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.
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.
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.
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.
Source: Markit Economics
US Crude Oil Inventories dropped 7.4 million barrels, marking the largest decline since September 2016.
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%…
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 :
On the other side, Japan 10 year is still in positive territory…
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
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.
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.
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 .
THANKS TO OIL PRICES FOR EURO AREA INFLATION
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…
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.
For example, Portuguese yields rose to highest since Feb 2016..(borrowing costs increased)
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
PRESSURE ON THE YUAN IN 2017
Great article about yuan per US dollar from investing.com: Chinese Yuan: “Manipulated” Does NOT Mean “Unpredictable”
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.
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.
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
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..
China CDS spreads is decreasing..It seems that capital outflow restrictions for the currency are working for now.
BITCOIN – INSTEAD OF GOLD ?
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.
COMMODITY PERFORMANCE IN 2016
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.
Latest daily 5Y CDS spreads..
During the week, Portuguese and Italy CDS spreads are going to rise again while Brazil CDS spreads decrease..
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