July, 06 2017 by lsr team

Grace Fan, Director Brazil/Latin America Research talks about the two main challenges facing Brazil. - Fiscal vulnerability is rising as the reform agenda has been derailed - Political chaos as President Temer has now become embroiled in Lava Jato corruption scandal. 

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...

March, 17 2017 by lsr team

- Chair Yellen dampens market’s policy trajectory - she has to, we don’t
- February retail sales weakened by tax refund delays; underlying demand strong
- CPI details indicate a change - rising prices for discretionary goods

December, 02 2016 by lsr team

Highlights: - 50% of S&P stocks gain from inflation, 20% lose
- Financials are the main winners 
- Consumer discretionary and Healthcare also benefit 
- Real Estate the big loser    

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.

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, 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.

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, 06 2016 by lsr team

Falling oil prices have been a key driver of economic performance, for better or worse, in all global economies.  The trough in prices that we expected during the first quarter has now passed.  Get ready for the next stage of the global oil revolution – the path to $50…  

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...

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, 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, 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, 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...

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, 30 2015 by lsr team

With economists across the City busy finalising their big what-will-happen in 2016 publications, LSR likes to revisit what we wrote 12 months ago and see how those views panned out. This is useful not only because it highlights our successes but also it provides a way to explain our clients what we got wrong. Of course, this breaks one of the golden rules of sell-side economics – never admit when you’re wrong - but we believe it is a way of providing intellectual consistency. Clients can usually forgive economists for changing their mind, as long as they can exp...

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...

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.

September, 14 2015 by lsr team

In our recent publications, we noted that the selloff in US stocks in the aftermath of China’s devaluation had taken the market deep into oversold territory, and that a rebound in the near term was looking very likely. In the following days equities duly bounced back and, while volatility remains elevated, S&P500 futures are now up 4.5% from the August lows. After the rebound, US equities are no longer blatantly oversold. Although less than a third of the S&P500’s constituents remain above their 200-day moving average (the lowest proportion since 2011...

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, 07 2015 by lsr team

Financial markets are right to be obsessed with China’s prospects. But they may be plain wrong to assume that the current Chinese slowdown is bad for global prospects: either of stock markets or the economy. On the contrary, China’s grotesque economic distortions have been major contributors to the sluggishness of world growth. Their correction should benefit most of us, not just China itself. China’s excessive, wasteful capex now being curbed, have been a major cause of weak recovery. The widespread assumption that reducing these excesses will be bad f...

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, 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...

July, 06 2015 by lsr team

The People’s Bank of China (PBoC) simultaneously cut its benchmark lending rate and reserve requirement ratio a week ago in response to the country’s slowing economy and sharp fluctuations in the stock market. This is no surprise to us as we’ve been expecting the PBoC to keep easing policy through further lending rate cuts, more mortgage credit easing, implicit support for the equity market and sharp RRR reductions to help with the cleansing of banks’ balance sheets. According to our estimates, China’s real GDP fell 0.2% in Q1...

July, 02 2015 by lsr team

All eyes are on the unfolding Greek drama, yet arguably what is going on in China is of equal if not greater importance for markets. China’s stock market has the blessing of the ruling Communist party, but this doesn’t mean equity prices can’t swing violently. Beijing would rather see money pouring into shares than inflating a new property bubble that could burst with potentially more severe social consequences. Yet it does not want a re-run of the market’s collapse in 2008 either – hence the recent crackdown on margin trading that set off t...

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, 12 2015 by lsr team

China’s stock market is piping hot with the A-share market up nearly 60% this year. But China’s economy has lost momentum sharply, with real GDP falling by 0.2% in Q1 according to LSR estimates, the worst since the global financial crisis. Our Chief Economist and Head of Research, Diana Choyleva talks about the two opposing forces and why it’s important for the Chinese authorities to support the equity market. Click here if you're interested to watch the full video on CNBC or...

June, 11 2015 by lsr team

One of our senior economists, Richard Batley has just come back from a client trip to the US.  Five days of visits to investment managers up and down the East Coast should serve to dispel any doubts that Chinese equity volatility is front and center of almost all investors’ minds.  At nearly every meeting we were asked: Should we buy or sell Chinese equities? It’s an important question and deserves a detailed answer.  Critical to this investment decision is understanding why China’s slumping growth and booming equity market, that appear...