THE HONEYMOON
Not everyone is finding the Donald Trump Presidency straightforward. Foreign leaders have struggled with his “ad-lib” style, the media have provoked his ire with “very fake news” and now the whole of Sweden wondered if they missed something (at a rally on Saturday Trump commented “Sweden, who would believe this?” referencing a non-existent terror attack, possibly confusing the country with Sehwan in Pakistan). However, for now markets like the cut of his jib. Better sentiment towards emerging markets was also in evidence last week. After recent successful Eurobond issues from Egypt and Nigeria, Mexico’s state-controlled oil company (Pemex) brought the biggest euro-denominated corporate bond deal ever. The EUR 4.25bn transaction was 4x oversubscribed. Egypt’s currency also made substantial gains and has now rallied around 15% against the USD this month. With the help of the IMF, Egypt is making solid progress and represents one of our top picks for 2017. US markets are closed for President’s Day today.
UNITED STATES
S&P 2,351 +1.51%, 10yr Treasury 2.41% +0.74bps, HY Credit Index 321 +1bps, Vix 11.49 +0.64Vol
US equities delivered strong gains for the week and it again came on very low volatility – extending the record number of trading days since the last 1% gain (50 days) or 1% fall (90 days). Economic data was strong across the board; retail sales beating expectations, the Philly Fed manufacturing index touching a 33 year high and the NFIB small business optimism survey holding its Trump highs (in contrast to consumer sentiment last week, which slipped back). CPI inflation also rose more than forecast and the positive tone extended to the corporate level; with earnings season 75% complete, aggregate earnings are up 5.2% YOY.
At her semi-annual testimony to congress, Janet Yellen reflected this backdrop stating “we expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2%.” Further, she commented “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.” Indeed, her fellow FED governor Jeffrey Lacker, president of the Richmond FED, went further “Rates need to rise more briskly than markets now seem to expect…and the elevated uncertainty now surrounding fiscal policy, particularly the potential for substantial fiscal stimulus, suggests that our next increase should come sooner rather than later.”
Despite the hawkish rhetoric, bond yields were little changed. The market prices only a 17% chance of an interest rate hike in March, a 45% chance in May and a 70% chance at the June meeting.
EUROPE
Eurostoxx 3,316 +0.97%, German Bund 0.31% -1.80bps, Xover Credit Index 296 -3bps, EURUSD 1.062 +0.24%
The 2nd estimate of Eurozone Q4 GDP came in slightly lower at 0.4% QOQ. Although a sector breakdown is not yet available, this is most likely due to industrial production for December disappointing. Overall, the Eurozone continues to show reasonable momentum (survey data is strong), but growth is yet to accelerate beyond the 1.5-1.7% “walking pace” of the last few years.
The minutes to the January ECB meeting provided a relatively neutral commentary. The “balance of risks to the economic outlook was seen as remaining on the downside” however these downside risks had “receded somewhat”. Most interestingly, the governing council agreed that“limited and temporary deviations” from the capital key rule were possible. This is to say the central bank could buy a greater proportion of peripheral versus German bonds than would be justified by their relative size.
At the political level, Greek bonds widened as squabbling between the various parties to the “bailout” continued. There is a Eurogroup meeting today, which may make some progress. In any case, Greece does not have a hard funding requirement until July. Meanwhile in France, the election race appears wide open as the main centrist candidates, François Fillon and Emmanuel Macron, battle scandals (the former for employing family members as parliamentary aides and the later for comments on French colonial rule and gay marriage). In addition, socialist candidate Hamon and far-left Melenchon are discussing a joint candidacy, which could also put them in the running. Polls continue to support a Fillon or Macron victory over Le Pen in the second round. Last, in Italy, Renzi resigned as head of the PD. This could force a split in the party, which would be significant as it would mean the only major pro-European party is no longer favourite to win an election.
Norway’s government proposed to increase the share of equities in its USD 900 billion sovereign wealth fund (from 60 to 70%), as well as reducing annual distributions (from 4 to 3%). This is potentially significant, given the fund currently owns 1.3% of global listed equities.
Weak economic data weighed on GBP last week. Retail sales for January came in well below consensus, whilst real core wage growth (i.e. adjusted for inflation) declined to a 2-year low. Despite still very low unemployment, the post-Brexit consumption boon may be faltering.
ASIA
HSCEI 1,044 +2.30%, Nikkei 1,925.00 -0.28%, 10yr JGB 0.10% +0bps, USDJPY 113.070 -0.30%
China’s producer price inflation reached a five-year high of 6.9% YoY in January, while consumer price inflation came in at 2.5% YoY, a three-year high. Seasonality effects of Chinese New Year detract somewhat, however, from the significance of the data.
