UPDATE: RBS advises clients to ‘sell everything’ except haven debt

The Royal Bank of Scotland’s credit team has advised clients to brace for a “cataclysmic year” and a deflationary crisis, warning that major stock markets could fall by a fifth and that the crude oil price may nearly halve, again, to $16 per barrel.

The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman Brothers crisis in 2008.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it says in a client note.

Andrew Roberts, the bank’s credit chief, expects Wall Street and European stocks to fall by 10%-20%, with an even deeper slide for the FTSE 100 given its high weighting of energy and commodities companies.

RBS forecast that yields on 10-year German Bunds, or government bonds, would fall to an all-time low of 0.16% in a flight to safety, and may break zero as deflationary forces tighten their grip. The European Central Bank’s policy rate will fall to minus 0.7%.

Indeed such bonds, and a few of their developed-market counterparts are about the only things RBS would be long of. It says be long “10-year gilts, USTs, Bunds and BTPs [Italian government bonds]”.

READ: Time to buy baked beans and a shotgun? 

It also recommended being long of shorter paper “as deposit rate cuts remain on the table,” especially in the eurozone, but also perhaps in the UK , which looks cheap as the few remaining Bank of England hawks (ie those who want to see higher rates) “get bounced from the table”.

“And mostly, beware of the risk-on optimists,” the bank goes on.

“One lesson from 2Q 2015 and the Bund sell-off we got caught in, is that we need to always ask ourselves what the exit door is with any trade – as we said into the credit crunch in 2008, this will be as much about limiting losses as making gains.”

This post first appeared here: https://news.markets/bonds/rbs-client-note-makes-waves-sell-everything-advice-8243/

Don’t panic, Chinese inflation is in a good place -Capital

China’s economy is beset with problems but inflation isn’t one of them, despite persistent factory-gate price weakness, according to Capital Economics.

Consumer price inflation rose to 1.6% in December, the latest official data show, up from 1.5% in November but a whisker below market consensus.

For Capital’s chief China economist, Mark Williams, this leaves it in something of a sweet spot, with pricing power “high enough to keep concerns about deflation at bay” but low enough to give policymakers “plenty of room” to loosen further. He is more sanguine than most about weakness in producer prices, which have now posted a 46th successive month of declines, with a 5.9% year-on-year fall registered in December.

“The rate at which producer prices are declining (5.9% y/y again in December) can be almost entirely explained by falls in global commodity prices,” Williams writes.

“Weakness of Chinese demand relative to global supply has been a big factor in the slide in commodity prices, but this price shift nonetheless leaves the Chinese economy better off,” he continues.

“In any case, a year after the steepest commodity price declines, producer price inflation should be on the cusp of a rebound.”

However, if the latest inflation numbers are indeed good news, Chinese markets aren’t feeling it so far. Indices there are still feeling the fallout from last week’s twin market shutdowns and are all off by more than 1%.

This post originally appeared here: https://news.markets/bonds/dont-panic-chinese-inflation-is-in-a-good-place-capital-8141/

Bank of America names its top emerging picks for 2016

The year 2016 isn’t very old but it already looks as though prediction is a game for the very brave. Chinese shares have already chalked up two days of plunge and shutdown; there’s new froideur between Saudi Arabia and Iran; and it seems very possible that North Korea has a thermonuclear weapon we didn’t know about.

Still, the foretelling goes on, with Bank of America Merrill Lynch latest into the fray with its top emerging market calls for this year.

“Our top trades for 2016 look to take advantage of monetary policy divergence within developed markets, between DM and EM, and within EM,” the bank’s analysts write.

“We are cautious on the return outlook given risks of a faster Federal Reserve (monetary) tightening, a sharper Chinese slowdown, volatile oil prices and US high-yield unraveling,” they go on.

Its not likely to be a blockbuster year though, with forecast returns of 1% for local EM debt, -0.4% for over all EM foreign exchange and 2.7% for EM’s external sovereign debt.

