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@RothkoResearch.
SP500: AVERAGE STRATEGISTS’ FORECAST FOR 2021 REACHES NEW SP500: average strategists’ forecast for 2021 reaches new high. As we previously saw, the massive liquidity injection from major central banks to prevent the economies from falling into a global deflationary depression has generated a significant rebound in equities prices, especially for the mega-cap growth stocks. JOBLESS CLAIMS AND NON-FARM PAYROLLS Jobless claims and non-farm payrolls. April 10, 2020 RothkoResearch. Two popular indicators that investors frequently watch to measure the temperature of the labor market in the US are the jobless claims and the non-farm payrolls. Historically, the market has been focusing more on the monthly NFP prints, but the recent waves of selloffs due to1Y10Y SWAPTIONS
An IRS is a bilateral agreement to swap a fixed rate of interest for a floating rate of interest. It is a derivative contracts (traded OTC) and it involves two counterparties (at least), the fixed receiver (receives a fix rate) and the fixed payer (floating rate). Unlike currency swaps, principal amounts are not exchange in an IRS‘vanilla
COINTEGRATION IN FOREX PAIRS TRADING Cointegration in Forex Pairs Trading 1 Introduction Forex pairs trading strategy that implements cointegration is a sort of con-vergence trading strategy based on statistical arbitrage using a PURCHASING POWER PARITY (PPP) AND REAL EXCHANGE RATES (RER)PPP AND REAL EXCHANGE RATEIMPLIED PPP EXCHANGE RATEPPP EXCHANGE RATEPPP EXCHANGE RATE CALCULATORPPP EXCHANGE RATE IMFPPP VS EXCHANGE RATE Purchasing Power Parity (PPP) and Real Exchange Rates (RER) Abstract: In this article, we introduce the Purchasing Power Parity, a the-ory that stipulates that in the S&P 500 – ROTHKO RESEARCH LTD. The past month has been quite eventful in the financial market and I am sure that some of the decisions (if not all) surprised many of us. After the SNB announce on January 15th, the ECB took over and unveiled a €60bn monthly QE (not open-ended) through September 2016; so 19 months at €60bn equals €1.14tr. The ECB, which has already been buying private assets such as covered bonds BIS NOMINAL AND REAL E ECTIVE EXCHANGE RATES (EER): NEER BIS Nominal and Real E ective Exchange Rates (EER): NEER and REER Abstract: In this article, we introduce the two e ective (i.e. multilateral) exchange rates that measure the value of a speci c currency in relation to an av- GREAT CHART: US TERM PREMIUM VS. BUSINESS CYCLES The jobless rate went down from 10% in Q3 2009 to 4.1% in March 2018, tracked by the term premium that fall from roughly 2.5% to -50bps in that same period. In other, it seems that the term premium follows the business cycles, trend lower in periods of positive growth and falling unemployment and rises in periods of contractions. ROTHKO RESEARCH LTD. As we previously saw, Tesla’s deliveries grew by nearly 60% between 2015 and 2020 and revenues growth averaged 53% in the last 5 years; if we assume that the growth rates decelerate to 30% for the next 5 years, Tesla annual deliveries will reach 2.8 million cars by 2025 and revenues will grow to 128bn USD (figure 8). ABOUT – ROTHKO RESEARCH LTD.KATE ROTHKOMARK ROTHKO ARTWORKSROTHKO CHAPELROTHKO PRINTROTHKO REDROTHKO EARLY PAINTINGS About. About. Rothko Research Ltd. provides frequent analysis and updates on the current global macro themes. Looking at the financial markets from different perspectives, using either economic, political or financial factors, we are not afraid to go against the general consensus and challenge the conventional wisdom. twitter:@RothkoResearch.
