By Brunello Rosa
16 September 2019
The world’s major central banks are taking to centre stage again. As we discussed in our review, last week the ECB kicked off the process by announcing a new stimulus plan, consisting of a cut to the deposit rate (accompanied by the introduction of tiered reserves to protect bank profitability), easier conditions for the new TLTRO long-term loans, a promise to keep interest rates at current or lower levels until inflation is closer to target, and new asset purchases that will last until shortly before rates start to be increased. While market participants expected a larger package in some ways, the ECB surprised to the upside by announcing an open-ended version of this easing program: the stimulus will continue until inflation stabilises at a level closer to target.
This coming week, two other major central banks will hold their policy meetings: the Federal Reserve and the Bank of Japan (BoJ). The Federal Reserve is widely expected to cut its Fed funds target rate further, as part of the insurance cuts it started in July. The real question is what the Fed will say about future rate cuts. The market expects these insurance cuts to be just the beginning of a prolonged easing cycle. President Trump is putting as much pressure as possible on Fed Chair Jay Powell to make sure this is indeed the case. However, the Fed is trying to resist any political interference, including the pressure to cut rates to respond to the increases in tariffs unilaterally decided upon by the White House. The clash between the two is intensifying; the former President of the New York Fed William Dudley openly advised the Fed not to fall into this political game, which only serves the purpose of ensuring Trump’s re-election in November 2020.
On Thursday, it will be the BoJ’s turn: analysts are split as to what the BoJ could do in September, just a couple of weeks before Japan’s planned sales tax increase from 8% to 10%. The BoJ might want to keep some of its ammunition for rainy days, but on the other hand it will not want to fall excessively behind the Fed and ECB in their easing cycles. In Europe, the Swiss National Bank and Norges Bank will also hold their policy meetings this week. Their policy decisions too will be greatly influenced by what the ECB and the Fed have done.
The Bank of England’s MPC, also meeting on Thursday, is also widely expected to remain on hold, waiting for Brexit developments.
In spite of all of the best efforts to reduce their relevance over time, the contribution of central banks remains absolutely crucial to countries’ policymaking. There is a lot of talk about the possibility of greater monetary-fiscal cooperation, if not explicit coordination. Some are even suggesting that the next step should be “helicopter money”, whereby central banks provide monetary instruments directly to the general public, thus circumventing the banking system. (Recently, key contributions in this direction have been given by Stanley Fisher, Philip Hildebrand, and others). Draghi himself, during his press conference last week, said that “government with fiscal space should act in an effective and timely manner.” But the reality on the ground, so far, is that fiscal policy is constrained, and monetary policy still remains, by and large, the only game in town when it comes to supporting economic activity during the ongoing slowdown.
by Brunello Rosa
19 September 2019
by Brunello Rosa
19 September 2019
by Brunello Rosa and Francesca Panelli
19 September 2019
by Giorgio Cafiero
17 September 2019
by Brunello Rosa
18 September 2019
by Brunello Rosa
12 September 2019
28 August 2019
Introduction: The Buchanan’s Take Over Argentina
It is hard to imagine a grimmer political risk out there just now than the appalling situation that Argentina finds itself in. An August 2019 Wall Street Journal headline puts it perfectly, ‘Does Argentina Have a Death Wish?’
Following the shocking August 11th presidential primary result, which saw the overwhelming triumph of Alberto Fernandez and his scandal- and competence-marred Vice-Presidential running mate, former President Cristina Fernandez de Kirchner, it would seem that the country does.
For the leftist, populist Peronist party leaders resemble nothing so much as the appalling anti-heroes of Fitzgerald’s peerless novella, Tom and Daisy Buchanan. Having left Argentina an economic basket case following the 12 years of the Peronist misrule under Cristina Fernandez and her late husband, Nestor Kirchner (2003-2015), the duo (plus Alberto Fernandez, their then Chief of Staff) left hapless, current centre-right President Mauricio Macri to clean up the substantial mess they had made.
Far worse still, in his abject failure to do so, they have skilfully used the disenchantment created by this lack of success to politically come back and ‘save’ the country that they themselves have obliterated. As was true in The Great Gatsby, only tragedy can result from such a vicious cycle. No one should bet on Argentina doing anything other than defaulting on its debts yet again.
The August Primary As Tipping Point
While the August 11th primary did not cause the economic mess Argentina is in, it certainly served as a trigger, transforming a possible political risk into a full-blown crisis. While the intricacies of the Argentinian political system are complicated, the outcome of the Argentinian primary vote was all too simple; the leftist, populist Peronists who misruled the country for twelve years are coming back to power in a landslide.
The presidential primary system was instituted in 2009, designed to limit the number of candidates running in the actual presidential election of just a few months later. Candidates need to manage 1.5% of the vote in order to qualify for the election itself. The first round of presidential voting is scheduled for October 27, 2019, the same day members of the national Congress and governors of most of the country’s provinces are also chosen.
