by Brunello Rosa
10 August 2020
After the disastrous collapse in economic activity recorded in Q2, with real GDP falling by double digit percentage points in many economies, including in the most advanced ones, the global economy is attempting a timid rebound in Q3. The re-opening of economies after months of widespread lockdown, when 1/3 to half of the world population was estimated to be subject to more or less draconian restrictions, is facilitating a comeback in economic activity. However, this rebound is uneven and uncertain at best. In its latest statement, the US Federal Reserve’s FOMC warned about a slowdown in this timid rebound, as signalled by many leading and contingent indicators.
Governments remain alert and active in their plans to stimulate economic activity. Among others The US is preparing its third fiscal stimulus package, the EU has just adopted the new Recovery and Resilience Facility, and the UK has prorogued its furlough schemes (together with other forms of fiscal support).
Central banks remain fully accommodative after having launched what we called “Covid-related forward guidance”. In fact, in August the Reserve Bank of Australia (RBA), in deciding to re-start QE after the lockdown in the state of Victoria, joined the Fedand the ECB in explicitly linking the duration of its monetary stimulus to developments of the virus.
After the so-called “time-limited” and “state-contingent” forms of forward guidance, in which the central bank will continue to provide monetary stimulus until a certain date arrives or a pre-set economic condition materialises, some central banks seem to have decided to launch a new form of state-contingent forward guidance, in which the condition to be met to reduce the stimulus is fully exogenous. Specifically, central banks will continue to keep policy rates low (or lower) or make asset purchases until there is convincing evidence that the virus has been durably and credibly contained.
Considering that the number of cases is still accelerating in very large parts of the world, such as in the US, Brazil and India, this means that central banks will keep the tap of liquidity open for the foreseeable future. Most central banks, when showing their implicitly expected path of policy rates, do not show any sign of tightening over the forecast horizon.
Who is benefiting from this situation in financial markets? Clearly risk asset prices have been the ones that have benefited from the combination of monetary and fiscal stimulus (sometimes coordinated in “helicopter money” fashion). But there is plenty of evidence that both equity and credit markets valuations are stretched, as they are under-pricing the risk of the chain of defaults and bankruptcies which is likely to manifest itself in coming months. Perhaps also because of this reason, the clear winner so far seems to have been gold.
The yellow precious metal has in fact reached and recently overcome the 2000$ per troy ounce for the first time since the Global Financial Crisis. Gold was trading at just over $250 in the early 2000, before starting a glorious rally that brought it to $1750 (monthly prices) during the Euro crisis in 2011-12. After retracing and falling to just over $1000 in 2015, the rally re-started with some conviction in mid-2019 (when the Fed started to implement its “insurance cuts”) with a serious acceleration in the last few months.
As discussed in our recent in-depth analysis, there are multiple reasons for this rally. Gold is perceived to be a good hedge against inflation, but also deflation (as it is a physical asset, but nobody’s liability, unlike government bonds). It is a store of intrinsic value and is also perceived to be a store of US dollar value, during a time when political uncertainty and turmoil in the US, ahead of the Presidential election in November, is making many investors nervous about the greenback.
by Grégoire Roos
5 August 2020
by Peter Cecchini
30 July 2020
Alessandro Magnoli Bocchi, Farah Aladsani and Fawaz Sulaiman Al Mughrabi
24 July 2020
by Brunello Rosa and Farah Aladsani
6 August 2020
by Marco Lucchin
21 July 2020
by Peter Cecchini
8 July 2020
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by John Hulsman
28 July 2020
Introduction: China Alarms The World
For all the West’s many failings over the coronavirus (and much else besides in this unheroic age), geopolitically its primary strategic rival China has had far worse innings of late.