SP500: AVERAGE STRATEGISTS’ FORECAST FOR 2021 REACHES NEW SP500: average strategists’ forecast for 2021 reaches new high. As we previously saw, the massive liquidity injection from major central banks to prevent the economies from falling into a global deflationary depression has generated a significant rebound in equities prices, especially for the mega-cap growth stocks. JOBLESS CLAIMS AND NON-FARM PAYROLLS Jobless claims and non-farm payrolls. April 10, 2020 RothkoResearch. Two popular indicators that investors frequently watch to measure the temperature of the labor market in the US are the jobless claims and the non-farm payrolls. Historically, the market has been focusing more on the monthly NFP prints, but the recent waves of selloffs due to1Y10Y SWAPTIONS
An IRS is a bilateral agreement to swap a fixed rate of interest for a floating rate of interest. It is a derivative contracts (traded OTC) and it involves two counterparties (at least), the fixed receiver (receives a fix rate) and the fixed payer (floating rate). Unlike currency swaps, principal amounts are not exchange in an IRS‘vanilla
COINTEGRATION IN FOREX PAIRS TRADING Cointegration in Forex Pairs Trading 1 Introduction Forex pairs trading strategy that implements cointegration is a sort of con-vergence trading strategy based on statistical arbitrage using a PURCHASING POWER PARITY (PPP) AND REAL EXCHANGE RATES (RER)PPP AND REAL EXCHANGE RATEIMPLIED PPP EXCHANGE RATEPPP EXCHANGE RATEPPP EXCHANGE RATE CALCULATORPPP EXCHANGE RATE IMFPPP VS EXCHANGE RATE Purchasing Power Parity (PPP) and Real Exchange Rates (RER) Abstract: In this article, we introduce the Purchasing Power Parity, a the-ory that stipulates that in the S&P 500 – ROTHKO RESEARCH LTD. The past month has been quite eventful in the financial market and I am sure that some of the decisions (if not all) surprised many of us. After the SNB announce on January 15th, the ECB took over and unveiled a €60bn monthly QE (not open-ended) through September 2016; so 19 months at €60bn equals €1.14tr. The ECB, which has already been buying private assets such as covered bonds BIS NOMINAL AND REAL E ECTIVE EXCHANGE RATES (EER): NEER BIS Nominal and Real E ective Exchange Rates (EER): NEER and REER Abstract: In this article, we introduce the two e ective (i.e. multilateral) exchange rates that measure the value of a speci c currency in relation to an av- GREAT CHART: US TERM PREMIUM VS. BUSINESS CYCLES The jobless rate went down from 10% in Q3 2009 to 4.1% in March 2018, tracked by the term premium that fall from roughly 2.5% to -50bps in that same period. In other, it seems that the term premium follows the business cycles, trend lower in periods of positive growth and falling unemployment and rises in periods of contractions. ABOUT – ROTHKO RESEARCH LTD. About. About. Rothko Research Ltd. provides frequent analysis and updates on the current global macro themes. Looking at the financial markets from different perspectives, using either economic, political or financial factors, we are not afraid to go against the general consensus and challenge the conventional wisdom. twitter:@RothkoResearch.
