week in review

 

THE FRENCH PRESIDENTIAL ELECTION

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The first round of the French presidential election will be held this Sunday.

Le Pen or Macron?

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Source: The Economist /KAL’s cartoon this week

Latest poll suggests that Macron overtakes Le Pen in France for the first round of presidential election, but there is little difference in the voting rate between Macron and Le Penn for now.

Le Pen stands for national identity and culture, against ‘massive immigration’  and she wants France to leave the EU’s zone. and exit the euro.  According to her, the European Union is a failure. On the other hand, Macron stands for globalism, equality and free movement.

Therefore, after the Paris terrorist attack on Thursday night, the probability of Le Pen’s victory could increase and this lead some investors to be cautious ahead of French vote.

Uncertainty still continues ahead of the election in France. Donald Trump also says that Paris terrorist attack will have a big effect on presidential election in France.

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 FRENCH UntitledFrance 5Y CDS spread has tightened in recent days, but ahead of the political election and terrorist attack, it has increased quite a bit recently as concerns over political risk continue to dominate. Moreover, French 10 year government bonds have rallied and turned higher on Friday.

Source: Bloomberg

France 10 year bond yield – Yield curve

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Very nice reading about the French Presidential election by Chris Bailey @financialorbit:

Will the French Presidential election hurt the value of your pension fund?

We could draw a line here and conclude it is all up in the air.  But this is a column and you want an investment view.  My continuing thought (as originally published here) remains that populists are not going to crash and burn global markets in 2017.

https://uk.finance.yahoo.com/news/will-french-presidential-election-hurt-value-pension-fund-103443786.html?soc_src=social-sh&soc_trk=tw

UNITED KINGDOM

Theresa May’s statement on 18th April 2017: Britain’s Prime Minister Theresa May has called a snap general election which is needed for ‘Brexit stability’ in Britain on 8 June. If Brexit talks go well to provide political unity and the conditions necessary for economic development, it will be good for pound.

The pound climbed to a 6-month high on Tuesday while FTSE 100 suffered the worst day since Brexit. The yield on the benchmark 10 year gilts jumped after May’s speech on Tuesday.

The pound also passed through its 200-day moving average – a key resistance level – for the first time since the EU referendum last June.

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ALL ABOUT POLITICS !

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Nice summary here about the pound and politics from Financial Times:

https://www.ft.com/content/0a85a8c0-2427-11e7-a34a-538b4cb30025

1. Theresa May’s “citizens of nowhere” speech leads to start of sterling sell-off
2. Philip Hammond and David Davis meet bank chiefs at the Shard in a “reassurance exercise”
3. May’s Sky TV interview leaves markets unimpressed; pound falls again
4. Sterling retreats after Downing Street briefings on May’s upcoming speech on Brexit
5. May’s Lancaster House Brexit speech contributes to pound’s 3 per cent bounce
6. Bank of England meeting prompts sterling fall
7. Article 50 is triggered, starting a two-year exit negotiation process
8. May seeks early election to take UK through Brexit
Meanwhile, UK receives biggest upgrade to 2017 growth from the IMF despite Brexit uncertainty.
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According to the IMF report, there are two interesting points: the first one is, emerging markets corporate debt are under rising risk premiums and protectionism, the other one is that deflation risks have also fallen, except in Japan.

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Credit:IMF http://www.imf.org/~/media/Files/Publications/GFSR/2017/April/chapter-1/text.ashx?la=en

OIL

Oil prices fell on Friday as rising US production balanced against OPEC cuts, geopolitical risk, political instability and Chinese economy .

According to the International Energy Agency (IEA), the oil market is slowly but surely reaching a balance as a result of success of the OPEC production deal. By  the way, OPEC oil production cuts continue and it seems to me that oil prices will continue to increase until the end of 2017.

Useful article here : https://www.ft.com/content/93554036-25ab-11e7-8691-d5f7e0cd0a16

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Russian Energy Minister said that Russia reduced oil production by 250000 barrels daily in April as compared to its October output. They will discuss oil cut extending with OPEC on May 24.

Russia plans to increase oil production if no new agreement is reached with OPEC. Therefore, Russia’s participation in the agreement will be so essential for oil prices’ future.

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This week, gold prices started to erase a loss for the week as investors seek safe-haven assets like gold after the French presidential election risk and Korean tensions.

STRONG POUND / OPTIMISM IN EURO-ZONE

Euro zone composite, services and manufacturing PMI data at 72 month high!

According to the Markit, Euro-zone PMI rose to 56.7 in April.  In other words, Euro-zone business activity hit a six year high in April on strong demand. Moreover, job creation has reached to the highest for almost a decade. However, euro dips with French election in focus next week.

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US 10-year bond yields dropped to lowest level since November as rising geopolitical risks. However, Trump told to the Associated Press today that he will unveil tax plan next week that includes “massive” tax cut for individuals and businesses. After that, US bond yields increased and dollar rose from 3 week-low. In addition to this, US federal reserve vice- chair sees two more US rate increases rest of 2017. This will lead dollar to be stronger than before.

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ITALY

Ratings agency Fitch downgraded Italy’s sovereign debt on Friday because of the country’s weak economic growth, fiscal slippage, weak government, banking problems and political risk ahead of elections due in 2018. Fitch reduced the rating to “BBB” from “BBB+”.

Source: https://www.fitchratings.com/site/pr/1022569 /  @Schuldensuehner

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week in review

The European Central Bank (ECB) kept its bond buying programme and interest rates unchanged as widely expected.

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The threat of deflation continues?

Draghi said that headline inflation increased mainly due to rising energy and food prices. However, underlying inflation pressures remain subdued.

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Draghi :

Single currency is irrevocable and euro is here to stay. Euro needed for single market.

The euro rose and  Euro-area bond yields climbed on Draghi optimism on the outlook for the Eurozone.

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The euro rallied on Friday after a report appeared that the European Central Bank policy makers had discussed the question of whether interest rates could rise before their bond-buying program comes to an end.

By the way, I like this cartoon!

