Constantine Fraser, TS Lombard European research analyst discusses the pound rally during Brexit talks. He speaks with Scarlet Fu and Caroline Hyde on "Bloomberg Markets: The Close." (Source: Bloomberg)
UK-based research firm TS Lombard estimated that GDP growth for the fourth quarter this year would fall below 6 per cent and be 5.7 per cent for 2020. Crucially, the firm believes Beijing will not set an official growth target for 2020, giving the government “significant leeway in how it manages the economy, and how much it allows the growth rate to fall”, said Roy Green, TS Lombard’s China economist.
Constantine Fraser, political analyst at TS Lombard, points out that Johnson will now have this deal rather than a hard Brexit to run on if the U.K. were to hold a general election. “The main takeaway is that the Conservative party is now committed to this deal, not no-deal, and will campaign for a majority for it if the coming general election takes place before the U.K. has left the E.U.,” Fraser said.
“It’s a better deal for the Tory right than May’s, because it allows for greater future UK-EU divergence (though it doesn’t make it inevitable); it’s worse for the DUP, because NI is essentially semi-detached from the UK for the foreseeable future and quite likely forever. It’s no longer so much a backstop as the default future status for NI. The main takeaway is that the Conservative party is now committed to this deal, not no-deal, and will campaign for a majority for it if the coming general election takes place before the UK has left the EU.” says Constantine Fraser, Political Analyst at TS Lombard.
“At the moment, the parliamentary arithmetic is somewhere between “extremely tight” and ‘no,’” said Constantine Fraser, a political analyst at TS Lombard. But the “main takeaway is that the Conservative party is now committed to this deal, not no-deal, and will campaign for a majority for it.”
That’s a serious long-term problem. In the short term, though, it has a terrible problem with collapsing domestic demand. As this chart from TS Lombard's Davide Oneglia shows, domestic new orders are falling faster than new export orders.
“The addition of human rights to the growing list of areas of U.S.-China confrontation reduces the possibility of a comprehensive settlement,” TS Lombard managing director Jon Harrison wrote in a note to clients on Monday, days before Congress passed the Hong Kong Human Rights Act. “The prospect of a partial deal does not change our view of the intractable nature and complexity of differences elsewhere.”
Das Volumen der geplanten Käufe ist auf jeden Fall enorm. «In den kommenden acht Monaten wird das Fed voraussichtlich Anleihen im Umfang von rund 480 Mrd. $ erwerben», schätzt Ökonom Steven Blitz vom Londoner Analysehaus TS Lombard. Das entspreche 96% aller neu emittierten Staatsanleihen.
The return to PPI deflation since July is not only acting as a drag on manufacturing investment, already under stress from U.S.-China trade tensions and supply-chain relocation, but also poses a major risk for onshore corporate debt refinancing, Bo Zhuang, chief China economist at research firm TS Lombard, said before the inflation data. Sustained PPI deflation, where the monthly rate remained below -2% for more than three to six months, would be a likely catalyst for the reversion to old-style credit stimulus, he said.
"China's not going to change its core economic policy to placate Washington, be it on intellectual property or similar," said Rory Green, an economist at investment research firm T.S. Lombard. "They are accepting slower growth, they are not going to do a big credit stimulus as we've seen in the past; markets are slowly realizing that."
“There are indications that this could be a more palatable option compared to May’s deal which has been rejected thrice previously,” said Andrea Cicione, head of strategy at TS Lombard. “That’s clearly a good development.”
As TS Lombard’s U.S. economist Steven Blitz puts this, the Fed’s actions are “an ease in the short-term worth some basis points” which have reversed a year’s worth of balance sheet reduction. The steepening of the curves, and Friday’s general enthusiasm for risk assets, show that the market gets that message; the Fed is determined not to cause any accidents.
Charles Dumas, chief economist at research and analysis firm TS Lombard in London, said: "People won't look back at his period in charge as being quite such a glorious thing as it would have been" had he finished his tenure two or three years ago, when European growth was better. "I think he did his job at the time in the context of keeping everyone in the euro — difficulty is has he succeeded? Not really — what was needed was more than monetary policy alone is capable of doing," he said.
Beijing will probably need to step up efforts to stabilize growth but “measured easing, not aggressive easing is likely,” wrote Bo Zhuang, chief China economist for research firm TS Lombard in a note to clients. His “success will be determined neither by responses to the trade war nor by Hong Kong but by management of financial risks,” wrote TS Lombard policy analyst Eleanor Olcott. “To achieve this end, Beijing is accepting slower growth,” she said in the same note.
Despite the optimistic signals coming from the trade talks, in reality positions have hardened on both sides, says Eleanor Olcott, China policy analyst at TS Lombard. She tells Daybreak Europe’s Nejra Cehic and Roger Hearing that the incorporation of human rights into the process of economic decoupling makes a trade deal much more difficult to reach.
Selgin said he anticipates that the T-bill purchases will be closer to $250 billion, a number also mentioned by Steve Blitz, chief U.S. economist at TS Lombard, who noted that the market may not believe Powell that this is not QE. Instead, the market will read “this for what it is (ease) and bill yields [would] drop below the two-year note,” meaning that “perhaps some planned rate cuts won’t happen – all else being equal.”
Despite the optimistic signals coming from the trade talks, in reality positions have hardened on both sides, says Eleanor Olcott, China policy analyst at TS Lombard. She discussed why the incorporation of human rights into the process of economic decoupling makes a trade deal much more difficult to reach. She speaks with Anna Edwards and Matt Miller “Bloomberg Markets: European Open.”
TS Lombard's chief economist Charles Dumas wrote in a report: "ECB policy looks biased from a German standpoint. While its stimulus value is highly disputable, one thing it certainly does is transfer cash from savers - ie, in the German view, Germans - to borrowers." He added: "If Japanese experience is anything to go by, negative interest rates may erode long-term growth prospects."
“The greatest challenge is de-risking the banking system, the urgency of which was brought home by the recent bailouts of Jinzhou and Baoshang banks,” says Eleanor Olcott at TS Lombard.
This took a pause as Beijing sought to avoid any embarrassment in the run-up to the People’s Republic’s 70th birthday, but now the celebrations are over, “we are likely to see a rising number of financial rescues”, she adds.
Eleanor Olcott, a Chinese policy analyst at the TS Lombard consultancy, told the South China Morning Post: "The impeachment proceedings tie Trump's hands when it comes to his domestic agenda, so his attention will be focused on his foreign policy stance, meaning we are likely entering a period of more volatile trade war news."
“One possible reason for this constraint is the health of India’s banking and financial sectors, which remains weak,” said Shumita Deveshwar, director of India research at TS Lombard.
“A shrinking savings rate and a large public sector borrowing requirement are keeping borrowing costs for banks elevated, and many banks are still dealing with relatively large amounts of bad debt on their books.”
