March Madness

Despite Donald Trump having been inaugurated as the 45th President of the United States only 28 days ago, saying that it has been an event-packed month is the under-statement of the decade.

However, as Randy Bachman sang in his number-one hit in 1974 – incidentally the year President Richard Nixon resigned following the Watergate scandal – “You Ain’t Seen Nothing Yet”.

Indeed while President Trump has already provided markets, the media and policy-makers a lifetime’s worth of material to digest, many of the issues which have pre-occupied financial markets in the past twelve months have somewhat lost some of their bite. Only recently, following Chairperson Yellen’s testimonies to the Senate and Congress (on 14th and 15th February), has the Fed’s likely path of rate hikes re-focussed financial markets’ attention.

Read the full article on my website: March Madness

Tradespotting: Choose protectionism. Choose higher inflation. Choose weaker trade and growth

The future of global trade, which has slowed despite a pick-up in global GDP growth, is hogging the headlines, with the spotlight on both the US and UK.

US President Trump and his team have so far focused on (1) substituting US imports for domestic production, with Trump adopting a carrot-and-stick approach (2) trade in goods, particularly manufactured goods and (3) trade with China and regional trading partners and in particular Mexico.

There is in theory nothing irrational in President Trump wanting to boost domestic production and exports, narrow the $500bn trade deficit and spur US employment.

However, his current approach may in practise fall well short of delivering the improvement in US trade and jobs which he seeks. In a more extreme scenario, his tactics could at least in the near-term lead to higher US inflation and weaker trade, creating headwinds for both the US and global economy.

The high-labour cost US economy should be looking to better compete with the likes of Germany, not China. But the quality and desirability of exports matters.

The Dollar’s strength, over which the Trump administration has little or no control, will likely continue to weigh on the overall competitiveness of US exports while at the same time fuelling cheap US imports.

A stronger Renminbi is not the solution as exporting nations other than the US may be better positioned to capitalise on such a relative-price change, while the USD-cost of imports from China may rise.

If the US imposed higher tariffs on imports from China and other countries (such as Mexico), it would take time for US-based companies to boost production given insufficient quality and capacity in US manufacturing.

Moreover, China and other exporting nations such as Mexico and Canada may respond to higher US import tariffs by increasing their tariffs on imports from the US. This would put US exporters at a clear disadvantage vis-à-vis other exporting nations.

Read the full article: Tradespotting: Choose protectionism. Choose higher inflation. Choose weaker trade and growth

Market Fatigue in the Face of Catastrophic Success

The relative stability in the Dollar, S&P 500 and US yields is broadly in line with my view that analysts and markets had got ahead of themselves with respect to the path of the US economy and financial markets.

Moreover, Chinese policy makers’ willingness and ability to use central bank FX reserves to support the Renminbi tallies with my expectation that “near-term, the PBoC may continue to see some value in a broadly stable Renminbi.”

Currency, equity and bond markets may also be suffering from “political-fatigue”, with Donald Trump’s “policy-by-tweets” exhibiting diminishing returns.

Expectations that Trump will have to deliver a more cohesive set of policy priorities will likely rise exponentially after his inauguration as President today. If he is unwilling or unable, markets’ good-will may flounder and the Dollar and US equities may correct lower.

In the UK, Theresa May’s speech was an important milestone in the UK’s already tortuous path towards a world outside the EU. But there are still many legal, political and economic hurdles the government must clear, including a number of parliamentary votes.

Given the uncertain path which British executive and legislative bodies will take to reach a difficult-to-predict outcome at a still unidentifiable point in the future, fluctuations in Sterling will likely remain common-place.

I see the risk tilted towards Sterling weakness due to the British government’s acute challenge of negotiating favourable trade deals with EU and non-EU countries and the UK economy’s reliance on faltering household consumption growth.

Read the article in full HERE.

Black Swans and White Doves

In the past week European and global politics, strong US growth data, mixed global macro numbers and eurozone, Chinese and Indian central bank policy have eclipsed Trump-mania.

What is perhaps more remarkable is markets’ reasonably benign, “risk-on” reaction, bar the euro’s sell-off in the wake of today’s ECB policy meeting.

One interpretation is that markets have become complacent to the risks presented by President Trump’s constellation of pseudo-policies, surging nationalism in Europe, the UK’s uncertain economic future and continued capital outflows from China.

I have a somewhat different take, namely that markets are rightly discounting some of the more extreme and perverse scenarios, including:

1. Protectionist US policies coupled with higher US yields and a strong dollar collapsing tepid emerging market, and eventually global, economic growth;
2. The “no” vote in the Italian referendum leading to the economic collapse of the European Union’s third largest economy;
3. Surging European nationalism culminating in the collapse of the eurozone and/or European Union;
4. The British government opting to sacrifice growth in exchange for a hard version of Brexit and;
5. Capital outflows from China ultimately forcing policy-makers into accepting a Renminbi collapse and shocking a corporate sector with significant dollar-debt.

Read the full article on my website.

Fast and Furious – Market Drift

Markets’ reactions in the four days following Donald Trump’s surprise victory in last week’s US presidential elections has lent support, in some cases somewhat perversely, to my underlying view that:

• Central banks and markets were at an inflexion point. My central premise was that slowly rising global GDP growth and inflation was starting to alter major central banks’ thinking, with developed central banks increasingly unlikely to cut policy rates and/or boost/expand their QE programs. The market implication was that global yields had probably bottomed out and that greater market volatility would likely accompany the transition to higher yields (see Central bank easing nearing important inflexion point, 16 September 2016).
• The US Federal Reserve (Fed) would hike its policy rate 25bp at its meeting on 14th December; and
• The dollar nominal effective exchange rate (NEER), which is now up about 2.8% year-to-date, would strengthen in 2016 for a third consecutive year, albeit more modestly than in 2014 and 2015 when it appreciated 10% and 12% respectively.

Read the full article on my website: Fast and Furious – Market Drift