June, 02 2017 by lsr team

Ken Wattret, Chief European Economist, talks about our latest Europe Watch publication Economics: ECB meeting – what to expect 
- Upbeat on growth, cautious on core inflation; financial conditions a concern
-  Easing bias  should go but probably stays for now; exit discussion more likely Politics: Italian elections draw near; May’s wobbles 
-  A risky autumn election in Italy is looking more likely
-  PM May still in pole position but weakened by a poor campaign Markets: Dancing round the May pol...

April, 12 2017 by lsr team

Jonathan Fenby, Managing Director, European Political Research, and Ken Wattret, Managing Director, Global Macro, discuss and answer your questions on this issue including:
- The probable result and the market reaction to either a Le Pen or Macron victory
- The economic outlook in either outcome
- The reform agenda needed to improve growth and encourage investors
- The reform that each candidate would be able to deliver
- Why both Macron and Le Pen would both have difficulty leading the French government
- How investors should posit...

April, 07 2017 by lsr team

The Fed surprised markets and commentators, including us, as the FOMC minutes showed plans to shrink the balance sheet beginning in 2017. Steve Blitz says this is significant because:
 
•       Signalling shrinkage of its balance sheet shows Fed planning for three increases
•       Fed’s intention is also to present a smaller target to its critics

January, 23 2017 by lsr team

Questions: 1) Last October you noted that Sterling(£) was getting oversold and that the market was overly concerned with respect to the UK’s external balances. 2) Currently on a real effective exchange rate basis how cheap is Sterling(£)? 3) You also highlighted previously that within an overall negative view on sovereign bonds(ex EM high yielders), gilts might be particularly vulnerable? 4) So one of our key macro trades remains short gilts/long US Treasuries? 5) Last week before PM May’s speech you suggested that whatever its content...

October, 28 2016 by lsr team

The PBoC’s trade-weighted RMB basket has weakened by a little over 8% since its launch last December. The drop has been orderly, in line with Beijing’s intentions. However, the low-hanging fruit from RMB depreciation has already been picked. Despite successively weaker CNY fixings against the dollar, the RMB basket has failed to decline since late August and this month it has been creeping higher. What is causing this divergence? Is it sustainable, and what does it mean for Beijing’s policy choices?

October, 21 2016 by lsr team

Some claim a US recession is ‘overdue’, but leading indicators are edging higher and we are not seeing the macro imbalances typically associated with major downturns. Rising bond yields and a correction in equity markets provide the clearest 2017 threats, while corporate indebtedness could compound these risks.

October, 07 2016 by lsr team

We think that an ECB taper is increasingly likely in 2017. But the bank’s immediate problem is how to overcome a scarcity of bonds available for purchase in order to complete the current programme. The ECB needs to be able to credibly declare victory before it heads for the exit.

September, 23 2016 by lsr team

The RBA’s shift to a neutral bias at its meeting in September, following 50bps of rate cuts in 2016, did not come as a surprise. Perhaps more interesting was the discussion of the most recent collateral damage in the global monetary policy race to the bottom. Officials took note of the distortive impact of the BoJ’s policies on Australia’s repo market, manifested in rising repo rate spreads relative to the RBA’s cash rate. In turn, persistently high repo rates put upward pressure on Australian banks’ funding cost base, further strengthening the...

September, 16 2016 by lsr team

Emerging market growth has been on a downward trend for just over half a decade. The slowdown probably bottomed out at the end of last year. On an aggregate basis, the advance in EM annual real GDP accelerated to 3.9% in Q2 from 2.4% in Q3 2015. Is this the start of a sustained rebound in EM growth? Click above to watch the full video or below for our latest report on emerging markets.

August, 05 2016 by lsr team

In our UK Outlook published shortly after the UK’s Brexit referendum, we outlined our expectation for the August MPC meeting of a 25bp interest rate cut and a new QE programme of around £100bn. At the time, the market was expecting a rate cut but the resumption of QE was a firm off-consensus call. When it came to it, the Bank of England delivered the quarter-point rate cut and, as yesterday’s re-pricing of sterling and the gilts curve demonstrated, surprised the market with a new £70bn QE package. To find out more, click above to watch the video o...

July, 27 2016 by lsr team

Since March, we have consistently made the argument for yield-seeking as opposed to growth-seeking strategies, with a particular emphasis on emerging markets.The relative disregard that EM assets have displayed for the UK referendum result and yuan weakness to multi-year lows underscores the resilience of this ongoing rally. Two important questions for investors are: how long can the rally last and what is the biggest risk? Click above to watch the full video or below for our latest Macro Strategy report on EM carry.