Eleanor Olcott, a China policy analyst at research firm TS Lombard, wrote in a note to clients on October 1 that the biggest challenge facing China under the leadership of President Xi Jinping was “neither the protests nor the trade war”, but cutting risk in the banking system.
“Trump’s actions throughout the trade war, escalating tensions in a wildly unpredictable manner, has made the US an unreliable negotiating partner in the eyes of the Chinese political elite. This, in turn, has relieved pressure on Xi to strike a deal because he is able to convincingly lay the blame for derailment on the US. The Chinese delegation continues to engage in trade talks with the primary intention of staving off further tariff hikes,” said Eleanor Olcott, China policy analyst from UK-based independent consultancy, TS Lombard.
“If these threats were to turn into action, the risk for Europe is that fears of an ever-escalating trade war could drive a further fall in the yuan,” Constantine Fraser, European political analyst at the TS Lombard research group, told CNBC via email. “That means lower demand from China, and from the rest of the world too — and more pain for Europe’s heavily export-dependent economy.”
“Our view remains that the Chinese leadership has accepted the need for slower growth. Furthermore, the trade war provides a useful scapegoat for an economic slowdown that to some degree was inevitable,” said Jon Harrison, managing director for emerging markets macro strategy at TS Lombard. “It may be that some limited interim deal on trade is possible, but this will require compromise on the part of the US that will prove difficult for the administration to sell domestically. At the same time China is unlikely to compromise its red lines. Hopes of any deal at all, even of an interim nature relating only to trade, may prove illusory.”
Bo Zhuang of TS Lombard says he expects the pattern in the Chinese yuan to follow a "staircase devaluation model," and the currency could fall another 5% around the beginning of 2020. He also discusses China's shadow banking sector.
“We haven’t seen the worst of the trade war impact yet and of course it’s a big impact on (manufacturing in) Europe because it relies so much more on exports than U.S.,” said Andrea Cicione, head of strategy at TS Lombard.The losses drove the pan-European index below its 100-day moving average, seen as a strong technical support level that could spur further losses.
While China is willing to make concessions on IP protection, expanding access for foreign investment, strengthening its currency and reducing the trade deficit, they aren’t likely to make structural economic changes, writes TS Lombard China policy analyst Eleanor Olcott in a note.
Boris Johnson "a assis sa crédibilité sur une sortie de l'UE le 31 octobre, et il est très difficile de voir comment il pourra faire. Sa réponse sera donc (...) d'exacerber la confrontation", prédit Constantine Fraser, analyste au cabinet d'études TS Lombard.
Charles Dumas of research shop TS Lombard thinks this may be caused by the concentration of German households’ savings in bank deposits and pensions that predominantly hold fixed income, both of which now yield less than nothing.
Analysts at TS Lombard say the lower interest rate environment in Brazil will benefit equities into 2020. "Both individuals and companies will continue to benefit from falling borrowing costs going into 2020. We expect the gradual recovery of the credit markets will continue through next year as the job market begins to show more convincing signs of improvement."
"Xi and the CCP's grip on power is strong. They have complete control over the media and, more importantly, the police and military," said Ms Eleanor Olcott, China policy analyst at research firm TS Lombard.
"The CCP, throughout their 70-year leadership of China, have inculcated a strong ethno-nationalism that remains the bedrock of their legitimacy and popularity."
Rory Green, an economist at TS Lombard, a London-based independent research firm, noted that the possibility is low for a financial crisis to take place in China partly as the state controls most of the financial system.
“At a macro level, we think there’s a very small chance of a great financial crisis US style credit blowout, basically the [Communist] Party essentially controls all the balance sheets,” said Green. “They are very adept at shifting the debt between [the groups].”
“On the constitutional side, this is enormously important. It’s an extraordinary decision. Basically, the court is saying that there are no executive powers that are not subject to judicial review. It’s a court choosing really to strengthen its own power", says Constantine Fraser, Analyst at TS Lombard.
“From the point of view of Brexit, I think markets are right not to over-react and not to see this as a game-changer. I don’t think it changes the fundamentals of the Brexit process.”
While driving a taxi is hardly a substitute for what was once-stable employment in the manufacturing sector, there is flexibility built into the Chinese labor market, said Rory Green, an economist for research firm TS Lombard. His monitoring of regional Chinese newspapers, including postings for manufacturing jobs, doesn't suggest any dramatic downturn in the labor market.
“The commitment to deleveraging and financial risk control is unwavering and [Vice Premier] Liu He still has the ear of [President] Xi Jinping,” Rory Green, Asia economist for TS Lombard told OilPrice.com last week.
The RBI has evolved from “an inflation-fighting central bank a year ago to one with an unequivocally pro-growth leadership”, according to TS Lombard’s Shumita Deveshwar, reflecting “a drastic change in the RBI’s priorities”.
“There are key risks in terms of fiscal expansion and inflationary pressures building up,” said Shumita Sharma Deveshwar, Gurgaon, India-based economist at TS Lombard. “But there are few options available for the government at this juncture and drastic measures are needed.”
“A lot of the spending happened in the first half of the year,” said Rory Green, an economist at London-based research firm TS Lombard. “As we are coming into August, over the third quarter, there’s less money to spend.”
For now, the Fed made a [rate] cut that doesn’t appear to be particularly effective, says Steve Blitz, Chief US Economist at TS Lombard. The FOMC is essentially left to hoping that easier financial conditions, dating back to early this year, are more than enough support for the economy (which they still feel is on course) to outweigh the negatives from a global slowdown. It is true that a recession doesn’t appear imminent. Further, the markets, and the economy by extension, could very well get a boost in the next month or so if Trump moves to a trade truce--he has apparently gotten the message that these wars need to be set aside, or better yet even reversed, to get the economic lift necessary to carry him to a second term. The risk is that if the global slowdown does now slow the U.S., the Fed will have given away valuable basis points of easing they can ill-afford to waste by proceeding too slowly so far. Therefore, they are, from our perspective, betting big they draw an inside straight. As for the course of Fed policy through year-end, barring any major deterioration or acceleration in the data, this series of 25-basis-point cuts will be interrupted in October for the FOMC to announce the balance-sheet adjustment and explain why this is not a return to QE, even though it is. December looks to be the time for the next rate cut.
In South Korea last year “semiconductor sales accounted for a staggering 92 per cent of Korean export growth, a single product dependence more akin to an oil nation”, said Rory Green, China and North Asia economist at TS Lombard.
“The ECB gave the Fed the opening to act more aggressively, but the FOMC just isn’t ready to take that step,” wrote Steven Blitz, chief economist at TS Lombard, in a Thursday research report.
