‘America First’ trade unravels as market risks mount

2018 ◽  
Keyword(s):  
Interest Rates ◽  
Yield Curve ◽  
Emerging Market ◽  
The United States ◽  
Content Type ◽  
Market Risks ◽  
Bond Yield ◽  
Downward Pressure ◽  
The Us ◽  
Technology Stocks

Subject Outlook for US financial markets. Significance Since October, the benchmark S&P 500 index has fallen by more than 5% as part of a broad-based sell-off of financial assets. Indications that the ‘America First’ inspired trade agenda is unravelling include concerns that rising US interest rates will dampen economic growth and corporate earnings, and a rout in technology stocks, the high-flying sector that powered the US equity rally from mid-May to late-September when US stocks significantly outperformed their European, Japanese and Emerging Market (EM) peers. Impacts Lower oil prices will extert downward pressure on inflation. Efforts by China and the United States to wean themselves off mutual dependence in tech could escalate, curbing the US tech stocks bull run. The first inversion of the bond yield curve since 2007, will fuel speculation that the Fed will slow monetary tightening. EM equities will remain volatile, despite have risen by nearly 9% since October 29, partly reversing their 2018 sell-off.

Disconnect will grow between Fed policy and yields

2018 ◽  
Keyword(s):  
Yield Curve ◽  
Content Type ◽  
Volatility Index ◽  
Bond Yield ◽  
Downward Pressure ◽  
The Us ◽  
Us Government ◽  
European Banks ◽  
Near Term ◽  
Price Distortions

Subject US market dynamics. Significance The flattening of the US government bond yield curve -- the process in which yields on short-dated bonds converge with, or exceed, those on long-dated debt -- is fuelling debate about monetary policy and the outlook for global growth, especially US growth given the determination of the Federal Reserve (Fed) to raise rates steadily. Financial markets fear the Fed is being overly hawkish, but price distortions and technical factors appear to be driving the flattening more than economic weakness. Impacts The VIX volatility index, Wall Street’s 'fear' gauge, is signalling near-term stability. The Bank of Japan’s July policy tweaking led to the sharpest 10-year bond yield rise in two years, highlighting fears of stimulus ending. The Fed is raising rates, but China is loosening policy to boost GDP amid rising trade costs, putting downward pressure on the renminbi. Turkish borrowers owe European banks nearly 170 billion dollars, half to Spain and over 35 billion dollars to France, worrying the ECB.

Tighter money conditions could cause multiple shocks

2018 ◽  
Keyword(s):  
Stock Market ◽  
Price Index ◽  
Yield Curve ◽  
Content Type ◽  
Financial Conditions ◽  
Downward Pressure ◽  
The Us ◽  
Technology Stocks ◽  
Multiple Shocks ◽  
International Investors

Significance Financial conditions have tightened markedly, sharply increasing international investors' sensitivities to market vulnerabilities. Impacts The US stock market is on its longest bull run according to estimates, but overvalued technology stocks could be at risk of correction. The Bloomberg industrial metal price index has fallen by 15%+ since early June; worries about slower China growth will keep prices lower. The US yield curve flattened the most in eleven years this week; Japanese and ECB stimulus is putting downward pressure on longer yields.

Commodities rout will fuel EM concerns and volatility

2015 ◽  
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Emerging Market ◽  
Commodity Prices ◽  
Content Type ◽  
Bear Market ◽  
Political Crises ◽  
Downward Pressure ◽  
Advanced Economies ◽  
Country Specific

Significance This drop has taken oil into its second bear market in the space of just over a year amid a broader rout in the prices of commodities, notably copper and gold. The commodity sell-off is fuelled by mounting concerns over the economy and financial markets of China, the world's top crude importer and its largest energy user. The sell-off is exacerbated by fears over the fallout from a US interest rates rise, which could come as early as September. Country-specific risks are weighing on emerging market (EM) assets, notably the currencies of large commodity exporters such as Brazil and Russia. Impacts The sharp fall in commodity prices will exert further downward pressure on inflation in both emerging and advanced economies. Re-emerging disinflationary trends will bode ill for the ECB efforts to boost inflation in the euro-area. The commodity sell-off will exacerbate economic and political crises in Brazil and Russia. The EM currencies fall is forcing many central banks to signal an end to monetary easing or to tighten policy.

