week in review

EUROZONE: 

Eurozone PMI accelerated in November and points to strong recovery despite of a political uncertainty in Eurozone. Both manufacturing and services output growth rose to highest level since December 2015.

ea-njfp2o0zm

On the other hand, Euro is still under pressure..European Central Bank (ECB) warned that rising protectionism and a slowdown in growth in emerging markets could still derail the eurozone’s recovery and Italy’s vote could spark fresh eurozone financial crisis. According to ECB, political uncertainty is putting the eurozone’s financial stability at risk. After the Brexit vote and Trump’s victory, the risk started to rise in Eurozone…

fullsizerender-copy-2

The referendum on constitutional reform in Italy will be the key for the euro’s future. Italy’s money is still cheaper than the average in recent years. Italy has already excessive debt and high unemployment compared to other European countries. In addition, Italian banks are still in trouble. The large current account surplus in Germany limits the growth in other European countries and create some imbalances between them. Therefore, some Southern European countries had to face deflation in the long-term.

This slideshow requires JavaScript.

TURKEY

On Thursday, Turkey’s central bank has raised benchmark interest rate and overnight borrowing rate  for the first time since 2014 after Turkish lira sinks to record low against the US dollar. If Turkey Central Bank cut the interest-rate this time, it would lead to further depreciation in the Turkish lira. Trump’s unexpected victory, a stronger US dollar and increasing expectations of a December by the Fed caused the emerging market currencies become more vulnerable. Therefore, Turkey’s central bank decision did the right move in the global economic conditions in order to control inflation and turkish lira despite of the government is uncomfortable with high interest rates. However, Turkish lira has hit new record low against the dollar on Friday after the deterioration of Turkey-EU relations and political uncertainty. The decision of the central bank will show its positive effect more on turkish lira clearly next week. On the other side, Turkey credit default swap (CDS) spreads have blown out in these days.

kk.jpg

RISK OF DEFAULT : VENEZUELA

Venezuela’s currency has lost 45% of its value this month and saw the biggest monthly decline ever. Inflation continue to rise significantly and it’s money supply has risen 127% over the past year. In addition, Venezuela CDS spreads are the highest ratio in the world..

img_4416

BOND YIELDS 

FullSizeRender - Copy (4).jpgSource: Investing.com/Deutschebank

Japanese 10 year bond yields reached the highest in 9 months on Friday.

img_4430

It seems that inflation expectations (%2 inflation target) with lower yields has not worked in Japan. Moreover, Japan has extremely low yields with high debt to GDP. Public debt has grown to 246% of GDP, it’s the highest ratio in the world. It’s difficult to reduce debt with stagnant economic growth and declining population in Japan.

IMG_4417.JPG

This week, the yen saw the worst weekly performance among major currencies. Japan’s Nikkei climbed the 10 month high as a weaker yen. Japan october exports fell 10.3% in yoy and trade surplus widens less than expected. In other words, this means a sign of slowing foreign demand.

This slideshow requires JavaScript.

CONTINUE TO YIELD CURVE CONTROL 

According to this article below : Japan’s core inflation measure has edged higher, and there is a good chance that it will land in positive. In other words, there is a good chance the benchmark index will crawl back into positive territory early next year..

https://www.tradingfloor.com/posts/latest-inflation-numbers-offer-bank-of-japan-a-glimmer-of-hope-8259554

Japan’s inflation problem is best illustrated in the chart shown below:

97ead9fb-a73f-4f8d-99ab-43ffea5bd691

Source: Bank of Japan

OPEC DEAL OR NOT 

Crude oil prices are falling as a strong dollar, high crude supplies, lower Chinese imports and OPEC cut uncertainty ahead of meeting. OPEC will meet next week. According to me, OPEC will reach output deal next week and the oil prices are going up again.

OJ-AS205_OILPOL_9U_20161125061812.jpg

Lastly, gold hit a 9 month low and mostly affected by the strong US dollar..

GOLDDDDDDDcommodity-gold@2x.png

week in review

This week witnessed the effects of the strong dollar, higher bond yields and CDS spreads as Trump’s victory and the U.S. rate hike expectations strengthen in December after the Federal Reserve Chairwoman Yellen’s comments.

The dollar index (DXY) surged to 14-year high this week and reached a fresh high since March of 2003 on Friday as certainty increases about US rate hike. In other words, Fed december rate hike odds approach 100% after the strong dollar and high inflation expectations.

This slideshow requires JavaScript.

The US inflation accelerated and reached the 1,6% year-on-year in October of 2016. The main reason for the growth in inflation is rising the gasoline prices. Therefore, the inflation figure is moving closely to  the US annual inflation target rate of 2%.

This slideshow requires JavaScript.

The 10-year Treasury yield hit its highest level of the year on Thursday after Yellen said that rate hike could be appropriate relatively SOON!

This slideshow requires JavaScript.

