May, 19 2017 by lsr team

Charles Dumas, Chief Economist at TS Lombard.
- Dollar near past real highs – could relapse later this year
- Pound and yen both undervalued – likely to stay that way
- China’s yuan overvalued – no major move till autumn congress
- Euro still undervalued – may rise sharply when ECB tightens
- Current account balances now matter – yen safe haven in 2018
- China’s debt soaring but not yet dangerous – growth to slow
- Japan’s high debt rising inexorably &nd...

February, 24 2017 by lsr team

Jonathan Fenby sets out 12 reasons why China feels good: 1. China’s economy is ticking over on a cyclical reflation path with sharp PPI recovery coming through.
2. Though it will get worse in absolute terms, the debt problem has been diffused for now by shifting it away from banks and local governments.
3. Currency outflows have moderated for the time being. The housing sector is heading for a correction not a meltdown.
4. Preparations for the Communist Party Congress in late 2017 seem to be on track with no challenge to Xi as he moves into his...

October, 14 2016 by lsr team

The euro area LI continues to put in an above consensus call. It is probably over predicting growth somewhat but its strength is fundamentally underpinned by the newly emerged German locomotive. While German demand often turns out to be derived from others, chiefly China, in this case it is genuine. In fact, this is highlighted by our below consensus Australia call. China’s stimulus has not fed through to a rebound in private demand, although easing PPI deflation is helping manufacturers.

July, 15 2016 by lsr team

With central banks ready to raid their emergency tool kits and the ECB rapidly absorbing most of the euro area’s bond market, it is perhaps understandable that Brexit hasn’t triggered a wider deterioration in European financial conditions. The economy however will take a hit in coming months as the UK is an important market for many euro area exporters. That said, Brexit has had a significant impact on European banks, especially Italian lenders. Currently, Italian non-performing loans stand at around €210bn-360bn, or around 20% of GDP. Click above to wat...

March, 09 2016 by lsr team

Improved risk sentiment is driving another rebound in EM assets. Investors have scaled back fears of a US recession, with Treasury yields now off recent lows and inflation breakeven rates bouncing from depressed levels. At the same time, China is loosening the fiscal taps, while the PBoC has shifted its focus back to boosting liquidity and credit. In turn, commodity prices have found a degree of stability. Market expectations for the path of Fed policy hit extremes in February. Since then, the US$ index (DXY) has turned higher, EM currencies have strengthened and oil pri...

February, 17 2016 by lsr team

Beijing has pledged to embark on the necessary reforms to lower debt levels in the economy. Yet the latest money and credit numbers show that Chinese banks expanded their loan books at a record pace at the start of 2016. In January, Chinese banks extended a whopping RMB2.5 trillion in new loans, or 4% of GDP. On a seasonally adjusted basis, RMB 1.6 trillion new loans were extended. Given that local government bond issuance has come to a halt ahead of a new debt swap programme, local government financing companies might have taken out bridge loans from banks to refinance...

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, 11 2016 by lsr team

The stock market is fixated on China, as the deep convictions of the China bulls are progressively and painfully eviscerated. But their inability until recently to see the flaws in China’s post-crisis recovery is fomenting a new delusion: that China’s slowdown, and stock-market angst, will necessarily pull down the rest of the world’s economies and stock markets. In other words, the obsession with China has taken on a new form rather than faded, as it should have done: China is clearly important, but it is not all-important. Click below to find out how...

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...

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, 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...