US rates may rise but economic risks are rising faster

2017 ◽  
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Sovereign Debt ◽  
Emerging Market ◽  
Content Type ◽  
Political Risks ◽  
Bond Yield ◽  
Treasury Bond ◽  
The Face ◽  
Equity Index

Subject Global equity market trends. Significance The four main US stock market indices began March at record highs, including the benchmark S&P 500 index at 2,400. Driven by expectations of stimulative and pro-business policies under the new US administration, equity markets are flying in the face of signals from the Federal Reserve (Fed) that interest rates will rise three times this year. The probability of a hike at the Fed’s March 14-15 meeting has risen above 80% on growing price pressures and stronger economic data, buoyed by hawkish comments from several Fed governors, including those who were previously dovish. Impacts Despite the post-election US bond market sell-off, around one-third of the stock of euro-area sovereign debt remains negative yielding. The gap between the two-year US Treasury bond yield and its German equivalent has widened to a record, a sign of rising monetary divergence. The euro lost 2% against the dollar in February as political risks escalated in the euro-area, centred around the French election. The emerging market MSCI equity index is 8.6% up this year, after losing 4.5% from November 9 to end-2016, a sign of higher confidence.

Amid many unknowns, EM assets will remain strained

2017 ◽  
Keyword(s):  
Emerging Market ◽  
Treasury Bonds ◽  
Government Bonds ◽  
Content Type ◽  
Bond Yield ◽  
The Us ◽  
Equity Funds ◽  
Treasury Bond ◽  
Mexican Peso ◽  
Bureau Of Labor Statistics

Subject Emerging markets under strain from dollar rally. Significance The US Bureau of Labor Statistics reported on January 6 that average hourly earnings grew at the fastest pace since 2009 in December -- a further fillip to the ‘trumpflation trade’ that has gripped financial markets since the victory of Donald Trump in the US presidential election. Expectations of further Fed rate increases have driven the dollar index and the ten-year Treasury bond yield higher, straining emerging market (EM) assets. EM mutual equity funds have suffered a wave of uninterrupted outflows since Trump’s victory. The Mexican peso and the Turkish lira have plumbed record lows against the dollar. Impacts Many EMs are preparing to sell dollar-denominated debt in anticipation of higher borrowing costs, including Argentina, Brazil and Nigeria. Speculative bets against US Treasury bonds have risen to a record high amid expectations of higher US inflation and further rate hikes. The stock of negative-yielding government bonds stands at 10.8 trillion dollars, fuelling demand for higher-yielding securities. In April, the US Treasury’s next Foreign Exchange Report could label China a currency manipulator though the criteria would need to change.

Flatter US yield curve reflects rising price pessimism

2017 ◽  
Keyword(s):  
Yield Curve ◽  
Emerging Market ◽  
Commodity Markets ◽  
Treasury Bonds ◽  
Content Type ◽  
Bond Yield ◽  
Corporate Earnings ◽  
Low Levels ◽  
The Impact ◽  
Global Growth

Subject Rising US market divergence between strong stock market and flatter yield curve. Significance The S&P 500 has returned more than 20% over the past twelve months, setting a record high in early November, while the Vix Index, which measures the anticipated volatility in the S&P 500, hit a record low on November 3. Solid corporate earnings and stronger global growth are buoying US stocks, but persistently low inflation is keeping yields on long-dated Treasury bonds at low levels, helping to flatten the yield curve. Impacts China’s 10-year local currency bond yield is rising; Beijing is increasing its campaign to curb corporate debt, hitting commodity markets. The dollar index is up 2.8% from early September and will continue to trend upwards, pressuring emerging market currencies and local debt. Investors continue to fear the impact of QE removal, seeing a ‘policy mistake’ as the biggest market ‘tail risk’, according to a survey.

