week in review

This week witnessed the effects of the low oil prices (as OPEC output cut doubts), rising inflation with bond yields and strong US dollar as powerful data on US third quarter of GDP growth for the first time in two years, strong flash october manufacturing activity and pending home sales up in september in US.

Oil futures fell on Monday after Iraq said it should exempted from OPEC output freeze and offered oil fields under new contract terms. Iraq’s decision and geopolitical conflicts in Iraq strongly affected the oil prices this week because Iraq is the second biggest producer in OPEC after Saudi Arabia. Then, the price of oil rose on Tuesday, as markets weigh OPEC supply cut prospects, but it ended week lower as uncertainty about OPEC cuts. Moreover, almost all currencies are most likely to be influenced by strong US dollar and movements in crude oil futures. On the other side, according to the IMF report, the outlook demand growth isn’t encouraging and further slowdowns in emerging and advanced economies can change the demand picture significantly. According to me, China is the key for oil prices future..

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German business confidence in October improved to the highest level since 2014. This means a positive sign that Europe’s largest economy has started to become powerful. German inflation hits its highest level since october 2014, as cost of services continued to rise while energy prices fell. Germany manufacturing PMI rose with business confidence..

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Datasource: ieconomics

The UK economy advanced 0.5% on quarter in the three months to September of 2016, beats the market expectations of 0.3 %. Therefore, UK’s GDP grew better than expected from the previous month. UK government bond yields reached the highest since day of Brexit vote after the UK’s GDP growth while oil prices are low this week. However, Brexit concerns and uncertainty still continue and it is important to make sure that growth is sustainable in future for UK.

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Datasource:ieconomics

US flash october manufacturing PMI reached the highest figure since October last year, boosted by stronger output and new business growth. The most important thing is that US economy strengthens as GDP rises by 2,9%. Moreover, the strong growth and positive data mean that Fed’s interest rate hike expectations rise in december. In other words, Fed is so close to increase the interest rates. Consequently, US government bond yields rises with inflation as rise of fed rate hike expectations.

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Datasource:ieconomics

Japan’s flash October manufacturing PMI also beats market expectations after showing its fastest expansion in nine months, on the other hand, Japanese core inflation hits 3 year low. After the core inflation data, it’s easily seen that Bank of Japan (BoJ) will need more time for inflation to reach it’s 2% target…How far is it? – BoJ might reach the expected inflation level in 2020.. The japanese yen is around 105,3 per USD today, the lowest level since late july, as an increase in US bond yields and GDP growth that raised the chances of interest rate hike in December and despite disappointing Japanese inflation data and huge public debt to GDP.

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Lastly, if imports exceed exports (which means trade deficit), there may be a problem in terms of competitiveness. As you see in the chart below, China benefits from the current account surplus while US carries large current account deficits. The US trade deficit, for instance, tends to get worse when the economy is growing strongly. On the other hand, China’s september exports also fell 10% form a earlier year. Nowadays, global trade demand has slowed. In other words, current account deficit is a big problem for some major emerging and also advanced countries such as United States, United Kingdom, Brazil, Australia, Canada, Turkey and Mexico.

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Datasource: IMF/Ratings: S&P

Credit Default Swap (CDS) 5Y spreads measure the sovereign risk. From the table below, Germany still has the lowest country risk while Venezuela has the highest one.

Today’s CDS spreads(bp):

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Datasource: Deutschebank..

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week in review

This week witnessed the effects of China’s consistent growth numbers, European Central Bank’s (ECB) unchanged monetary policy decision as expected, rising inflation in United Kingdom, the strong dollar, weak euro and increase in oil prices as fall in US crude stocks and low Chinese output.

The Chinese economy expanded an annual 6.7 % in the September quarter of 2016, the same number as in the previous two quarters. Therefore, the growth was in line with market expectations. However, China need to move forward and provide continuous expansion in growth and control the corporate debt growth. China’s housing prices in Shenzhen have risen since the start of 2015. It’s the problem that the average cost of home in Shenzhen is higher than London, San Francisco and New York. There is an expeditiously growing gap between real estate and Shanghai Composite Index. Moreover, Chinese industrial production growth slows in september while retail sales continued to increase. Retail sales figure becomes the most significant factor in order to sustain China’s economic growth in recent years  and grows faster than expected in China. It seems to me that China will exceed the US to become the world’s largest retail market in future.

