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“Smart Money: How digital currencies will win the New Cold War - and why the West needs to act now”, the book Brunello Rosa has written with Casey Larsen for Bloomsbury Publishing, will be available in all major bookshops from October 24th, 2024.
This book discusses the fundamental theme of the “geopolitics of central bank digital currencies” in a non-technical manner, and is aimed at the general public. It does not shy away from discussing their most controversial implications, including the risks to privacy, the stability of the banking system as we know it, or the re-organisation of the global financial architecture around these new instruments.
Go to the book's webpage on brunellorosa.com
In their latest podcast Brunello Rosa and Manas Chawla discuss the “bipolar” behaviour exhibited by markets in the last few weeks.
11 October 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss the two conflicts in Ukraine and the Middle East continue, with no end in sight.
4 October 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the election in Brandenburg confirmed the AfD’s rise in East Germany
27 September 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss how the Harris-Trump TV debate has re-opened the race for the White House.
20 September 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the Cold War between US and China is intensifying.
13 September 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss the difference between defending the “freedom of speech” and spreading misinformation.
6 September 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the Israel-Hezbollah military exchanges re-open the risk of a further extension to the conflict in the Middle East
30 August 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the US Presidential race will remain heated until the very last minute.
23 August 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the recent market rout masks a healthy repricing of valuations
16 August 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss how major central banks are at a turning point, and its implication for global markets.
11 August 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the US elections are at a crossroads after the recent events.
2 August 2024
In their latest podcast Brunello Rosa and Manas Chawla discuss why the double mistake of “Ursula” and “Giorgia” doesn’t bode well for the EU
26 July 2024
In June 2023, Rosa & Roubini Associates has been recognised for the second consecutive year as the best independent macroeconomic research & advisory firm by Corporate Vision Magazine
R&R provides independent research on the global economy
R&R provides independent advice on global issues
by Brunello Rosa
7 October 2024
In the last month, and in particular during the last couple of weeks, we have observed an unusual combination in price action, with a rise in equity and sovereign yields and at the same time an increase in gold and oil prices, thus breaking historical correlations and preparing the ground for an inevitable correction.
Let’s start with equity markets. If we look at the performance of the major indices in the last month, the MSCI World Index has gained 5.11%, around a third of the 16.7% growth it has recorded year-to-date. The S&P 500 has gained 6.3%, which is about a third of its 20.6% gain since the beginning of the year, while the Eurostoxx 50 has gained 4.6%, half of the 9.6% it has gained since January 2024. But the real stars of the last month have been the Chinese indices. Hong Kong’s Hang Seng has gained 30.3% in a month, making up almost the totality of the 33.4% increase it has recorded since January. In mainland China, the Shanghai stock index has managed to reverse its previous decline: a 20.6% increase in the last month has brought its yearly performance into positive territory, with a 12.5% gain year-to-date.
As equity indices were rising, sovereign bond yields also rose. When, in mid-September, the Fed decided to cut the benchmark Fed funds rate by 50bps, surprising the market to the upside, yields initially fell: the 2-year US Treasury yield dropped from 4.00% to 3.50%, while the 10y UST yield initially fell before rising back up in consideration of the reduced risk to growth (and potentially the higher risk to inflation) deriving from the move. But in the last couple of weeks, the 2y UST yield has been rising more markedly, reaching 3.92% on Friday, after the higher than expected Non-Farm-Payroll figure for September. Meanwhile, the 10y UST yield has also reached 3.97% over the same period.
In the commodity space, gold has continued to beat all previous records. One year ago the gold bullion was just over $2000, and one month ago it was $2500. In late September it reached $2706, and is now trading at $2673. This movement represents a rupture to the historical norm (or more simply correlation) that sees a rise in UST yields associated with a fall in gold prices (as gold does not pay interest and does not guarantee a return). Meanwhile, Brent oil prices have increased from $69 per barrel in early July, and is now trading at $79.
The most interesting question is what is behind this bipolar – one could say schizophrenic – behaviour of markets, which on the one hand exhibit the typical risk-on features (higher equity and oil prices and bond yields) and on the other hand shows a record-high level of risk aversion? There are several factors at play here, which can explain this unusual combination of price actions.
First, the US economy, which seemed on the verge of a recession until the summer, is actually proving much stronger than expected, as testified by the 354K increase in NFP in September, much higher than the 140K consensus or the previous reading of 159K. This has served to dissipate the doubts that the Fed had cut rates by more than expected in September as a sign of panic for the rapidly deteriorating economy. By the way, the larger-than-expected cut (and the consequent decline in bond yields) did provide a boost to risky asset prices.
Second, the massive monetary stimulus introduced by Chinese authorities in the two weeks preceding the country’s October 1st National Day celebration (which opens up the so-called golden week) helped push Chinese equity markets up, and boost all other equity indices, driven by an expected improvement in the Chinese economy as well as a much-needed kick to the luxury sector in developed economies.
On the other hand, in the commodity space, the rise in gold prices signals the increased risk aversion by investors, which observe a combination of nasty geopolitical developments, with no end in sight, in both the Middle East and Ukraine, as well as the risk of higher inflation, as well as deflation, ahead. Gold is traditionally considered a good hedge against inflation, but offers even better protection in case of deflation, being an asset with no corresponding liability (as in the case of equities or bonds), and therefore offering protection against counterparty risk.
The rise in oil prices can be explained by a combination of two opposing forces conjoining to send them higher. On the one hand, stronger than expected global demand (from both US and China) incentivise oil production and consumption. On the other hand, rising geopolitical tensions, especially in the Middle East, lead to higher oil prices, as people expect reduced supply, in particular possibly from Iran.