June, 30 2016 by lsr team

The UK voted last Thursday to leave the EU. So far at least, market reaction to the news hasn’t been anywhere near as violent as the doomsday predictions before the vote implied. There is little evidence of either liquidity stresses or contagion so far. We believe that the imminent risks of contagion may be quite limited as, unlike in 2008, there is no major drying up of liquidity to force a widespread liquidation of risk assets. To find out more about Brexit’s market implications and our views, click above to watch the video or below for our latest Macro Str...

June, 22 2016 by lsr team

June would have been a busy month for event risk by any measure, with ECB, Fed, BoJ and BoE policy decisions, an OPEC meeting at the start of the month and Spanish elections at the end. But all these have been completely overshadowed by the EU referendum the UK will hold tomorrow on June 23. With the emphasis very much on the short term, we focus on two aspects of Brexit: what’s likely to happen and how to position for it. Click above to watch the full video or below for our latest Asset Allocation report on Brexit strategy.

May, 26 2016 by lsr team

The surprise rise in the yen and the less surprising rise in the euro this year have removed Ms. Yellen’s international concerns about why she should not be hiking interest rates. Specifically, a dollar spike now seems least of our concerns… Our Chief Economist, Charles Dumas talks us through the domestic conditions in the US and Euro area and the risks of rising bond yields by next year. These issues will be further discussed in our upcoming LSR View, stay tuned!  

April, 20 2016 by lsr team

Freya Beamish, senior economist at Lombard Street Research talks about the risks on the horizon for Japan on FundForum Asia. Click above to watch the full video.  

April, 15 2016 by lsr team

Welcome to our LSR Weekly View. In this video, our senior economist, Freya Beamish discusses Japan's monetary policy following the recent yen strength .These key issues are also covered in our latest LSR View. Click above to watch the full video or below to read the full report.  

February, 23 2016 by lsr team

With the prospect of a June referendum hanging over the markets, interest in Brexit trades has heightened. There is currency-market evidence showing that speculative investors have been positioning for a possible Brexit principally in the FX options markets. Indeed, a chunk of decline in sterling during late December and January may be related to the build-up of option-market positioning, since spot market positioning indicators do not show evidence of extreme short positioning so far (see chart above). Our central view is that sterling will remain the main shock-absorbi...

February, 10 2016 by lsr team

It was almost exactly a year ago that various bond yields in Europe turned negative, unleashing a wave of questions from our readers. Clients wanted to know what this strange phenomenon meant and how long it would last. Twelve months on, far from proving to be a temporary aberration, central banks in Europe have taken their policy rates deeper into negative territory. Now the Bank of Japan has joined in and helped push the 10-year government bond yield to almost zero today. With risks to the global economy intensifying, there is even speculation that US and UK rates coul...

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...

January, 08 2016 by lsr team

While it is always dangerous to extrapolate from the recent past, the consensus expects 2016 to look remarkably like 2015. The issues that have dominated market commentary over the past 12 months – EM weakness, global deflation and central bank divergence – remain the sellside’s favourite 2016 themes. There is also a surprising amount of agreement about what will happen. Growth will move sideways, inflation will remain too low and the divergence trade has further to run. T...

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...

October, 29 2015 by lsr team

Japan’s central bankers are locked in the same vicious cycle as the rest of the world. The US in isolation could easily have raised rates by now, but the rest of the world is not ready and is now big enough to give the Fed cause to pause. However, unwilling to relinquish their grip on America’s coat tails, central banks outside the US have responded to Fed hesitation by lowering the bar, pushing interest rates below zero and devaluing currencies. The result is a race to the bottom. Japan’s QE is already huge and expanding the programme would hasten the...

October, 26 2015 by lsr team

Though few economists expected concrete announcements from the ECB last week, many thought Mario Draghi would hint at further action by the end of the year. Mr Draghi doesn’t like to disappoint markets and this occasion was no exception, as he delivered a dovish message and emphasized the central bank’s willingness to reassess its policies in December. The recovery is proceeding, but global risks have increased. Moreover, the ECB seems determined to keep its currency down, especially with the Fed apparently backtracking from its plans to raise interest rates....

September, 08 2015 by lsr team

China’s economic transformation is a game-changer for the world economy. Recent market jitters have shown that investors have now begun to acknowledge the sharp growth slowdown we forecast. Yet confusion and uncertainty abound as most regard China’s economy and politics a black box. China’s equity market crash, the authorities’ panic intervention and the growth slowdown have undermined confidence in China’s economy and policymaking. But it seems investors’ own fear is now preventing them from seeing the big picture and important change...