WEEKLY CHARTS
Great Chart: Nasdaq 2020 vs. 1998. Even though some analysts have compared the 2020 rebound in equities to the 1930 ‘hope’ phase following the 1929 crash, we think that this year has shown some strong similarities with the 1998 / 1999 period. While tech stocks were experiencing strong inflows in the second half of the 1990s amidthe dotcom
FX TRADING – ROTHKO RESEARCH LTD. EURCHF is the FX ‘value’ trade according to PPP. Unlike bonds or equities, currencies do not carry any fundamental value and have historically been known as the most difficult market to predict. In our FX fair value model page, we look at different ways of CHINESE ‘LIQUIDITY’ KEEPS CONTRACTING (GOOD NEWS FOR US Chinese ‘liquidity’ keeps contracting (Good news for US Bonds) May 12, 2021 RothkoResearch. Since the start of the year, we have seen that the annual change in China Total Social Financing (TSF) 12 Sum has been shrinking rapidly, which could eventually become a SP500: AVERAGE STRATEGISTS’ FORECAST FOR 2021 REACHES NEW SP500: average strategists’ forecast for 2021 reaches new high. As we previously saw, the massive liquidity injection from major central banks to prevent the economies from falling into a global deflationary depression has generated a significant rebound in equities prices, especially for the mega-cap growth stocks. S&P500 – ROTHKO RESEARCH LTD. RothkoResearch Leave a comment. Even though the financial markets recently experienced a variety of interesting events, the most surprising one was the fast recovery in equities since they hit their low on March 23 rd. Figure 1 shows that the SP500 has pulled back to its 50% Fibo retracement of its yearly high-low range, experiencingone of its
GREAT CHART: GOLD PRICE VS. NEGATIVE-YIELDING DEBT After oscillating around USD 8 trillion between the beginning of 2016 and the end of 2018, the amount of negative-yielding debt doubled to nearly USD 17 trillion in the first half of 2019 amid political uncertainty and concerns over global growth, levitating gold prices from $1,280 to $1,525. INTRODUCING THE BUTTERFLY Butterfly is the difference between the average volatility of the call price and put price with the same moneyness level (25-Delta) and the ATM volatility level. For instance a BF 25 could be expressed by the following formula: BF 25 = (σ 25C + σ 25P) /2 – σ ATM. As Risk Reversal measure the slope (skewness), butterfly spreads measure the THE JAPANESE YEN HISTORY In today’s article, we provide a little recap of the history of our all-time favorites: the Japanese Yen. According to the yearly BIS Foreign Exchange Turnover, the Japanese Yen (JPY) is part of the G10 currencies and is the third most ‘traded’ currency with a daily average of 1.1 trillion US Dollars.Its percentage share of average daily turnover stands at 21.6%, and its two main A HISTORY OF THE BRITISH POUND In today’s article, we provide a recap of the history of the British Pound. According to the yearly BIS Foreign Exchange Turnover published in April 2016, the British pound is part of the G10 currencies and is the fourth most ‘traded’ currency with a daily average of 649 billion Dollars.Its percentage share of average daily turnover stands at 12.8%, and its two main ‘counterpartiesSkip to content
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Think like an artist, Invest like a scientist… GREAT CHART: G10 POLICY RATE VS. WORLD EQUITIESMarch 12, 2020
RothkoResearch Leavea comment
As more and more regions in developed economies have been put under a dramatic total lockdown amid growing concerns over Covid-19, central banks have started to cut rates aggressively in order to avoid a complete market meltdown. We saw in the previous week that both the Fed and the BoE held emergency meetings and cut rates by 50bps, the most since the Great Financial Crisis, benefiting from their positive benchmark interest rate to act faster than the rest of central banks. Economies already experiencing a NIRP policy (i.e. Sweden, Euro area) will probably implement or expand asset-purchase programmes in order to fight against a significant economic shock and therefore implicitly reduce their ‘shadow rate’, a rate first introduced by Fischer Black (1995) that can measure the effects of QE, to lower levels. However, it is important to note that a significant reduction in benchmark policy rates globally has been associated with sharp equity sell-offs. This chart shows that in the previous two downturns, the GDP-weighted G10 policy rate was cut by approximately 4 percent and coincided with a global equity sell-off of 45% to 55%. Are we set for a similar story in 2020? CHART. G10 POLICY RATE VS. WORLD EQUITIES (SOURCE: EIKON REUTERS) Posted in Global Macro,
Weekly Charts
Tagged
Central Banks ,
Covid-19 , equities
, Fed
, G10
, MSCI
SOME YEN CHARTS…
March 4, 2020March 4, 2020 RothkoResearch Leavea comment
In the past few months, investors have been questioning the Yen’s status of safe haven as the currency has constantly been depreciating in the past year despite the elevated uncertainty. The first surprising chart is the divergence between USDJPY and Gold prices (in USD terms). Figure 1 (left frame) shows that after co-moving strongly for 7 years, the USDJPY exchange rate decoupled from Gold (in USD terms). While Gold prices have been constantly soaring in the past year, and especially in recent weeks over growing concerns around Covid-19, USDJPY has remained steady oscillating around 109. In addition, we also noticed a significant divergence between USDJPY and US 10Y Treasury yield. Even though currencies have a variety of short-term drivers, the 10Y US-Japan interest rate differential has been one of the popular ones in the past cycle. As long-term interest rates in Japan have been trading around 0 percent in the past few years after the BoJ decided to keep the yield on 10-year Japanese government debt around zero percent, we just look at the US 10Y yield. Interestingly, demand for US Treasuries has been very strong in the past few weeks, leading to a sharp fall in the US 10Y yield to below 1 percent, while the move on the Japanese yen was more moderate (figure 1, right frame). Has the Yen lost his popularity in periods of marketstress?
