Just as with Brexit, markets underestimated the strength of the populist movement yesterday, when Donald Trump was elected the 45th president of the United States. Short-term reactions aside, what will this shift in US political leadership mean for the economy and markets going forward?
Posted in Economy, Equity, Fixed Income, Industry Insights, Markets, Multi Asset
Tagged Donald Trump, Economy, Equity, Ken Taubes, markets, Presidential Elections, US Elections
1. Key Takeaways from UK’s “Super Thursday”
Christened “Super Thursday” for the confluence of the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting, the release of the minutes of the previous MPC meeting and the publication of the quarterly Inflation Report, last week’s Super Thursday had a little bit of extra spice. It was also the day that the UK High Court published its verdict on the Parliament’s role in triggering Article 50. Here’s what we learnt from last Thursday:
- The risk of a general election in 2017 has, in our opinion, increased. UK Prime Minister Theresa May pledged to appeal the High Court’s ruling to the Supreme Court. Should the government lose its appeal, it will probably have to introduce legislation to start the Brexit process. If that legislation faces amendments from pro-Remain MP’s, PM May could lose her patience and decide to call a general election. Polls indicate that the current government would win with a larger majority.
- The ruling and need for parliamentary approval reduces the likelihood of a “hard Brexit”. We talked in last week’s blog about a “dirty Brexit”, and most of the developments we saw last week continue to point to that type of scenario developing.
- The MPC have moved firmly towards a neutral stance from its previous dovish stance in terms of interest rates. Monetary policy was noted as being able to respond “in either direction to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the target”. However, the MPC did sound a warning note, cautioning that “there are limits to the extent to which above-target inflation can be tolerated”.
- The near-term economic outlook looks stronger than the BoE expected when it eased policy in August, but the medium-term outlook is considerably cloudier. Inflation is expected to increase to 2.7% in 2017, before falling back to 2.5% in 2019.
- The MPC in obviously in “wait-and-see” mode, with no clear feeling for what’s going to happen in the future. As noted above, the Bank has been surprised by the resilience of economic activity since June, but remains concerned about the impact on activity once Article 50 is triggered. But right now, in our opinion, they have little confidence in their forecasts.
- From a markets perspective, we continue to believe that a steeper UK yield curve should be warranted, as a bigger inflation premium is incorporated into longer-dated bonds. We also believe that Sterling will remain under pressure in the long-term, and would suggest any bounce in the currency may provide an attractive opportunity to sell Sterling.
Pioneer Investments Economist, Qinwei Wang shared his thoughts with followPioneer.
Recent developments have suggested that growth momentum in China has been holding up relatively well, while there are increasing signs that policymakers are accelerating their efforts in structural measures.
As a result, we are turning slightly more constructive about the outlook for China over the next couple of years, although we still expect growth to be lower and risks pertaining to the management of its comprehensive multi-year structural transition to remain.
Posted in Economy, Equity, Fixed Income, Industry Insights, Markets, Multi Asset, Uncategorized
Tagged China, Economy, Erika, investment, Lacchia
1. Reasons for the Recent Bond Sell-Off
October has been a bad month for bond markets. German Bunds have risen 30bps, making it their worst month since 2013, whilst U.S. Treasuries have climbed to their highest levels since May 2016. We have heard numerous reasons for the sell-off, and address some of them below:
- Increased probability of a Fed rate hike in December (now 73%) – the recent economic data in the U.S. (and globally) has been just about strong enough to allow the Fed to hike in December and not, in our opinion, upset markets.
- All about inflation breakevens – real rates haven’t moved. In the major markets, the majority of the recent sell-off can be attributed to a rise in inflation expectations, due to the increase in the oil price over the last 12 months.
- Stronger UK data sees market pricing next rate move as a hike – as mentioned below, Q3 GDP data in the UK was sufficiently strong to make the market consider that further rate cuts may not be needed.
- Euro OverNight Index Average (EONIA) no longer pricing in rate cuts – as in the UK, recent strong economic data in Europe (better IFO survey data and German Industrial Production numbers), along with increasing inflation makes it unlikely that the ECB would cut the deposit rate further.
- Stretched positioning – data from the Eurex futures exchange and anecdotal evidence from counter-parts suggest that many investors were long duration. The cutting of these positions as bond yields rose exacerbated the selling pressure.
- Bond volatility had been close to historic lows – the Merrill Lynch Option Volatility “MOVE” index showed bond market volatility had moved back towards the very lows levels seen in May 2013 and August 2014. In both cases, volatility rebounded sharply higher shortly afterwards.
Whilst we have some sympathy with the move higher in yields, and are running a short duration position ourselves in Europe, we don’t subscribe to the belief that this is the start of another “taper tantrum”.
(Part three of three) In this final blog of our series, Matteo Germano, Global Head of Multi Asset Investments shares his thoughts on the implications for multi-asset investing.
From a global multi-asset perspective, how is the US election affecting your
On the basis of current policy proposals we do not expect any significant change if Clinton gets elected. In line with the Obama administration, she is focusing on increasing middle-class incomes and creating fair growth.