Source: FinancialTimes/Yields

Bonds are suffering this week. According to trading economics, Italy’s 10-year bond yield has risen 49 points to 2.16% this month, it’s the highest since July 2015. The increasing yields in Italy showed the biggest sell-off in Italian bencmark debt since May 2012. Rising concerns about the political stability and constitutional referendum lead to increase the risk and bond yields in Italy. In addition, Italian Prime Minister Matteo Renzi has promised to resign if he losses on December 4th referendum. If the no-vote wins and he resigns, this will create the political uncertainty in the short-term in Italy. Italy has already huge government debt and it is difficult to reduce debt with weaker economic growth. As you can see from the chart below, CDS spreads in Italy are so sensitive to the political and economic news/information in recent months and they are going to soar as the Italian constitutional referendum edges closer..

kfkfkfkgkgkgkfullsizerender

Moreover, UK’s 10Y gilt yield, Spain, Germany and Portugal 10Y bond yields have jumped more significantly than in recent months. Euro is under pressure as concerns over the political uncertainty in Europe. EURO/USD went down and reached an 11-1/2 month low after ECB President Draghi said the Eurozone economy remains highly reliant on continued monetary support.

This slideshow requires JavaScript.

On the other side, crude oil prices rallied this week as rising US stockpiles  and a stronger dollar dominates the OPEC optimism.

After the Trump’s victory on 8th November, credit default swap (CDS) spreads have blown out rapidly (default risk is increasing) and continued to soar during this week for some countries, such as Mexico, Brazil, Colombia, Indonesia, Turkey, South Africa and of course for the epic Venezuela.

This slideshow requires JavaScript.

venezuela-reweb2                      Datasource: DeutscheBank

             Lastly, a weekly comic from the investing.com:’The power of US dollar’…

FullSizeRender.jpg

week in review

This week witnessed the effects of Donald Trump’s victory over Hillary Clinton against the evidences of most of the polls. Donald Trump became the 45th president of the United States, so all economies have entered the new normal.

US Election results: Donald Trump takes the White House

http://www.independent.co.uk/news/world/americas/us-elections/president-donald-trump-path-to-270-key-states-how-he-will-win-a7406096.html

After the Trump’s victory, there are concerns about Trump’s anti-globalisation actions might spread protectionism around the world, make welcome trade barriers and restrict global economic growth. The economic consequences of such a potential trade war will not be attractive for US consumers and will lead to loss in US consumer surplus in future. The US will be affected at least as much as the China from potential trade protectionism. Putting tariffs on imports leads to discourage competition rather than eliminate massive deficit between the countries and industries and to decrease the product quality and innovation. Maybe it works in the short-run, but in the long run, it might be a disaster for all countries in the global economy right now. Moreover, European Union already slashes growth forecasts by showing the result of Brexit uncertainty and the surge of anti-globalization and populism around the world.

This slideshow requires JavaScript.

After Trump’s unexpected victory, the dollar enjoyed the best week in a year today by advancing against the yuan, Mexican peso and emerging market currencies. Therefore, the Chinese yuan plunged to a six-year low against the dollar on Thursday as a concern about Trump can target China. Mexico’s peso has been hit hardest and plunged more than %12 to record low. (one of its biggest ever decline since a 1994-1995 devaluation). Moreover, South Korea’s won, South Africa’s rand, Poland’s zloty, Indonesia’s rupiah fell sharply against the dollar today as increasing concerns about the US inflation and Trump’s trade and fiscal policies. Indonesian’s stock index fell 3 % and it’s credit default spreads (CDS) jumped with the rupiah declined. As a result of this, Bank of Indonesia confirmed that there is an intervention in order to stabilize the local currency and bond markets.

This election week, investors turned into the safe-haven assets, so they became more risk aversion and they prefer the yen as a recovered some of this week’s losses. In addition, the yen still moves higher in tandem with Nikkei. The crude oil prices are falling as a Trump’s victory effect and an increasing of an oil output according to OPEC’s montly report. However, sign of trade weakness between China and America in future may also weaken the oil demand, create greater instability in the energy sector and will have a decisive influence on the oil prices in the future. On the other side, copper prices reached the highest level since june 2015 as infrastructure projects’ expectations increasing with Trump’s presidency. Moreover, gold prices (reflection of investor fear) saw the largest weekly loss since 2013 and the Dow Jones Industrial Average reached an all time high in november 2016 as Trump’s victory.

This slideshow requires JavaScript.

img_4267

It’s expected that Trump will concentrate on tax cuts and public infrastructure spending which leads to higher US inflation linked debt and higher bond yields. As a result of accelerating inflation, the Federal reserve might increase the interest rates in december. Moreover, after Trump’s victory, US 10-year note yield jumped most since 2013. Why do treasury yields still move higher?

oye-untitled

Because of the inflation expectations? Investors became much more confident in the short-term ?..

