June, 16 2017 by lsr team

Steve Blitz, Chief US Economist talks about how:
-  Inflation eludes Yellen yet again, nevertheless she continues to chase it
-  But core inflation down means Fed funds rate now normal – inflation is for 2018
-  2017 outlook has changed: balance sheet reduction in Sept, no rate hike until Dec

June, 09 2017 by lsr team

Christopher Granville comments on UK election results:
- Minority Conservative government potentially bullish for economy
- Short-term Brexit process risks stem from political weakness
- Growth – now right on potential – to slow to 1%, recession risk is low

May, 19 2017 by lsr team

Charles Dumas, Chief Economist at TS Lombard.
Highlights:
- 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...

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

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...

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

February, 03 2017 by lsr team

Dario Perkins answers your questions on Trump policy:

- How far are markets underestimating President Trump's protectionsit tendencies?
- Is America really getting a bad trade deal?
- What are the Trump trade scenarios?
- How relevant is the 1930s experience?
- How would a possible trade war be different now?
- How might China respond?
- If major RMB devaluation what impact on the US & the global economy?

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...

December, 21 2016 by lsr team

Highlights
- EMs to benefit from US and Chinese reflation in 2017
- But global macro ‘push’ factors set to recede thereafter
- Mature US recovery at risk from tighter monetary conditions
- Beijing’s debt-RMB dilemma pressing as the mini-cycle turns
- Global search for yield to persist, albeit tempered
- Lift-off growth phase elusive for North Asia’s exporters
- Clogged rate and FX channels leave fiscal stimulus option

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?

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...

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.

July, 22 2016 by lsr team

Our preliminary estimates show that Chinese GDP growth stabilised at 6% in Q2. Domestic demand growth slowed to 5% in Q2, but offset by net trade. With the improvement in activity momentum largely a result of policy stimulus, it is highly questionable whether the government’s growth target can be achieved without fresh stimulus to boost investment. More worryingly, despite the recent stabilisation in industrial profits, private fixed asset investment growth has remained weak. With the outlook of domestic demand souring, companies are under pressure to deleverage an...

July, 07 2016 by lsr team

Last quarter we warned that, although growth was likely to remain positive during our 2-year forecast horizon, the end of the cycle was now in sight. Since then the Brexit vote has dragged forward the debilitating effect of final demand uncertainty on investment that we would normally associate with the very late cycle. As a result we expect a technical recession during H2 2016. To find out more about Brexit’s impact on the UK economy, click above the watch the video or below for our latest UK Outlook report.  

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.

June, 02 2016 by lsr team

China’s rebalancing started only in 2015, with recent numbers showing significant progress in rebalancing from excessive saving and capex towards more consumer spending. Capex in 2015 fell by 1.8% of GDP, while gross savings dropped by 1%. This is the first concrete evidence of genuine rebalancing, but still remains small in relation to what is needed. Our Chief Economist, Charles Dumas explains how further rebalancing can be achieved through explicit yuan devaluation against the dollar and other major currencies. Click above to watch the full video. &...

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!  

May, 19 2016 by lsr team

Everyone likes a close race, and the media are trying really hard to portray the upcoming referendum on the UK’s membership of the EU as one that could go either way. In most surveys, the percentage of Undecided votes is very high – typically between 15% and 20%. With both Remain and Leave well below 50%, it is clear that it’ll be the people who haven’t made up their minds yet who will determine the outcome. To find out how investors can position themselves ahead of the vote, click below.

May, 16 2016 by lsr team

Depending on who you believe, Brexit would either cause a crisis on a par to what happened in 2008, or herald the start of a British economic renaissance, an era of free trade and rapid deregulation. The truth, of course, is that nobody really knows what will happen because the outcome depends on what policies and institutional arrangements are put in place following the referendum. The only thing we know for sure is that this situation is causing considerable uncertainty and a Brexit vote would compound any short-term damage that is doing to the UK economy. While Brexit...

