Global Macro Recap 17/09/2018

Global Macro Recap 17/09/2018

Goldman Sachs and Ray Dalio warn of Bearish Future on the Horizon

Big names in finance have recently warned the world of a bleak future on the horizon after the US has experienced the second longest economic expansion on record. In a recent interview with Bloomberg, Ray Dalio expressed his concerns of an economic downturn in the next two years. According to Dalio, as the fiscal stimulus tapers off, higher interest rates, slower credit growth and unfunded government liabilities pose risks to the US economy.

Goldman Sach’s Market-Risk Indicator is at its highest since 1969. The indicator is designed to provide a reasonable signal for future bull and bear markets. The indicator considers equity valuation, growth momentum, unemployment, inflation and the yield curve. Goldman Strategist Peter Oppenheimer wrote that a long period of low equity returns is most likely.

 

President Donald Trump Proceeds with $200 billion of Tariffs

President Trump instructed tariffs of $200 billion on Chinese products last Thursday despite Treasury Secretary Mnuchin’s attempts to restart negotiations with Beijing. However, the latest round of tariffs has been delayed as the administration considers the limited amounts of products which would have a significant impact on US consumers and major companies. So far, the Chinese have retaliated with tariffs on an equivalent amount of US exports and promised to match the US tit-for-tat.

Apple said last week that the $200 billion round of tariffs could hit its products such as the Apple Watch and AirPods Headphones. Big retailers also such as Target and Walmart could also be sucked into the trade war as the new round of tariffs may be allocated to consumer products ranging from shoes to TVs.

Officials from both countries have met four times for formal talks to end disputes, most recently in August. All efforts so far have fizzled. Washington has sought to put pressure on Beijing to reduce its trade surplus and protect the intellectual property rights of US companies.

Global Macro Recap 9/09/2018

Global Macro Recap 9/09/2018

South Africa Enters Recession

The South African economy officially entered a recession for the first time since the GFC on Wednesday as the economy contracted 0.7% annualised in the second quarter. Slack agricultural output and soft consumer spending have put pressure on the economy.

Australian Growth beats Expectations

The Australian economy has beaten expectations with 3.1% annual GDP growth for the second quarter. The ABS indicate that commodities export accounted for half of the contribution to growth. The mining sector output grew 2.9% thanks to increase in coal, LNG and iron ore production. Even though household spending was weak, household savings fell further to more than a 10-year low of just 2.1%.

ANZ, CBA follow Westpac and lift variable mortgage interest rates

ANZ and Commonwealth Bank have followed Westpac in raising variable home loan interest rates by 16bps and 15bps respectively across both owner-occupier and investor mortgages. Both banks expressed that the decision to raise interest rates despite a flat cash rate was a difficult decision, especially given “the impact raising interest rates have on family budgets” (ANZ Executive Fred Ohlsson).  

Over the past six months, Australian banks have seen funding costs increase significantly. This is mainly driven by the reliance on offshore funding, reflected in the 90-day swap rate on bank bills. 

Global Macro Recap 28/08/2018

Global Macro Recap 28/08/2018

Venezuelan Bolivar Devaluation

Venezuelan President Nicolas Maduro carried out one of the biggest currency devaluations in history, devaluing the Venezuelan Bolivar by 95%. The official rate of the currency will go from 285,000 per US dollar to 6 million per US dollar. Many private companies, already dealing with hyperinflation, years of brain drain, price controls and threats of seizure, now must deal with even faster inflation (running at 108,000% annualised) and mandatory wage hikes. It’s also possible that the exodus of Venezuelans to other countries will increase, even as Ecuador and Peru announced entry restrictions and tensions rise along the Brazilian border.

Further Trump Concerns

US equity futures fell in response to Trump’s latest legal woes, however there was little sign of pronounced impact in global markets. The guilty plea to illegal campaign finance charges by Michael Cohen (Trump’s former attorney) coincided with the President’s former campaign chairman Paul Manafort’s conviction on eight counts of tax and bank fraud charges.

Trump has accused China and the European Union of manipulating their currencies, as progress in rectifying the US trade deficit has stalled. The USD has appreciated almost 6% since April, prompting complaints from Trump over Federal Reserve interest rate hikes.

Trump’s desire for a weaker dollar to support US manufacturing exports has led some to speculate that he may launch a campaign to weaken the USD, a practice which hasn’t occurred since the Plaza Accord in 1985.

Such a move could undermine the USD’s status as the world’s reserve currency and have a disastrous effect on demand for US assets.

