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by Brunello Rosa
21 June 2021
As the Covid-19 pandemic hit in 2020, a synchronous wave of monetary easing took place in the world. Whether or not the pandemic would prove to have a negative effect on aggregate supply (as in fact did occur, as supply was constrained by lockdowns and severe restrictions), there was certainly a shock to aggregate demand, which needed to be supported by coordinated fiscal and monetary accommodation. In both DMs and EMs, central banks adopted a mix of policy rate cuts, asset purchases (in this case also by EM central banks), various forms of forward guidance, and credit-easing measures to stem the economic downturn due to the pandemic.
In the DM world, G10 central banks resorted to the various instruments that had been created during the Global Financial Crisis (GFC) of 2008-09, and expanded these instruments further (for example, the ECB’s PEPP). Most central banks have brought their policy rate to the zero-lower bound (ZLB), or even closer to the effective lower bound (ELB), if the latter was in negative territory. In the G10 space, the biggest policy innovations have been, in our opinion, the following: 1) the yield curve control (YCC) at the short end by the Reserve Bank of Australia, to reinforce an otherwise not-very-credible forward guidance; 2) the maturity extension of asset purchases, along with a reduction of the quantity purchased by the Bank of Canada; and 3) the new deposit tearing system adopted by the Bank of Japan, allowing the central bank to reduce the deposit rate further into negative territory while protecting bank profitability.
A number of central banks have also started to embrace policies accompanying the fight to limit climate change, primarily the ECB, BOE and BOJ.
In EMs, many central banks cut their policy rates to their all-time lows, to levels that have always been more typical for G10 central banks. Some of them, for example the Banks of Israel, India, and South Korea (among others) even started QE programs, in spite of the inherent risks of FX stability, loss of credibility and fiscal dominance that those programs entail.
One year later in H1 2021, with the pandemic being gradually gotten under control, central banks have to decide what to do next. In the G10 space, there are three groups of central banks. Those which have started (or have announced they will start) reducing the pace of accommodation (chiefly the Bank of Canada, which started tapering QE in April, and Norges Bank, which announced it will raise rates in September). Then there are those which are carrying out their latest round of accommodation yet are ready to start considering a reduction of their easing stance (chiefly the US Federal Reserve). Finally there are those which are still finishing their latest accommodation programs and cannot afford to start thinking about tapering, namely the ECB, BOJ, and BOE.
In EMs, a number of central banks have already started reversing their easing policies, and have raised rates. According to Reuters, there were already ten rate hikes that took place by the end of May, by central banks in countries such as Russia, Turkey, Indonesia, Brazil, and South Africa. These increases are to defend their currencies against the US dollar, which has been weak for years, and to stem inflation deriving from a rise in commodity prices and the reopening of economies.
As BoJ Governor Kuroda said during his last press conference: it is not unusual for central banks to have divergent policy stances. And from these divergences, a number of interesting trading opportunities may emerge
by Brunello Rosa and Karmen Meneses
18 June 2021
by Brunello Rosa and Karmen Meneses
18 June 2021
by Brunello Rosa and Karmen Meneses
17 June 2021
by Alessandro Magnoli Bocchi, Karmen Meneses, Fawaz Sulaiman Al Mughrabi
21 May 2021
by Brunello Rosa
16 June 2021
by Brunello Rosa
10 June 2021
Subscribe to receive our free weekly Viewsletter "Making Sense of This World"
by John Hulsman
15 June 2021
Introduction: It Always Comes Back To Saudi Arabia
I first became fascinated by Saudi Arabia while researching my biography of T.E. Lawrence, To Begin the World Over Again: Lawrence of Arabia, From Damascus to Baghdad. Like my hero, I simply couldn’t be rid of the place. In my case, it came about because whether the subject was the world economy, global oil prices, fighting terrorism, constructing stability in the Middle East, or checking Iran, it simply is impossible to advance any of these weighty agendas without a real understanding of the enigma that is the Kingdom of Saudi Arabia.
Yet all too often cardboard caricatures have taken the place of real knowledge of this vital country. Either Saudi Arabia is seen as a staunch western ally, whose inner workings and own specific interests are not to be thought of over much, or it is viewed as a pantomime force of evil, seducing western leaders to overlook its obvious villainy. These contrasting stereotypes become merely another way of acknowledging that the political risk analyst in question has overlooked Lawrence’s basic intellectual insight; to successfully work with another culture an unremitting study of it is necessary.