April, 21 2016 by lsr team

Charles Dumas, director of Lombard Street Research, discusses the EU referendum’s impact on the UK unemployment numbers, and Bank of Japan Governor Haruhiko Kuroda’s latest comments on monetary easing. He says the Bank of Japan has no control over the currency market and that people have an exaggerated understanding of the power of central banks. Click here to download and listen to the Bloomberg podcast or below to read his la...

April, 20 2016 by lsr team

The EM asset rally has been underpinned by a dovish Fed, receding fears of US recession and tentative evidence of macro stabilisation in China following a shift to pro-growth policies in Beijing. What has received less attention is the role played by recent yen appreciation, from both fundamental and risk angles. The onset of Abenomics weakened JPY/USD by some 40% in the space of three years. The yen bottomed in June, received a boost in the wake of August’s CNY step devaluation and embarked on a relatively steep appreciation path in December 2015 as global risk av...

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.  

April, 13 2016 by lsr team

Back in January, economists were gloomily warning about currency wars. The Bank of Japan had just announced negative interest rates and seemed to be threatening even lower – possibly much lower – rates to come. The ECB was set to respond at its meeting in March. And, of course, everyone was concerned about the prospect of a major Chinese devaluation. A few months after much of this talk has disappeared. There seems to be a ceasefire in the global currency ‘war’ and many economists attribute this to February’s G20 meeting in Shanghai. Even...

March, 31 2016 by lsr team

During March we spent time visiting our mainland Chinese clients in a number of cities. Understandably, many of these meetings became discussions on the yuan’s exchange rate. Right now the currency is overvalued. Our central expectation is that the yuan will decline to something like fair value over the coming 12 months through a combination of internal devaluation (PPI inflation of around -5%) and nominal depreciation of around 10%. While a gradual, ‘straight-line’ yuan depreciation would be in everyone’s interests, capital controls and a repeat...

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’...

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, 25 2016 by lsr team

We held a client seminar on the economic impact of Brexit in June 2015 – as always at LSR we like to be well ahead of the curve! As we stated then, the longer-term implications of a vote to leave are likely to be small in either direction. However, since the middle of last year our concerns about the immediate impact of the referendum have been amplified by the declining household savings rate. With consumer demand closer to the end of its own cycle any investment disruption will be keenly felt. To what extent sterling will contin...

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, 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, 25 2016 by lsr team

Markets are jittery and the latest manufacturing data, both from the US and the wider global economy, are doing nothing to restore confidence. Last week’s plunge in the Empire State index confirms a trend that has been apparent for some time – global industry is struggling. Since manufacturing has often been reliable guidance to near-term macro trends, investors are understandably worried. It is no coincidence, for example, that industrial data play a dominant role in the OECD’s leading indicators. So why are manufacturers struggling? More importantly,...

January, 21 2016 by lsr team

Not all the countries have joined in the global currency war. To some of the currencies most exposed to the slowdown in Chinese growth and associated deflation currency pegs are a symbol of normalcy; a signal to investors and speculators alike that the strains wrought by falling prices are only temporary difficulties. No one should be fooled; at best these pegs are illusions of stability and in many cases are making a difficult position worse. In this note we look at the two dollar pegs frequently mentioned in client queries; the Hong Kong dollar (HKD) and the Saudi Arabian...

January, 18 2016 by lsr team

Charles Dumas, director at Lombard Street Research, discusses market reaction to the slowdown of the Chinese economy and what to expect as the yuan devalues. Click below to watch the video on Bloomberg.

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...

January, 13 2016 by lsr team

With the offshore Chinese yuan plunging to a five-year low against the dollar, how worried should we be? Freya Beamish, economist at Lombard Street Research, discusses the Chinese yuan and China’s economy. Click here to watch the video on CNBC.    

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...

January, 06 2016 by lsr team

To Western investors, many sitting down in front of their terminals for the first time since the Christmas break, Monday’s sell-off was a reminder of the risks they will face during 2016. In fact, in 38 of the last 50 years the price action of US stocks in January has set the direction for the full year. So amid the anecdotes and clichés of popular market commentary, Monday’s plunge was reckoned to be especially significant. But how much did January 4 2016 really tell us about the rest of the year? Click below to find out why the wall of worry will be...