So, here’s the list:

BoAML’s top foreign exchange pick is to be long both Mexico’s peso and Poland’s zloty against the euro, while being short a basket of Korean won, Malaysian ringgit against the dollar, and South Africa’s rand against the rouble – all on the basis of monetary policy divergence.

The bank’s favourite local-debt long positions are in Russia, India and Brazil.

It prefers Russian paper to Turkish, fretting that, “the latest news on macro policy and constitutional changes” raises the risk that Turkey will be stripped of its investment-grade credit ratings.

Those who like Argentina’s chances under its new, more conciliatory and market-friendly administration might like to consider its EUR GDP warrants, perhaps hedged in currency terms in order to minimise exposure policy transition there. BoAML has raised Argentina to overweight thanks to the change in government.

However, events in China are clouding the outlook. Its the largest EM, after all, and its start to the year has been an epic, just not one that’s been fun to watch.

“We remain cautious amid renewed Chinese slowdown concerns and the global equity market rout,” the bank’s analysts conclude.

This article first appeared here: https://news.markets/bonds/bank-america-names-top-emerging-picks-2016-7901/

We’ve just seen the weakest year for inflation since the euro’s birth

Now that all the eurozone inflation numbers are in for 2015 we can see that it’s been a truly extraordinary year.

The eurozone’s December’s consumer price index rise of 0.2% left the average rate for the year as a whole at zero – the weakest year since the single currency’s birth in 1999. The past year’s figures take annual inflation below even the nadir of the financial crisis and, as the chart below shows, efforts to stimulate prices in the wake of that debacle petered out quickly. This is the sort of stubborn low inflation which is sure to invite uncomfortable comparisons with Japan’s long fight to bring some pricing power back to its economy.

Indeed, the forecaster Capital Economics finds it hard to see at this point where a sustained increase in inflation is going to come from. Its analysts concede that the headline rate is likely to rise, especially if oil prices recover. However, core inflation is set to remain subdued by any measure given weak cost pressures, little sign of wage inflation and “plentiful spare capacity in the economy,” they write.

And some base effects from weak oil are hardly the stuff of durable recovery.

Headline inflation has now been below 1% since October 2013 and, despite continued signs of recovery in the eurozone, domestically generated inflation is also proving sluggish. December services inflation was 1.1%, whereas in the pre-crisis days a print below 2% was unusual.

Market-based measures of medium-term inflation expectations remain adrift: a swap contract that estimates five-year inflation in five years’ time stands at 1.67%. Such measures are heavily influenced by moves in inflation now, which could be read as a lack of faith among investors in the European Central Bank’s ability to achieve its aim, which is supposedly inflation of near but not over 2%.

The ECB failed to match the markets’ exaggerated hopes of policy easing in December, but a few more months of inflation this docile are sure to see investors begging for more. Thursday’s account of that famously underwhelming policy meeting is going to be hotly awaited to see how close the ECB might have come to action back then.

Source: Capital Economics

This post is republished from news.markets: http://news.markets/bonds/weve-just-seen-weakest-year-inflation-since-euros-birth-7762/

No early Christmas gift for George Osborne; UK borrowing soars

The UK borrowed far more than expected in November, according to official figures.

Public sector net borrowing totalled £14.2 billion, up from £7.4 billion in October and way ahead of market expectations, which had been for a turnout of £11.8 billion in what’s often a weak month for government receipts.

Economists have long been worried that the UK will miss its borrowing targets, but in his Autumn Statement Chancellor of the Exchequer George Osborne insisted that he was on track to move the country into a primary budget surplus by 2019/20.

However, while this month’s data look bad for Number Eleven Downing Street, the National Statistics office itself suggests looking at the cumulative year-to-date figures instead, emphasising the volatility of the monthly series.

Here the news is slightly better, with the central government’s cash requirement down £8.2 billion from January to November 2014, at £49.4 billion.