Under Argentinian election rules, if any candidate comes first in late October with 45%, or has at least 40% and a ten percentage point lead over their nearest challenger, they win the election outright. Failing this, a second round (scheduled for November 24, 2019) will be held, this time a contest between the two largest vote getters.
In practice, the primary has come to function as a bellwether for the upcoming presidential contest, making the Argentinian political topography clear. In this case, Fernandez’s August 11th win with over 47% of the vote (to President Macri’s 32%), if replicated, would be more than enough to vault him into the presidency following the first round of voting.
While pundits and polls had predicted a narrow Fernandez win in the primary, conventional wisdom held that the result would be close, a second round of voting would be necessary, a contest that Macri just might win. All such wishful thinking went out the door following the shock result, which leaves the incumbent with next to no chance at re-election. For investors, the awful truth that the primary revealed is that the economically illiterate populists--likely to pour gasoline on Argentina’s economic fire--are well and truly on their way back to power.
This all marks a far cry from the many hopes that greeted the market-friendly, centre-right Macri’s rise to power in 2015. The tragedy of the president is that he did start to make good on the damage the feckless Peronists had done to the Argentinian economy, but far too slowly and cautiously. As a result of not ripping the Band-Aid, Argentina endured the pain and sacrifices of austerity without benefitting from any appreciable economic growth that could be expected to follow.
To the good, Macri mended relations with global lenders, infuriated by the game-playing of Cristina Fernandez’s administration, which led to Argentina’s default on its debts in 2014. The Argentine president managed to secure a mammoth $57 billion loan from the IMF, the largest in the institution’s history, based on the credibility of his austerity pledges to them. Macri also began to open up the notoriously protectionist Argentine economy, allowing the peso to float. But for all this, it was simply not enough to sustain his fledgling presidency.
For the negatives of President Macri’s short tenure have undoubtedly outweighed the positives. Unluckily for him, Argentina has faced a massive drought that imperilled its world-class and highly competitive farm sector.
Macri also failed to deliver the growth promised as the reward for austerity, with Argentinian GDP declining by 2.5% in 2018, with the country expected to replicate this dire result this year. Joblessness also remained intractable, with official unemployment lurking at above ten percent, as fully more than one-third of the population are now living in poverty. Inflation, that other scourge of the poor, started to rise under Macri’s presidency as a result of the elimination of the many subsidies of the Kirchner era, and has now reached the stratospheric heights of 55% by the end of August 2019 - as a result of the peso devaluation.
Food prices have shot up over the past year by an even more appalling 60%, even as sky-high interest rates of 60% (designed to bolster the flailing Argentinian peso) have stifled growth. At the time inflation was rising, the government changed the central bank’s inflation target (from a 8-12% range to a 15% level), thus “encouraging” the Banco Central to cut, rather than increase, its policy rates. And this was the move that sparked investors’ panic and started the crisis. Macri’s economic mishaps and half-measures, given the crisis he inherited from the oblivious Peronists, have doomed him to the worst of all politico-economic worlds: austerity destroyed his popularity, without delivering the promised economic results.
…And Its Costs
The consequences following the devastating presidential primary have been as immediate as they are disastrous. Fitch Ratings Agency immediately downgraded Argentina’s credit to junk status, flatly stating that this was due to the highly increased risks of sovereign default that a new Peronist government makes likely. The day following the primary vote, August 12, 2019, the Buenos Aires stock market tumbled 48% in a single trading session, the second largest single daily fall of any stock market in the world since 1950.
Predictably, the peso also collapsed, cratering 18% against the dollar in the immediate aftermath of the election. Argentina has spent a ruinous $709 million since the primary result to bolster the currency, which has still fallen by more than 20%. The longer term snapshot is no better, as the peso lost fully half its value against the greenback in 2018 alone.
But worse troubles lie ahead. Fitch reports that it expects Argentina’s federal government debt to reach 95% of GDP by year’s end, excessive for a developing country. The immediate landmine dead ahead is the country’s massive short-term debt obligations, 80% percent of which are denominated in rapidly appreciating dollars, making such repayment increasingly perilous. As of March 31, 2019, Latin America’s third-largest economy owes around $27 billion in debt repayments due by year’s end; a further $27 billion comes due in 2020.
Default on such a debt mountain is all too likely, given the otherworldliness of the Peronist leaders since their startling victory. Rather than taking concrete steps to calm the markets, Alberto Fernandez has obliviously thundered on about the need to reformulate relations with the IMF around the concept of ‘respect’ rather than ‘submission.’ This all might sound better if the Peronists had an actual economic plan—rather than the usual populist slogans—to deal with the tsunami they have unleashed on their country.
(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 16 - 22 September 2019
Central Banks' Stimuli Ahead in US And China
In the US, IP is expected to pick up (Aug., c: 0.2% y-o-y; p: -0.2). The Fed is expected to cut Fed funds target range by 25bps to 1.75% - 2.00% (p: 2.00 - 2.25). The market probability of ‘one rate cut’ stands at 79.6 (p: 90.0%).
