Global markets have stabilised today following the slump in Chinese markets yesterday after re-opening. Chinese liquidity injections are certainly helping. That said, it could be too early to call for an end to virus fears at least according to a new Lancet paper, which makes for alarming reading.
We were expecting to feature a battery of pieces on the Iowa caucuses – notably on whether there was a Bernie Sanders surge. However, the results have been delayed, so at the time writing we are in the dark.
For our regular top picks, we feature Blackrock’s views on the dollar and equities. Nowcasting expert and former ECB research director Lucrezia Reichlin gives her view on the ECB’s strategic review. We also include a ranking of which ESG funds outperformed in 2019.
Finally, top Asia strategist, Morgan Stanley’s Mirza Baig updates his view on India ahead of the RBI meeting on Thursday.
Oh and I’ll be featuring on Bloomberg TV today at 4pm UK / 11 am EST, so please feel free to tune in!
India: Trading The L-Shaped Recovery (2 min read) We update our views on India ahead of Thursday’s MPC meeting. After the RBI’s surprisingly hawkish MPC meeting on 5 December, when the policy rate was left unchanged at 5.15% following five successive rate cuts totalling 135bps, my modal scenario was as follows:
“RBI will focus on improved policy transmission (OMOs, twist, etc.) but stop short of direct intervention in credit markets. Growth expectations would continue to deteriorate. RBI would resume cutting rates in 2020. INR would continue depreciating; bonds would be volatile in the near-term with a misplaced focus on onion prices but rally next year for the wrong reasons (lack of growth).”
(Mirza Baig, 4th February 2020)
Nowcasting and Forecasting the Potential Domestic and International Spread of the 2019-nCoV Outbreak Originating in Wuhan, China (The Lancet, 9 page read) Estimates more than 75,000 people are infected in Wuhan and a doubling period of 6.4 days for the infection rate. Given the spread to both other major cities in China and globally authorities must be prepared to act quickly to contain new outbreaks as they appear.
EM benefitting from ongoing balance sheet expansion and Azerbaijan’s oil comeback
Fed’s Printing Press Favors Emerging Markets (Blackrock blog, 2 min read) Emerging market equities have outperformed since the Fed restarted its balance sheet expansion late last year. With the Fed, ECB and BoJ all committed to further asset purchases in 2020, EM equities should continue to benefit, with China looking particularly cheap.
The U.S. Dollar and Emerging Market Assets (Blackrock blog, 2 min read) The US dollar is poised for a stable-to-weakening trend in the next 6 to 12 months as interest rate differentials move in favour of EM, and the trade truce reduces the safe haven demand for the dollar. Geopolitics and an unexpectedly hawkish Fed are the risks to watch.
The Oil Boom You Haven’t Heard of (OZY, 3 min read) Azerbaijan once accounted for half of all global oil output. Three oil booms later the country no longer ranks among the world’s top producers but Baku is looking to position itself back on the oil map. If previous transformations are anything to go by, don’t rule them out.
Action points for the ECB’s strategic review and what drives FOMC dot plots
What the ECB’s Strategy Review Must Do (Project Syndicate, 4 min read) Former Director of Research at ECB, Lucrezia Reichlin argues that the review must determine whether policy mistakes, poor coordination between fiscal, monetary and financial policies or structural factors are behind the persistent failure to meet the inflation target.
What Drives the FOMC’s Dot Plots? (Journal of International Money and Finance) Labour market data are key drivers of FOMC interest rate projections at all time horizons, while for longer horizons trade and markets news also matter. Inflation is not found to make much difference.
Inflation and Public Debt Reversals in Advanced Economies (IMF, 23 page read) Higher inflation will have a limited impact in reducing DM debt ratios. A 1pp increase in inflation would knock just 0.5-1pp off the debt/GDP ratio, with a higher and more persistent impact under longer debt maturities.
Two contrasting views on inequality
Inequality and Economic Growth (Project Syndicate, 4 min read) Former Chief Economist of IMF, Simon Johnson, argues for a wealth tax, refocused antitrust policies and changes to campaign finance rules to achieve a more equal society, and to sustain economic growth.