_Figure 1_
_Source: Eikon Reuters_ First of all, even though the US Treasuries have been considered as the ultimate safe haven in the past 30 years, which explain the success of risk parity strategies during that period, the Japanese Yen remains the preferred currencies in the G10 space in periods of elevated price volatility. For instance, figure 2 shows that the Yen tends to appreciates strongly when VIX starts to surge; in the past 30 years, the JPY has averaged 44bps in monthly returns against the USD when the VIX was trading above 20, nearly four times more than the other traditional safe CHF (Swiss Franc)._Figure 2_
_Source: Eikon Reuters, RR Calc__ulations_ Secondly it is important to know that the Yen is usually sensitive to the dynamics of the stock market and tends to appreciate in periods of equity sell-offs. Figure 3 (left frame) illustrates perfectly this example and shows a great co-movement between our favourite cross AUDJPY (also known as the proxy for carry trade) and the SP500. We can also see the strong relationship between USDJPY and Japanese equities in figure 3 (right frame); a cheaper currency is usually associated with higher equities in Japan (‘Pavlovian’ response)._Figure 3_
_Source: Eikon Reuters_ Hence, we do not think that the Yen has lost its status of safe haven and we saw last week that it has responded pretty well to the global equity sell-off, appreciating by nearly 5 figures against the greenback. In addition, to the exception of the US Dollar, the Yen has been strengthening in the past two years against most of the popular crosses such as EUR, GBP, AUD and CAD. Figure 4 (left frame) shows that the EURJPY and GBPJPY exchange rates have depreciated by 12% and 10%, respectively, since the start of 2018. We can also notice that the AUDJPY exchange rate has been constantly weakening amid elevated uncertainty, pricing in further weakness in global (ex-US) equities (figure 4, right frame). Is the AUDJPY actually right about the ‘fair value’ of equities._Figure 4_
_Source: Eikon Reuters_ Figure 5 shows that the USDJPY exchange rate has been also nicely co-moving with the digital safe: Bitcoin. In the past 3 years, strength in the crypto market has been associated with JPY appreciation. Even though the relationship is pretty new, it will be interesting to see if both assets (JPY and Bitcoin) continue to receive support if price volatility remains high. Don’t lose faith on the Yen, not now!_Figure 5_
_Source: Eikon Reuters_ Posted in Global MacroTagged
Bitcoin , Covid-19
, Safe haven
, Uncertainty
, US 10Y
, USD
, USDJPY
, Yen
GREAT CHART: CEO CONFIDENCE VS. CONSUMER SENTIMENT SURVEYS January 30, 2020January 30, 2020 RothkoResearch Leavea comment
In the past two years, the elevated economic and political uncertainty in addition to the lagged effect of quantitative tightening have significantly weakened growth expectations and as a consequence increased demand for safe assets such as the US Dollar and US Treasuries. While the situation seems to have improved slightly in the past 6 months on the back of aggressive rate cuts from central banks globally, business surveys are still pricing in further deterioration in the US economy. For instance, the ISM manufacturing PMI hit a low of 47.2 in December 2019, diverging significantly from the 50-percent threshold that separates growth from contraction. CEO confidence also dropped to its lowest level in a decade and is currently pricing a much higher probability of recession than other popular indicators. On the other hand, consumer confidence indicators have remained strong in the US as consumption remains solid (real PCE expenditure has been averaging 2.5% in the past few quarters). How long can that divergence persist until US consumer sentiment starts to fade away? This great chart shows that the CEO confidence survey has acted as a good 12-month leading indicator of consumer confidence (University of Michigan) since 1980. We can notice that top executives in the US are currently pricing a significant deterioration in consumer sentiment for the next 12 months to come. However, some divergences occurred in the past, particularly in the late 1990s when CEO confidence started to fall drastically in 1998 and 1999, but consumer confidence was constantly rising during that period mainly due to the tremendous rise in equities that was inflating household wealth. Even though we are concerned about the deterioration of those business surveys, we may continue to see a divergence within the next twelve months between business and consumer confidence surveys as equities keep reaching new all-time highs and interest rates remain ‘too low’ relative to the current pace of nominal GDP growth inthe US.
