Politics in focus but there's much else to worry about
- As fiscal stimulus gains traction focus on politics will intensify
- Trump November win likely hawkish for US rates, bullish for USD
- So far, benefits from a weaker GBP have outweighed Brexit concerns
- Global credit and solvency concerns have re-emerged as a key theme
“Politics is the art of choosing between the disastrous and the unpalatable” – J. K. Galbraith
Last week, our discussions (and the market's focus) were centred around the monetary policy decisions and rhetoric of the Fed and the Bank of Japan. However, as we suggested, it is our view that recent monetary developments signify “an important transition for the global economy, a shift away from monetary stimulus towards fiscal stimulus and structural reform”.
As this transition evolves globally, political considerations will have an increased impact on investment decisions and market themes and trends. The US presidential elections are an obvious example of this, however, others such as the Brexit negotiations, the French and German elections, the continued Spanish political impasse as well as rising populism and anti-globalisation sentiment will also be key.
The press verdict on last night’s US Presidential debate (the first of three) is that Hillary Clinton edged it (a CNN/ORC poll showed 62% of viewers believed the Democrats won). A broad consensus suggests that a Trump win would be hawkish for US rates, bullish for the USD (and negative for MXN), a view reaffirmed last night with his criticisms of accommodative monetary policy under Yellen’s Fed watch, creating a “big, fat, ugly bubble... vulnerable to rising interest rates”. Clinton, however, is seen as more supportive of the current monetary stance, trade deals and of a weaker USD.
The market’s verdict would suggest a modest Clinton win under the guidelines set out above. However, Trump did not fare badly enough to reduce the political (and thus economic) uncertainties.
“...risk is jumping off a cliff and building your wings on the way down” – Ray Bradbury
In the UK, the economy continues to fail to fall off a cliff, as many doomsayer commentators (even surprisingly entities, such as the FT and The Economist) continue to espouse, in a manner almost hopeful of economic collapse in order to prove their point.
Following the upward revision of near-term GDP from the Bank of England earlier this month, a recent study suggests that the UK has attracted inbound deals worth almost $50 billion since the referendum. (The study also suggests that the UK has grown its share of total European M&A in the wake of the referendum to 32.3%, the highest share in both value and volume terms.) The UK housing market also appears to be regaining some of its pre-referendum poise. All of this suggests that (so far at least) the benefits from a weaker pound have so far outweighed Brexit concerns, and that for most (perhaps excluding some commentators) life goes on.
Indeed, one of Germany’s most prominent businessman, (Bild and Die Welt owner) Axel Springer’s Mathias Doepfner said yesterday that “leaving the EU will make Britain a more attractive destination to foreign investors.”
“No man’s credit is as good as his money” – John Dewey
While so far the tone of today’s note has been that perhaps things are not that bad, there are unfortunately areas of increasing concern for the global economy and more imminently for global financial markets, at the current juncture.
Global credit and solvency concerns have once more returned to the fore in the form of market jitters over Deutsche Bank’s recent losses, regulatory fines, and weak capital position (and weekend comments from Chancellor Angela Merkel which seemingly distances national support from the systemically important bank). Furthermore, concern over China’s bad loans (thought to be nearing $2 trillion) are becoming more acute. Last week the BIS (central bank to the central banks) said that China’s credit-to-GDP gap had risen to 30.1 in Q1 2016 - well beyond the 10 level that it would consider a sign of potential danger.
“The universal view melts things into a blur” – Emile M. Cioran
From our perspective, this puts financial markets in a complicated state. In the medium term we would suggest that there is potential for GBP upside relative to both expectations and its peers. In the short term however, we would expect fears over the banking sector and broad negativity to weigh on GBP. While we actively look for opportunities to buy GBP, the near-term backdrop favours remaining on the sidelines for now.
The situation is broadly similar for USDJPY from our perspective, where we see US real yields bottoming out (along with the differential with Japan) and anticipate that the weight of Japanese monetary easing will begin to take its toll on the JPY. In the near term however, wider market fears and risk-off sentiment are keeping the JPY supported.
The same could also be said of bonds where ultimately we see yield curves (led by the US) beginning to rise (and steepen) over the medium term. From this same standpoint we can not say the same thing about equities, and while the removal of global accommodation will (at least at first) be modest and gradual, equities have vulnerabilities to both a stronger and a weaker economic (and economic sentiment) backdrop from here.
— Edited by Clare MacCarthy
Neil Staines is head of trading at The ECU Group