Still, the pound is likely to face headwinds as the New Year gets under way. Borrowing remains high and the Bank of England appears in no hurry to follow the Federal Reserve in raising interest rates. Moreover, the battle lines are now being drawn over the UK’s place or lack of one in the EU, which will keep the ‘Brexit’ issue smouldering ahead of a referendum on the issue, which must come relatively soon.

Sterling is the other currency “I remain wary of”, writes Kit Juckes, Societe Generale’s long-serving macro strategist, who worries too about the Australian and New Zealand dollars.

“We’ll have to live with a weaker pound in 2016,” he adds.

This post first appeared on news.markets: http://news.markets/bonds/no-early-christmas-gift-george-osborne-uk-borrowing-soars-7235/

ECB will keep policy easy for as long as it takes -Praet

The European Central Bank will keep monetary policy easy for as long as necessary, its chief economist says in an interview with a Belgian newspaper.

The ECB cut its deposit rate earlier this month and extended its asset-purchase programme in a bid to bring inflation in the eurozone, currently just above zero, back to its target of almost 2%.
The ECB “will pursue an accommodative monetary policy for as long as is necessary. Without giving a date, this timescale is fairly long,” Peter Praet, who is also a member of the Bank’s executive board, told La Libre Belgique.

“Additional risks have arisen from the slowdown in the emerging countries, risks that are pretty significant for the euro area. There are also downward pressures on prices in the manufacturing sector as a result of surplus output and the very high unemployment level,” he says.

He added, however, that the ECB cannot act on its own and governments also need to do their part, implying that at present they are not doing so.

“People expect too much from the ECB, if other actors rein in their efforts whenever we take action,” Praet said. “We are seeing less of an effort on the public finance side.”

First published here: http://news.markets/bonds/ecb-will-keep-policy-easy-long-takes-praet-7165/

Fed rate hike boosts stocks, bonds and the dollar; hits commodities

European financial markets’ reaction to Wednesday’s widely forecast US interest rate increase suggests that, far from clarifying the outlook for 2016, the Federal Reserve has raised more questions than it has answered.

The decision by the US central bank to raise rates by a quarter of a percentage point was widely seen as a ‘dovish hike’, implying that any further rate increases will be modest and spread over time. That has lifted stock markets around the world, with European bourses following their counterparts in the US and Asia higher.

By 1130 GMT, London’s benchmark FTSE 100 was up 1.4%, Frankfurt’s DAX up 3.3% and Paris’s CAC 40 up 2.6% following gains on Wall Street and through Asia.

Similarly, in the European government bond markets, 10-year yields were lower all round on the prospect of further rate rises arriving only slowly. Money that was parked in cash ahead of the Fed’s decision may also have been put back to work in bonds as well as shares.

“The decision to raise rates for the first time following almost a decade of crises and unconventional policy measures is being welcomed as much for its end to uncertainty as its vote of confidence in US economic recovery,” writes Mike van Dulken, head of research at Accendo Markets.

However, the dollar – far from weakening as it does usually when bond yields decline – was actually stronger all round; gaining against all the other major currencies such as the euro, the yen, sterling, the Swiss franc and the Australian and New Zealand dollars.

That may have been a simple response to higher US rates and relief that the Fed’s decision is now out of the way, or it may have been because the Fed still sees rates rising more quickly than the markets are pricing in.

“The hike, usually bad news for stocks and good news for the currency, saw both rally as relief that the central bank hadn’t disappointed was clear to see,” writes James Hughes, chief market analyst at GKFX.

The rise in the dollar may explain a strongly adverse reaction in commodities, which are largely priced in dollars and therefore tend to fall in price when the greenback advances. Brent crude oil recovered earlier losses but Comex gold was down 0.9% and the overall Bloomberg commodities index was 0.4% weaker.

“In the wake of the FOMC decision, base and precious metals along with oil prices are all trading lower,” writes Brenda Kelly, head analyst at London Capital Group, referring to the rate-setting Federal Open Market Committee.