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EURO AREA

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According to Eurostat, GDP up by 0.4% in the euro area and by 0.5% in the EU28 during the fourth quarter of 2016, compared with the previous quarter. In the fourth quarter of 2016, Estonia (+1.9%), Poland (+1.7%) and Lithuania (+1.4%) recorded the highest growth compared with the previous quarter, while Greece recorded negative growth (-1.2%) and GDP in Finland remained stable.

Germany

Germany current account surplus narrowed in January of 2017 in the same month a year earlier. It was the smallest surplus since May 2015. However, Germany trade surplus rose in January of 2017, reported a EUR 14.8 billion trade surplus in January of 2017, widening from EUR 13.2 billion a year earlier. It is the highest surplus for a January month since 2015.

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Greece’s trade deficit problem!

Greece’s trade deficit increased sharply by 91.7% in January 2017 in the same month a year earlier.

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Trade imbalances

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According to the IMF report, some statistics above show that  there is a huge gap  in current account ratios between Germany and the USA.

Source:IMF

France

According to a Credit Suisse, Le Penn is the biggest risk to European financial stability. By the way, you can easily see from the graph below that France 10Y bond yields has increased sharply in one year due to rising political uncertainty. Rising concerns about euro breakup under Le Penn leads to increase credit default swap spreads (CDS) spreads much higher in France.

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The USA

US non-farm payrolls rose more than expected, beated expectations. US unemployment rate fell to 4.7% in February 2017 from 4.8 % in the previous month, in line with market expectations.

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Dollar is under pressure again as Friday’s strong job report increased the expectations of rate hike soon. Thus,  treasury yields started to decrease on Friday. However, Fed’s rate hike decision is not only depend on jobs, but also uncertainty about fiscal policies under Trump.

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Chart of the week!

This map below shows US states renamed for countries with similar GDPs via @visualcapitalist

Fascinating graph!

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Rising rate hike expectations leads gold to be less attractive metal.

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United Kingdom

After the UK budget failed to support for the pound, pound fell to a seven-week low on Wednesday. The gilt curve steepened after long-dated sales for FY 18-18 were above expectations..

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Very nice read via Chris Bailey @financialorbit : The really big message from the UK Budget (that people are not talking about)…

https://uk.news.yahoo.com/the-really-big-message-from-the-uk-budget-that-people-are-not-talking-about-104618041.html?soc_src=social-sh&soc_trk=tw

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After Draghi offered optimistic outlook  and raised growth and inflation forecasts at conference on Thursday, euro gained against the dollar and pound.

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Oil fell this week as US crude stockpiles rose to a record high in ninth consecutive week of gains. Number of US oil rigs continues to rise as price starts to drop.

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week in review

EURO AREA

According to the Eurostat, Euro area annual inflation rose to 1.8 % in January. The most important thing is that Italy’s inflation revised up to 1% in January of 2017- it’s the highest inflation rate since August of 2013.

In January 2017, the lowest annual rates were registered in Ireland (0.2%), Romania (0.3%) and Bulgaria (0.4%). The highest annual rates were recorded in Belgium (3.1%), Latvia and Spain (both 2.9%), and Estonia (2.8%). 

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Potential of a Greece default- An  Italian bail out – Alarm from Spain and Portugal

German bond market yields fell as rising predictions of Le pen victory. The European Central Bank’s bond-buying speculation led to a two-year German bond yields down. Therefore, two-year German bond yields reached at new low. In addition to the strength in German bonds, German 5Y Credit Default Swap (CDS) spreads are narrowing while Portugal, Italy and France 10Y spreads are widening over Germany. In other words, their borrowing costs are rising versus Germany.

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The euro break-up risk led the french yields to set for biggest weekly fall in 7 months. You can see the chart below that there is  some panic between the bond investors as Le Pen, who has plan  to break-up the euro, narrows gap.

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A very interesting chart from @joshdigga !

It seems that Fillon’s presidential election odd leads to increase the 10Y spread much more than the Le Pen’s.

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The euro remained under pressure this week as rising euro break-up risk and French political election uncertainty. Political uncertainty in EU and US impact the prices and dollar fell on US policy doubts this week.

UNITED KINGDOM

Upward Revision

Britain’s economy grew 0.7 % in the fourth quarter of 2016.

Britain’s economy grew 0.7 % in the fourth quarter of 2016  because of the sharp depreciation of the pound which leads to import more expensive in the UK, but business investment (firms’ demand for capital) in the UK  decreased by 1% in Q4 2016.

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How the FTSE and pound have changed since Brexit…

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That view was echoed by Howard Archer, an economist at IHS Global Insight.

Source: http://www.independent.co.uk/news/business/news/brexit-gdp-growth-final-quarter-2016-07-per-cent-revision-a7592751.html

You can see from the graph above that the value of pound fell sharply against the dollar after Brexit.

Chart of the week!

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The US is still the world’s biggest economy..

The four biggest economies in South America (Brazil, Argentina, Venezuela and Colombia) produce only about 4% of global GDP, while Africa’s three biggest economies (South Africa, Egypt and Nigeria) produce no more than 1.5%.

Source: https://howmuch.net

China produces about 14,84 of global GDP, while Germany, France, Spain, Italy and United Kingdom all produce 15,73 of global GDP.

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Gold reacted negatively to interest rate hikes, so gold prices rose this week after Fed minutes suggested interest rate hike later.

Concerns over rise in US crude supply !

Oil prices were down after US crude inventories rose for a 7th week..

Useful article here:

With shale oil production like this, who needs Trump?

https://www.bloomberg.com/gadfly/articles/2017-02-26/with-shale-oil-production-like-this-who-needs-trump

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week in review

 

EURO AREA

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According to the Eurostat, seasonally adjusted GDP rose by 0.4% in the euro area (19) and by 0.5% in the EU(28) during the Q4 of 2016.

France

France 5Y Credit Default Swap (CDS) spreads have blown out this week as rising in populism risks. France 5Y CDS spreads reached their highest level after the Brexit.