“Powell has a split at the FOMC he has yet to bridge. There are those who believe the global situation risks slowing the US economy and unleashing disinflation versus those who view the world as background noise and focus on domestic variables as the key determinant of fed funds policy and see the US economy doing just fine, thank you,” he said.
Scarlet Fu and Caroline Hyde bring you the latest news and analysis leading up to the final minutes and seconds before the closing bell on Wall Street. Today's show tackles the GM strike, AI in IBM and Iran's warning to the U.S. Guests Today: Steve Blitz of TS Lombard (Source: Bloomberg)
“A decisão do Fed e a comunicação do Powell mostram que a autoridade monetária dos Estados Unidos não está esperando uma recessão de fato, o que permite adicionar estímulos a conta-gotas”, disse o economista para Brasil da TS Lombard, Wilson Ferrarezi. “Com isso, o spread entre os juros brasileiros e os dos EUA está caindo. Isso implica em um real mais depreciado dqaui para frente.”
“The political pressure to do something about growth is very strong now,” said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London. “If it looks like the government is determined to spend something, the central bank will be even more cautious than it has been already.”
“Investors should await clarity in the coming months on what steps the government will take to ease labor laws, reform the banking system and privatize state-owned enterprises,” said Amitabh Dubey, an analyst at TS Lombard. “But at the same time they should be prepared for a continuation of past policies: namely, a mix of reform, state control and populism.”
The Fed appears largely split between "those who believe the global situation is going to keep slowing the U.S. economy and threaten to unleash disinflation versus those who view the world as background noise and focus on domestic variables," said Steven Blitz, chief U.S. economist at TS Lombard.
While Mr. Powell is in the former camp, that group of officials has been unable so far to sway their colleagues " from a well-worn position that historically kept the Fed too tight for too long," Mr. Blitz said.
“It’s a gift from the gods of the Fed,” Marcus Chenevix, an analyst at investment research firm TS Lombard in London, said before the announcements. “They’re suddenly allowed to loosen when the U.S. probably shouldn’t.”
“It’s clearly not a positive, and it adds a negative to the outlook,” said Steve Blitz, chief United States economist at T.S. Lombard, an independent research firm. “It’s another straw on the camel’s back.”
Laut Steve Blitz, US-Ökonom vom Researchhaus TS Lombard, wollte Powell damit betonen, dass sich die amerikanische Wirtschaft noch nicht auf eine signifikante Verlangsamung zubewegt, auch wenn es laut Blitz danach aussieht.
The Saudi economy “has been in a prolonged state of stagnation since 2014,” when it succumbed to a crash in oil prices, said Marcus Chenevix, an analyst at investment research firm TS Lombard in London. “To have this come just at the moment when some green shoots are starting to emerge must be profoundly frustrating.”
Scarlet Fu and Caroline Hyde bring you the latest news and analysis leading up to the final minutes and seconds before the closing bell on Wall Street. Today's show tackles Brexit with Christopher Granville of TS Lombard starting at 15min until 19min (Source: Bloomberg)
US-China trade tensions are causing an “oversupply of manufactured goods” and weaker demand, according to independent research provider TS Lombard.
“On the supply side, Chinese firms facing existing tariffs and fearing escalation, have aggressively reoriented spare capacity to production for domestic markets. The result is a glut in manufactured goods, particularly consumer durables, which is weighing on prices,” TS Lombard’s Rory Green and Bo Zhuang said in a research note on Thursday. “Consumer durable [producer price index] is the lowest since 2006. Excess supply comes at a time when a trade war induced fall in consumer confidence means households are reluctant to ramp up spending even with lower prices.”
Most of the political and economic world is, understandably, focused on the US-China trade war. But there's another trade conflict brewing that could also have global economic ramifications: the fight between Japan and South Korea. Tensions have escalated over wounds from World War II and spilled over into export controls, which could hurt the tech industry and more. While there is more likely to be a resolution in this dispute than in the US-China conflict, there are still political worries all around. Rory Green is an economist at TS Lombard, an economics and investing research group covering China and North Asia.
hweta Singh, managing director of global macro at TS Lombard, said the second round of asset purchases would likely have a “milder impact than QE-I, when borrowing costs were higher, fragmentation across the euro area was severe and domestic risks were far greater.”
“Crucially, there may be much less scope this time for the euro to edge lower and thus boost inflation expectations, while the pool of eligible assets that the ECB can buy has shrunk since QE-I was launched.”
The tone of recent data suggests merely slowing growth, beyond manufacturing, and glimmers of a near-term bottom. At a TS Lombard conference this week, there was one shard of light among the gloom: a recent pick-up in broad money growth for the US and Europe. Other optimists highlight the pleasant surprises in economic data from Asia and the US.
Charles Dumas, chief economist at TS Lombard, discusses the impact of European Central Bank policy on inflation and economic growth. He speaks on "Bloomberg Markets: European Close." (Source: Bloomberg)
Economist Linda Yueh joins China policy specialist Jonathan Fenby to discuss foreign policy in the South China Sea, why a Scottish court has ruled the suspension of the UK’s parliament is unlawful and the economic impact of Brexit.
Manufacturing is an engine with impressive power. "It takes a really deep and longer decline in manufacturing to pull down the overall economy, but you can get there," says Steve Blitz, chief US economist at TS Lombard. "Remember, it was manufacturing that led the country out of the  recession."
Según los cálculos de Shweta Singh, analista de TS Lombard, esa flexibilización permitiría al banco central comprar 1,5 billones de euros más de bonos soberanos, lo que incrementaría el tamaño del programa actual en más de un 50%.
China faces a stockpile of manufactured goods, forcing it to cut prices and creating a deflationary situation that also dents profitability, says Rory Green, an economist at TS Lombard. That in turn makes it harder for companies to pay down debt, which could add to the already record amount of corporate defaults, Green adds.
“The key risk is that rate cuts could even backfire. Deeply negative interest rates could push up saving rates — see the surge in German savings, for instance,” Shweta Singh, a managing director at TS Lombard, said. “Crucially, there may be much less scope this time for the euro to edge lower and thus boost inflation expectations.”
Some areas of dispute between Washington and Beijing can be agreed and some can’t, says Steve Blitz, chief US economist at TS Lombard. Blitz tells Daybreak Europe’s Caroline Hepker and Roger Hearing the best that can be done is a series of small agreements rather than a grand overall deal.
Caroline Hyde and Scarlet Fu bring you the latest news and analysis leading up to the final minutes and seconds before the closing bell on Wall Street. Today's show tackles the turmoil in China and Apple's law violation Guests Today: Rory Green of TS Lombard at 27min until 31min (Source: Bloomberg)
Shweta Singh, managing director of global macro at TS Lombard, said in a note Wednesday that the shift in ECB communications was “puzzling.”