She adds that Goldman Sachs’ call that iron ore will likely remain below $40 over the next three years is also weighing on sentiment.

This article originally appeared here: http://news.markets/bonds/fed-rate-hike-boosts-6994/

Fund managers predict three or more US rate hikes in next 12 months

More than half the global investors polled by Bank of America Merrill Lynch in its latest Fund Manager Survey expect the Federal Reserve to raise US interest rates three times or more in the coming 12 months.

In total, 58% told the bank’s researchers in December that was what they expected, while 53% described “long US dollar” as the most crowded trade in the markets, up from 32% last month.

“The strong dollar view is writ large across all asset, regional and sector allocations. It will take a very dovish Fed and weak US earnings to reverse the strong dollar view in 2016,” writes Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

Ahead of Wednesday’s decision by the rate-setting Federal Open Market Committee, which is expected to raise the Federal funds rate for the first time in almost a decade by a quarter of a percentage point, investors are defensively positioned even though the Fed is also expected to accompany the increase with generally dovish comments.

Editor’s blog: How to trade this week’s US rate rise

Risk taking fell, reports BAML, and cash holdings rose to 5.2% of portfolios from 4.9% in November.

Elsewhere, a net 43% of regional fund managers said they expect China’s economy to weaken in 2016, up from a net 4% last month, and the weighted average economic growth projections for China in 2018 fell to 5.5% from November’s 5.9%.

A net 29% of asset allocators were underweight commodities, up from a net 23% in November, and while investors increased their underweight positions in US equities, Europe and Japan were the most favoured regions for overweight positions in 2016.

Investors also emphasised a focus on quality, with a net 65% saying that high-quality earnings stocks will outperform low-quality earnings stocks next year.

“European equities remain in favor despite disappointment over the ECB decision,” writes James Barty, head of European equity strategy at BAML. On December 3, the European Central Bank dashed many investors’ hopes with a less aggressive than expected package of measure to boost the eurozone economy.

Republished from news.markets: http://news.markets/bonds/fund-managers-predict-three-us-rate-hikes-next-12-months-6822/

Plunging oil prices needn’t keep BoE rate setters awake at night

Plunging oil prices may not lead to a huge fall in overall UK inflation, and so are unlikely to stay the Bank of England’s hand when it comes to raising interest rates.

That’s the message in the latest research from Pantheon Macroeconomics’ chief UK watcher Samuel Tombs and it comes as the international Brent crude benchmark falls to around $40 a barrel, from $50 just a month ago.

Tombs’ point is that while changes in oil prices feed through “quickly and mechanistically” into the price of petrol, they have much less influence elsewhere. Bluntly, firms are reluctant to pass on savings they make on input costs such as oil when signs of resilient consumer demand suggest they don’t have to.

“Airfares, for instance, have increased by nearly 10% over the last year, rather than falling by the 10% implied by their previous relationship with oil prices,” Tombs writes.

Moreover, while oil prices have fallen, sterling has slipped too. The pound’s slide to the $1.50 area from $1.54 in the past month will make imports to the UK more expensive and provide an inflationary offset to oil-price weakness.

None of the above is to suggest that oil will never fall to the point where Bank of England rate setters have to worry about them, however.

Of course they might.

“A further plunge in oil prices to below $30 probably would keep consumer price inflation below 1% and likely would persuade the [Monetary Policy] Committee to stand pat for a few more months,” Tombs goes on.

“But the MPC would then have to raise interest rates more quickly than they otherwise would have done, as lower crude prices will have little bearing on inflation or interest rates two to three years out.”

In Pantheon’s view then, the renewed fall in market interest rate expectations over the last few days in response to the fall in oil prices does not look entirely warranted.

Original article published by news.markets: http://news.markets/bonds/plunging-oil-prices-neednt-keep-bank-of-england-awake-at-night-6392/