CHART. US CEO CONFIDENCE (12M LEAD) VS. CONSUMER CONFIDENCE (SOURCE:EIKON REUTERS)
Posted in Global Macro,
Weekly Charts
Tagged
CEO confidence ,
Consumer confidence
, Michigan
Surveys , US growth
, USD
GREAT CHART: GOLD PRICE VS. NEGATIVE-YIELDING DEBT November 13, 2019November 13, 2019 RothkoResearch Leavea comment
Empirical researchers have demonstrated that gold has had many drivers over the past few decades, but has been mainly influenced by interest rates, inflation trends, the US Dollar, stock prices and central banks reserve policies. Baur and McDermott (2010) also shows that the precious metal plays the of a safe ‘zero-beta’ asset in periods of market stress and equity selloffs. For instance, in the last quarter of 2018, US equities (SP500) fell by 14% while the price of gold in US Dollars was up 7.6%. In the short run, participants usually look at the co-movement between gold price and real interest rate (TIPS) to _define _a fair value of the precious metal (gold price rises when real yields fall and vice versa). However, gold has shown a stronger relationship with another variable in recent years: the amount of negative-yielding debt around the world. This chart shows us the striking co-movement between the two times series. After oscillating around USD 8 trillion between the beginning of 2016 and the end of 2018, the amount of negative-yielding debt doubled to nearly USD 17 trillion in the first half of 2019 amid political uncertainty and concerns over global growth, levitating gold prices from $1,280 to $1,525. However, we have noticed that investors’ concern has eased in the past two months, normalising global yields (to the upside), increasing the US 2Y10Y yield curve back to 25bps after turning negative in the end of August, therefore reducing preference for ‘safe’ assets such as bonds. The amount of debt yielding below 0% has dropped significantly since the end of August to USD 11.6 trillion this week, dragging down gold prices to $1,460. We think that market participants have overreacted to the global growth slowdown in the first half of the year and that the rise in leading indicators we have observed in the past three months (i.e. global manufacturing PMI) will continue to push preference for risk-on assets. The amount of negative-yielding debt could easily come back to its 2016-2018 8-trillion-dollar average in the following months, hence emphasising the downward pressure on gold prices. It looks like gold is set to retest the $1,350 – $1,400 support zone in the short run (which used to be its resistance zone before the 2019 rally). CHART. GOLD PRICE (IN USD) VS. AMOUNT OF NEGATIVE-YIELDING DEBT (TR USD) – SOURCE: BLOOMBERG, EIKON REUTERS. Posted in Global Macro,
Weekly Charts
Tagged
Central Banks , Fed
, Gold
, inflation
, monetary policy
, Negative yielding
debt ,
Uncertainty
GREAT CHART: SP500 VS. US TREASURIES (RISK ADJUSTED) June 28, 2019June 28, 2019 RothkoResearch Leavea comment