With Italy’s economy stagnating in the second quarter while Germany, the euro area’s largest economy, contracting and indicating further weakness to come, Singh suggested there was “little room for optimism on the economic outlook.”
In contrast, Steve Blitz, chief U.S. economist for TS Lombard, thinks the Fed, at least, can have an impact on the U.S. economy. While monetary policy actions and reactions aren’t mechanical, he said, we can expect a short-term interest-rate cut to steepen the yield curve – that is, to ensure that shorter rates are considerably lower than longer ones, which is good for the banking sector. A rate cut will also weaken the dollar, which is good for the economy.
"If the ECB were to cut the policy rate without embarking on QE-II, markets would be disappointed. Crucially, driving rates a lot deeper into negative territory would be ineffective and could even backfire," said Shweta Singh, head of global macroeconomics at TS Lombard.
“With the UK’s autumn political storm now breaking out in full force, this may prompt ‘peak uncertainty’ hopes . . . Investors might now look forward to the dust settling and knowing where we stand,” said Christopher Granville, managing director at TS Lombard. “The UK outlook is, instead, utterly imponderable.”
Für Steven Blitz, Ökonom beim Analysehaus TS Lombard, ist vor allem die Divergenz zwischen sinkenden Margen und steigenden Aktienmärkten besorgniserregend. Sie erinnert ihn an die Jahre vor der Jahrtausendwende, als die US-Notenbank die damalige Aktienrally angeheizt hatte.
TS Lombard China policy analyst Eleanor Olcott said in an email that the timing of the withdrawal is key, given that it came just two days after Reuters published a leaked transcript of a talk Lam gave privately to a group of businesspeople in the city. She described the unrest as a national-security and sovereignty issue for Beijing, which limited her options in trying to end the political crisis and suggested a division in views between her and the leadership on the mainland.
Andrea Cicione, head of strategy at U.K.-based independent research provider TS Lombard, isn’t so optimistic. President Donald Trump, he notes, has delivered on every threat made to China. “There’s no indication that this is getting better from a risk perspective,” he said in a phone interview.
India’s economy will rely on further monetary easing to kick-start sagging growth as budgetary constraints rule out significant fiscal stimulus, Shumita Deveshwar, Director of India Research at TS Lombard, said on Tuesday.
“If Indonesia can find a way to open up its economy to foreign direct investment, this would reduce the dependence on portfolio inflows and reduce the risk to the financing of the current account deficit,” said Jon Harrison, managing director for EM macro strategy at TS Lombard.
But after the Brexit-deadline in March passed with the UK still in the EU the British drew down their inventories and Germany's exports to the UK suffered, explains a recent report from London-based financial firm TS Lombard.
"This suggests negative GDP data for both 2019 H2 quarters," the Lombard report states. Or put bluntly, the third and fourth quarters could see declines in economic output in Germany.
Bo Zhuang of TS Lombard says there's room for the Chinese stock market to decline in the next six months. He also says the yuan could weaken to 7.6 per U.S. dollar within 2020, depending on how quickly U.S. tariffs escalate.
Until that changes, a process that could take many years, the two countries have little choice but to stick together. Any serious attempt to break trade ties “would be a disaster,” said Rory Green, an economist specializing in South Korea and China at the London-based analyst TS Lombard.
“It’s something they’d have to look at doing over a number of years, slowly decoupling these heavily interlocked supply chains,” he said. “It’s not something that could happen painlessly.”’
“History suggests currency intervention only works when accompanied by shifts in relative monetary policies and coordination across nations,” Dario Perkins, managing director, global macro at TS Lombard, said in a recent note.
“The conditions for coordination do not exist today and unilateral U.S. attempts to force the dollar down could get messy,” he said.
“I think it’s an incredibly irresponsible thing for Dudley to write,” said Steve Blitz, chief U.S. economist at TS Lombard. “For him to do that, it just creates an unnecessary amount of turmoil at a time when there’s already too much turmoil.”
In the case of an extreme escalation of the trade war, the U.S. could also impose financial sanctions that stop Chinese firms from raising funds in the U.S., TS Lombard analysts wrote in a note to clients on April 22.
Steven Blitz, chief U.S. economist at TS Lombard, talks about the economy and Federal Reserve policy. He speaks with Bloomberg's Shery Ahn and Paul Allen on "Bloomberg Daybreak: Australia." (Source: Bloomberg)
In 2018, semiconductor sales accounted for 92 per cent of South Korea’s export growth, a figure which led Rory Green, China and North Asia economist at research firm TS Lombard, to describe it as “more akin to an oil exporter than a tech hub”.
“It is a terrible time for them to be involved in a trade dispute. Semiconductor prices have halved since last year, and that is hitting Korean exports very hard,” said Green. “Even though export volumes are still OK, the price of semiconductors mean that even without the Japan dispute and the US-China trade war, it’s hard for Korean exports to turn positive this year.”
From a French perspective, the hosts will “want to try to manage this G-7 so it doesn’t turn into another embarrassing mess with everyone arguing with each other,” Constantine Fraser, European political analyst at the TS Lombard research group, told CNBC via telephone.
“I think it is quite possible” there will be no joint communique at the end of this year’s summit, Fraser said, before adding the statement was now little more than an “increasingly desperate fig leaf.”
“The G-7 is no longer for the world’s richest countries to show a united front… And the lack of a joint communique is a recognition of where we are at,” Fraser said.
Some analysts say the lack of an overarching rate-cutting framework is making it harder for investors to gauge what will drive the Fed's next moves. Officials gave markets "no benchmark to indicate why they would cut again," said Steven Blitz, chief U.S. economist at TS Lombard, a research firm.
Protests in Hong Kong and protests in Silicon Valley, as Facebook and Google unite with President Trump against Macron's French Tech Tax on "The Close". Today's Guest: Rory Green, TS Lombard Economist appears at 27min (Source: Bloomberg)
"Xi Jinping has had the toughest year since he came to power", said Eleanor Olcott, China policy analyst at research firm TS Lombard. "Not only is he facing unrest on China's peripheries in Hong Kong and Xinjiang but the trade war is weighing on an already slowing domestic economy."
"This story shows no signs of abating as the US considers extending scrutiny to other Chinese tech firms and Beijing prepares its 'Unreliable Entity List' of firms subject to export controls," said Eleanor Olcott, China policy analyst at London-based economic consultancy TS Lombard.
"Meanwhile, the US diplomatic campaign to get allies to freeze Huawei out of any role in 5G networks will continue in earnest - only adding to Beijing's feeling that it is being unfairly targeted by the US," Ms Olcott wrote in a report on the dispute.
While Trump was able to use the rates to increase or decrease the presure on China, he can't do it as easily with the list of entities. "The bureaucratic management of export decisions cannot be subordinated in the same way as the tariffs for Trump's whim," she writes Eleanor Olcott, Chinese political analyst at TS Lombard in a note to clients, adding that the decision could have a lasting impact on the US-China relationship.