January, 04 2016 by lsr team

Happy New Year! Having sifted through various sell-side reports, we conclude that our emerging market view is more on the bearish side. While we have a constructive stance on some EMs, India and Mexico in particular, our general tone is still one of caution. For more details, please request a copy of our year-ahead piece -2016: Don’t panic, yet! In today’s note, we address three key questions: 1) Why are we more bearish than consensus on EMs? 2) What would make us more optimistic? 3) What would make us more negative? Click below to find out more.

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, 25 2015 by lsr team

Last week we published our LSR View explaining why US growth is likely to accelerate into 2016 and that, by inference, recent scares about the potential for a US recession are greatly overplayed. We think US real GDP growth is set to quicken to 2½ -3% from the 2% average of the past five years. This exceeds most current estimates of US growth potential and fully justifies the Federal Reserve’s expected rate increases. Rapidly growing household spending, on housing as well as consumption, plus an end to five years of fiscal drag will be the main engines of gr...

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, 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, 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....

October, 12 2015 by lsr team

Over the past three years, Beijing under the leadership of Xi Jinping has changed the direction of its economic policy decisively. Alone among the world’s major savers, China has embarked on necessary but painful reforms rather than opt for competitive devaluation. Despite much weaker growth, overall policy has been tight. By Chinese standards, progress on financial liberalisation has been swift. However, the ultimate success of China’s policy drive will depend on three big IFs. To find out more about whether China will be able to rebalance and help the globa...

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, 06 2015 by lsr team

The emerging market (EM) slowdown that started in 2011 and gathered pace after the taper tantrums of 2013 continues unabated. The two questions investors often asked over the last couple of years have been: are EMs heading for a 1990s-style crash and is the worst behind us? We have replied No to both, and the follow-up question has usually been ‘how much more pain is in store?’ This has been tough to answer. Our latest publication - LSR View looks at the extent of the adjustments that EMs still need to make by answering the following set of questions: 1) W...

September, 16 2015 by lsr team

When oil prices crashed last winter, the world’s major central banks were planning to ‘look through’ this development. They argued the impact would be temporary, with inflation quick to rebound. This view has been broadly correct- inflation in developed economies is close to a trough and should rise by early 2016 thanks to favourable base effects. That said, the global economy is clearly more deflationary than policymakers anticipated at the start of the year. Meanwhile, China’s slump has caused a broader EM downturn, which is weighing heavily on...

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...

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...

September, 02 2015 by lsr team

We have warned of painful adjustments and weaker currencies in EMs, most recently in our 2015 outlook. Our own LSR EM FX index is down 11% against the dollar since the start of the year, and even China has dipped a toe in the tempting waters of currency depreciation. In real terms, many EM currencies are still overvalued. Our analysis suggests that a further 9% real depreciation of the LSR EM FX index would be required just to make EMs as competitive as in late 1990s. The important question here to ask is whether US policy can support the large scale EM devaluati...

September, 01 2015 by lsr team

The yuan’s relatively small depreciation cannot explain its huge impact on investors’ attitudes. Rather, it served as a reminder of the persistent, powerful global deflationary trend. In the UK context, sterling strength has amplified global deflationary pressure on UK economy. Our analysis suggests that currency strength alone will have been sufficient to push annual CPI inflation around 0.5% lower today than it otherwise would have been. Along with large falls in energy prices, global deflation has done more than enough to contain any pick-up in inflation t...

August, 26 2015 by lsr team

The market has focused its attention on the People’s Bank of China’s (PBoC) interest rate and RRR cut. But more importantly, we also saw another move by the PBoC that reinforces its commitment to allowing the market to play a bigger role. The central bank scrapped the ceiling on rates for deposits of more than one year. This follows the change in the exchange rate regime announced on August 11th, in conjunction with a 1.9% depreciation of the renminbi, aimed at nurturing a more market-driven currency. What does this mean for China and its currency? Click belo...

