February, 10 2017 by lsr team

- Trade dispute with US to peak in 12 months - Trump deal could be 45% tariff on "non-essential" goods - Chinese trade surplus to fall from 2018 - RMB policy will be undermined - FDI will decline and then retreat

August, 26 2016 by lsr team

Euro area GDP was a tad disappointing in Q2 but, overall, European data remain solid. We expect above-trend growth (1½%) over the next 12 months, although at a marginally slower pace. Spain has been outperforming the rest of the region while Italy remains the laggard, a trend that is likely to continue. To find out more, click above to watch the video or below for the full report.

March, 15 2016 by lsr team

The Bank of Japan left monetary policy unchanged today. The effect of negative interest rates on the currency in January was the opposite of that intended: the central bank’s aggressive adoption of negative deposit rates merely fuelled global angst at a critical juncture, driving repatriation flows into Japan and pushing up the currency. The ECB’s policy easing last week had a more beneficial effect on asset prices but has again left the currency unchanged, reinforcing the message for the BoJ. For Japan, where currency moves dominate the equity market, it’...

February, 15 2016 by lsr team

The UK cycle is rapidly maturing. We have stressed before that uncertainty over Brexit is likely to add a burden to the end of the cycle, dampening investment intentions just when consumption bottlenecks would otherwise have driven up capex. As with the Scottish referendum, polls have narrowed. The latest poll of polls put those who want to remain in the EU on 51%, with those who wish to leave on 49%. Many of those who expect an exit presumably think it would be a good thing. But in the short term, uncertainty over how Brexit would affect trade and capital flows will tak...

February, 09 2016 by lsr team

Ironically, financial market turbulence has hit just as the world economy’s chances of rebalancing successfully had increased. We published our year ahead piece in early December with the title “Don’t panic!”, but investors returned to work after the holidays worried about China’s slowdown, collapsing oil prices, global debt unwinding and the dearth of policy options left open to leading central banks. Widespread anxiety pulled the rug from under asset prices. As is our tradition, we asked our clients in mid- January for their top questions...

February, 02 2016 by lsr team

The BoJ followed through on recent threats to loosen policy by cutting its interest rate on new reserves to -0.1% last Friday. A comparison to Europe pushing into negative territory is misguided at best. Japan has a government deficit of 6% of GDP to finance and a huge pile of public debt to service so it needs to keep its investor audience captive. The increase in reserves each year is huge because of the BoJ’s asset purchase programme. If a central bank buys 80trn yen of JGBs then by definition, this eventually creates 80trn yen of reserves. Reserves at the BoJ incr...

January, 18 2016 by lsr team

The majority of investors have consistently been behind the curve on our Chinese slowdown story. Coming to terms with a series of negative surprises has led most to turn bearish on the global economy just as China’s leaders have actually taken the right policy steps. The bizarre expectation that Beijing could somehow engineer a difficult economic adjustment smoothly has inevitably disappointed investors, reinforcing their worries. Unfortunately, because of the huge obstacles in the way of a successful transition, the risk of an unnecessary economic crisis will grow if...

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 24 2015 by lsr team

Beginning in the early 1970s, Japan embarked on a long quest to reform its financial sector. Liberalisation in one area brought unintended consequences in others. Excessive leverage and regulations that failed to keep up with changes inevitably led to a crisis. Today, China has come to a point where financial reform is critical. While China does not have Japan’s luxury to pursue financial reform gradually, Japan’s experience however could shed some light. We visit Japan’s story and look at its implications and what China could do to avoid Japan’s...

November, 18 2015 by lsr team

Last week we summarised the first panel discussion of our recent conference in New York, “The New Abnormal: American monetary policy and China’s liberalisation”. The second panel addressed the question of whether China’s financial transformation would be “a boon or a curse for the world economy”. LSR’s own Diana Choyleva was joined by Chinese political analyst TL Tsim and Fraser Howie, co-author of “Red Capitalism”. The panellists agreed that the process of financial market reform had reached a critical point, exempli...

November, 12 2015 by lsr team

Brazil is battling a host of structural, cyclical, external and political risks. It faces headwinds from a turn in the metals supercycle, tighter liquidity conditions, diminished competitiveness and a payback from poor policy choices. It is one of the most vulnerable economies on almost all the metrics that we use to assess growth prospects in emerging markets (EMs). Brazil has been one of our least preferred EMs for long time now and we see no reason to change our stance. In fact, the pain is set to intensify. Click below to find out more.