In this chart, we look at the performance of US equities relative to Treasuries over time. As you know, price volatility differs among different asset classes; hence, in order to compare the relative performance of equities versus _risk-free_ securities, we need to vol adjust. Using monthly times series of total returns of the Bloomberg Barclays US Aggregate Bond Index and the SP500 index, we calculate monthly returns of each asset class and then adjust our US Treasuries exposure using the 1-year realised volatility of equities. We also rebalance our portfolio every single month so that the volatility of each asset _remains_ constant. As you can notice, the SP500 index has lost 65% of its value relative to bonds since January 1974, with a _high_ of 77% reached in the last quarter of 2010. Moreover, in the past two economic downturns, equities have lost 20% of their values between 1999 and 2002 and 12% of their value between 2007 and 2009. We saw last year that US 10Y nominal yield topped at 3.25% and struggled to break higher despite a nominal growth close to 6% in the United States. With yield plummeting to 2% in the past 6 months, the bond market is currently pricing in a sharp deceleration of economic activity and some practitioners are expecting rates to fall to zero percent as fear over a 2020 recession have increased dramatically. This raises the following question: should we expect Treasury bonds to significantly outperform US equities once again in the next economic downturn? CHART. SP500 VS. US TREASURIES – TOTAL RETURN. SOURCE: BLOOMBERG,EIKON REUTERS
Posted in Global Macro,
Weekly Charts
Tagged
QE , SP500
, Treasury Bonds
GREAT CHART: US YIELD CURVES: 5Y30Y VS. 3M10Y March 26, 2019March 26, 2019 RothkoResearch Leavea comment
On Friday (March 22nd), the disappointing German PMIs led to little sell-off in global equities and a rise in risk-off assets such as government bonds and _safe-haven _currencies (i.e. JPY, CHF). For the past month, we have been warning that the elevated uncertainty in addition to the low level of global yields were challenging the healthiness of the equity recovery since the beginning of the year. Moreover, fundamentals have been fairly weak overall (in the US, China and even in the Euro area), with leading economic indicators diverging from equities’ performance. For instance, many indicators have been pricing in a slowdown in the US economic activity, however the SP500 index is up approximately 14 percent year-to-date and trading 100pts short from its all-time highs reached in the end of September last year. With the German 10Y yield falling in the negative territory, the amount of debt trading below 0 percent reached $10tr, up $2tr since the beginning of the year. In addition, the divergence between the 3M10Y and 5Y30Y yield curved have continued; while the 3M10Y turned negative (gaining all the market’s attention), the 5Y30Y has been trending higher in recent months, up 40bps to 66bps in the past 6 months. In this great chart, we can notice an interesting observation: each time the 5Y30Y has started to steepen before the end of the economic cycle, the 3M10Y followed the move 6 months later. We know that the critical moment of the business cycle is when the yield curve is starting to steepen dramatically. Hence, should we worry about the steepening of the 5Y30Y? CHART. 3M10Y VS. 5Y30Y (6M LEAD) – SOURCE: EIKON REUTERS Posted in Global Macro,
Weekly Charts
Tagged
3M10Y , recession
, US
, Yield curves
WHY HAVE RESERVES FALLEN SO DRAMATICALLY SINCE 2014? February 27, 2019February 27, 2019 RothkoResearch Leavea comment
The introduction of QE in order to re-instaure financial stability first and then bring back appetite for risky assets has led to an incredible expansion of the central banks’ balance sheet. For instance, the Fed’s total assets increased from roughly $900bn in the summer of 2008 to $4.5tr in 2015 after several rounds of monetary stimulus (see recap of QE history here).