Inflation is a factor, but the market is trying to figure out who will own all the new debt the next government wants to print. In other words, this isn’t a case of Treasuries responding to inflation. This is Treasuries reacting to the expectation of deficit spending under Trump, creating excess Treasuries and the market is trying to figure out who will own them.

Here’s the answer:

http://seekingalpha.com/article/4022422-trump-treasury

Global economic uncertainty which represents the new normal, still continues over the markets as Brexit progress and US election results.

Lastly, CDS spreads which measure the sovereign risk, don’t like the global economic uncertainty. The higher the spread means the greater the risk of DEFAULT for countries. They significantly depend on the global risk appetite. As you can see from the table below, Mexico/Brazil/Venezuela/Colombia/Turkey/Indonesia’s risk of default increased the most as the Trump’s victory.

Credit Default 5Y Spreads before the election, the election day and after the election:

heyoooooooooooUntitled.png
Source: DeutscheBank/CDS spreads based on basis points (bp)

week in review

This week witnessed the effects of strong global manufacturing PMI data in October of 2016, central banks (BoJ, Fed and BoE) unchanged monetary policy decisions on interest rates, the rising value of sterling as BoE’s monetary policy unchanged decision and Article 50 ruling of the Lisbon Treaty news, falling oil prices as US crude oil inventories rise than expected and rising doubts over the OPEC production cut.

According to Markit Economics PMI data, the JPMorgan global manufacturing PMI grew at 2 year high in October. In other words, october flash manufacturing PMI data reached the highest level since july 2014 as output, employment and new orders increased the most since june. On the other hand, unfinished work or unfilled workers, input and output prices  in manufacturing and charges in services sector continue to rise.

The manufacturing PMI in the UK fell to 54,3 in october of 2016 from 55,5 in September, so below market expectations of 54,5 as weaker pound which caused the input costs rise. The services PMI reached the highest figure in UK since January as a  rising demand, improving market confidence while job growth slowed and price inflation reached the highest since 2011. Furthermore, Bank of England raised the inflation forecasts on Thursday as a weaker pound and uncertainty of Brexit despite the strong economic growth since the EU referendum in June. 

As you can see from the chart below, a figure above 50 indicates the manufacturing sector economy is generally expanding, whereas a figure below 50 represents the slowing manufacturing. The manufacturing PMI slowed in South Africa, Indonesia, Brazil, South Korea and Turkey  while US, China and Euro Area factory activity growth rose strongly in october of 2016 compared to previous month. On the other hand, The Institute of supply management (ISM) non-manufacturing index fell to 54,8 in US in October of 2016 from 57,1 in September. An ISM index figure above 50 indicates growth in the non-manufacturing sector (still signaling expansion for the US economy), and is seen as positive for the USD. ISM Non-Manufacturing index which is a leading indicator of U.S. economic health, focus on indicator of inflation and growth. Regularly high ISM figures indicate a general price increase in the economy and US economy has regularly ISM non-manufacturing figures in recent months. On the other side, Zinc, lead and tin reached the highest in more than a year as a result of Chinese strong factory data.

IMG_4079.PNG

This slideshow requires JavaScript.

On Thursday, after the high court rules in UK that requires Parliament vote to leave EU could lead to a softer Brexit that throws brexit progress into chaos. In other words, uncertainty caused market chaos again. Therefore, pound started to rise sharply while FTSE100 index fell.

jdjdUntitled.png   Source: Tradingeconomics/ieconomics

The Federal Reserve (Fed) kept interest rates unchanged on Wednesday before the U.S. election, and emphasizes that it could hike in December. Moreover, non farm payrolls in the United States increased by 161 thousand in October of 2016, lower than in September. Unemployment rate in US dropped to 4,9% in october and US trade deficit reached the lowest trade gap since 2015. As a result of some positive economic data for US, Fed is so close to rate hike in december, but they may still wait for an all clear sign from the economy and presidential election result. The markets are pricing the fed rate hike nowadays and fear of dollar volatility caused the emerging markets’ currencies decline against the dollar.

This slideshow requires JavaScript.

Oil prices saw the below 44$ as the rise of US crude inventories, rising concerns over the OPEC output cut, low demand growth (from China) and the war in Syria and Yemen.

OIL.png

Credit Default Swap (CDS) spreads which measure the sovereign risk, are increasing so much in some countries this week compared to the previous week, such as, Spain, China, Italy, Mexico, Indonesia, Colombia, Russia, Turkey, Brazil, Portugal and Venezuela (Venezuela’s currency falls most in 15 months). CDS spreads react directly to new information and news. They are mostly influenced by political and geopolitical risks, new government concerns, falling oil prices, uncertainities over global economic conditions, US election, debt growth. Therefore, the country risk continues to increase for these countries. (datasource: Deutschebank and CDS 5Y spreads based on basis points)

özUntitled.png