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Greece Inflation – 10y Bond Yields

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Greece consumer prices rose in January, led by transport, housing, alcoholic beverages and tobacco costs. It was the first increase in consumer prices since February of 2013. According to the IMF, Greece has massive public debts and  needs to lower pensions and cut tax rates.

Greece needs help!

Here’s the chart from  Moody’s: Trouble!

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Italy- return on assets is low!

According to the OECD, Italy is one of the few OECD countries where the tax administration agency does not have a staff development plan and does not regularly evaluate staff. Moreover, Italy’s non performing loans (NPL) ratios have been historically higher than in other European countries as the banking sector has long faced structural challenges due to poor governance, especially among many cooperative banks, high fragmentation and operating costs.

You can read the full report here:

https://www.oecd.org/eco/surveys/italy-2017-OECD-economic-survey-overview.pdf

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Very useful article from ValueWalk:  I Agree!

Greece has one foot out EU door, but Italy where concern should be focused:

http://www.valuewalk.com/2017/02/italy-collapse-eu/?utm_source=dlvr.it&utm_medium=twitter

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Emerging Market Currencies

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Russian rouble performs very well in 2017, comparing the other emerging currencies. Ruble is led by slightly increased oil prices. The Brazilian real also continues to perform well under a rebalance government spending, rising commodity prices. South Africa’s rand reached its best levels in 15-months against the US dollar on Tuesday, after the data showed that the country’s unemployment rate fell to 26.5 % in the last three months of 2016 after reaching a 12-1/2-year high of 27.1 % in the previous period.

The russian ruble appreciated as oil rose from 2014 to 2016, but this usual relationship broke down in early 2017.

Good article here:

http://www.marketwatch.com/story/theres-no-good-explanation-for-the-russian-rubles-rise-2017-02-16

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In 2017, Brazil economy started to perform well as rising commodity prices and falling inflation rate in response to the weak economy, comparing to its emerging peers.

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However, Brazil’s economy is still suffering. There is still a political uncertainty, downgrade risk and huge government debt burden in Brazil. Therefore, the 5Y  Brazil CDS spreads have become wider again and the risk of default probability is higher than the South Africa and the Russia. In Emerging Economies, sovereign yields spreads narrowed since June as rising commodity prices.

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The emerging markets debt asset class has grown tremendously in the past two decades.

Useful article here: http://marketrealist.com/2017/02/case-emerging-markets-bonds/

Growth in market size has been driven primarily by the increased issuance of local currency-denominated sovereign bonds, as well as corporate bonds.

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UNITED KINGDOM

Retail sales in the United Kingdom fell unexpectedly by 0.3 % month over month in January 2017, due to increased prices in fuel and food.

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FED RATE HIKE

US Federal Reserve chair, Janet Yellen, said it may be “appropriate” to raise interest rates at one of its upcoming meetings and signals March rate hike is possible. Us treasury yields decreased on Friday, but they will increase  as inflation picks up  if the Fed hikes rate in March.  (Yield curve is flattening as rising the fed rate hike probability)..

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Performance of 10 year Bond Yield Chart today..

Bond yields moved higher this week  after Yellen said March hike is on the table.

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TREASURY SELL-OFF / Chart of the week!

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As you can see the chart above, foreign holders hold a smaller amount of US government debt than before.

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The Euro gained against the pound this week despite of French election and Greece concerns. The pound dropped against the dollar on Friday after the economic data showed UK’s monthly retails sales fell unexpectedly in January, leads to increase concerns that higher consumer prices may weigh on consumer-driven growth.

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Gold prices edged lower as the potential fed rate hike in March. Oil was lower this week as EIA (Energy Information Administration) said that US stockpiles of crude and gasoline hit record highs.

Latest5Y CDS spreads..

Mexico 5Y CDS spreads have widened quicker this month. The insurance cost against European sovereign debt is rising as French election risk, Italy’s high non-performing loans ratio and Greece debt concerns.

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Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

Source: Deutsche Bank/Marketwatch

week in review

Euro area

Germany Trade Surplus hit record in 2016

German Trade Surplus reached a new record high at EUR 252.9 billion in 2016, surpassing the previous high of EUR 244.3 billion in 2015, as exports rose more than imports.

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Record German trade surplus add to political risk…German 5Y Credit Default Swap (CDS) spread has widened after the Brexit and Italian Referendum..Now, German CDS spread started to price the French presidential election..

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France 5Y CDS spread is still widening as rising concerns/uncertainty over the impact of elections. France’ default of risk probability for now is higher than the Brexit referendum.

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Source: Deutsche Bank

This chart below shows the bond market volatility around national elections and EU-scepticism. Anti-EU sentiment in elections has had a greater impact on market volatility over time.

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Target2 balance is a key indicator of Europe’s balance of payments crisis. Very good article here by Valuewalk:

http://www.valuewalk.com/2017/02/target2-balances/

The excess liquidity created by the ECB’s QE program is not staying in peripheral countries but leaking out to creditor nations such as Germany, leading to rising Target2 balances, the JP Morgan said.

When the Bank of Italy, via its QE program, buys bonds from a German bank or a U.K. bank with an account in Germany, this flow causes a rise in Bank of Italy’s Target2 deficit and an increase in Bundesbank’s surplus, Morgan explained. Similarly, when the Bank of Italy buys bonds from a domestic investor who uses the proceeds to buy a foreign asset, the Bank of Italy’s liability with the euro system grows.

Several Italian banks are still suffering.

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Portugal and Italy /Non Performing Loans (NPLs) are still not dropping. On the other side, Ireland NPLS fell sharply between 2013 and 2016. According to the OECD, Portugal investment is still very low, comparing the periphery countries. It seems to me that it is difficult to improve profitability for Portuguese banks. The second graph below shows the how Portugal’s growth and net savings contracted from 2007 to 2016. For the link:

https://www.oecd.org/eco/surveys/Portugal-2017-OECD-economic-survey-overview.pdf

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Greece

According to the IMF, Greece still faces fundamental challenges: (i) a vulnerable structure of the public finances; (ii) significant tax evasion and an ineffective tax administration; (iii) impaired bank and private sector balance sheets; and (iv) pervasive structural obstacles to investment and growth. Moreover, its public debt remains highly unsustainable, despite generous official relief already provided by its European partners.

