We feature an Exclusive on how the Fed’s repo operations impact the Fed’ balance sheet and broader risk markets. The dollar (lower) could be impacted, especially against EM (higher). The piece is written by former NY Fed and Bridgewater Economist, Dominique Dwor-Frecaut.
On the curation side, we have a special section on coronavirus in China. Markets are clearly reacting to the news. We have also now added a new regular section on ESG and climate change given how important the topic has become (including at Davos).
Elsewhere, former Goldman Sachs guru Jim O’Neil strikes a cautionary note on global growth. Ed Yardeni is more positive and reiterates his bullish equity view. We feature two pieces on indicators that capture that US business cycle. And new research finds ETFs are increasing the sensitivity of EM to global financial conditions.
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We feature an Exclusive on how the Fed’s repo operations impact the Fed’s balance sheet and broader risk markets. The dollar (lower) could be impacted, especially against EMs (higher). The piece is written by former NY Fed and Bridgewater Economist, Dominique Dwor-Frecaut.
On the curation side, we have a special section on coronavirus in China. Markets are clearly reacting to the news. We have also now added a new regular section on ESG and climate change given how important the topic has become (including at Davos).
Elsewhere, former Goldman Sachs guru Jim O’Neil strikes a cautionary note on global growth. Ed Yardeni is more positive and reiterates his bullish equity view. We feature two pieces on indicators that capture the US business cycle. And new research finds ETFs are increasing the sensitivity of EMs to global financial conditions.
Enjoy!
Bilal
How The Fed’s “Not QE” Boosts Risk Markets (3 min read) The Fed is moving to a RP (repo) operational target, which requires a bigger balance sheet. In the context of the ongoing risk rally this is likely to translate into further USD weakening against EMs.
Up to the September RP volatility, the Fed balance sheet strategy was aiming for ‘the minimum level of reserves needed to continue operating in a floor system’. This was based on surveys of banks suggesting aggregate minimum reserves need to be around USD900 bn. In November, however, a senior NY Fed official signalled a change of strategy: ‘the quantity of reserves needed to maintain an ample reserves framework is subject to uncertainty and may change over time’, noting that ‘the level of reserves needed is more than the sum of individual banks’ demand, particularly when there are frictions that result in inefficient redistribution of reserves.’
(Dominique Dwor-Frecaut, 21st January 2020)
Is China on the brink of another public health emergency? Regardless of the WHO’s official decision on Wednesday, concern is rising with human-to-human transmission of the coronavirus now confirmed and cases spreading both within China and to other countries in Asia.
Wuhan Coronavirus Keeps Spreading (Trivium China, 2 mins read) Scroll down to point 6, reminds us of the initial efforts to supress information on SARS outbreak in 2002. The number of reported cases in current outbreak is now in excess of 200. Transmission risk significantly heightened by the mass travel ahead of Chinese New Year holiday later this week.
China Coronavirus: Beijing Breaks Its Silence, But Only To ‘Deny Rumours’ (South China Morning post, 4 min read). As concerns mounted over the weekend China’s Centre for Disease Control and Prevention initially denied that are hospitals outside Wuhan were treating patients for the virus, or that it was supressing any information.
The WHO provides a useful Q&A on the coronavirus while the BBC also tries to answer questions. You can also view WHO statements since the outbreak of the virus was first reported late last year.
The WHO will meet on Wednesday to decide whether this constitutes a “public health emergency of international concern”. See their twitter feed for the latest updates.
Differing views on the outlook for US equities plus the role of ETFs in raising Ems exposure to the global cycle
How ETFs Amplify the Global Financial Cycle in Emerging Markets (FED, 61 page read) Investors holding exposure to EM markets through ETFs rather than mutual funds is dramatically increasing the sensitivity of cross-border capital flows and market returns to global financial conditions. [Bullish EM volatility]
Trends Diverge as Markets Enter 2020 (Advisor Perspectives, 5 mins read) Last year, manufacturing lagged services, and profits lagged stock performance. Authors think positive growth outlook is priced and bonds are underpricing inflation. [Bearish equities and bonds]
Nothing To Fear But Nothing To Fear (Dr. Ed’s Blog, 5 mins read) Ed Yardeni is positive on US equities in the year ahead. Earnings growth is set to improve with forward revenues at a record high. Any correction due to concerns over high multiples should be used as a buying opportunity. [Bullish equities]
A timely look at CB reserves levels and the impact on policy implementation. For Europe, a new measure to estimate the impact of ECB QE.
Monetary Policy Implementation with an Ample Supply of Reserves (Federal Reserve Bank of Atlanta, 47 page read) After last year’s repo spike this study looks at whether low or high reserve supplies at major central banks offer a more stable monetary policy. Unsurprisingly, the paper finds the Fed’s current policy of “ample reserves” to be the most prudent.
Predicting Downside Risks to House Prices and Macro-Financial Stability (IMF, 47 page read) IMF uses current house price overvaluation, excessive credit growth, and tighter financial conditions to jointly forecast higher house-price-at-risk (HaR) up to three years ahead. Tighter macroprudential policy is found to be the most effective way of limiting downside risks to house prices.
The Euro Area Bond Free Float and the Implications for QE (Wiley, 35 page read) The authors construct a new measure of “free float” to estimate the impact of ECB QE on bond yields, growth and inflation. They estimate QE reduced 10‐year bond yields in the Euro Area by around 30bps in 2015, and in 2016 produced a 0.2 positive impact on the output gap and 0.3pp on inflation.