Wildly overconfident President Xi Jinping, throwing away his initial mask of quiet reasonableness, has instead donned the visage of Mao’s authoritarianism. Entirely doing away with former Paramount Leader Deng Xiaoping’s astute ‘softly, softly’ approach to foreign policy - a strategy designed to lull the rest of the world into analytical sleep until it was too late to arrest China’s rise to superpower status - Xi has instead vastly miscalculated, only succeeding in uniting much of the heretofore slumbering rest of the world against China.
Beijing has bullied Australia, imposing economic sanctions on Canberra for having the gall to call for an international investigation into the origins of the coronavirus (a probe which would inevitably focus on looking into China’s manifest culpability for its spread).
Beijing’s unilateral abrogation of the ‘One Country, two systems’ basis for the transfer of Hong Kong from British to Chinese rule—made apparent by the draconian new national security law expressly designed to extinguish freedom there—has called into disrepute the last few overly-credulous UK governments’ appeasement of Beijing, signposting it as the abject failure it has been as a policy.
Likewise, a formerly complacent America is no longer oblivious. In a politically toxic US, one of the rare areas left of common strategic agreement is that China is America’s undoubted primary foe, that it is dangerous, and that it must be aggressively countered. In this sense, whether Trump of Joe Biden wins the 2020 presidential election is beside the point; the foreign policy elite of both parties now accepts that a rising China is this generation’s preeminent foreign policy challenge.
The main reason for this startling bipartisan consensus lies in the US elite and public’s clear view that China’s actions regarding the pandemic were tantamount to manslaughter.
The common view is that China ruthlessly decided that, once the virus was devastating its own country, the rest of the world would have to suffer as well if Beijing’s geostrategic position were ever to be maintained, whatever the global human cost.
As the Pew Research Center survey of March 29th illustrates, a full two- third’s of Americans polled now have an unfavourable view of China, up a startling 19 points since Donald Trump took office in January 2017. China is now clearly seen as America’s top enemy.
Even rival rising power India has been needlessly antagonised by an arrogant Beijing, as its troops have come over the border in the high Himalayas, taking territory from Delhi on the roof of the world. In doing so, all China has done is speed the already well-established process of throwing geo-strategically pivotal India directly into waiting American arms.
And that is China’s basic strategic problem. While America has the Anglosphere countries firmly behind it (UK, Australia, New Zealand, Canada), along with India, Japan, and a plethora of lesser powers in Asia and Europe, China has almost no firm allies to speak of. As we have written before, Sino-Russian ties are greatly overstated, falling well short of a formal alliance, as the Kremlin — given its great Russian nationalist ideology – is loath to play Robin to China’s Batman, which structurally limits the possibilities of their working together in some sort of systematic manner.
So, in essence, Beijing finds itself alone in taking on the rest of the world; and its recent brutishness isn’t helping its cause.
(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 10 - 16 August 2020
The Week Ahead: US CPI Inflation To Rise While RBNZ Is Likely To Remain On Hold
In the US, July’s CPI inflation is expected to rise to 0.8% y-o-y (p: 0.6%), while core-CPI is likely to remain unchanged (p:1.2% y-o-y).
In the EZ, industrial production is expected to improve, while remaining in contraction at -11.7% y-o-y (p: -20.9%).
The RBNZ is expected to keep its official cash rate at the historical low of 0.25%.
The Quarter Ahead: US-China Tensions To Keep Rising, While The Fed Will Likely Strengthen Its Forward Guidance
President Trump: 1) imposed restrictions on 11 Hong Kong and Chinese officials, including Carrie Lam, Hong Kong’s chief executive, and Luo Huining, mainland China’s top official in the city - after revoking Hong Kong’s special trade status, a designation that exempted the city from restrictions the US applied to mainland China; and 2)ordered a sweeping ban “on dealings with the Chinese owners of the popular apps TikTok and WeChat”, declaring “they are a threat to US national security, foreign policy and the economy”. The ban will take effect in 45 days; while its impact on users remain unclear, the administration might face legal challenges over its authority to ban consumer apps. China and Hong Kong will likely reciprocate, escalating tensions.
