Brexit talks

The European Union’s Brexit negotiator, Michel Barnier, meets his UK counterpart David Davis in Brussels on Monday for their second round of divorce talks. The talks come as Mr Barnier has grown frustrated with Britain’s approach.

Foreign secretary Boris Johnson said the Europeans could “go whistle” over their “extortionate” claim for a financial payment on leaving the EU. In response, Mr Barnier noted, “I don’t hear whistling, just the clock ticking”.

Emerging Markets: What has Changed

  • The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.
  • The Pakistani rupee was devalued, prompting a new central bank governor to be named.
  • Vietnam’s central bank cut interest rates for the first time since March 2014.
  • Egypt’s central bank surprised markets with a 200 bp hike to 18.75%.
  • South Africa’s ruling ANC reportedly proposed that SARB be state-owned.
  • Petrobras announced two separate cuts to fuel prices.

In the EM equity space as measured by MSCI, Chile (+1.9%), Hungary (+1.8%), and India (+1.7%) have outperformed this week, while Qatar (-1.4%), Hong Kong (-1.3%), and Russia (-1.1%) have underperformed.  To put this in better context, MSCI EM fell -0.8% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, Argentina (10-year yield -6 bp), India (-3 bp), and Taiwan (-3 bp) have outperformed this week, while Turkey (10-year yield +27 bp), Colombia (+25 bp), and Indonesia (+21 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 8 bp to 2.39%.

In the EM FX space, EGP (+1.4% vs. USD), BRL (+0.5% vs. USD), and HUF (up 0.2% vs. EUR) have outperformed this week, while TRY (-2.9% vs. USD), RUB (-2.8% vs. USD), and ZAR (-2.6% vs. USD) have underperformed.

The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.  The US and South Korea almost immediately announced a new joint military exercise.  Although the US has indicated that all options are on the table, there does not appear to be support for military options by South Korea, Japan, Russia, or China.  

Japan seen left out of global exit from easy money

Image result for japanYields on long-term government bonds are climbing across the world as major central banks signal an end to the era of easy money, possibly leaving the Bank of Japan fighting a lonely battle against deflation.

German long-term rates topped 0.49% early Monday to reach the highest level in roughly three and a half months. Long-dated U.S. Treasurys reached a one-and-a-half-month high of 2.3%.

 European Central Bank President Mario Draghi sparked the trend by hinting at an early reversal of ultraloose policy. “The threat of deflation is gone,” he said June 27. Bank of England Gov. Mark Carney soon followed, indicating a possible rate hike in the U.K.

Speculation that Europe is following in the footsteps of the U.S. by pulling back from monetary easing quickly spread among investors. Although Europe and Japan both languish amid weak inflation rates, growth in the manufacturing sector in the eurozone is giving the ECB room for tightening.

Rising yields are reaching other parts of the world. In Australia, long-term interest rates have surged since June 27 to hit a one-and-a-half-month peak Monday.

Emerging Markets :An Update

EM FX ended the week on a mixed note, as investors await fresh drivers.  US jobs data on Friday could provide more clarity on Fed policy and the US economy.  Within EM, many countries are expected to report lower inflation readings for June that support the view that most EM central banks will remain in dovish mode for now.   We remain cautious on the EM asset class near-term.   

 Caixin reports June China manufacturing PMI Monday, which is expected at 49.8 vs. 49.6 in May.  Official manufacturing PMI was already reported at 51.7 vs. 51.2 in May.  While the two series often diverge, we warn of upside risk to the Caixin reading.  For now, markets are comfortable with China’s macro outlook.

Thailand reports June CPI Monday, which is expected to remain flat y/y.  This remains well below the 1-4% target range.  Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%.  Indeed, with no price pressures to speak of, we believe rates will remain steady into 2018.

Indonesia reports June CPI Monday, which is expected to remain steady at 4.3% y/y.  This remains well within the 3-5% target range.  Bank Indonesia next meets July 20 and is expected to keep rates steady at 4.75%.  While the bank has signaled an end to the easing cycle, we do not see any tightening in 2017.

Following the stress test results, the banks like the banks (buyback bonanza)

The Federal Reserve says all 34 banks passed the stress tests and approved plans to use extra capital for stock buybacks and boosts to dividends.

Since that announcement its been a bit of a scramble from the banks to announce dividend and buyback hikes …
Bank of America:
  • Plans to buy back $12bn of shares
  • To buy back up to $15.6bn in shares (huge buyback)
  • Jack up the dividend to 32c/share
JP Morgan
  • To buy back up to $19.4bn in shares (huge buyback – largest ever)
  • Divvy boost to 56c/share

Morgan Stanley:

  • $5bn share buyback
  • Divvy hike by 25% (from 20 cents to 25 cents)

IMF’s new program to preapprove emergency access to dollars

The International Monetary Fund will introduce a framework to mitigate currency crises by ensuring easy access to dollars without requiring the onerous structural reforms that have marked past rescue programs.

This arrangement is intended mainly to deal with capital-account crises — currency collapses triggered by severe capital flight. With money likely starting to return to the U.S. as the Federal Reserve pivots from monetary easing, the IMF worries that corresponding outflows from emerging economies could drag down their currencies. Collapsing currencies can give rise to financial crises as foreign-debt loads soar. The situation could be made worse, if speculators take advantage of the situation to make quick profits.

 A country dealing with a capital-account crisis must intervene frequently in foreign exchange markets to prop up its currency by selling dollars. The new arrangement being developed by the IMF will help countries borrow greenbacks, mainly via short-term loans maturing in a year or less.

The IMF will evaluate potential borrowers under normal conditions, looking at such data as their current-account and fiscal balances, and let them join the framework if they are deemed sufficiently healthy. Loans will be limited based on each country’s capital contribution to the fund, among other factors.