Surges in the price of oil, gas and mining output drove the spike in PPI inflation in the short term, whilst the medium term backdrop continues to be one of reduced excess supply-side capacity. Consumer price rises in January came on the back of increases in the cost of food, with pork prices up 7.1% YoY. Both CPI and PPI are also beginning to reflect the high credit growth rates witnessed in 2016 as the central bank attempted to inflate the economy following ‘hard landing’ panic back in Q1-16.
India’s rate of consumer price inflation decelerated in January for the sixth straight month to 3.2%, comfortably below the central bank’s 4% medium-term target rate. Food inflation was a key contributor to the disinflation, with pulse and vegetable prices still in deflationary territory. The central bank acknowledged that low food price inflation is masking the fact that core inflation is accelerating, from 4.9% in December to 5.1% in January, driven mainly by higher commodity prices.
Bank Indonesia left interest rates on hold at 4.75%, maintaining a “cautiously accommodative” stance.
Taiwan’s stock market was top performer in emerging markets last week, up 9.1% in USD terms. The market continues to attract strong portfolio inflows, with $1bn of inflows month to date in February and a cumulative $5bn of inflows in 2017 year to date. This week saw Taiwan’s Q4 GDP growth rate being revised up unexpectedly from 2.6% to 2.9% YoY, as well as a marginal upward revision to the government’s official 2017 GDP growth target to 1.92% from 1.87%, the highest target for three years. Expectations for higher electronics exports and a large fiscal stimulus package during the first half of 2017 further added to positive sentiment.
LATIN AMERICA
MSCI Lat Am 2,625 +0.98%
Colombia’s consumer confidence fell in January to its lowest-ever level of -30.2%, compared to -10.7% in December and 21.3% in January 2016 (0 being neutral). The country is suffering from high inflation, higher value-added taxes since the tax reform implementation at the beginning of the year and sluggish economic growth. To reignite the economy, the central bank could cut rates within the next few meetings provided that inflation expectations fall. Besides monetary policy, Colombia President Santos and Finance Minister Cardenas announced a fiscal stimulus plan. The COP 40Tn (USD 700Mn) plan focuses on public investment in infrastructure, housing and schools. It will be funded by the room created by recent reforms and higher oil prices. Colombia is in an adjustment phase. 2017 will be a transition year to rebalance the country’s accounts. The peace agreement and tax reform passed in December 2016 is structural and is positive for the country longer term. However, one shouldn’t expect major news from Colombia until the2018 elections as President Santos has very little political capital.
Brazil Retail sales ended 2016 with a record decline of 6.2% YoY, as core retail sales fell 2.1% MOM in December – the worst month since 2001. Peru’s economy expanded by a stronger-than-expected 3.25% percent in December from a year earlier and by 3.90% in all of 2016 as a surge in copper production offset tepid domestic demand. Mining investment over the last decade has supported Peru’s economic growth over the past few years but the non-mining sector has been growing much below its potential due to the absence of economic reforms and investment. With PPK incentivising foreign, domestic private investments, we expect non-mining to take as the engine for growth.
AFRICA
MSCI Africa 813 +1.75%
Annual inflation in Nigeria rose in January to 18.7%, while the Naira’s black market exchange rate fell to 513 (vs. 305 official rate). Recent data also showed that Nigeria (1.604Mn barrels per day) has lost its spot as Africa’s top oil producer to Angola (1.651Mn barrels per day). Production decline in Nigeria is mainly due to attacks from the Delta Avengers and this loss of earnings is likely to worsen Nigeria’s financial troubles. The ZAR broke 13 to the USD, appreciating 16% over the past 12 months. Although last week’s move occurs amid positive sentiment for EM currencies, the longer-term appreciation brings the ZAR closer to its equilibrium level, from a very cheap base following “Nenegate”.
South Africa’s headline consumer inflation slowed to 6.6% YoY in January from 6.8% in December. Falling core inflation and falling food prices (normalizing following the 2016 drought) should support the case for cutting the benchmark interest rate. An easing monetary policy would help the South African economy get back on its feet as retail sales rose only by 0.9% YoY in December.
Egypt is making good progress in its economic reform program and the recent developments might be an indicator that the transition is coming to a close, International Monetary Fund Managing Director Christine Lagarde said on Monday. The Egyptian Pound continued to strengthen last week and is by far the best performing currency in the world year to date.
Source: Alquity Global Market Update www.alquity.com