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Week: 7 - 13 October
The Week Ahead: UK QoQ GDP To Rise; Unemployment Rate To Stay Unchanged in US And EZ; Headline Inflation To Fall In EZ
In the US, in September, unemployment rate is seen staying unchanged at 4.2%. NFPs are expected to rise by 145K (p: 142K). In September, S&P Global Manufacturing and Services PMI are likely to decline to 47.0 (p: 47.9) and 55.4 (p: 55.7). Composite PMI is seen falling to 54.4 (p: 54.6).
In the EZ, in September headline inflation rate is seen falling to 2.0% y-o-y (p: 2.2%), while core inflation is likely to remain at 2.8% y-o-y. In August, unemployment rate is expected to stay unchanged at 6.4%. In September HCOB Manufacturing and Services PMI are expected to decrease to 51.5 (p: 52.5) and to 50.5 (p: 52.9). Composite PMI is seen declining to 48.9 (p: 51.0).
Among the largest EZ economies, inflation rate is likely to: i) fall to 0.8% y-o-y (p: 1.1%) in Italy; ii) ease off further to 1.7% y-o-y (p: 1.9%) in Germany.
In the UK, in Q1, GDP growth rate is expected to rise by 0.6 q-o-q (p: 0.7%) and 0.9% y-o-y (p: 0.3%). In September, S&P Global Manufacturing and Services PMI are likely to decline to 51.5 (p: 52.5) and 52.8 (p: 53.7). Composite PMI is seen falling to 52.9 (p: 53.8).
The Quarter Ahead: Iran Awaits Retaliation from Israel; EU Approves 45% tax on Chinese Electric Cars
Oil prices spiked over fears that escalating conflict in the Middle East could disrupt global crude supplies. Concerns center on Israel possibly targeting Iran's oil infrastructure, which could provoke retaliation. When asked about Israel striking Iran's facilities, President Biden said discussions are ongoing, but no action is imminent. While OPEC has enough capacity to offset a full loss of Iranian oil, it would struggle if Iran retaliates against Gulf neighbors' installations.
The EU approved tariffs of up to 45% on Chinese electric vehicles to counter Beijing's subsidies, despite opposition from Germany. Von der Leyen emphasized the importance of the EV sector for Europe's competitiveness. However, German automakers like Mercedes-Benz and BMW criticized the decision, warning of negative consequences and calling for continued talks with China.
Real Economy: Strong NFP Figures in the US, EZ Inflation Falls; UK GDP decelerates
In the US, in September, unemployment rate edged down to 4.1% (c: 4.2%; p: 4.2%). NFPs rose by 254K (c: 140K; p: 159K). In September, S&P Global Manufacturing and Services PMI declined to 47.3 (c: 47; p: 47.9) and 55.2 (c: 55.4; p: 55.7). Composite PMI declined to 54.0 (c: 54.4; p: 54.6).
In the EZ, in September headline and core inflation rate fell to 1.8% y-o-y (c: 1.9%; p: 2.2%) and at 2.7% y-o-y (c: 2.8%; p: 2.8%). In August, unemployment rate stayed unchanged at 6.4% as expected. In September HCOB Manufacturing and Services PMI decreased to 45.0 (c: 44.8; p: 45.8) and to 51.4 (c: 50.5; p: 52.9). Composite PMI declined as well to 49.6 (c: 48.9; p: 51.0).
Among the largest EZ economies, according to the preliminary estimates, inflation rate: i) fell to 0.7% y-o-y (c: 0.8%; p: 1.1%) in Italy; ii) eased off further to 1.6% y-o-y (c: 1.7%; p: 1.9%) in Germany.
In the UK, in Q1, GDP growth rate decelerated to 0.5% q-o-q (c: 0.6%; p: 0.7%) and advanced by 0.7% y-o-y (c: 0.9%; p: 0.3%). In September, S&P Global Manufacturing and Services PMI decreased to 51.5 (c: 51.5; p: 52.5) and 52.4 (c: 52.8; p: 53.7). Composite PMI fell to 52.6 (c: 52.9; p: 53.8).
Financial Markets: Stock Prices Are Mixed; Yields Edged Up; Dollar Increased; Oil And Gold Prices Increased
Market Drivers: Surprise job gains boosted stocks in the US, overcoming Middle East tensions. However, in Europe, major stocks fell amid investor caution as a result of the escalations of conflicts in the Middle East. US Treasury yields reached a two-month peak, after a stronger-than-expected job market changed expectations for future rate cuts.
Global Equities: Decreased w-o-w (MSCI ACWI, -0.6%, to 847.40). The US S&P 500 index rose (+0.2% w-o-w, to 5,751.97). In the EZ, share prices decreased (Eurostoxx 50, -2.2% w-o-w, to 5,068.55). In EMs, equity increased (MSCI EMs, +0.4%, to 1,179.34). Volatility decreased rose marginally to 20.40 (VIX S&P 500, 52w avg.: 14.6; 10y avg.: 18.1).
Fixed Income: w-o-w, the 10-year US Treasury yields rose (22 bps to 3.97%). The 2-year US Treasury yields edged up (+36 bps to 3.92%). The German 10-year bund yields increased (+7 bps to 2.21%).
FX: w-o-w, the US Dollar Index increased (DXY, +2.1%, to 102.52; EUR/USD -1.7%, to 1.10). In EMs, currencies declined (MSCI EM Currency Index, -0.5% w-o-w, to 1,780.90).
Commodities: w-o-w, oil prices jumped (Brent, +9.2% to 78.14 USD/b). Gold prices increased w-o-w (+0.2% to 2,673.20 USD/Oz).
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