If what Saudi Arabia symbolizes is a matter for intense debate, that it is important is not. The country accounts for 16.2 percent of the world’s estimated oil reserves. Uniquely, compared with its other two energy superpower rivals, the US and Russia, Saudi Arabia retains the capacity to be the world’s swing producer, as it can add (or subtract) millions of extra barrels of oil a day at will, thereby largely helping to set the global energy price. OPEC’s exports, of which Saudi Arabia remains the dominant producer, still account for 60 percent of the worldwide trade in oil. This alone makes Riyadh vital to the world economy.
But Saudi Arabia is far more than the primary determiner of the spot price of global energy. As keeper of the holy places of Mecca and Medina—the two most sacred sites for Muslims throughout the world—the country is seen as the titular head of Sunni Islam, and one of the five organic great powers of the Middle East itself (along with Israel, Iran, Turkey and Egypt). No, however you look at it, Saudi Arabia is vital to the functioning of the planet.
Upending Saudi Political Culture
Typically for this little-understood country, its most important political change in decades—a seismic shift in how the elite of the country functions—has passed with nary a whisper in the wider world. Founded as an absolute monarchy by Ibn Saud in 1932, during his reign Saudi Arabia transformed itself into the energy superpower it now is. However, with Ibn Saud’s death in 1953, under the veneer of remaining an absolute monarchy, in reality the Saudi government become far more consultative, as each branch of his immediate, massive family (Ibn Saud had 45 sons) was given a say in how the royal family titles were dispensed.
Consultation and balance within the House of Saud were perpetuated in two ways. First, the major ministries under the king were doled out to competing branches of the family, patronage that kept everyone (relatively) happy. Second, it was decided that the ultimate position of king would work its way through the direct (suitable) sons of Ibn Saud, before skipping down a generation to the founder’s grandsons.
As such, no one branch of the family, even if it had attained the kingship, definitively won out over all the others. This traditional system was institutionalized in 2006, when it was decided that the Saudi Crown Prince would be chosen by the Allegiance Council, which was composed of delegates from each line of ruling family, totally 34 princes in all.
However, all this was to change with the ascension of the present King Salman in 2015. He came to the throne in the usual way, with his half-brother Muqrin chosen as his Crown Prince. But things were to radically change as Salman, aware that the long string of sons to Ibn Saud was at last nearing its end, made a play to dominate what had long been a more consultative system.
After just three months, Muqrin was deposed by Salman, with his governmentally experienced nephew Mohammed bin Nayef (MbN) being appointed as the new Crown Prince. This was especially significant as MbN signified at last that the succession step change was being attempted, as he would have been the first of Ibn Saud’s grandsons to ascend to the throne. King Salman, in deposing his half-brother Muqrin, made it clear he intended to personally lead this process.
More importantly, in the long run, King Salman installed his favorite son, Mohammed bin Salman (MbS), as second in line to throne, advancing his own specific branch of the ruling family. Striking just two years later, the king then deposed MbN as Crown Prince, installing his favorite MbS, who has since come to de facto rule the country for his aging (but still formidable) father. So, it will be MbS who becomes the first of Ibn Saud’s grandsons to ascend to the Saudi throne.
This silent political earthquake has profound repercussions.
By elevating his son and demoting his brother and nephew, Salman has unilaterally done away with the consultative approach to governance that characterized the al-Saud family, from the death of its founder in 1953, until the present king’s ascension in 2015. The era of consensus is over. Second, MbS’s youth (he is 35) and King Salman’s advanced age (he is 85) suggests the Crown Prince could rule Saudi Arabia for decades, as since 2017 his is already de facto in charge of the day-to-day running of the country. In order to shore up his father’s sea change in how the country is run, MbS has pursued an effective, if ruthless, policy of sidelining all critics and threats.
In November 2017, MbS consolidated his power by initiating an anti-corruption campaign, arresting 11 Saudi princes and 38 other top officials seen as opposing his rise, including billionaire Al-Waleed bin Talal. Following on from this, in October 2020, 45 additional high-level military and public officials were arrested, including MbN for ‘treason.’ It is within this context of securing his succession that the murder of Jamal Khashoggi in the Saudi consulate in Istanbul in October 2018 — a prominent journalist and critic of both MbS and the regime—must be viewed. King Salman’s initiative amounts to going back to the regime’s founder, Ibn Saud, with the country becoming once again an absolute monarchy. While this could well leave the country fragile in political risk terms—as state policy is dependent on the whims of a very narrow set of decision-makers—in reality it is an effort to shore up political stability as MbS attempts to re-make Saudi society fit for purpose for our new era. Saudi Arabia is in a race to renew itself. .