The Truth About Income Inequality (Reason, 15 min read) Not all income inequality is bad nor has inequality risen to the extent often cited. Global inequality is falling and both the poor and middle class in the US are now better off than in the past. And using a more complete definition of income the top 1% have seen incomes rise more slowly than Piketty suggests.
The risks from slower global trade growth and global unemployment linkages
A Global Economy Without a Cushion (Project Syndicate, 4 min read) Former Chairman of Morgan Stanley Asia, Stephen Roach, points out that global trade growth last year was the fourth weakest since 1980, and the three weakest were all associated with global recession. Global growth is already close to stall speed leaving significant risks from the much-reduced buffer from trade growth.
Tracking Long-run Growth in the Euro Area With an a-theoretical Tool (VoxEU, 6 min read) During the past 30 years institutional integration, competitiveness and monetary policy all supported long run growth. Equity cycles, debt ratios and sovereign stress all have a negative or mixed impact on growth.
Forecasting Unemployment Rates with International Factors (Munich Personal RePEc Archive, 22 page read) A global unemployment series is constructed to show linkages between unemployment rates in seven OECD countries. Migration and common business cycles are possible explanations.
How demographic changes could impact the US election and Europe after Brexit
Europe Can’t Afford to Alienate the UK (Spiegel International, 7 min read) Europe’s future is more a confederation of states rather than a true union. But that future still needs the UK on side as a key ally with a permanent seat on the UN security council. Trade negotiations must avoid pushing the UK further from Europe’s influence.
The Demographic Shifts Disrupting the Political World (Axios, 3 min read) The growing number of older voters, more states with non-white majorities, and a less rural, less religious country will all influence the 2020 US Presidential election.
As Congress Talks Climate Policy, Carbon Price Gets No Love (Axios, 4 min read) Despite the focus on climate change and the environment carbon pricing is yet to get much support in the US Congress from either side.
Financing constraints for intangible assets and liquidity risks from large CCPs
Central Clearing and Systemic Liquidity Risk (Federal Reserve, 39 page read) Large central counterparties create procyclical liquidity risks despite their role in improving financial stability. Macroprudential stress tests focused on liquidity are needed to determine the impact of shocks to central counterparties on system wide liquidity.
Productivity and Finance: the Intangible Assets Channel (OECD, 61 page read) Firms with higher intangible assets face tighter financing constraints due to difficulties in measuring and valuing such assets, with a detrimental impact on productivity growth.
On Socially Influenced Preferences (Stumbling And Mumbling, 3 min read) The case for a progressive consumption tax rests on the basis that other people’s spending makes us spend more. Behavioural and informational externalities also influence spending.
More on the UK’s Huawei decision and the economic impact of China’s ageing population
After Trump’s China Trade Deal, The Case For A Chexit (Vanity Fair, 8 min read) The Phase 1 deal will increase US trade links with China yet IP theft and unfair competition are hurting American industry. An “amicable disentangling” is the prudent way forward.
5G Choices: a Pivotal Moment in World Affairs (The Strategist, 8 min read) The UK’s decision to keep Huawei out of core 5G functions does not guarantee cybersecurity. Capability, opportunity and intent are what matters. And with access to foreign networks the first two factors are available to exploit.
Population Aging, Credit Market Frictions, and Chinese Economic Growth (Philadelphia Fed, 49 page read) China’s increasing life expectancy is one factor explaining per capita income gains and rising savings rates over the past forty years. Credit policies also played a role.
The ESG funds that outperformed last year plus what’s missing in the EU’s green taxonomy
The Biggest ESG Funds Are Beating the Market (Bloomberg, 3 min read) Nine US ESG funds outperformed the S&P last year and seven have outperformed over five years. Companies that can help reduce inequality and those with a long-term competitive edge are some of the factors used to determine ESG investment in the top ranked funds.
ESG Challenges and Solutions (Morningstar, 3 min read) The UN’s Principles for Responsible Investment (PRI) should consider; consistency and clarity in the definition of ESG, the limitations of tracking error and changing ESG rating methodologies. PRI should encourage collaboration as well as education on ESG.
The EU’s Risky Green Taxonomy (Project Syndicate, 4 min read) The EU must consider where financing gaps exist in green activities and which investment products are efficient. By focusing only on which activities are sustainable the EU risks both mis-selling, creating barriers and slowing down the energy transition.
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