Greece says that the IMF is too pessimistic about the future, but the data shows that the IMF is right.

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Of course, Greece CDS 5y spread (or the cost of insuring Greek government debt against default) has blown out and Greece 2-year bond yields hit 10% yesterday as creditors continue to disagree.

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According to Fitch Ratings, number of ‘AAA’ rated countries lowest since 2003, reflecting the longer term impact of the global financial crisis. Fitch’s AAA sovereigns are : Australia, Canada, Denmark, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland and the United States.

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However, if you can stomach the risks, big upside is seen in European stocks..Europe is the cheapest it has been to US in nearly 40 years..

Very useful article here : http://www.cnbc.com/2017/02/09/these-stocks-havent-been-this-cheap-in-40-years.html

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Very nice Euro area overview that is written by Chris Bailey @financialorbit:

Populists are not going to crash and burn global stock markets

https://uk.finance.yahoo.com/news/populists-are-not-going-to-crash-and-burn-global-stock-markets-095715816.html?soc_src=social-sh&soc_trk=tw

Chart of the day!

Foreign governments have been selling US Treasury bond and notes at a record pace..

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The  US  dollar started to increase from 2014, so global central banks have been selling treasuries in order to defend their currencies. Moreover, global uncertainties and inflation expectations play a major role in these selloffs.

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The difference between the VIX and the Global Economic Policy Uncertainty Index is now at the highest level on record.

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Keep watching bond yields and gold.. They will signal approaching the market volatility..

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Euro under pressure during this week against the dollar as rising political risks in EU.

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Lastly, copper, oil, US wheat, silver, corn, coffee and cotton gained during this week. Oil prices rose as OPEC output cuts at record compliance 90% says: IEA (lifted global demand forecast.)

Copper tends to move in line with Chinese industrial activity.

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week in review

EURO AREA

According to the Eurostat, Euro area annual inflation up to 1.8% in January of 2017, it is the highest inflation rate since February 2013, boosted by energy prices. Euro area GDP growth advanced by 0.5%  during the Q4 of 2016, compared with the previous quarter and unemployment reached at 9.6% in December 2016, it is the lowest rate since May 2009. Industrial producer prices rose by 0.7% in the euro area in December 2016, compared with November 2016. The seasonally adjusted volume of retail trade fell by 0.8% in the EU28 in December 2016, compared with the November 2016. According to Markit Economics, Eurozone Manufacturing PMI hits 69-month high at start of 2017. National PMI data shows  that growth was fastest in Austria, the Netherlands and Germany.

You can read the full report here:

https://www.markiteconomics.com/Survey/PressRelease.mvc/a915b56e2cd04567ac14c353a076f069?hootPostID=ddc0f6aceb4c5537cda737d0f8927aa3

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Spain inflation reached the highest since October 2012. Consumer prices in Italy are also expected to rise 0.9% YOY in January 2017, following 0.5% increase in the previous month. German inflation is so close to 2% which the European Central Bank (ECB) aims at inflation rates of below, but close to, 2% over the medium term. In summary, inflation is rising in Europe..

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However, unemployment rates are still high for Greece, Spain, Cyprus, Italy, Croatia and Portugal. Germany’s unemployment rate fell to a record low this week. The gap between Germany and these European countries  unemployment rates continue to rise. For example, Italy’s unemployment is rising sharply after 2012 which ECB started bond buying program. As I always say, the European QE is not effective as it seems, created the imbalances in Euro area.

Graph source: Zerohedge/EuroStat

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VSTOXX, Euro STOXX 50 Volatility Index, is the ‘European VIX’ which measured the volatility, seems low in Euro Area for now, but rising political risk and uncertainty over the European elections in 2017 will cause the Euro Stoxx 50 Volatility Index (VSTOXX) to go higher than its average. For example, France 5Y Credit Default Swap (CDS) spreads continue to rise as growing political risk. Moreover, the gap between March and April volatility shows depression about France’s election when you look at the Euro Stoxx futures volatility curves below.

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Low Volatility by Historical Standards, But High Political Risk

Very useful article here about volatility : The average US VIX level in January (11.6) was the third lowest  January on record..Trump policy uncertainty will also continue and trade protectionism will have a negative impact on global financial markets.

http://seekingalpha.com/article/4041935-goldman-buying-trumps-dollar-downer-rhetoric

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It seems to me that the spread between the European VSTOXX and the US VIX will widen in next few months. Euro are growth advanced, but new bond supply is not growing..

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Ten of European bond issuances had a ‘C’ rating by S&P metrics in 2016..

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Euro Periphery Bond Yields

The yield between Italy and Germany has widened again as political concerns despite of ECB’s bond buying program (QE). Portugal 5Y CDS spreads continue to blow out dangerously. Spain 5Y CDS spread is going well, comparing to other periphery bond yields. After rising political concerns, Germany 5Y CDS spreads  also start to rise..

You can see the detail below from the latest CDS spreads.. Turkey 5Y CDS spread is tightening..Ireland and Austria CDS spreads has widened from a little this week.

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 Japan and UK 5Y CDS spreads are so close to each other again and both of them are tightening. (the perceived risk of default is decreasing)

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CHINA reweb2.pngChina’s risk is widening and China’s central bank raised a key lending rate for the first time in 6 years as worrying about the movement of credit growth.

Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

CDS source: Market Watch/ Markit Economics/ Deutsche Bank

Black Rock Sovereign Risk Index include different results for some countries in December 2016. BSRI is looking at the: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%) for countries. You can read here: https://www.blackrockblog.com/blackrock-sovereign-risk-indicator/

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For example: Turkey scores most highly on Fiscal Space  while China scores most highly on External Finance.

Talk effect on the Dollar : Keep on talking..

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Euro gained again against the US dollar this week..Australian Dollar hit to a 3 month high against the US dollar as exports boom.

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Gold gained while copper and natural gas weakened this week. Gold demand increased to 3 year high as political disruption. Oil also gained after first month of OPEC cut..