In the US, President Trump signed four presidential orders to: 1) extend jobless aid, by providing additional weekly benefits to the unemployed; and 2) suspend the payroll tax - but Democrats argue his relief powers are limited.
Despite the UK’s acceptance to pay a financial settlement to the EU, PM Johnson warned that - in the event of a ‘no deal’ - “the GBP 39bn is no longer, strictly speaking, owed [to Brussels]”. Such refusal could lead the EU to take the case to the International Court of Justice.
The UK and Japan reached “substantial agreement on most elements” of a post-Brexit trade deal, largely mirroring the 2019 EU-Japan trade agreement.
Key Fed’s facilities and programs, put in place during the COVID-19 crisis, cover: i) Treasuries; ii) mortgage securities; iii)commercial paper and corporate bonds; iv) municipal bonds; and vi)provide credit to businesses. The Fed declared it is “extending its lending programs [set to expire on September 30] to businesses, governments, and individuals until the end of the year”.
Real Economy: The Global Recovery Remains Fragile; Rising Risks Of A COVID-19 Second Wave
In the US, July’s Markit composite PMI rose to 50.3 (c: 50.0; p: 47.9), the first expansion of private sector activity since January - as: i) services PMI rose to 50.0 (c: 49.3; p: 47.9); while ii) manufacturing PMI fell to 50.9 (c: 52; p: 49.8). July’s data indicated: i)a rise in nonfarm payrolls (a: 1.76m; c: 1.60m; p: 4.79m); ii) better-than-expected average hourly earnings (a: 4.8% y-o-y; c:4.2%; p: 4.9%); and iii) a fall in the unemployment rate (a:10.2%; c: 10.5%; p: 11.1%). In the week ending August 1, the number of claims for unemployment benefits rose by 1.2m (c: 1.4m; p:1.4m) – the lowest since the pandemic started. Finally, jobless benefits applications recorded the largest weekly drop in almost two months.
In the EZ, July’s composite PMI stood at 54.9 (c: 54.8; p: 48.5) – the steepest monthly expansion in business activity since June 2018, as: i)manufacturing PMI rose to 51.8 (c: 51.1; p: 51.1); while ii)services PMI fell to 54.7 (c: 55.1; p: 55.1). Finally, June’s retail sales expanded by 1.3% y-o-y (c: -0.5%; p: -3.1%), up from the contraction recorded in May.
As expected, both BoE and RBA kept their key policy rates on hold at historical lows (BoE: 0.1%; RBA: 0.25%); policymakers reiterated they “will do whatever is necessary to support an economic recovery”.
Financial Markets: Positive Economic Data Encourage Investors; Equities Up, Bonds Flat
Market drivers: as investors monitor both the: 1) US Fed forward guidance; and 2)upcoming US Congress USD 1tn stimulus package, DM stocks rose on: i)signs of the economic recovery gaining traction; and ii) policy-stimuli hopes.
Equities: w-o-w, global stocks rose (MSCI ACWI, 2.1%, to 563), led by the US (S&P 500, +2.5% to 3,351; Eurostoxx 50, +2.5% to 3,253).
Fixed income: w-o-w, global debt indices were unchanged (BAML Global, 0.0% to 299.0). Across key DMs, yields rose mildly (10y UST, +3bps to 0.56%; 10y German bund, +3bps to -0.51%).
FX: w-o-w, the USD spot index remained flat (DXY, +0.1% to 93.435) as well as the EUR (EUR/USD, +0.1% to 1.179), while EM currencies fell slightly (MSCI EMs FX, -0.2% to 1,609). The USD/TRY tumbled to 7.307, a record low.
Commodities: Oil prices strengthened (Brent, +2.5% to 44.4 USD/b). Gold soared (Gold, +3.0% to 2,035 USD/Oz.), driven by inflation fears triggered by: i) CB easing; and ii) government stimulus programs.
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