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

Emerging markets are grappling with deficient global demand, souring domestic fundamentals, a strong dollar and potentially higher US real rates. A lower yuan creates a ‘perfect’ storm for most EMs, at least in the short term.  Our analysis has consistently highlighted Malaysia as one of the more vulnerable Asian economies and the sharp depreciation of the ringgit validates our concerns. The collapse in the global oil price, a sharp increase in leverage and poor FX reserves ammunition are some of the reasons. Besides, idiosyncratic risks have esc...

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%...

August, 17 2015 by lsr team

Japan’s Q2 real GDP declined at a 1.6% annual rate, led by consumer spending and exports. While Q1 was buoyant, underlying growth since the start of Abenomics –QE in late 2012 has been no better than on trend. The Q2 contraction would have been a lot worse if the government had not resumed boosting public investment, and government spending in general, to complement continued massive QE. The basic problem in Japan remains that only exports seem capable of generating growth in the economy. Japan has two alternatives: implement structural measures to slash corp...

August, 13 2015 by lsr team

China joins currency wars, just as the Fed prepares to raise rates. The move in the yuan over the last couple of days is the sharpest since the steep devaluation of 1994, which is often cited as one of the first actions that ultimately led to a widespread emerging market financial crisis. The start of the Fed’s rate rise cycle during the same year was the straw that broke the camel’s back. What does it bode for emerging markets this time around? Please click below for the full report.  

August, 11 2015 by lsr team

The People’s Bank of China fixed the yuan rate at the top of yesterday’s trading range, pushing the currency down by 1.9% against the dollar. In their statement today, the authorities said the change would help drive the currency towards more market-driven movements. As we have previously argued, growth has weakened sharply under the burden of the overvalued yuan and capacity excesses while monetary conditions remain tight. Although the economy desperately needs a weaker currency, joining the other saver economies -Japan and the euro area- in the global currency...

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...

July, 30 2015 by lsr team

Recent comments by various MPC members and last week’s MPC minutes make next week’s Quarterly Inflation Report an interesting event to watch. Since the recovery began in mid-2013, policy discussions have centred on the debate between the economy’s cyclical strength and structural weakness in the labour market. Labour market conditions, however, have improved over the past year with a sharp rise in employment and wage inflation picking up. The UK’s domestic recovery is becoming increasingly solid, but is still vulnerable to external weakness, mostl...

July, 27 2015 by lsr team

The minutes from July’s RBA meeting confirmed a cautiously dovish monetary stance. Given the subdued inflationary pressures- reflecting sluggish growth and a weak labour market, the downward pressure on policy rate should persist, at least in the near term. At the same time, Governor Stevens is under pressure to protect the economy from a lack of fiscal drive. The end of Australia’s commodity supercycle has far-reaching fiscal implications: government finances are stuck in chronic deficit and foreign debt build up is accelerating. Click below to find out...

July, 24 2015 by lsr team

In his latest round-the-world trip over the past couple of weeks, our Chairman, Charles Dumas visited Beijing, Shanghai, Los Angeles, Portland, Seattle and San Francisco. A frequently recurring question was how the current US recovery might be blighted by huge Chinese adjustments, just when it appears to be getting properly established. He remains bullish on US stocks for the next year or so but is warning that we expect Chinese problems and USD strength to hamper stocks in the medium-term.    Click below to find out more about Charles’ latest views on th...

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...

June, 17 2015 by lsr team

The June FOMC was once a potential candidate for a Fed-funds rate ‘lift-off’. Today it actually brought a dovish surprise.  And no, today’s dovish surprise isn’t about reducing the chances of a lift-off in September (as we at LSR expect). That may happen and the dots don’t rule that out. What today’s statement and forecast revisions showed is that lift-off matters less than the path of rates that follows. FOMC members have long been at pains to emphasise this crucial message.  Today was the day that message finally got t...

June, 08 2015 by lsr team

Turkey’s AK party has failed to secure a parliamentary majority, showing its worst results in 13 years in Sunday’s election.  Our economist explains the turbulence ahead and why this is a wake-up call for Turkey’s authorities. Click ‘Request Publication’ if you’re interested in our detailed report.