(Part two of three) Paresh Upadhyaya is Director of Currency Strategy, US at Pioneer Investments.
In this second of a three-part series, Paresh Upadhyaya shares his thoughts on the potential implications of a Trump or Clinton win for the USD and fixed income markets.
Posted in Economy, Equity, Fixed Income, Industry Insights, Markets
Tagged Donald Trump, Federal Reserve, Fixed Income, Hilary Clinton, Paresh Upadhyaya, Presidential Elections, US dollar
(Part one of three) Marco Pirondini is Head of Equities, US and Portfolio Manager of global equity strategies.
What would a Donald Trump victory or a Hillary Clinton victory mean for financial markets? In this first of a three-part series, Marco Pirondini, Head of Equities, US, shares his thoughts on the implications for US equities.
1. Inflation – Some Like It Hot
Central bankers in two of the world’s major economies have recently been discussing their thoughts on the appropriate level of inflation, and what their reactions might be to any breaching of their inflation targets. The suggestion appears to be that after a prolonged period of deflation / low inflation, authorities should be willing to tolerate a period of above-target inflation. In a speech at a Boston Federal Reserve conference in mid-October, Fed Chairperson Janet Yellen pondered on the benefits of allowing the U.S. economy to “run hot” for a period of time. She wondered whether a “high-pressure” economy would help remove some of the slack that has built up in areas such as labour force participation. Not surprisingly, the U.S. bond market reacted – bonds sold off and the yield curve steepened as investors built in some inflation premium into long-dated bonds. Over in the UK, members of the Bank of England’s Monetary Policy Committee (“MPC”) were having similar thoughts. The significant depreciation in the British Pound since the Brexit vote on June 22nd has made it very likely that the UK could face a period when inflation will exceed the MPC’s target level of 2.5%. The reason the MPC might be willing to look through this breach of target is that there is little sign of domestically generated inflation in the UK economy – virtually all of the expected rise in inflation in the coming months is likely to be attributable to Sterling’s weakness. However, mirroring moves seen on the U.S. bond market, UK gilts also sold off. Indeed, UK gilts have been the worst performing major bond market in the last 6 weeks, with significant rises in both nominal bond yields and inflation breakeven levels. Central bankers might find that once the inflation genie gets out of the bottle, it’s very hard to get it back in. Even though the authorities may persuade themselves that a little bit of extra inflation might be welcome, bond market investors know the effect that inflation has on their returns, and for those investors there is no such thing as temporary inflation.
Marco Pirondini is Head of Equities, US and Portfolio Manager of global equity strategies.
Energy investors are focused on OPEC’s recent pledge to curb oil production, which triggered wide swings in oil prices and expectations of higher prices ahead. But we’re wary of the oil outlook. The market is oversupplied, with inventories close to all-time highs for both oil and refined products. OPEC recently surprised the market with an announcement that it has brokered a deal to cut about 800,000 barrels a day. For context, production has risen from under 30 million barrels a day at the end of 2013 to almost 34 million barrels a day as of 9/30/16. Will 800,000 barrels a day make a difference?
1. Chinese PPI – A Warning Sign?
With plenty of headlines during the week devoted to the U.S. elections, Sterling’s fall (of which more below) and a potential shortage of Marmite (don’t ask), it would be easy to have missed the news that the Chinese Producer Price Index (PPI) turned positive in September for the first time since early 2012. The index is a measure of factory-gate prices and economists suggested the pick-up was driven by gains in coal and copper prices amid a government push to scale back overcapacity. The slow but continual weakening of the Chinese Renminbi has also been a factor, with the exchange rate recently having broken the 6.70 level against the U.S. Dollar. The release of the PPI number coincided with the announcement that headline Chinese consumer price inflation accelerated from an annualised rate of 1.6% in August to 1.9% in September. Given the close link between producer prices and export prices, it raised hopes that China might soon stop exporting deflation to the rest of the global economy. It’s also a potential sign that global deflationary fears are fading, which would be welcome news for most of the world’s major central bankers. Feedback we received from the recent International Monetary Fund (IMF) meetings in Washington suggested that policy makers were watching Chinese PPI with interest, noting its recent improvement. Some in Washington believe that this improvement could spill over into global inflation numbers, and potentially alter many policy and rates assumptions. In a number of previous blogs, we have expressed our view that headline inflation rates could soon start to pick up, as last year’s fall in oil prices drops out of the calculations. Over the coming months, the inflation figures should see a rising oil price compared to this time last year, and this effect may push inflation higher. We also believe that the inflation protected securities offer good value at present levels. We are beginning to build positions in inflation markets that should benefit from this anticipated pick-up in headline inflation rates.