“If the US makes it difficult for Chinese firms to raise capital in the US, more Chinese firms may come to apply for listings in Hong Kong, to have their [initial public offerings] there. That would have a positive impact on Hong Kong,” said Rory Green, China economist from TS Lombard, an independent investment advisory firm.
Slowing earnings growth and weakening manufacturing employment mean that the Federal Reserve is increasingly reliant on a faltering US stock market to deliver a boost to sentiment, according to Steven Blitz of TS Lombard, and that means it needs to signal more rate cuts to come.
"The Fed can help by confirming the next 50bp in rate cuts already priced into the market when the Federal Open Market Committee meets in mid-September. We will see if they take it," Mr Blitz wrote in a research report.
Oliver Brennan, senior macro strategist at independent investment research provider TS Lombard, observed last month that the US Treasury likes to hold enough cash in the TGA to “cover one week of outflows, which it has estimated at US$325 billion”.
The trade war with the U.S., though, may be the very reason why this policy is not being pushed right now by China, Rory Green, Asia economist for TS Lombard told OilPrice.com last week. “With the renminbi weakening, and set to reach 7.50 to the [U.S.] dollar level if the U.S. imposes 25 percent tariffs on all Chinese exports, it is more difficult for China to persuade the big oil producers like Russia, Iran, Iraq, Venezuela, to make the switch away from the dollar,” he said. “For China as well, the timing is not quite right, as its use of Eurodollar financing is currently significant, it has a lot of dollar-denominated bonds rolling over shortly, and its balance of payments needs a relatively healthy U.S. demand profile, but China wants to get away from the dollar system and that is the overall direction of travel,” he concluded.
“In our discussions with Chinese exporters the most frequently cited response to (American) tariffs was ‘to seek other markets.’ Europe is the only other market,” says Rory Green, an economist with TS Lombard. Green wrote in a report published July 12 that “Chinese producers are slashing prices and essentially dumping goods into Europe.”
"I think there is going to be this 'staircase movement' in the yuan, letting it fall 3% to 5% within the next two months and then keep it stable for about six months before making the next depreciation move," says TS Lombard's chief China economist Bo Zhuang. "They do this in order to stabilize market expectations. People in China know what's coming. I would say that if China doesn’t get a deal with the U.S., you will see this kind of movement in the currency: weak, long stability, then weak again," he says, forecasting the yuan to hit 7.5 to the dollar within the next 18 months. The yuan is currently trading at 7.04 to the dollar.
TS Lombard says the latest U.S.-China trade spat is “different” and predicts that China will respond with further tariffs of its own on U.S. imports on 1 September. The chart highlights the rapid escalation of tariffs in recent months.
For investors, the Hong Kong protests have already hurt retail and tourism, slowing foot traffic in shopping districts, denting tourism, and further dampening consumer confidence, says Eleanor Olcott, TS Lombard China policy analyst, in an email. “The cancellation of all flights out of Hong Kong today is unprecedented and will deepen the drag to Hong Kong’s tourism,” Olcott writes. “The emotive nature of these protests means that even when they do abate, consumer-oriented businesses that have operations in both the mainland and Hong Kong will find it increasingly difficult to navigate political tensions...A political faux pas on either side can instigate a consumer boycott campaign.”
Stock buybacks would remain high as always, Stephen Blitz, chief U.S. economist and managing director with TS Lombard, told Xinhua. Blitz said as interest rates drop to a lower level and stocks have come down, it's time to buy stocks back.
“That’s the problem with thinking that the Federal Reserve can just cut rates and get the dollar cheaper,” says Steven Blitz, economist at TS Lombard. “If it cuts 50 basis points, you have a global round of central banks cutting interest rates.”
"It could be coincidence," said Steven Blitz, chief U.S. economist at investment research provider TS Lombard. "I think the timing is definitely suspicious." The sideways glance from Blitz and others is the result of a newly regular dynamic. Trump announces increased tariffs and uncertain markets fall. He lowers them and talks of a trade deal and the markets improve.
“There is certainly scope for exporters to leverage the trade war to increase their selling price. This will happen and is an additional tailwind to the more important domestic drivers mentioned above,” Rory Green, China and North Asia economist at TS Lombard, told CNBC Friday.
Oliver Brennan of TS Lombard says investors are discounting nearly a 50% chance of a no-deal Brexit. Based on options pricing, a no-deal Brexit could take the pound to a range of $1.15 to $1.20, while avoiding one could see sterling climb to a range of $1.25 to $1.30.
Oliver Brennan of investment service TS Lombard said there is no “unambiguously” positive outcome for sterling. “The best markets can now expect is no no-deal at the end of October.” “This brings with it the risk of a general election by year-end, so the upside to GBP is limited by the uncertainty which such an event brings.”
Eleanor Olcott, China Policy Analyst, TS Lombard, joined Rishaad Salamat and Doug Krizner on Daybreak Asia. She says China sees strength in being able to wait the trade war out. She goes on to consider the potential for a nationalist backlash against U.S. goods and looks at the mainland’s response to protests in Hong Kong.
A manufatura chinesa enfrenta complicações no segundo semestre do ano. O índice de preço ao produtor está caindo, o que significa que os fabricantes dos produtos “made in China” estão perdendo poder. Essa fraqueza causa liquidação de estoques, já que companhias tentam se livrar de produtos encalhados graças à guerra comercial, o que induziu um crescimento insustentável de inventário na China, disse Bo Zhuang, o economista-chefe da firma de pesquisas e investimentos TS Lombard.
Bo Zhuang, chief China economist at market research firm TS Lombard, also said that blaming Trump might become a viable strategy for Chinese President Xi Jinping, who faces mounting domestic and international pressure.
“If you want to be successful, you have to be strategic,” Steven Blitz, chief U.S. economist at TS Lombard. “Be very clear what the point is, how you want to get it, what is the victory. Because the fact is, you’re asking this question and I can’t even tell you what victory is.”
China’s latest defence White Paper retorts in kind, accusing the US of hegemonic overreach. Jonathan Fenby from TS Lombard says Beijing is knitting together all elements of the Communist Party’s military, industrial and technological complex for the long struggle, hoping to raise the political cost high enough to break the Trump presidency.
Bo Zhuang, chief China economist at TS Lombard, said the yuan's fall was the obvious result of "active monetary policy intervention" in response to Trump's most recent tariffs threat. It is now clear that China "is willing to tolerate further currency weakness in the face of the renewed escalation of trade tensions," Bo said.
China, which has prevented the yuan’s exchange rate from breaching the psychologically important level of 7 to the US dollar for the last 11 years, let the currency sink below that threshold on Monday, in response to “bad faith” negotiating on the part of the US, according to Bo Zhuang at TS Lombard, a research firm.