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week: 21 - 27 June 2021
DMs’ Manufacturing PMIs To Soften While EZ’s And Japan’s Services PMIs Are Expected To Improve
In DMs, manufacturing PMIs are expected to soften, as: i) US indicators point to a gentle slowdown (c: 61.0; p: 62.1); ii) EZ data are likely to deteriorate (c: 62.1; p: 63.1; while ii) Japan’s figures are expected to stay subdued (c: 53.1; p: 53.0).
In the US, services PMIs are likely to remain stable (c: 70.0; p: 70.4);
In the EZ and Japan services PMIs are expected to improve (EZ, c: 57.6; p:55.2 - Japan, c:47.0; p: 46.5).
The Quarter Ahead: Inflationary Pressures Linger; US Fed Signals Earlier-Than-Expected Rate Hike; Geopolitical Tensions Rise
Globally, in H2-2021 output and demand are likely to keep rebounding strongly, driven by: 1) continued fiscal and monetary policy support; and 2) the steady rollout of vaccines. Inflation’s current rise is likely to prove cyclical. CB’ policy rates are expected to remain low, and financial markets are likely to be supported by sustained asset purchases.
Globally, key risks are: 1) DM governments returning to a more cautious fiscal stance; 2) a negative credit impulse in China; and 3) pandemic-related structural economic damage.
At the Geneva summit last week, US President Joe Biden and Russian President Vladimir Putin agreed to discuss several topics, including “alleged cyberattacks and human rights violations that have strained relations between Russia and the United States”. After the summit, President Biden characterized the meeting as “positive,” and President Putin called it “constructive.”
China is New Zealand’s largest trade partner. Amid rising tension between China, Australia and New Zealand, New Zealand’s trade minister stated “we will continue to expand our trading relationship with China” while we “aim to agree on free trade deals with the UK and the EU this year in a bid to diversify its export markets”.
Most US Fed officials expect a rate rise in late-2023, against earlier predictions of “a first rate hike expected in 2024”, because the US economy “recovered strongly from the pandemic and consumer price inflation hit an annual rate of 5% in May”. Fed chair Powell hinted at an upcoming tapering, stating that officials were “talking about reducing the Fed’s USD 120bn-a-month asset purchases”, which have boosted financial markets since March 2020.
Real Economy: Slow And Bumpy Global Recovery; Inflation Pressures Build Worldwide
In the US, May retail sales declined by -1.3% m-o-m (p: -0.9%) and slowed to 28.1% y-o-y (p: 53.4.2%), as Americans shifted spending to services – driven by: i)the reopening of the economy; ii) a pick-up in travel; and iii) a base effect from last year.
In the EZ, core inflation increased to 1.0% y-o-y (p: 0.7%), while the inflation rate reached 2.0% y-o-y (p: 1.6%), reflecting a sharp rebound in demand, due to the economy’s re-opening.
In Japan, May’s core inflation rate rose by 0.1% y-o-y, while headline inflation eased to -0.1% y-o-y (p: -0.4%).
In Japan and Norway, both BoJ and Norges Bank left their interest rate unchanged as expected at -0.1% and 0.00%, respectively. Norges bank signaled that the first post-pandemic rate hike is “likely to come in September 2021”.
Financial Markets: Stocks Trended Downwards; Bonds Remain Flat; USD Posted Strong Gains
Market drivers: Stocks retreated w-o-w, as the US Fed hinted at raising interest rates by late 2023, sooner than previously anticipated. Sentiment veered towards pessimism, as investors remain focused on careful portfolio positioning, capital preservation, and liquidity management.
Global equities fell w-o-w (MSCI ACWI, -0.6%, to 715); commodities and value stocks were particularly hit. In the US, indices ended the week sharply lower as investors worried about of an even more hawkish monetary stance, as on Friday, Federal Reserve Bank of St. Louis leader James Bullard said he expects “the first rate increase even sooner, in late 2022”.The S&P 500 Index fell (-0.6% w-o-w, to 4,222). In the EZ, equities deepened losses after the hawkish Fed comments (Eurostoxx 50, - 1.0%, to 4,083).
Fixed Income: w-o-w global bonds remained flat (BAML Global, -0.2% to 293.9) and UST yields fell (-1 bps, to 1.44%).
FX: w-o-w, the USD rose, strengthening against the EUR (DXY, +1.8%, to 92.225; EUR/USD -2.0%, to 1.186), mostly driven by the US Fed’s hawkish shift in tone.
Commodities: Oil prices rose (Brent, 0.8% to 73.3 USD/b), after OPEC sources stated the producer group “expected limited US oil output growth this year, despite rising prices”. Gold prices fell significantly (-6.0% to 1,763 USD/Oz), amid USD strength and prospects of inflation-taming monetary tightening.
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