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Global reflation has been good for Emerging assests historically.. US Sovereign yields and equities are still rising. Dollar – Treasury positive correlation continue to weaken in 2017.

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Lastly, according to S&P ratings, 9.6$ trillion in rated corporate debt is scheduled to mature globally through year end 2021…(Credit conditions affected from Brexit, geopolitical concerns, growing populism, rising interest rates and volatile currencies..)

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week in review

The Dow index has hit 20,000 for the first time ever !

On Wednesday, the Dow climbed to new highs…

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Here’s how the FT covered the Dow hitting 10,000 on March 16, 1999

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Goldman Sachs Group is the best stock in the Dow for now, following JP Morgan chase & Co..

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The Strength of the US Stock Market 

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US stocks have rallied significantly following the presidential election as President Donald Trump increased bullish sentiment on Wall Street. The Trump equity rally continues…

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Source: Trading Economics

The North American Free Trade Agreement (NAFTA)

kkUntitled.pngNAFTA is an international agreement that was signed by the United States of America, Canada and Mexico. The aim of deal is to eliminate most trade tariffs between the 3 nations, increase investment and tighten protection. However, President Trump wants to renegotiate NAFTA because he believes that the deal will destroy American jobs. If Trump renegotiates NAFTA, the states whose economies depend on most heavily on trade with Mexico and Canada, such as Michigan, Texas, North Dakota, Kentucky and Indiana will be under pressure..

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Trump also withdrew the US from the Trans-Pacific Partnership (TPP) trade deal which was designed to regulate trade between the US, Australia, New Zealand, Canada, Singapore, Vietnam, Malaysia, Japan, Mexico, Peru, Brunei, and Chile on Monday.

US-CHINA TRADE WAR AND US-MEXICO TRADE WAR 

Trump threatened to impose high tariffs on Chinese goods.  If the U.S. and China impose 45% tariffs on each other, Chinese consumers may boycott U.S. brands. It is clearly seen that the unbalancing trade act will destroy the American consumers if there will be a trade war between China and US.

Very useful article from the Economist :

http://www.economist.com/news/finance-and-economics/21715656-trade-tensions-will-mount-destructive-trade-war-can-still-be

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After these tweets above and Trump’s plans for the Mexico wall, Mexico President cancels US visit to meet with Trump. Moreover, Trump’s secretary said the border barrier would be funded by a 20 % import tax on goods from Mexico. Therefore, the peso has fallen sharply against the dollar again during this week.

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US BORDER TAX  on ASIA EXPORTS

Useful article here:

https://www.bloomberg.com/news/articles/2017-01-26/u-s-border-tax-may-be-asia-s-trade-wall

According to Credit Suisse, the Philippines and China face the greatest direct risk from such a tax because they have an export mix that’s heavily reliant on electronic and capital goods, which can be easily replaced by US-based producers.

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On the other side, US GDP growth slowed to 1.9% in Q4 2016, reached slowest rate since 2011.

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The strong dollar hit the US exports and caused the US trade deficit widened. Therefore, the world should avoid a trade war..

Volatility=The Market Price of Uncertainty 

I liked the graphs below which include the economic policy uncertainty index. More uncertainty about economic policy leads to the volatility up in the markets.

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US DOLLAR AND US TREASURY 10 YEAR YIELDS  

The positive correlation between the dollar and Treasury yields started to decline in 2017. After Trump’s election in November of 2016, US treasury yields curve steepened on stronger US growth and high inflation expectations. Treasury yields will be moving higher after the FED will rate hike.

Dollar rally continues and demand for US stocks will result in a higher demand for the U.S dollar.

This is how the dollar can react to price action in Treasury bond yields..

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Bank of Japan (BoJ) Move –  Print More Money !

Bank of Japan increased its buying in 5 to 10 year bonds in order to bring down their yields. The 10 year Japanese goverment bond yields dropped to 0.070 % on wednesday. The falling in yields pushed the yen lower.

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A huge gap between Japan and US government bond yields..

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The Japan inflation is still not close the  BOJ’s 2% target.

CHINA – A Large Share of Global GDP As Well As Global NPFE Debt..

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Source: Moody’s Investor Service

NFPE= Non- Financial Public Enterprises

UK – GDP GROWTH – INFLATION

UK inflation is increasing as rising oil prices and UK GDP growth continues to accelerate despite Brexit uncertainty.

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EURO AREA

FRANCE

The market is starting to price in a risk premium French assets, so French bond yields are rising above 1% as political election risk in France.

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A Mirror of Political Risk !

France’s 5Y Credit Default Swap spreads have retraced about 50 % of the post-Brexit gains following Trump’s election victory. CDS spreads overreact when there is political risk.

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European bond yields continue increasing, but they still yield less than nothing despite of European Central Bank’s (ECB) bond buying program.

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Very nice summary and useful article which is about bond yields, Brexit, US treasuries, is written by Chris Bailey @financialorbit :

https://www.yahoo.com/news/global-markets-dont-worry-about-headlines-think-about-this-102322810.html

Chris Bailey:

For you and your investments it means you keep holding onto those financial sector shares and gold holdings but also keep the faith that the world will not be a disaster and flop into a protectionist fuzz.  If you want to watch anything – even as an equity investor – then watch bond yields as they tell you all you need to know about that big decision whether to buy/hold or sell your investments.

According to Eurostat, Q3 2016 compared with Q2 of 2016 Government debt declined to 90.1% of GDP in Euro Area. Greece, Portugal and Italy have huge public debt to GDP ratio, comparing to others.
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Source: Eurostat

Euro and Pound gain against the US dollar..KESLLUntitled.png

EMERGING MARKETS

In 2017, Turkey has still high risk, comparing the other emerging markets while Korea has low risk.  Surprisingly ratings agency S&P revised its outlook for Turkey to ‘negative’ from ‘stable’ as rising constraints on policy makers’ ability to contain inflation and currency pressures. Moreover, the other rating agency, Fitch downgraded Turkey’s sovereign debt to ‘junk’ as political and security concerns on Friday. As you can see from the chart below, China is on the risky side and Russia’s sovereign risk of default has declined in recent months..