Bo Zhuang, a China economist at research provider TS Lombard, argues the timing conveniently allows the Chinese government to "point the finger" at the U.S. while engaging in protectionist behavior to offset the impact of China's debt overhang on its "domestic growth outlook." At a time when Chinese businesses, households, and the government are relatively constrained in their ability to borrow, it should not be surprising that the government might want to support exports for the sake of jobs and incomes.
“The new threatened tariffs [on Chinese imports in the US] doubtless go beyond what China regard as constituting ‘good faith’ negotiations,” says Bo Zhuang, chief China economist at TS Lombard, calling this “weaponising the yuan”.
“If the tariff round does go ahead and it lasts more than a few months, it could trigger a more aggressive stimulus,” said Bo Zhuang, an economist at TS Lombard, whose own view is that the threatened tariff round could cut Chinese growth by 0.15 per cent.
According to the forecasting firm TS Lombard, it's probably a form of retaliation following Trump's threat last week to impose higher tariffs on the remaining $300 billion of imports from China if progress isn't made in the trade dispute.
Rory Green, an economist at TS Lombard, told CNBC that chicken prices will follow pork prices upward in the second half of this year. “Poultry is now considered the safe option as health concerns mount over (African swine fever) contagion, further boosting demand,” he told CNBC in an email.
Bo Zhuang, chief China economist at research firm TS Lombard, said that the trade war has had a “mixed impact” on inventories, with Chinese tech firms having to hold large stockpiles and other industries drawing down their inventories, which could affect the results at Chinese firms.
“Given our negative outlook on industrial prices, the unsustainability of a prolonged build-up in tech inventories and the undiminished threat of future tariffs, we expect inventory liquidation over [the second half of 2019], which will in turn weigh on industrial activity,” Zhuang said. “With domestic and external demand tepid, and the risk of further tariff hikes still looming, producers will continue to draw down inventory, keeping production and orders for raw materials in maintenance mode.”
Doch Dario Perkins von TS Lombard weist auf die periodisch auftretenden Finanz- und Bankenkrisen hin, die die grundsätzliche Gefahr hoher Verschuldung demonstrierten. Hinzu kommt die veränderte Finanzierung neuer Verschuldung: Die Kapitalmärkte haben auf Kosten der Banken ihre Rolle als Kreditgeber ausgebaut. Die Suche der Investoren nach Rendite hat zu einer Flut an «BBB»- und High-Yield-Anleihen von Unternehmen und einer Zunahme der entsprechenden Risiken geführt. Diese Kategorien machen heute 60% aller ausstehenden Unternehmensanleihen aus, doppelt so hoch wie 2008.
After the Federal Reserve signaled a pause in interest-rate increases at the end of January, just six of 62 economists surveyed in February by The Wall Street Journal said the Fed's next move was likely to be a cut.
And of those, just one -- Steven Blitz, the chief economist at market-research firm TS Lombard -- predicted the central bank would cut interest rates this year, which it did Wednesday.
Rory Green, China economist at TS Lombard, said Hong Kong could be affected by the outcome of the trade war and challenge Hong Kong’s status as a free trading port. “Passage of the extradition bill could certainly provide a trigger for the U.S. to question Hong Kong’s status as a separate customs entity from mainland China. Hawks in Congress have already cited the territory’s unique status as providing China with both a trade and technology loophole through which to evade U.S. export restrictions and tariffs.”
The Federal Reserve reduced interest rates for the first time since the financial crisis and hinted it may cut again this year to insulate the record-long U.S. economic expansion from slowing global growth. Discussing the news is Steve Blitz, Chief U.S. Economist at TS Lombard with Co. Hosts: Jason Kelly and Taylor Riggs. Producer: Paul Brennan
"With its deposit rates already at a negative 40bps, its balance sheet surging to 41pc of GDP and huge constraints on the bond-buying scheme, the ECB is pushing on a piece of string," TS Lombard's global head of macroeconomics, Shweta Singh, wrote in a research report published yesterday.
Chinese manufacturing faces headwinds going into the second half off the year. The Producer Price Index is declining, meaning makers of Made in China widgets are losing their pricing power. This weakness will cause inventory liquidation as companies look to offload stuff they're having a hard time selling due to the trade war, which has induced an unsustainable countercyclical inventory build in China, says Bo Zhuang, the chief China economist for investment research firm TS Lombard.
The trade war has had a mixed impact on China's inventory, but its effect will turn decisively negative in the coming months, Zhuang thinks.
Now that the pension reform hurdle has been nearly cleared, the focus has switched to the tax system, TS Lombard analyst Wilson Ferrarezi wrote in a note to clients on July 24.
"In an effort to take advantage of the pro-reform momentum in Brasilia, politicians are showing a growing willingness to attack the thorny issue of tax reform," TS Lombard analysts wrote in the 10 page report published last week.
What’s more, points out Steve Blitz, chief U.S. economist for TS Lombard, some investors can look elsewhere if they don’t like the U.S. tax landscape. “I can trade anywhere in the world and markets can open up anywhere in the world and I can just move my money offshore,” he said.
Market maneuvering aside, Blitz thinks there are bigger problems with, as he puts it, “this idea of ‘I’m gonna tax this activity to pay for that.’”
Bloomberg Markets: the Close' Full Show - Caroline Hyde and Romaine Bostick bring you the latest news and analysis leading up to the final minutes and seconds before the closing bell on Wall Street. Today's show tackles what to expect protests in Hong Kong with Jonathan Fenby of TS Lombard. (Source: Bloomberg)
“Johnson’s instincts are liberal in a way that Trump’s aren’t—Trump has given every indication that he is a protectionist authoritarian, whereas Johnson seems to be if anything a laissez-faire Tory liberal,” says Constantine Fraser, European political analyst at the TS Lombard research group. “The difficulty is, with Johnson more than with Trump, there is a willingness to say whatever is necessary.”
Steve Blitz, chief economist at the investment advising firm TS Lombard points to that index as one sign that manufacturing is not in recession. And Blitz has others: Orders at U.S. factories went up $1 billion in June, he said. "A recession is not evident in profits, still positive, and not evident in employment — flat to growing," Blitz said.
“The net on this is that given the Fed’s global reasons to ease and that market strength and hence consumption are similarly built on the expectation of lower policy rates the Fed has no option other than to cut 25 on Wednesday and see whether the data unfold to create the need for a further cut in September,” said Steve Blitz, chief U.S. economist at TS Lombard.
“The market owes its strength in large part to the Fed eases priced in. And the Fed has noted the slowdown in business resulting from the generally slower global economy,” said Steve Blitz, chief U.S. economist at TS Lombard. “The net of this is ... the Fed has no option other than to cut 25 on Wednesday and see whether the data unfold to create the need for a further cut in September. The push is to keep equities up and help the world be safe for dollar debt.”