The purchase of those financial securities (Treasuries and MBS) through commercial banks led to a significant increase in reserves held at the Fed, which soared from a negligible amount prior the crisis to a high of $2.8tr in August 2014. Then in October 2017, the Fed began Quantitative Tightening (QT), which consists in unwinding those massive portfolios and normalizing monetary policy. Since then, the Fed’s total assets balance has declined by roughly $500bn to $4tr, of which $2.2tr of Treasuries and $1.6tr of MBS. However, on the liability side, we noticed a strong reduction of reserves by approximately $1.2tr since their highs (current reserve balances of $1.6tr). Why have reserves fallen so dramatically since 2014? The chart on the left shows the different components of the Fed’s balance sheet liabilities. While the excess reserves are down by $1.2tr, the currency in circulation and the Treasury balances have increased by $423bn and $291bn, respectively. The other smaller liabilities are foreign currency holdings and the reverse repurchase agreements (reverse repos, RRPs), which are roughly flat since 2014. Therefore, the increase in currency outstanding and Treasury balances accounted for $714bn, which confirms that the remainder is associated with the shrinkage of the Fed’s asset holdings (i.e. $500bn). REVERSE REPOS AND MONETARY BASE Even though the dollar amount of reverse repos is roughly at the same level where it was in 2014 (USD 250bn), an interesting observation arises when we look at the times series of the monetary base and reverse repos (figure 1, right frame). The monetary base, which is the sum of the currency in circulation and reserve balances, fell from $4.1tr in August 2014 to $3.4tr in January 2017 although the Fed had not started its QT process (assets were steady at $4.5tr). The fall in reserves was partly offset by an increase in reverse repos, which soared from $230bn to $520bn during the same period. This means that the Fed was already tightening its monetary policy back then by draining the banking system of the reserves it had created. The monetary base was reduced as the Fed was lending out its bonds in exchange for the reserves that the bond purchases created (transactions called reverse repos). Banks reserves are therefore temporarily reduced, replaced by ‘reverse repurchase agreements’. FIGURE 1. FED LIABILITIES, MONETARY BASE AND REVERSE REPOS (SOURCE:FRED)
Posted in Global MacroTagged
excess reserves , Fed Balance Sheet Unwind, QT
PHILLIPS CURVE AND WAGE INFLATION DYNAMICSFebruary 14, 2019
RothkoResearch Leavea comment
ABSTRACT: Debates around the Phillips curve, a long-time relationship between unemployment and wage inflation, have been haunting both academics and practitioners over the past few years. Despite unemployment rate at its lowest level in decades, wage growth has been weak in most of the developed countries. There can be various factors that may be playing a part, ranging from a collapse in the rate of union membership for private-sector employees to a higher concentration of large firms (employers have become monopsonists, impacting level of wages). Therefore, in this article, we review the development of the Phillips Curves in the major development economies and look at the short-run and long-run determinants of wage inflation according to recent empirical research.PDF LINK ===>
Debates around the Phillips curveDownload
Posted in Empirical ResearchTagged
monetary policy ,
Phillips Curve , WageInflation Dynamics
GREAT CHART: USD REER VS. VEU/SPY January 24, 2019January 24, 2019 RothkoResearch Leavea comment
An interesting observation arises when we plot the annual change in the US Dollar with the relative performance of US vs. World (ex-US) equities. As you can notice it in the chart, the World (ex-US) equity market tends to outperform the US market when the US Dollar is weakening. For instance, the US Dollar (USD REER) performance in 2018 led to an outperformance of US equites (SPY) over World (VEU) up to 20% before the last quarter. In addition, this chart shows that the annual change in the USD tends to mean revert over time, fluctuating between -10 and +10 percent. Hence, investors could not only benefit from playing the range on the greenback, but also speculate on equity relative performance between US and non-US stocks. As we expect the US Dollar to weaken through the course of the year, this could lead to a significant performance of the world (ex-US) equities. A weaker USD also eases the pressure in the EM corporate bond market, which is heavily USD-denominated, and therefore loosens financial conditions. CHART. USD REER VS. US / WORLD (EX-US) EQUITIES – YOY CHANGE Posted in FX Trading,
Weekly Charts
Tagged
EM , S&P500
, SPY
, USD
, VEU
IS IT TIME TO GO LONG UK FINANCIAL ASSETS? January 17, 2019January 17, 2019 RothkoResearch Leavea comment
Last year, there were worries that the continued depreciation of the British pound was going to increase inflationary pressure in the UK economy and therefore _force_ policymakers to start a hawkish tightening cycle. With uncertainty still significantly elevated, demand for Gilts would keep UK LT years at low levels and many analysts predicted a potential ‘yield curve inversion’ as one of the main outcomes for this year. However, over the past few months, the fall in oil prices in addition to the 12M lagged currency ‘effect’ have been pressuring inflation expectations to the downside. Our model, which incorporates the annual change in currency and oil prices as two key inputs, has been predicting a correction in future inflation prints in the UK (figure 1, left frame). Therefore, with the short-term implied yield curves Dec19 Mar19 and Dec20 Dec19 trading at 19.5bps and 15bps, respectively, the market expects slightly less than two hikes by the end of 2020 (figure 1, right frame). This leaves policymakers more flexibility concerning their interest rate normalization policy after warning that Brexit uncertainty ‘intensified considerably’ in theend of last year.