November, 09 2015 by lsr team

The Bank of England’s Mark Carney, who has been a accused of flip flopping over the past few years, turned dovish again on ‘Super Thursday’ as he unveiled new macroeconomic projections that served to push back market rate expectations. Given the downside risks to global growth and with the ECB on the verge of expanding its stimulus, the MPC clearly felt that a little dovishness couldn’t do any harm. As a result, most investors don’t expect interest rate ‘liftoff’ until late 2016, with increasing speculation the first rate hike might...

November, 03 2015 by lsr team

The IMF is expected to announce its decision on whether to add the yuan to the Special Drawing Rights (SDR) basket of major global currencies as soon as this month. The omens are good, especially as China has announced a spate of measures aimed at winning the IMF’s approval. Joining the SDR could generate demand for yuan assets that would help ease heavy capital outflows. If China is denied entry, the chances of a yuan devaluation will rise sharply, boding ill for the world economy. So what does it mean if the yuan is included in the SDR? Click below to find out....

October, 27 2015 by lsr team

China’s economy has entered a critical period in its post-crisis adjustment, posing serious risks for the rest of the world. Our final GDP estimate shows Chinese growth at just 0.4% QoQ in Q3, the weakest since the Global Financial Crisis. Its sharp growth slowdown, feeding through into a deterioration in the labour market, will be a stern test of Beijing’s resolve to reform in coming quarters.  So far policymakers have stayed firm. The central bank cut interest rates and banks’ required reserve ratio (RRR) last Friday in a bid to support grow...

October, 09 2015 by lsr team

Abenomics is a response to frustration with Japan’s poor economic performance since its bubble burst in 1990. But Abenomics treats the symptoms, especially deflation, rather than the disease, which it makes worse. Disastrous consequences of Abenomics have only been avoided so far, because it has failed to generate inflation – courtesy of the oil price slump and Japan’s enfeebled domestic demand. But can QE ever be stopped and more importantly, is Japan about to face a financial crisis? Click below to find out our latest View on Japan.

October, 07 2015 by lsr team

Over the last year investors have finally accepted that the global savings glut, which we at Lombard Street Research have discussed for many years, is one of the main drivers of the global economy and of asset class returns. The collapse of the oil price in 2014 and the depreciation of the Chinese yuan in 2015 are the seminal events that have caused the scales to drop from even the most sceptical of eyes. While investors alert to deflation risks are now looking mainly to Asia and Lat-Am where market capitalisations are highest, more fragile states facing greater deflatio...

September, 10 2015 by lsr team

A weaker currency is good news for overvalued and overinvested China, but a collapsing yuan will be a disaster for all. According to data from the Bank for International Settlements, international bank claims on China fell by $120 billion in the three quarters to Q1 2015. The past five quarters have also seen record-high net capital outflows of $440 billion. Capital flight has intensified after Beijing announced that it will allow its currency to be driven by market forces, starting with an initial 1.9% depreciation on the 11th of August. So far the authorities have allo...

August, 10 2015 by lsr team

China’s overall monetary conditions have been kept tight for some time now with broad money growth - the best indicator of overall monetary conditions in an economy, slowing to its lowest rate on record in recent months. Despite the introduction of new monetary policy tools – SLO, SLF, MLF, PSL, etc by the People’s Bank of China over the past few years, liquidity injection through these facilities has not been large. Meanwhile, real lending rates are high and capital is flowing out of the country. While many have argued that China is witnessing capital...

August, 04 2015 by lsr team

The Reserve Bank of India (RBI) kept the policy repo rate unchanged in its monetary policy meeting today while leaving the door open for more rate cuts. Our report answers two critical questions: to what extent the RBI can afford to loosen policy and more importantly, whether it would work. Interbank liquidity conditions are improving in India. In fact, liquidity conditions are looser than at any time since 2009. This is in line with our expectations and is one of the reasons why we think economic recovery will gain traction. But will fears about excess liquidity cause t...

June, 24 2015 by lsr team

As the start of the rate hiking cycle in the US draws closer, concerns are intensifying about the tightening of liquidity conditions in emerging markets (EMs). Some investors cite the aggressive QE policies of the BOJ and more recently the ECB as forces that will keep official liquidity provision abundant. But our analysis continues to show that the evidence so far, at least from Japanese QE, does not offer much room for hope. Annual outflows from Japan have increased since the start of BOJ’s latest QE programme and are now the highest since the global financial crisi...