Steve Blitz, chief U.S. economist at TS Lombard, believes that with the GDP data, Fed Chairman Jerome Powell would have a hard time convincing the hawks on the Federal Open Market Committee of the need for a quick 50 basis-point cut.
“So here is the Fed, faced with overall growth at trend created by the combination of a slowing business sector yet still strong consumption a function of stable if slower employment growth and a strong stock market,” Blitz said.
“The net on this is that, given the Fed’s global reasons to ease and that market strength and hence consumption are similarly built on the expectation of lower policy rates, the Fed has no option other than to cut 25 (basis points) on Wednesday and see whether the data unfold to create the need for a further cut in September,” Steve Blitz, chief U.S. economist at TS Lombard, wrote in a research note.
If there is a crumb of comfort to be had from all of this risk-taking, then it is that things won't be quite as bad this time when the music stops as in the last great crash, according to Dario Perkins of economic consultancy TS Lombard.
"The sub-prime crash was particularly deadly because the world's largest banks had leveraged themselves up to record levels using toxic collateral. When the value of these securities plunged, it triggered a nasty spiral of falling asset sales and forced deleveraging," he said.
"If the 'buy-side bubble' bursts, it would not have the same devastating macro consequences - though we would still expect a large decline in asset prices and probably a recession," he concluded.
“Trade war concerns have swiftly moved on to a possible FX war,” said Shweta Singh, managing director at TS Lombard. “The bar for the euro to edge lower and boost inflation expectations may be much higher this time, while the assets that the central bank can buy have shrunk."
There is, however, a bullish case for sterling and Mr Johnson, according to Constantine Fraser, an analyst at economic consultancy TS Lombard. "Brexit has become a US-style culture war, in which substance matters less than the mood of the tribe," he said. "With a little imagination, repackaging...the 'Boris Bargain' could be made to feel like a very different proposition." He added that this could prompt a sterling rally.
• Auto sales have been a weak spot. Though a popular gauge of consumption trends in the past, Green says the data have been muddied by factors beyond trade uncertainty - including new emission standards in China, tighter restrictions on buying cars in the biggest cities, and a growing used-car market—so auto sales may not be the best gauge.
• Disposable income is a better gauge. While confidence is weak, Green says disposable income is growing reasonably well, helped by wage growth and income tax cuts.
• Green says a savings survey from the People’s Bank of China is a more reliable indicator of consumer confidence than official stats, which show an increase in confidence despite the trade war. The PBOC survey though shows confidence has slipped while a perceived need for saving has risen. But consumer credit has been rising, which could help Chinese consumers feel more flush.
• Green says stimulus measures will help consumption and retail sales growth stabilize, but he doesn’t expect consumption to offer a major boost to growth this year.
De esta opinión es Constantine Fraser, analista de TS Lombard. "Hay espacio para algunos pequeños cambios en la interpretación del tratado de salida de la UE, algo que dependerá en gran parte de la posición de Dublín. En todo caso, Brexit es más una guerra cultural al estilo americano, donde la sustancia importa menos que el sentimiento de la tribu y las señales de las figuras con autoridad. Aquí, la habilidad del vendedor importa más que el producto, y Johnson tendrá el capital político y el poder de persuasión que Theresa May no tenía en marzo. Con un poco de imaginación, nuevo envoltorio y retórica, el acuerdo de Boris podría parecer una propuesta diferente".
“It’s quite likely that a no-deal would set off a euro area recession, if only because of the uncertainty it would add to the existing slowdown,” said TS Lombard economist Constantine Fraser, pointing to Germany and Ireland in particular. “As things stand, [Germany] will just about avoid recession, but a no-deal Brexit could tip it over the edge,” he said. In turn, that could drag down the entire eurozone.
But the longer Congress remains in leadership limbo, the longer the BJP will have to consolidate power without interruption and pursue its Hindu-first agenda, warns Amitabh Dubey, a political analyst at TS Lombard. “Secularism as a political platform has been weakened,” said Mr Dubey. “The challenge for the Congress is to redefine secularism — and they have to take this seriously, because the entire ideology of the country is under threat.”
Falling government support will inevitably drive down housing transactions and prices in these small cities, which will weigh on national-level sales and prices, Bo Zhuang, chief China economist at TS Lombard, said in a note last week.
“I wouldn’t say it’s not working, but it’s not as big an impact as people thought,” said Bo Zhuang, an economist at research firm TS Lombard. If Beijing doesn’t dig deeper into its policy tool box, economists predict that growth will gradually trend to the lower end of the official targeted range of 6% to 6.5% for the year. “Domestic demand is anemic,” said TS Lombard’s Mr. Zhuang, who expects 6.1% growth in the second half.
"Our base case is despite the second floor vote being delayed until 6 August, the reform is on track to be approved by the Lower House by a large majority," Wilson Ferrarezi, economist at TS Lombard, said in a note.
TS Lombard Chief U.S. Economist Steve Blitz explained how that all fits together in a note released late on Tuesday. The pace of job growth has slowed, making it less crucial for home builders to keep construction going at the same pace, possibly leading to some loss of jobs and putting less upward pressure on pricing, which may help convince the Federal Reserve to cut rates, and so on.
TS Lombard highlighted a whole other set of risks in the different approaches taken by U.S. and China negotiators that the U.S. may not be fully taking on board. The U.S. approaches talks with the view that it is defending a negotiating position, “but for China much of what the U.S. is trying to achieve appears to be a threat to the system that is fundamental to the power and control of the Communist Party,” TS Lombard analysts wrote in a recent note.
Bo Zhuang, chief China economist at TS Lombard, said China’s domestic growth drivers, including investment and consumption, were weak and that Beijing was likely to use “quasi fiscal and monetary easing” to accelerate growth later this year.
The current miss on the 2% inflation target means the Fed needs to make a substantial rate cut in July, according to Charles Dumas, Chief economist at TS Lombard. Dumas told Daybreak Europe’s Nejra Cehic the Fed had always waited too long to start a rate cut cycle - if it went for a cut of 50 basis points in July it would have broken that cycle and, he said, have a good chance of getting the US economy going.
"El impulso económico parece haberse ralentizado en algunas de las grandes economías, y esa fragilidad podría afectar a la economía de EE.UU.", explicó Steve Blitz, economista jefe de TS Lombard, en una nota a sus clientes.
