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.
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
Christopher Granville explains why there needs to be a Brexit Plan B.
- UK Brexit negotiation process creates economic risk
- The UK government may or may not be able to deliver ‘Plan A’
- Businesses need a credible Plan B before the end of 2017
- Failure to set out the alternative will see investment collapse
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...
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
Xi Jinping promised in November 2015, that the economy would grow at 6.5% through to 2020. This was necessary, he said, to fulfill a promise by his predecessor, Hu Jintao, to double the 2010 GDP and per capita income by the end of the decade. However, over the past year, there have been several signs that Xi might be willing to back away from this pledge. After recent conversations in Beijing, we believe:
• Policymakers will accept growth below 6.5% from next year.
• The change responds to a wide-scale recognition that the current rapid pace of...
Dario Perkins on:
• Markets are now more realistic on President Trump
• US tax agenda more important than fiscal
• Stimulus will come late in the business cycle
• No likely improvement in productivity and medium-term growth
• Border adjustment tax unlikely to happen
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...
- 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
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?
Successful renegotiation of NAFTA is likely but will not provide the template for the US administration’s future China policies. - US-Mexican trade is dominated by global value chains. US-sourced content in Mexican exports to the US is 40% so it is impossible for Trump to realize his threats to impose border taxes on Mexico without causing major damage to US manufacturing jobs. - This makes a successful renegotiation of NAFTA both possible and probable. - But the same cannot be said about US-China trade, which lacks such well-developed channels for trade. As...
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...
- Germany & EA both growing above-potential, inflation rising
- Less inordinate ECB stimulus to be announced this summer
- Rising euro vs. dollar later in 2017 to put pressure on Italy
- Germany to accept fiscal union, or Italexit a risk in 2018-19
- Ultra-cheap euro, huge trade surplus: a cause of Brexit-Trump
- World impatient with prolonged resolution of new euro-crisis
- German domestic imbalances could shrink over 10-15 years
- Baby boomers retire – saving down. Immigration raises capex
Trump's policies are clearly inspired by Ronald Reagan in the 1980s. Reagan introduced substantial tax cuts and trickle-down economics, but Reaganomics conflicts with Trump's desire to close the US trade deficit.
Euro area GDP was a tad disappointing in Q2 but, overall, European data remain solid. We expect above-trend growth (1½%) over the next 12 months, although at a marginally slower pace. Spain has been outperforming the rest of the region while Italy remains the laggard, a trend that is likely to continue. To find out more, click above to watch the video or below for the full report.
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.
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 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.
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.
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...
Are emerging markets at the start of multi-year bull market, or will the old problems come back to sink EM assets? Nowhere are these questions more relevant than in Brazil. Click above to watch the full video.
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. Our senior economist, Richard Batley discusses Brexit and its impact...
Shweta Singh, senior economist at Lombard Street Research, discusses the new budget that caters to the rural sector of the economy. Click below to watch the full video on CNBC.
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...
The UK cycle is rapidly maturing. We have stressed before that uncertainty over Brexit is likely to add a burden to the end of the cycle, dampening investment intentions just when consumption bottlenecks would otherwise have driven up capex. As with the Scottish referendum, polls have narrowed. The latest poll of polls put those who want to remain in the EU on 51%, with those who wish to leave on 49%. Many of those who expect an exit presumably think it would be a good thing. But in the short term, uncertainty over how Brexit would affect trade and capital flows will tak...
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.
Brazil is battling a host of structural, cyclical, external and political risks. It faces headwinds from a turn in the metals supercycle, tighter liquidity conditions, diminished competitiveness and a payback from poor policy choices. It is one of the most vulnerable economies on almost all the metrics that we use to assess growth prospects in emerging markets (EMs). Brazil has been one of our least preferred EMs for long time now and we see no reason to change our stance. In fact, the pain is set to intensify. Click below to find out more.
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...
In a recent note, we highlighted increasing EM political risk. Emerging markets constitute the ‘deflationary’ leg of our ‘deflationary boom’ forecast for the global economy. But heightened political risk is not just an emerging markets issue. Greece, for example, just held its third election in nine months. In Spain the rise of two new reformist parties, Podemos and Ciudadanos, effectively ensures that a coalition government will emerge from November’s election. Australia has had four prime ministers in 27 months whereas the previous four premi...
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...
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...
Greece came perilously close to crashing out of the euro last weekend and though a deal was agreed to reopen bailout talks, the country’s euro membership hangs in the balance. We continue to assume there will be a third bailout, but this remains a risky assumption and in any case the threat of Grexit will be a recurring theme. With this in mind, we consider what might happen in the Grexit scenario by examining the short term impact of Grexit on the Greek and the euro area economy. Click below to find out if Greece is better off without the euro and whether euro are...
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...
Greece’s Prime Minister Alexis Tsipras has called a referendum on 5 July, urging voters to make a decision on whether to accept the terms of a bailout offered by its creditors. Unless there is a dramatic twist, Greece will fall in arrears on its end-June payment to the IMF. While this has no immediate implications for the rest of Greece’s sovereign debt, it risks sending the economy into a tailspin and a slippery path to Grexit. We think that the referendum is both problematic and risky as neither outcome will recover the government’s shattered credibility...
Following the surprise result of the UK general election, sterling markets are still faced with the prospect of political uncertainty. An in/out EU referendum has to be held before the end of 2017, and most likely will be in late-2016. The prospect of another fiscal rule intended to lock-in budget surpluses could have the effect of introducing a politically-motivated volatility. In the meantime, the UK economy is shaping up to enjoy a period of stable, non-debt dependent growth led by the consumer sector. LSR’s Richard Batley introduced the sem...
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.