In China, the economy is likely to show signs of growth (Retail sales Aug., c: 7.9% y-o-y; p: 7.6; IP Aug., c: 5.2% y-o-y; p: 4.8%). Further CB easing.
In Japan and the UK, CBs are expected to leave interest rates unchanged at -0.1% and 0.75%, respectively.
Geopolitical Risks (US-China, Brexit) Show Signs Of Easing
Ahead of planned US-China negotiations: i) President Trump delayed a 5% additional increase in tariffs on Chinese goods, originally set for October 1, to October 15; ii) China excluded US farm products - i.e.: soybeans and pork - from additional tariffs; and iii) the Trump administration discussed “offering a limited trade agreement that would delay US tariffs in exchange for Chinese commitments on agricultural purchases and intellectual property”.
In the EZ, the ECB lowered its 2019 forecasts for: i) growth to 1.1% (p: 1.2); and ii) inflation to 1.2% (p: 1.3). ECB President Draghi emphasized the need for fiscal policy–i.e. increased government spending and tax cuts–to avoid economic stagnation, as the EZ is ‘facing more weakness than previously thought’, due to a global trade slowdown.
In the UK, PM Johnson will meet EC President Juncker to discuss a ‘Brexit deal’ in preparation of the Brussels Summit of October 17-18, ahead of the October 31 deadline. If the deal fails to pass through parliament, the government will be forced to: i) seek an Article 50 extension; and ii) avert a no-deal Brexit.
In Turkey, the MPC signaled less scope for further steep moves, given the current monetary policy stance is ‘consistent with the projected disinflation path’.
Real Economy: Stronger-Than Expected Data, Lower Risks And CBs Reduce Recession Fears
In the US, consumption data were stronger-than-expected, as: i) retail sales advanced by more than forecasted (Aug., a: 0.4% m-o-m; c: 0.2; p: 0.8); and ii) consumer sentiment rebounded from a three-year low (Sep., a: 92.0; c: 90.0; p: 89.9). Core consumer inflation hit a one-year high (CPI core Aug., a: 2.4% y-o-y; c: 2.3; p: 2.2) while the headline reading declined (a: 1.7% y-o-y; c: 1.8; p: 1.8), as increased medical care costs were offset by lower energy prices.
In the EZ, the industrial sector continues to show signs of weakness (IP Aug., a: -2.0% y-o-y; c: -1.3%; p: -2.6). In Germany, the trade surplus jumped to a fourth-month high (Trade balance Jul., a: 20.2bn; c: 17.5, p: 18.1), following an unexpected increased in exports (Exports, a: 0.7% m-o-m; c: -0.5; p: -0.1). The ECB: i) cut the deposit rate by 10bps to -0.5% (c: -0.5%; p: -0.4); and ii) announced a QE restart: starting next November, it will buy EUR20bn of bonds every month “until inflation expectations come sufficiently close to, but below 2%”.
In Japan, Q2 growth was revised downwards, to 1.3% y-o-y (p: 1.8) as worsening trade conditions hit business spending.
In the UK, economic growth was stronger-than-expected (a: 0.3% m-o-m; c: 0.1; p: 0.0) on the back of a strong services output (a: 0.3% m-o-m; p: 0.0), which accounts for 80% of the economy.
In China, trade tensions hurt Chinese exports (Aug., a: -0.1% y-o-y; c: 2.0; p: 3.3) causing a decline in the trade surplus (a: USD 34.8bn; c: 43.0; p: 45.1).
In Turkey, the CBT cut its key lending rate by 325 bps to 16.50% (c: 17.25; p: 19.75).
Financial Markets: Risk-On Sentiment Prevails Driven By Stronger-Than-Expected Data, Lower Trade-Related Fears And CB Easing
Market drivers: Riskier assets rose, following eased geopolitical tensions and CB stimuli.
Stocks: w-o-w, global equity indices rose (MSCI ACWI, +1.1% to 527) driven by both DMs (S&P500, 1.0% to 3,007; Eurostoxx, +1.6% to 3,550) and EMs (MSCI EMs, +1.4% to 1,022). Volatility declined (VIX S&P 500, -1.3 points to 13.7, 52w avg.: 17.0; 10y avg.: 17.1).
Bonds: w-o-w, global indices fell (BAML Global bond index, -1.4%). The 10y UST bond yield rose by 35bps, to 1.90%.
FX: w-o-w, the USD weakened (DXY, -0.1% to 98.257) against a basket of currencies and the EUR rose (EUR, +0.4 to 1.107). The GBP rose to a two-month high (GBP/USD, +1.3% to 1.250), on diminished “no-deal Brexit” worries. EM FX strengthened (MSCI EMs, +0.8% at 1,621). Following the CBRT rate cut, the TRY strengthened against the USD to 5.685 (w-o-w, +0.5%).
Commodities: Oil prices fell (Brent, -2.0% to 60.2 USD/b). Due to lower recession fears, gold fell (Comex, -1.2% to 1,488 USD/Oz).
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