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United Kingdom’s inflation rate rose to nearly 2 year high in september as expected because of Brexit negative impact on almost all sectors’ input costs, weak pound and rise of oil prices. On the other side, as expected, Draghi kept rates unchanged and did not give much information about tapering QE (Quantitative Easing-bond buying program) or not. (The ECB will continue to buy €80 bn per month until the end March 2017). Consumer prices in the Euro-region also rose in september as higher oil prices. While inflation is rising little in Europe, growth remains steady. According to me, from now on, it’s getting more difficult to sustain growth without cheap money in Europe. Even if Germany has strong economy, the other Europe yields are in negative territory for several years. Most Europeans still suffering from deflation and ECB’s expected inflation is still far away from the target, so this will not be good for Europe and Euro’s future. This caused the economic imbalances between the European countries. (Portugal-Greece-Italy). In addition, investors got used to borrow cheap money and get low returns, so they are turning towards the assets and want to earn high returns in the stock market. This created the massive asset price inflation (bubbles in houses and shares because of lower yields rates).

After Draghi’s speech on Thursday, the euro fell and continued to fall today and  hit a seven month low against dollar after the ECB left its monetary policy unchanged, but kept the door open to more stimulus in December. At the same time, the dollar index increased with the oil prices and reached to the highest since March as rising expectations of a Fed rate hike this year. Moreover, from the graph below, euro (EUR/USD) and pound (GPB/USD) has moved in tandem against the dollar for a long time.

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From the graph above, Japan’s currency gained strength compare to year ago while Britain’s value weakened after Brexit. The yen has strengthened by about 13% against the dollar to the low-104 range over the past year.

Data Source: TheEconomist

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Credit Default Spreads (CDS) 5Y/Rating Source: DeutscheBank – Trading Economics

Dominion Bond Rating Service (DBRS), a Canadian credit-ratings agency, will update its rating of Portuguese sovereign debt today. DBRS worries about Portugal’s slowing growth and weakness of the banking sector. Nowadays, sovereign credit ratings react faster than CDS spreads. Therefore, rating agencies’ negative decision will hit the demand for government bonds. Portugal’s risk of default also increased the most this year compared with some major emerging countries, as followed by the Brazil, South Africa, Turkey and Russia. When I analyze the graphs above, it’s seen that Turkey, South Africa, Brazil have high current account deficit and inflation. On the other side, Japan, Portugal and Italy have high debt/GDP ratio. Lastly, Germany has strong macroeconomic indicators, especially significant current account surplus and has low country risk compare to other countries.

week in review

This week witnessed the effects of rising oil prices, global bond yields curve to steepen further, upward pressure on inflation coming from energy prices, increasing the US FED rate hike probability after FED policy makers speeches, treasuries rally on weak China trade data and pound’s weakest level since 1848. Oil prices rose above 50$ and reached near one year high as Saudi optimism, Russia ready to or even cut output with OPEC and falling US fuel oil imports as inventory falls.

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The pound has fallen to its weakest level since 1848 as hard-Brexit effect and oil prices up. The euro fell below 1.10 since july. Turkish lira, Argentine and Mexican peso lost their values against the dollar this week. Emerging currencies affected negatively by the increasing the US rate hike probability and oil prices that caused the inflation up. Turkey’s currency is also influenced by the geopolitical factors and political uncertainty. US dollar index (DXY) rose as next FED rate hike expectation in december. Despite of weak trade and rising inflation in China, China overtook US as biggest oil importer in september again. Therefore, China benefited from the low oil prices in september. According to me,  oil prices continue to rise and will change the global balance..

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Bond yields in the developed world have been rising this month..Higher energy prices help the yields lift up recently. For example, Germany’s 2 and 30 year yield gap closed on Monday at the widest since May. Living in a low-interest rate world leads to the higher yields that can be very attractive for investors. Moreover, US Treasury yields rallied as China weak trade data and the US fed rate hike expectation.