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Portugal’s risk..! Portugal and Turkey CDS spreads are so close to each other…

Source: DeutscheBank

This graph below which is taken from @joshdigga and shows the emerging currency composition of external debt. Venezuela’s external debt is highly depend on US dollar. Venezuela has the highest risk, comparing the other countries in the world.

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Lastly, latest CDS (Credit Default Swap) Spreads for some countries. Rising (or widening) spreads indicate the perceived risk of default is rising. French, Portugal and Italy CDS spreads are widening again this week as rising political concerns. Greece (Hellenic Republic) 5Y CDS spread has blown out in a week.

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Source: Markit Economics and Market Watch

Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

week in review

EMERGING MARKETS CURRENCY IN 2017 

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Source: Bloomberg

IT’S ALL ABOUT POLITICS !

This week did not start well for the some emerging markets, especially for Turkey and Mexico. Turkey’s lira and Mexico’s peso hit the record lows again against the dollar  during this week..The terror attacks, security and political concerns caused the Turkish lira down against the US dollar and other emerging markets’ currencies. As a result of this, Turkey 5y Credit Default Swap (CDS) spread has blown out during this week. Moreover, Turkey is more vulnerable to external shocks, comparing to the other emerging economies.

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Mexico’s peso is also affected negatively from the politics between US and Mexico, in other words, the fear of new restrictions to Mexico by the US president Trump. As a result of this, Mexico 5y CDS spreads have blown out during this week, too.

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Data source: DeutscheBank

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Overall, avoiding emerging markets is not an option of course..

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On the other side, after the signals about UK will exit the single market and some political speeches, pound is also depreciated against the US dollar this week. According to me, pound’s future is dependent of Brexit progress and it’s all about politics, especially in the last 12 days. The correlation coefficient between GBP and DXY in the last 12 days in 2017 (except today), is almost nearly -0,13. This means that pound has no much relation (correlation) with the DXY, especially in the last 12 days in 2017. As you can see on the chart below, UK 5y CDS spreads are going well in general..

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According to the chart above, UK bencmark index  FTSE 100 seems so vulnerable to any pull-back in commodity related shares. FTSE 100 hit fresh high record this week as weaker pound.

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UK HOUSE PRICES ARE INCREASING 

House prices in UK in the three months to December were 6.5% higher than in the same three months of 2015..

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Source:http://static.halifax.co.uk/assets/pdf/mortgages/pdf/December-2016-Halifax-House-Price-Index.pdf

And very useful article here that is written by Chris Bailey:

https://uk.finance.yahoo.com/news/what-do-you-fancy-a-rampant-ftse-100-or-a-recovering-pound-104042147.html?soc_src=social-sh&soc_trk=tw

The article summarized the pound and the FTSE very well by Chris Bailey @financialorbit :

Here’s my prognosis for 2017.  A higher Pound and a FTSE 100 that stops racking up the all-time highs and is driven not by miners, energy, industrial exporters and overseas earners but banks, UK consumer names and more domestic plays.

EUROPEAN UNION 

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According to the Eurostat, The EU continues to be a net investor in the rest of the world. EU and US markets still highly interconnected..

You can read the full report here:

http://ec.europa.eu/eurostat/documents/2995521/7788281/2-12012017-BP-EN.pdf/684f355f-8fa6-4e75-9353-0505fa27f54f

EA INDUSTRIAL PRODUCTION 

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In November 2016 compared with November 2015, industrial production increased by 3.2% in the euro area.

GERMANY : The Euro Area’s Growth Engine

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Thanks to European Central Bank (ECB), German GDP growth reached 5 year high as full employment and low interest rates. Euro area inflation is rising.. Some ECB members were against any QE (bond-buying programme) as inflation picked up in the euro zone.. They are also worrying about the political uncertainty in EU.

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DISINFLATION IN THE REAL WORLD AND INFLATION IN ASSET PRICES/WIDE DISPERSION

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Source: Goldman Sachs

European equities performed well since January 2009 (after the global financial crisis). Asset prices are rising with the ECB’s bond buying program in EA. However, the GDP growth in EA is still weak ..

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ITALY 

Italy’s unemployment rate reached at highest level since june 2015, above the average of the Euro-area. Canadian rating agency DBRS on Friday cut Italy’s sovereign credit rating to BBB (high) from A (low) as raising borrowing costs for Italian banks and political uncertainty..IMG_5243.JPG

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France 5y CDS spread has widened in these days as presidential election (uncertainty) will begin at the end of the this month..

PORTUGAL 10 Y GOVERNMENT BOND YIELD RISING-STILL IN RISK

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ptreweb2 (3).pngTwo different countries, Portugal and Turkey, but their 5 Y CDS spreads (default risk) are so close to each other.

Source: DeutscheBank

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During this week, Euro gained against the US dollar after strong data in EU and ECB minutes.

Lastly, latest 5Y CDS spreads for the some countries from Markit Economics. Look at the Turkey’s CDS spread in basis pts change in 1 week..(It’s too much)!

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Source:Marketwatch

Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

week in review

 US TRADE DEFICIT PROBLEM

The U.S trade deficit in November rose to the highest level in 9 months. It seems that trade deficit doesn’t correct itself over time for US. Strong dollar leads to make US goods are more expensive on global markets.

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US labour market recovery …

US unemployment rate rose to 4.7% in December 2016 from  4.6 % in the previous month. As we know, US inflation reached the highest inflation rate in November of 2016 since October of 2014, mainly boosted by higher energy cost.

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US WAGES ARE RISING – SIGNIFICANT IMPROVEMENT 

US wages grew last month at fastest rate since 2009, financial crisis. Non Farm Payrolls in the US increased by 156 thousand in December of 2016, in other words, the US economy had a net gain of 156,000 jobs in December. Moreover, US initial jobless claims fell to near 43 year-low.