Greek Soverign Debt

After nearly nine years of austerity and political turmoil, Greece is finally exiting what is supposed to be the last of three bailout programs. Although their federal budget is in surplus and their economy is growing again, they are still 240 billion euros in official debt. Together with private debt, this brings the government’s total burden to more than 180% of GDP.

European creditors have estimated that by 2060 this burden should be reduced to 100% of GDP. However, the EU’s projections involve extremely optimistic thinking. More realistic estimates suggest that Greece will still have to borrow hundreds of billions of Euros in the future, creating the potential for yet another Greek crisis.

Greece now ends a period of tutelage over how its debt is serviced. Although the country has now regained sovereignty in how it services its debt, it still owes billions to foreign creditors. This week it was also reported that the left-leaning Greek Government, who initially resisted privatisation of state owned assets, was interested in increasing the sales of state owned assets to private buyers. By the end of 2018 it is expected that Greece will reach 2.7 billion euros in asset sales for the year, one billion euros more than in any year since 2011.

 

Global Macro Recap 17th August

Global Macro Recap 17th August

   · Turkey has experienced a tumultuous week after US President Trump imposed sanctions on Turkish government officials triggering a currency crisis. The Turkish Lira fell steeply to a low of 0.14 USD/TRY on Monday but has since recovered to a value of 0.16 USD/TRY. Turkey has responded by imposing further tariffs on US imports, with Turkish President Erdogan calling for a boycott of Apple Products. The Turkish Lira has lost 60% of its value year to date. 

 

· India announced their largest trade deficit in July since May 2013 with their gap between imports and exports reaching $18 billion USD. This has worsened the prospects for the Rupee which has already been negatively affected by the crisis in Turkey, the currency has already depreciated 8.6% in 2018 and on Tuesday fell to a low of 70.08 INR/USD.

 

· The Bank of Canada has raised interest rates for the fourth time since July 2017, reaching 1.5%. The low rates since the global financial crisis have resulted in a record level of $1.6 trillion USD in debt, a figure that is mostly made up by mortgages. This level of debt has caused the central bank to gradually increase interest rates in order to avoid dramatically increasing default rates in the economy.

 

· On the 15th of August, Hong Kong intervened to defend its peg to the US dollar for the first time in three months, after the local currency fell to the weak end of its trading band. 

Unlike a floating exchange rate system, where the value of the currency is determined through the private market forces of supply and demand, under a fixed or ‘pegged’ exchange rate, the value of the currency is determined against a major world currency (usually the US dollar) and maintained within a certain range by the central bank. The Turkey-induced turmoil in emerging markets prompted risk aversion among investors and strengthened the US dollar, placing pressure on the Hong Kong dollar.  In response, the Hong Kong Monetary Authority bought HK$2.159 billion (275 million USD) of local dollars to ensure the currency traded within its permitted range of HK$7.75-7.85 against the USD. However, with the Hong Kong dollar likely to remain weak in the near future, further intervention from the monetary authority is expected.

 

·  On the 7th of August the RBA left the cash rate on hold at 1.5% on the back of worrying levels of household debt, stagnant wages and falling house prices. The bank has become more optimistic that the unemployment rate will continue to fall and for inflation to rise towards target as Australia reaches potential output. The bank’s GDP forecast remains unchanged at 3% in 2018 and 2019. However, the market isn't so sure as indicated in the futures curve which now hasn't priced in any rate hike until January 2020.

 

The National Accounts: Analysis of Australia's GDP, Capex, Wages, Inflation, Corporate Profits and Consumption

The National Accounts: Analysis of Australia's GDP, Capex, Wages, Inflation, Corporate Profits and Consumption

The National Income and Product Account (NIPA), is one of the four main financial statements of the economy, which outlines the gross domestic product (GDP) of a country. Typically, the NIPA is released by the statistics authority of a nation, the Australian Bureau of Statistics publishes Australia's NIPA quarterly. We will demonstrate how to read and understand the NIPA, and undertake some analysis of Australia's GDP, capital expenditures, wages, inflation, corporate profits and consumption. 

Click here to read our National Accounts: GDP Analysis report

Bonds: Nominal, Inflation-Linked, GDP-Linked, Social Impact

Bonds: Nominal, Inflation-Linked, GDP-Linked, Social Impact

The bond market is the largest securities market in the world, providing countless investment options. Many people are familiar with aspects of the market, but as the number of new products grow, even a bond expert is challenged to keep pace. While a fixed-coupon bond is the most common type, in this report we will examine three other types of bonds that are generating a lot of attention recently; Inflation-Linked bonds, GDP-Linked bonds and Social Impact bonds. We will showcase some of their unique characteristics and the advantages that they offer for investors and the economy.

Click here to read our bond report to learn about these interesting and emerging bond types