August, 24 2015 by lsr team

The yuan devaluation has set in motion a chain of events that ultimately resulted in the current selloff in global risk assets. Emerging markets, already underperforming for much of the past few years, took the first hit. The liquidation is now spreading to developed markets, with most equity indices down more than 10% in under a week. Market volatility should not be a surprise at this stage of the cycle. As the chart above shows, rich valuations tend to correlate with deeper and more frequent market gyrations. What is it then that explains the violence in market moves t...

August, 24 2015 by lsr team

The recent devaluation of the yuan appears to have been the main reason why expectations of a Fed rate rise been pushed back. As recently as mid-June a hike of 25bp by the end of 2015 was fully priced in, but that has now been pushed back to Q1 2016. Given the increasing FX uncertainty and global deflation, we think there is a significant risk that investors could perceive an earlier-than-expected rise in Fed rates as a policy mistake. There is already some evidence of this concern, with long-term breakeven inflation rates falling to post-crisis lows as two-year yields h...

August, 21 2015 by lsr team

A 3% depreciation in the yuan (CNY) is, per se, hardly a game changer for global markets. But the move could have broader implications, certainly in the near term – not least as Japan and the euro area are firmly in easing mode. Sustained CNY depreciation will send disinflationary impulses to the rest of the world, complicating EM policymakers’ task and magnifying risks around domestic EM leverage.  To find out more about how a weaker yuan amplifies the EM ‘slow burn’ challenges we have identified in the past, click below.  

August, 19 2015 by lsr team

China’s decision to devalue the yuan last week may have been a surprise in terms of timing and mechanics, but we have been expecting a decline in the currency for some time. The size of the drop falls short of what would be needed to declare a currency war, but the risks of one happening at some point have increased. Our asset allocation (AA) stance remains skewed towards developed equities, but we tone down our bullishness slightly this month. Meanwhile, we would like to highlight the strong performance of our AA model portfolio (+8.6%) versus the benchmark (-0.9%...

July, 21 2015 by lsr team

Despite the turbulence of the Greek crisis, the euro area government bond market has seemingly remained a haven of peace and contentment. Yields in southern Europe have remained low, the Spanish bonos, for instance, continue to yield over 40bp less than US Treasuries. While this suggests ECB’s temporary success in avoiding the Greek contagion, our analysis shows that contagion channels remain open in the case of Spain despite growth improving in the Spanish economy. With the upcoming general election in Spain later this year, political contagion could pose a bigger...

July, 09 2015 by lsr team

The Greek No vote and the Chinese stock rout are key setbacks to investor sentiment. With the Greek public voting NO in the referendum and the subsequent reaction of several influential political leaders on the creditors side, the tone has now shifted towards containing the contagion if a deal cannot be reached. While a deal is still our base case (albeit with reduced conviction), we deem it prudent to reduce portfolio risk given the increasing uncertainty regarding the direction of the Greek negotiations. We regard contagion risks as manageable and intend to ramp up our ex...

July, 07 2015 by lsr team

Contrary to broad expectations of a split vote, Sunday’s much-awaited referendum produced a resounding ‘No’. The ball is now back in the creditor’s court, and all eyes are on this week’s Eurogroup and leaders’ summit. Whatever the outcome, this negotiation process has cost Greece dearly. The economy is sliding deeper into recession and the financial system is starved of liquidity. Should Greece default on a €3.5 billion bond payment to the ECB on July 20th, the gates of Grexit will be forced wide open. Click below to find out more.

June, 18 2015 by lsr team

The Greek central bank reported on Wednesday that €30bn deposits were pulled out of Greek banks between October 2014 and April 2015 and warned that Greece is likely to default and exit from the eurozone if it fails to reach a deal with lenders. Prior to that, we’ve also seen a massive sell-off in Bunds, triggered by modest inflation in the eurozone and markets’ refusal to believe that the QE programme will be implemented in full. While a Grexit isn’t our central scenario, we believe that the markets may be too complacent about the impact of a Greek...

June, 10 2015 by lsr team

The German 10-year Bund yield rises above 1% for the first time since September as the selloff in German sovereign debt continues. Our Chief Economist and Head of Research, Diana Choyleva explains the dynamics behind the bond market selloff and when we expect the first Fed rate hike. Click Read more where you'll be directed to watch the full video.