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According to the Markit Economics, The US Manufacturing PMI hit a 21-month high in December that is mostly driven by a stronger rate of employment growth and inventory building. Manufacturing conditions improved to the strongest level since April 2011 for the Eurozone and since 2015 for the US. Japan and UK also saw growth drive, the flash PMI rising to its highest for nearly a year for Japan and a 2,5 year high was seen in the UK. The strongest manufacturing PMI improvement in December was seen in the Netherlands, followed by Austria, while Brazil recorded the steepest decline, followed by Malaysia in December.

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Source: Markit Economics

US Crude Oil Inventories dropped 7.4 million barrels, marking the largest decline since September 2016.

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US government debt is still attractive for investors despite of an uncertainty fiscal policies..Markets are still waiting/pricing the interest rate hikes..For example, Goldman Sachs raised 10 year US yield forecast to 3% by the end of the year from 2.75%…

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The S&P 500, Dow Jones, Nasdaq and Russell 200 of small capitalization stocks have all hit fresh highs since November 8..

Useful summary here :

https://www.ft.com/content/796410cc-c6ff-11e6-8f29-9445cac8966f

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On the other side, Japan 10 year is still in positive territory…

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FED UNCERTAINTY – AGAIN VOLATILITY 

US FED : there is “considerable uncertainty” in relation to the future fiscal and economic programs under Trump’s presidency. His plans are to increase fiscal spending and cut taxes, which will result in higher inflation. According to the Fed, Donald Trump could push up growth and inflation. Therefore, the Fed might increase rates faster than previosuly anticipated.(the key point : agressively)

Absolutely chart of the week: THE TRUMP EFFECT ON US DOLLAR 

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Source: Visual Capitalist

This week, after the Trump’s tweet about Ford, Mexicon peso hit a record low against the dollar as Ford cancels factory plans in Mexico.

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and Mexico CDS spreads (default risk is rising) are going to increase…The CDS spreads in Mexico have blown out after the US election in November 2016.

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Source: Deutsche Bank

PRICE RECOVERY FOR EURO AREA 

Consumer prices rose 1.1% in Euro area. Germany inlation reached 3 year high and very close the ECB’s inflation target. Draghi said: ‘The risk of deflation has largely disappeared’…

Deflation is not only problem for Euro-area…but also is a significant problem..

ISTAT: Italy was in deflation for the first time since 1959 in 2016. It hasn’t happened since 1959 . 

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THANKS TO OIL PRICES FOR EURO AREA INFLATION 

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MORE OPTIMISM ?

According to Eurostat, November 2016 compared with October 2016, industrial producer prices up by 0.3% in both Euro area and EU28. Improvement in consumer/business confidence and manufacturing sector in Euro area shows positive signs. However, political election uncertainities and banking problems (not all banks) continue in Euro area. 2016 year was not a good year for Italian banking stocks. Moreover, Fed’s uncertain rate hikes and inflation worries continue to affect the Euro area’s economy and euro currency.., actually almost all economies.

Paul Krugman tweeted about Germany and shows the Germany’s massive trade problem in one chart: Despite massive trade surpluses, there is a sharp long-term decline even in Germany…

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This week, after Fed meeting minutes and US jobs data,  euro zone bond yields rose as US fed’s uncertain tone about fiscal policies and concerns about inflation and dollar appreciation and after the US jobs data.

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For example, Portuguese yields rose to highest since Feb 2016..(borrowing costs increased)

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Global debt hit 325% of world GDP..While emerging markets debt continue to rise, government bond and syndicated loan issuance in 2016 grew to almost 3 times its 2015 level. That scares me the most..source from: zerohedge.com

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PRESSURE ON THE YUAN IN 2017 

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Great article about yuan per US dollar from investing.com: Chinese Yuan: “Manipulated” Does NOT Mean “Unpredictable”

Source:https://www.investing.com/analysis/chinese-yuan:-%E2%80%9Cmanipulated%E2%80%9D-does-not-mean-%E2%80%9Cunpredictable%E2%80%9D-200171661

Below, you can see a chart of the yuan vs. U.S. dollar exchange rate going back to 2014 .

The arrows on this chart show you the timing of 15 yuan forecasts subscribers saw over the past two years, edited by Chris Carolan.

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It’s best summarized by this quote from Chris Carolan’s Asian-Pacific Short Term Update:

“The [dollar/yuan] rate is pegged by the Chinese government, though it is subject to market pressures.

“…markets are bigger than governments.”

The yuan depreciated 6.6 % against the dollar in 2016, its biggest one-year loss since 1994.

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Source: BIS and Visual Capitalist

2016 was not a good year for yuan against the dollar. According to the BIS report, yuan is the 8th most traded currency by 4% share value in 2016..

As we know, Trump has labelled China a currency manipulator and threatened to impose huge tariffs on imports of Chinese goods.

CONTROL CAPITAL OUTFLOWS FOR SUPPORTING YUAN 

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China has increased efforts in recent weeks to support the yuan and control capital outflows.

However, capital outflows and defending/guarding the yuan caused the foreign reserves drop.. Therefore, China’s foreign-exchange reserves fell to the lowest level in nearly 6 years last month. It seems that China foreign reserves are going to fall and if the reserves fall more and reach the inadequate level, this will not good for the currency..

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China CDS spreads is decreasing..It seems that capital outflow restrictions for the currency are working for now.

BITCOIN – INSTEAD OF GOLD ?

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Bitcoin (the digital asset) gained 126,2% over 2016…In summary, uncertainty in the global economy increases the bitcoin’s demand.

The  effect on rising bitcoin’s demand is the Chinese investors have turned to bitcoin as the yuan weakened. However, China’s restrictions on capital outflows cause the speculations over the bitcoin. Increasing inflation expectations in Venezuela also supported Bitcoin. Investors look Bitcoin as a hedge of inflation. As we know, India took 86.4 % of circulating banknotes in order to prevent the use of  money laundering and tax evasion. Thus, Indians are also interested to buy Bitcoin.

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COMMODITY PERFORMANCE IN 2016

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Iron ore and Zinc were the best performing commodities in 2016, following natural gas, brent and crude oil.

