May, 04 2017 by lsr team

China remains the key country as far as future gas demand growth is concerned. However, countries such as India and Pakistan as well as South East Asia are emerging as other major sources of demand. With global gas markets changing and becoming increasingly liberalized, LNG is set to dominate supplies into the Asian market.

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.

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.

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…  

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, 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, 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, 14 2016 by lsr team

Twelve months ago, economists were busy trying to assess the impact of the collapse in oil prices on the global economy. Opinion was divided. Some thought the 60% drop in prices would provide a sizeable boost to consumer demand. Other economists were sceptical, worrying that the plunge told us something disturbing about the state of the global economy. A final group of commentators was even gloomier, arguing the inevitable correction in shale fracking would cause a US recession and tip the world into a crisis. At LSR we were on the optimistic side of the debate, though w...

January, 13 2016 by lsr team

Last year we outlined a view of the oil price suggesting that the floor of around $40 per barrel that held during much of 2015 would continue to provide support during the first half of 2016. We saw the risk to prices remaining strongly to the downside and firmly ruled out any near-term rally. With the New Year ushering in fresh growth concerns, these risks are starting to be realised. Nevertheless, even at current levels the main threat is that prices move lower still. So where do oil prices go from here? We think the oil price could fall as low as $20, but unlike the f...

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...

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, 04 2015 by lsr team

The drop in oil price since mid-2014 has been especially abrupt due to a huge positive supply shock that has magnified the impact of a decline in demand for commodities. US oil production has increased by almost five million barrels per day (mbd) over the last five years. Moreover, the re-admission of Iran to the global oil market will further increase near-term supply by around one million mbd. But with persistent oversupply, along with some uncertainty about remaining storage capacity, could oil prices remain at the $40p/b floor we outlined at the start of 2015? Click...

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, 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...

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, 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, 06 2015 by lsr team

Last Friday’s monthly GDP data reveal that the Canadian economy has not recovered from the oil price shock as quickly as the Bank of Canada had hoped. Output contracted for the fifth month in a row since January and it is highly likely that the economy fell into a technical recession in 2015 H1 for the first time since 2000Q4, when the US subprime crisis shook the world. Despite the disappointing H1 data, we believe that growth will rebound in H2 as the impact of the US recovery kicks in. However, while we remain constructive in the near-term outlook of Canada&rsqu...

July, 15 2015 by lsr team

The recent fall in oil prices has been attributed to a combination of faltering Chinese growth and the prospect of a suspension of Iranian sanctions following the recent Iran nuclear deal. Our analysis, however suggests otherwise. As our own Chinese real GDP series shows, Chinese growth has already been very weak for around a year; furthermore oil market analysts have pointed out that, even in the event of a full suspension of sanctions, Iran will not be in a position to have a material impact on global supply for many years. So what are the driving forces behind the retrea...

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.