New findings that show austerity doesn’t negatively impact public opinion after all, and what’s needed to ensure the 2030 sustainable development goals are on track.
Mad about Austerity? The Effect of Fiscal Consolidation on Public Opinion (Wiley, 18 page read) The effect of a tighter fiscal stance on public opinion is relatively small and closely follows the impact of austerity on economic activity. The findings do not concur with the view that austerity creates a negative effect on public opinion and the popularity of public institutions.
Closing the SDG Gap (Project Syndicate, 5 mins read) Continuing progress at the same rate as the past decade would mean the 2030 sustainable development goals (SDG) will not be met. So far, pledges such as eradicating extreme poverty, ending preventable child deaths and averting a climate disaster have gone unfulfilled.
European Green Finance Is Expanding, A Discount on Bank Capital Would Discredit It (Bruegel, 5 min read) Financing for the 1.5% of GDP in annual spending under the recently agreed “European Green Deal” will largely come via by bank loans, not capital markets. But reduced capital requirements for those with eligible loan books could prove counterproductive through higher funding costs.
India’s role in determining whether we have reached peak global growth and the benefits of an H1-B visa for US tech start-ups.
Has the World Economy Reached Peak Growth? (Project Syndicate, 3 mins read) Former Goldmans guru Jim O’Neill argues the 2020s will need a productivity miracle to offset the ageing population in China and the West. India has the greatest potential to influence global growth in the 2020s due to its relatively young population. But current government policies are far from supportive. [Bearish global equities]
The Sahm Rule and Recessions (The Dangerous Economist, 3 mins read) Claudia Sahm’s rule defines predicts recession based on the three-month average unemployment rate rising half a percentage point or more above its low during the previous 12 months. With no false positives and more timely predictions than other recession indicators, it’s well worth using.
The United States is Starved for Talent (NBER, 40 pages) Winning the lottery for a high skilled H1-B visa significantly improves a tech start-up’s likelihood of attracting venture capital funding. Shows access to the best talent in the world is an edge for the US.
BlackRock on this year’s geopolitical risks
What to Watch in Geopolitics in 2020 (BlackRock Blog, 2 min read) Mike Pyle, Global Chief Investment strategist for BlackRock, points to the current high in BlackRock’s geopolitical risk indicator with recent tensions between the US and Iran. For this year, geopolitical risks to watch are continued fragmentation of trade and technology, increasing protests driven by income and wealth inequality and cybersecurity.
New indicators on recession forecasting and news-based sentiment
Recession Forecasting With the Federal Reserve Bank of Chicago’s Newly Released Brave-Butters-Kelley Indexes (iMarketSignals, 4 min read) The new BBKIs are constructed using 500 monthly macroeconomic timeseries indicators and aims to measure monthly real GDP growth and a number of its components. Despite a two-month time lag, they seem to be accurate and currently show no signs of a recession. [Bullish equities]
News-based Sentiment Indicators (IMF, 56 page read) Sentiment either spikes or trends up before financial crises according to a new “text based” uncertainty measure developed by IMF researchers. The dataset is for 20 countries and can be used an Early Warning Indicator (EWI).
Twenty-two policy proposals for the US’ China strategy. Huawei security concerns linger on.
Implementing Grand Strategy Toward China (CFR, 82 page read) Twenty-two policy prescriptions for the US to navigate the current phase of US-China relations. Domestic initiatives include limiting China’s IP theft and developing AI. On foreign policy includes shifting military resources to Asia and pushing China to accepting reciprocity (including on trade practices and market access).
The Case Against Huawei (Balding’s World, 5 min read) Huawei is owned by the Chinese Communist Party through a complex structure of Trade Union Committees, most of its senior employees have ties to the military or security services and there is clear evidence of data collection on individuals, firms, intellectual property – the list goes on. [Bearish Huawei]
China’s Ten-Year Struggle against U.S. Financial Power (The National Bureau of Asian Research, 10 mins read) Recaps China’s efforts to boost its financial power. Bilateral swap lines, renminbi promotion through the BRI and regional trade, interbank payments systems and use of its own super apps including payment systems. [Bearish dollar]
Ocean temperatures hit a record high in 2019 while climate activists target Wall Street’s largest financers of fossil fuels
Record-Setting Ocean Warmth Continued in 2019 (Advances in Atmospheric Sciences, 6 page read) Measuring ocean heat content (OHC), driven by trapped greenhouses gasses, is one of the best ways to capture the rate of global warming. Latest data shows 2019 was the highest ever recorded in history.
Why the Climate Movement’s Next Big Target Is Wall Street (Gizmodo, 5 mins read) A new campaign to stop financing of fossil fuels (Stop the Money Pipeline) was unveiled last week targeting some of the largest financers of fossil fuels – JPMorgan, Liberty Mutual and BlackRock. [Bearish financials]
Climate Risk and Response: Physical Hazards And Socioeconomic Impacts. (McKinsey 15 min read). The poorest countries could be more exposed, with greater reliance on outdoor work and natural capital, and less financial means to adapt. Policy makers and business leaders need to put in place the right tools, analytics, processes, and governance to properly assess climate risk. [Bearish frontier EM]