_Figure 1_
_Source: Eikon Reuters, RR_ MIXED SIGNS FROM LEADING INDICATORS AND SURVEYS As for many developed countries, industrial production has contracted significantly in the few couple of months of 2018, down 1.5% YoY in November. However, we can notice that our leading indicator recently ticked up and therefore is pricing a stabilization in the UK business activity (figure 2, left frame). It is still too early to switch our forecast to positive and therefore the next few data points will be important to watch in order to take a fundamental view on UK financial assets. On the other hand, the CFO survey from Deloitte is standing at 2016 _critical_ levels, as CFOs expect uncertainty to impact business spending and lower hiring in the medium term._Figure 2_
_Source: Eikon Reuters, _ UNCERTAINTY AND FIRMS’ INVESTMENTS Empirical studies from the Bank of England found significant negative relationship between uncertainty and firm’s investments. For instance, Melolinna et al. (2018) found that the uncertainty, along with the cost of capital and macroeconomic fundamentals, has been an important driver of investment. The authors measure the uncertainty at a firm-specific level, which is the daily volatility in individual stock prices that cannot be explained by general market variation (CAPM model). Figure 3 (left frame) shows negative co-movement between uncertainty (HFM) and the UK business investment. In another study, Smietanka et al. (2018) look at the macroeconomic uncertainty, which looks at the _dispersion_ in surveys of professional forecasters. Figure 3 (right frame) also demonstrates a negative relationship between uncertainty (U) and the level of investment (dash line is a fitted line based on post-2008 sample)._Figure 3_
_Source: Melolinna et al. (2018), Smietanka et al. (2018)_ INTERESTING RISK PREMIA FOR THE LONG-RUN Hence, the elevated uncertainty, combined with low consumption growth (consumption growth decreased from 0.9% annual prior the financial crisis to 0.3% post-Brexit) and a sluggish growth in the housing market are all going to weigh on the 3 to 6-month outlook, which may be reflected in asset prices. However, fundamentals in the UK have not deteriorated as in some of the European countries (i.e. France), and therefore we could expect an outperformance of UK assets relative to European ones. Figure 4 (left frame shows that the UK stock market appears _cheap_ relative to the US and Europe._Figure 4_
_Source: Bloomberg, Eikon Reuters, RR_ WHAT DOES IT MEAN FOR THE POUND? As we mentioned it in our latest FX Weekly, the British pound got strong support when it fell below the 1.25 level against the US dollar, therefore we think that buying Cable below that support could offer interesting returns for longer-term investors. As we expect the US dollar to weaken within the next 12 months (in our base scenario), currencies such as the euro and the pound could offset some of the USDweakness.
As we can see it in Figure 5, Cable is currently flirting with the 1.29 level, which corresponds to the 61.8% Fibo retracement of the 1.1975 – 1.4350 range and the 100-day SMA. A breakout of this area could lead us to the next retracement at 1.32. However, GBP may stabilize in the short term and therefore we think it could be interesting to play the crosses (long EURGBP and short GBPJPY). In addition, we can notice an interesting observation in figure 6, which shows the strong co-movement between GBPJPY and the world (ex-US) equities; we usually tend to look at AUDJPY as a proxy for risk-on / risk-off environment. Therefore, GBP could also be impacted by a small consolidation in the stock market. _ __Figure 5_
_Source: Eikon Reuters__Figure 6_
_Source: Eikon Reuters_ Posted in FX Trading,
Global Macro
Tagged
BoE , Brexit
, Cable
, Carney
, GBP
, Liquidity
, UK Industrial ProductionPOSTS NAVIGATION
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