Posts tagged emerging markets
Two Ideas

This will be a short update. I am working on a more extended macroeconomic essay—and I am trying to finish a short story—both of which are stealing time. In any case, I have little to say about the main themes beyond what I said last week. In the bond market, I concur with the points made early last week by Bloomberg’s Cameron Crise. Everyone knows the Fed is determined to keep raising rates, but market-pricing suggests that we are close to the end of the road for this hiking cycle. Between those contradicting points of view, the debate about the importance, or lack thereof, of the flattening yield curve has turned into a black hole threatening to consume all other stories in the bond market. I am sympathetic to that, but I don’t think the story is complicated. The 2s5 and 2s10 will invert in the next six-to-nine months, setting up an end of the U.S. business cycle towards the end of 2019 or at the beginning of 2020. At least, I think this is a reasonable base case until either of the following things happens. First, the Fed could suddenly decide that it doesn’t want to invert the curve. I doubt it, but the appointment of Richard Clarida as Vice Chair—apparently, he cares about the curve—certainly is an interesting development. Second, it is possible that the curve can steepen, or hold its current spread, even as the Fed fund rate motors higher.

Read More
Watching and Waiting

Sometimes it is best just to sit back and do nothing, and perhaps, watching the World Cup isn’t such a bad way to spend your time at the moment. Last week, I laid out what I consider the two main economic and market themes. First, real narrow money and liquidity growth is slowing, which is usually a bad sign for risk assets and second, monetary policy divergence is being stretched to new extremes. I surmise that most of the key macro-trading trends can be derived from these two stories. All other important themes are just crammed into the box labelled political uncertainty, a box which incidentally is increasingly full to the brim. The consensus is that political risk is the dog the never barks; this true on a headline level. But I can’t help but think that markets are a like deer caught in the headlight. Everyone is waiting for one of the political land mines to blow up, but no one knows what to do about it. In the U.S., Mr. Trump has escalated the global trade wars, though markets are not exactly pricing-in the end of the globalised world order as we know it. Rather, they seem to have settled on the idea that the U.S. is winning. Small cap U.S. equities have soared, and the dollar is bid. The latter effectively is an equaliser. If the dollar rises as U.S. imposes import tariffs, the real economic impact of Mr. Trump’s policies will be curbed, perhaps even neutralised altogether.

Read More
Two Questions, 1 & 1/2 Answers

Two questions, at least, are on investors’ mind at the moment. Is the synchronised global upturning turning into a synchronised slowdown? Will the dollar rally be sustained, and if so, will it spark further stress in emerging markets and in the global economy? You would be hard-pressed to argue that the global economy is slowing dramatically, at least based on the most recent headline data. My estimates suggest that global GDP growth was unchanged at 2.9% year-over-year in Q1, thanks mainly to a slight 0.3 percentage point rise in U.S. growth to 2.9%. That said, this number includes the 6.8% headline in China, which no one believes, and we still don’t know what happened in Japan. Finally, this number masks the fact that momentum in Europe slowed across the board. Growth in the euro area is still solid, but it slowed sharply in Q1. And the first indications for Q2 do not promise much in the way of a rebound. After growth of nearly 3% last year, all evidence so far points to somewhat slower growth of 2% in 2018. The picture is even grimmer in the U.K. where growth slid to a five-year low of 1.2% in Q1. Looking beyond the GDP numbers, leading indicators are discouraging, but not yet in panic territory.

Read More
It's all relative

Volatility returned to equity markets last week, but it was a quick visit. The S&P 500 slid 1.8% on Wednesday, the VIX jumped and babies were thrown out of with the bathwater in Brazil. For a short while, it looked like significant chink in the armour, but this market is not easy to bring down. Equities snapped back at the end of the week and volatility receded. On the week, the S&P 500 ended down 0.4%—after a 0.3% decline the week before—just about the same as the MSCI World. One of the main debates on the Tee Vee Thursday morning was whether this "pull-back" marked the beginning of the big kahuna sell-off and a global recession. When the market goes up, we cry foul due to high valuations and tentative evidence of "bubble behaviour," and when it finally stumbles it stands to reason that it must the beginning of the big unravelling.

Read More