Global instability still dollar-positive
- IMF 'now calling for those that have fiscal space to use it'
- Brexit debate, ongoing Greek issues point to difficulty of EU reform
- USD likely to remain the beneficiary of global turmoil
By Neil Staines
“There is plenty to worry about” — Christine Lagarde
The International Monetary Fund's spring meeting has emitted a constant stream of downbeat comments over recent sessions despite the fact that the economic data have shown signs of stabilising globally over recent weeks.
Following the global financial crisis, monetary policymakers, governments, global institutions (such as the IMF), and rating agencies were widely criticised for looking in the wrong direction (through rose-tinted spectacles?) when the crisis hit.
At the current juncture, all are in danger of being guilty of the exact opposite.
Furthermore, as fiscal monitors warn of a sharp increase in deficits and debt in emerging economies (as weaker growth and lower commodity prices weigh) and as deficits hit new highs, world government debt/GDP ratios rise.
The IMF is now calling for those that have fiscal space to use it, stating that “monetary policy alone can not carry the growth burden”. The recommended near-term solution is that those with fiscal space should borrow more, and the long-term hope is more growth.
“Slow growth is a fact of life in the post-crisis world” — Olivier Blanchard
From our perspective, this strategy generates a number of concerns and one likely outcome.
Firstly, those economies that have fiscal space – Germany, for example – are not so keen on the idea. Secondly, it is not clear either that the macroeconomic backdrop is fundamentally as bad as feared or that ramping up global debt (arguably the root cause of the financial crisis) in order to stoke a recovery is the ideal strategy.
With much of the world stuck in either low growth or recession, and with two of the three biggest economic areas pursuing monetary activism of a form that is in our view not at all suited to the capital and/or savings dynamics of their economies, the macro climate is less-than-ideal.
In the present circumstance, savers and owners of capital (such as the Eurozone and Japan) are punished by low or negative rates whereas borrowers and spenders (such as the US) are beneficiaries.
The likely outcome, in our view, is a higher USD.
Our frustrations about the dislocation between economic activity and official rhetoric were redoubled overnight as the broad Chinese data for March showed further signs of stabilisation. Despite rising concerns over corporate leverage ratios (presumably by all but the IMF), the Chinese authorities appear to be in control of the growth transition.
This is a global economic positive, even if Chinese service sector growth does nothing for the rest of the world.
“The EU is not just unreformed, it is unreformable” — Nigel Lawson
Over recent sessions, the Brexit debate has also heated up. As the official leaflet on "why the government believes that voting to remain in the European Union is the best decision for the UK" lands on British doormats, the Bank of England increased their warnings of a “prolonged period of instability in the UK”.
What is perhaps more interesting from our point of view, however, is the impact and implications of a Brexit for the remainder of the EU and indeed the Eurozone. From our perspective, this is a significant risk that is yet to be adequately priced by the markets.
Dutch finance minister and Eurogroup President Jeroen Dijsselbloem yesterday urged the UK to work on concerns inside the EU, concerns that he stated are widely shared within the union. However, the fact that the EU, EC and IMF are still unable to find a way forward among themselves – let alone with Greece in the neverending Greek debt saga – leads us to agree with Lawson.
"Hope is a waking dream" — Aristotle
With little data today, attention will be drawn to the oil summit in Doha over the weekend. While expectations have likely already surpassed realistic levels, it is is also true that just getting the relevant people together is a step in the right direction.
The market's opening on Sunday will most likely be driven by the headlines that emanate from Qatar. In the near term, liquidity and participation remain low in financial markets, but we retain our medium term view that the USD is the likely beneficiary of the current global economic and geopolitical trajectory.
— Edited by Michael McKenna
Neil Staines is head of trading at The ECU Group