OPEC CUT PRODUCTION

Useful read here: http://seekingalpha.com/article/4034064-opec-cut-production-now

As we know, OPEC cut production in late-2016 for the first time since 2008 and has %79.6 crude oil reserves. OPEC  produces  35% of the world’s oil production. Oil prices rally continues on doubts over OPEC production cut agreement.

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Latest daily 5Y CDS spreads..

During the week, Portuguese and Italy CDS spreads are going to rise again while Brazil CDS spreads decrease..

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Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

Source: Marketwatch

week in review

FED’S HAWKISH RATE HIKE 

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The Federal reserve raised its short term rate to a range of a 0.50-0.75% from a range of 0.25-0.50 % and signaled three increases in interest rates in 2017 instead of two and it expects to raise rates much faster in 2017 than previously anticipated. According to Federal Open Market Committee (FOMC), inflation has increased since earlier this year, but still below the Fed’s 2% longer-run target, partly reflecting earlier declines in energy prices and in prices of non-energy imports and labor market has continued to strengthen.

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The dollar reached the highest level since January 2003 after the Federal Reserve (FED) hiked interest rates in first move since 2015.

The US 10 year treasury yield curve has steepened further and climbed above 2,5 and reached the highest level since 2014 after the fed hawkish rate hike. After gains, US dollar and treasury  10 year yields fell from peaks today. As you see from the chart below, the treasury curve is steepening and flattening at the same time.

SELL-OFF TREASURIES 

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On the other side, U.S housing starts and building permits fell more than than expected, released today. US inflation rose to 2 year high and reached the highest level since October 2014. Moreover, according to Markit, US factory activity growth improved at 21 month high.

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FED RATE HIKE-RISING OIL PRICES-THE STRENGTHENING DOLLAR-VOLATILITY : DRIVE CAPITAL OUT OF THE EMEs?

Expectations of raising fiscal spending under Trump presidential and the price of oil rising will bring the inflation and the FED will increase the interest rates aggressively in 2017. Thus, emerging markets started to worry about rising interest rates, in other words, higher funding costs of debt. Some emerging markets are still suffering large external funding needs and macroeconomic imbalances which lead them to be vulnerable to capital outflows. For example, Turkey, Brazil, Indonesia, Mexico, Russia and South Africa are the most sensitive to high capital outflows, comparing to other EMEs. These countries also have high credit default spreads (CDS). In other words, they have high risk of default.

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Good news for Russia / oil producing country: Russia CDS spreads have tightened due to rising oil prices after the OPEC deal to cut production. (The risk of default is decreasing/will decrease in Russia)..

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LESS ROOM FOR FURTHER US DOLLAR APPRECIATION FOR EM CURRENCIES

EM currencies tumbled from 25% above fair value in 2011 to 30% below fair value in January of this year.

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Although EM currencies, represented by the JPMorgan Emerging Local Markets Index Plus, have rebounded since January 2016, they continue to trade near the discounts associated with the 1997 “Asian Contagion” and 1998 Russian debt default. EM currencies can certainly get cheaper before they revert toward historical norms, but they might just as easily snap back quickly to fair value.

EM RETURNS CONTINUE TO RECOVER UNTIL NOW 

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Source:http://www.valuewalk.com/2016/12/emerging-markets-hat-trick-time-throw-hat/

JAPAN – WEAK YEN = INFLATION

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Higher oil prices after OPEC deal and a weak yen since the Trump’s victory may help Bank of Japan (BoJ) reach its inflation target in 2017 even if it seems difficult. Japan CDS spreads are tightening and seems that the risk of default in Japan is very low.

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ABENOMICS AND GROWTH 

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China’s Currency Manipulation- Sharp falls in the value  of yuan-Hong Kong overnight costs 

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Source:http://www.wsj.com/articles/chinas-currency-manipulation-caught-in-two-cool-charts-1481804310

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China 10-year government bond yields keep moving higher and CDS spreads are widening..

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It is always good to be reminded about CHINA..

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EUROZONE 

Eurozone bond yields climbed to hit 11-month high in FED week. After climbed, they started to fall as fed price hiked in..

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RECAPITALIZATION OF ITALIAN BANKS-NEW PRIME MINISTER -NO PROBLEM AT ALL?

New Italy PM Gentiloni says ready to intervene to support banks. Unicredit: Italy’s largest bank is raising 13.8$ billion in the country’s biggest share issue and cut jobs in overhaul. Moreover, Unicredit sells Pioneer asset management arm to Amundi for more than 4.2$ billion..

GOOD NEWS BEFORE CHRISTMAS: Monte dei Paschi wins approval for debt-for-equity swap to retail investors is a crucial element of the plans to raise €5 billion in the coming weeks.

Italy CDS Spreads continue to tighten significantly as recapitalization of banks, but still has high risk of default more than Spain, Germany and France.

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Lastly, S&P warned that Italy GDP growth to fell below %1 over next two years after banking pressures.

EURO – UNDER PRESSURE/THE REACTION TO THE FED’S HAWKISH RATE 

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EUR/USD dropped 1 % after the fed rate hike.

The Euro area economy has improved in the third quarter and inflation is increased by 0.6% yoy in November 2016. According to Markit, businesses across the euro zone ended the year on an upbeat note as expected and weaker euro boosts price growth and manufacturing.

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UNITED KINGDOM 

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Pound had fallen sharply against the dollar on Thursday as Fed hike priced in. FTSE100 closed above 7000 on Friday as rising energy stocks. UK inflation hit 1.2% yoy in November 2016 as jump in oil prices during 2016 and Bank of England leaved UK interest rates on hold at 0.25% . Source: ONS

UK risk of default probability continues to decrease after Brexit shock..

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OIL: CONCERN ABOUT POTENTIAL PRODUCTION INCREASES IN THE US AND LIBYA 

Oil prices have risen after OPEC cut deals with non-OPEC member countries. However, continued dollar strength can reduce the demand for oil, especially in emerging economies.

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 SUMMARY: LATEST CDS 5 YEAR SPREADS 

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Source:Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

Source:Marketwatch /Deutschebank/Investing.com