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Graphsource: https://www.fxstreet.com/analysis/brexit-impact-over-yields-rising-currencies-at-both-ends-of-risk-spectrum-fall-201610110500

Germany and US 10 year government bond yields and oil prices move in tandem in recent months. There is a strong correlation between bond yields and oil prices in recent years.. Fears of high inflation that is coming from commodity prices in the future mean that investors ask for high yield (a low price) today..

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Portugal’s credit default swap (CDS) spreads seem really ugly compare to major emerging countries. (China, Brazil, South Africa, Turkey and Russia). If the CDS prices rise, the country is at a growing risk of default. In other words, CDS spreads are a good proxy in order to measure the Country Risk. Portugal and Italy face the default risk in EU and have high debt, inflation and political uncertainty. Portugal may need to new bail-out program or fiscal reforms in order to prevent risk of default urgently.

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Lastly, It’s clearly seen that Brexit impact is not over…because  CDS spreads (as a measure of default risk) still continue to rise in UK. In addition, UK 10 year yields reached the highest level since Brexit referendum as fear of high inflation in future and this time reacted with CDS spreads. It seems to me that CDS spreads don’t like uncertainty in no way. On the other side, this week, FTSE100 moved in tandem with oil prices again and changed on Chinese data news.

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CDS Source: DeutscheBank

week in review

This week witnessed the effects of flash crash on pound against the US dollar (Sterling plunged more than 6% in two minutes in early Asia trading on Friday that created more speculation on markets) and a sharp increase in oil prices as OPEC deal and US crude reserves fell for 5th consecutive week reported by the Energy Information Administration (EIA).

Everyone wants to know the real reason behind the massive loss of pound in one night and there are three strong reasons why it happened: ‘Fat finger’ error (when a trader enters a wrong number)? or French President comments about Brexit? or Low liquidity in Asia Trading?

The  most realistic one for me is the low liquidity because during these periods of reduced liquidity, currency rates can behave more sudden and volatile price movements, especially in Asia trading.                                                                     

BRITISH POUND 

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FTSE100 and pound have negative directions for now and FTSE100 soars above 7000 as pound fell sharply. Pound seems the second worst performing major currency in the world after the argentine peso. On the other hand, FTSE seems to enjoy this moment for now and represents the Brexit effect will be no longer allow the negative things for the many companies that have earnings abroad. It seems to me that foreign buyers will continue to profit from the pound’s decline though the selling UK assets for a while.

    UK 10Y BOND YIELDS 

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A bond yield is the amount of return an investor realizes on bond. UK 10 year government bond yield hits the 0.967 and reached the highest level since late june. ( Yields rise as bond prices fall.)

Credit Default Swap (CDS) spreads reflect the current sovereign risk and is a sign for financial health for a country. They react faster to the market news, so they are going to an increase in UK as concerns of hard-Brexit, political uncertainty and oil prices up. In other words, the cost of purchasing protection against a default on UK sovereign debt is increasing. On the other side, country risk of Japan and UK is almost same and move in tandem since April. Brexit still has negative impact on Japan’s CDS prices on bonds. Japanese manufacturing firms faced uncertainty and their business operations in UK are affected negatively from Brexit because investors started to buy more yen after the brexit shock and expensive yen leads to Japan’s export decline and their produce become less competitive (Japan is an export oriented economy). CDS spreads also depend on other factors such as market liquidity, equity volatility, counterparty risk and the global financial environment, in particular US interest rates and global risk appetite. I guess that uncertainty about Brexit will continue to affect UK’s economy & pound negatively for a while…


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                                Source: Deutsche Bank Research

CRUDE OIL

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OPEC deal to cut production and decrease US crude stocks  caused the oil prices rise much more than before. Therefore, crude oil prices rose above 50$ for the first time since August..
                                                             
     BRENT OIL & DXY 
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In general, oil and US dollar have strong inverse relationship to each other. It’s interesting that oil and US dollar index  moved in tandem this week. Moreover, DXY gains in momentum and hits two months high..

This week,  IMF warned that world debt reached the 152$tn record…Japan has the highest public debt to GDP ratio in advanced economies. Public Debt to GDP ratio is very significant variable for Credit Rating Agencies’s decision about investment grade for countries. If these numbers continue to increase, this will cause the country risk up in future. According to World Bank study, if the debt-to-GDP ratio exceeds 77% for an extended period of time, it will drag down economic growth..

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