Fed policy move will mean lower rates for even longer

2020 ◽  
Keyword(s):  
Interest Rates ◽  
Economic Activity ◽  
Yield Curve ◽  
Balance Sheet ◽  
Content Type ◽  
Us Economy ◽  
The Us ◽  
The Impact

Significance The Fed reduced interest rates to 0-0.25% and almost doubled the size of its balance sheet to offset some of the impact of the COVID-19 pandemic on the US economy but clear signs of economic activity rebounding are now prompting the Fed to look further out. Impacts The Fed will reassure markets that there will be no rate increases under virtually any circumstances in the next few years. Eventually the Fed will consider reducing the size of its balance sheet; this will require adroit management to avoid worrying investors. There appears to be little support at the Fed for negative rates; adopting yield-curve control remains possible if the recovery disappoints.

Turkey’s new economic team acts to restore credibility

2020 ◽  
Keyword(s):  
Monetary Policy ◽  
Stock Market ◽  
Interest Rates ◽  
Late Stage ◽  
Emerging Market ◽  
Content Type ◽  
Finance Minister ◽  
The Us ◽  
Multiple Interest ◽  
The Eu

Significance In one of the most significant changes in direction in a major emerging market (EM) in recent years, newly appointed TCMB Governor Naci Agbal has tightened monetary policy dramatically while abandoning a convoluted system of multiple interest rates. With another technocrat, Lufti Elvan, appointed finance minister, monetary policy could be returning to normality. Impacts A Biden administration is expected to prove unaccommodating towards Turkey, especially given its purchase of a Russian air defence system. This may be leading Erdogan to extend feelers to the EU, recently promising reforms and insisting Turkey is an “inseparable” part of Europe. Anti-coronavirus vaccines’ late-stage trial results are encouraging market optimism, with the US stock market hitting a record this month.

The Effect of Quantitative Easing on Investment in the US and UK: An SVAR Approach

2018 ◽  
Author(s):  
Thomas Russell
Keyword(s):  
Interest Rates ◽  
Quantitative Easing ◽  
Structural Vector Autoregression ◽  
Bond Yields ◽  
Bond Yield ◽  
Downward Pressure ◽  
The Us ◽  
Historical Relationship ◽  
The Uk ◽  
The Impact

Following the collapse of Lehman Brothers in 2008, the Federal Reserve and the Bank of England implemented asset purchase programs to provide further liquidity to faltering markets, and to continue to place downward pressure on market interest rates. Later called Quantitative Easing, the higher asset prices and lower market yields induced by the purchases were expected to translate into lower market borrowing costs and increased investment. This project focused on estimating the effect of Quantitative Easing on real investment in the US and UK up to 2010. First, the historical relationship between bond yields and investment was estimated using a time series econometric model called a structural vector autoregression. Next, using the historical relationship between bond yields and investment, the impact of the asset purchases on investment was calculated using the bond yield changes induced by  Quantitative Easing announcements. Deviations in bond yields on Quantitative Easing announcement dates suggested an impact on investment of 5.93% in the US, and an impact of 3.37% in the UK. Moreover, both the US and UK econometric results are statistically significant. Taking into account the econometric assumptions required to estimate the impact of Quantitative Easing on investment, the results in this project should be viewed with caution. However, the results will be useful in framing future thought on Quantitative Easing as a tool to provide macroeconomic stability 

The G7 is edging closer to a new round of SDRs

2021 ◽  
Keyword(s):  
Yield Curve ◽  
Developing Economies ◽  
Emerging Market ◽  
Developing Nations ◽  
International Reserves ◽  
Content Type ◽  
Us Congress ◽  
Special Drawing ◽  
The Us ◽  
Special Drawing Rights

Significance The COVID-19 crisis has exposed the disparity in fiscal and monetary firepower between developed and developing economies. Within the G7, support is growing for a new allocation of IMF special drawing rights (SDRs) -- international reserves that can be swapped for hard currency -- now that the US leadership is better disposed to multilateral action. Impacts The US Congress must approve an SDR round over USD685bn; a smaller issue is likely as many Republicans oppose financing Iran and China. The G20’s moratorium on developing nations debt servicing payments is set to be extended beyond June, but vast payment gaps still remain. The rising US yield curve and dollar rally will pressure emerging market borrowers by raising their dollar-denominated debt repayments.

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