“The purpose of the Aramco bond issues was to facilitate the extraction of cash from the company and into MbS’s pet projects, allowing for the monetisation of the asset without making any changes to governance, as an equity sale would have demanded,” Marcus Chevenix, MENA analyst for consultancy TS Lombard, in London, told OilPrice.com. “The bond prospectus reveals a fascinatingly dysfunctional relationship between Aramco and the Saudi government, in which the oil producer is expected both to compensate the traditional centres of power for the money they are losing to MbS’s projects and to provide extra financing for the PIF [Saudi Arabia’s Public Investment Fund] itself,” he said.
By focusing on the global factors, the Fed appears "to have finally fully accepted the global impact of U.S. monetary policy," said Steven Blitz, chief U.S. economist at TS Lombard. Most global trade is in dollars and many companies, especially in emerging markets, have dollar liabilities tied to U.S. interest rates. Thus, a cut in the fed-funds rate would feed into a cheaper greenback and a steeper yield curve, which would boost growth and inflation closer to the Fed's 2% target.
Steve Blitz, chief economist at TS Lombard, said Powell and the Fed have simply come to recognize just how much a world that largely trades in dollars has come to depend on what the U.S. central bank does.
“Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy,” is how Blitz summed up what he called the Fed’s new-school thinking.
Eleanor Olcott, China policy analyst at TS Lombard, warned that while markets have rallied since the truce was announced, a number of important issues, from intellectual property protection to Huawei, have complicated the trade negotiation process.
Bo Zhuang, Chief China Economist, TS Lombard, joined Doug Krizner and Rishaad Salamat on Daybreak Asia. He discusses his outlook for the Chinese economy, where he sees the biggest risks ahead and the impact of changing supply chains.
Rory Green, an economist with research firm TS Lombard says that while the measures could have “significant repercussions” for the global economy if they are made permanent and are strictly enforced, they could also backfire against Japan. “Samsung and SK Hynix could actually welcome a short-term supply shock, which accelerates inventory destocking and boosts memory chip prices. For Japanese producers, there is a risk of permanent loss in market share,” he said.
The absence of a general stimulus will not deprive certain parts of the economy of a boost. Consumer spending is set to pick up after reaching record-low levels this year, says Bo Zhuang, chief China economist at TS Lombard.
TS Lombard analysis shows Indonesia's average net FDI to gross domestic product from 2013 to 2017 stood at 2.1%, lower than both Malaysia and Vietnam. FDI in 2018 dropped 8.7% to $29.3 billion, owing partly to preelection caution and fears over the potential impacts of the U.S.-China trade war, but also to bureaucratic entanglements and restrictions on foreign ownership in many sectors.
“I would say that the phrase ‘some bonds’ is very vague, and suggests a token gesture rather than a genuine program of support for Lebanon,” said Marcus Chenevix, analyst, MENA and global political research at TS Lombard.
Some people are now using this as an opportunity to push for political change, said Eleanor Olcott, China policy analyst at research firm TS Lombard. There’s now a divergence between the anti-extradition protesters and those trying to harness the spirit of the anti-extradition movement to push for political change, she said.
“The anti-extradition bill protest was about maintenance of the status quo,” Olcott told CNBC in an email. “By contrast, the protesters now are asking for change to the political system, for a change of leader.”
Eleanor Olcott, China policy analyst at TS Lombard in London, said ahead of the G20 the policy positions of both countries had hardened since talks broke down at the beginning of May. “On both sides, red lines have hardened in the past few weeks. The Chinese are now insisting, for a domestic audience, that the deal could only happen if the US immediately rolled back additional tariffs and made more realistic demands to reduce the trade deficit,” Olcott said. “The US, meanwhile, is refusing to accept any restrictions on its ability to levy tariffs in the future.”
Eleanor Olcott, economist at the consultancy TS Lombard, said falls in new orders in both this survey and in official data suggested China’s domestic economy was slowing, in addition to the impact of tariffs on the country’s exports.
Some economists have run simulations based on an increase in the purchase limit to 50%. If the ECB bought federal, regional and municipal debt to that extent, it would create space for 60 billion euros a month for two years, according to TS Lombard’s Shweta Singh and Davide Oneglia.
Charles Dumas, economista jefe de TS Lombard, cree que si la Eurozona quiere evitar una 'japonización' dura "tendrá que aceptar una unión fiscal y económica total y comenzar a descifrar cómo lograr una unión monetaria óptima, algo que los simples criterios de convergencia de Maastricht no han conseguido".
“Financial markets welcomed the announcement that a full-blown standalone US-China ‘bilateral’ meeting would be held in the margins of the annual G20 Summit,” said Christopher Granville, managing director of global political research at TS Lombard, in a note. “That was an understandable relief reaction.”
“Judging by the more conciliatory tone from both Washington and Beijing last week, the likely optics of the Trump-Xi talks will resemble the previous G20 meeting in Buenos Aires last December,” he said. “Back then, the leaders’ friendly rapport supplied the impetus to launch a new series of negotiations, with an agreement to refrain from further tariff hikes or other punitive action for the following three months while the talks proceeded.”
Constantine Fraser, de TS Lombard, "un Brexit sin acuerdo sigue siendo muy improbable. En primer lugar, Boris Johnson prefiere un acuerdo a un no acuerdo, y hará un esfuerzo serio por alcanzar un mejor pacto con la UE. Y en cualquier caso, el Parlamento dispone de los medios para evitar una salida sin acuerdo". En su opinión, el principal escenario es que haya unas elecciones y/o referéndum este invierno para romper el bloqueo existente si no hay un acuerdo para dejar la UE el 31 de octubre.
Christopher Granville at TS Lombard says investors should be wary of a “deceptive Osaka thaw” at G20 over trade: “The economic attrition caused by ‘trade war’ uncertainties, and the risk of derailment, will . . . persist for months to come. Since any deal will almost certainly have evaded thorny tech sector questions at the heart of the US-China strategic rivalry, the chances of disputes blowing up again thereafter seem too high for comfort. Any post-Osaka relief rally will be built on flimsy foundations.”
The recent attacks on tankers and facilities in the Middle East are also weighing on the energy market and could create a similar situation to the Gulf tanker war in the 1980's, said Marcus Chenevix, an analyst at the consulting firm TS Lombard.
Equities and bonds are pricing in very different economic scenarios, and something’s gotta give says our chart of the day from Dario Perkins, managing director of global macro at TS Lombard. While stocks are a good guide to the current state of the economy, the bond market is a better predictor, so look out equity investors, says Perkins.
The trigger for the Fed to cut rates is simple - it’s inflation not growth says Steve Blitz, chief U.S. economist at TS Lombard. Speaking to Daybreak Europe’s Matt Miller and Caroline Hepker he said inflation has been slipping back and Fed chief Jerome Powell is focused on getting to the 2 percent target. He also discussed the uncertainty surrounding the trade war.
“The Fed is set to meet next on July 30-31, and investors in interest-rate futures markets have priced in at least a quarter-percentage-point cut then in the central bank’s benchmark short-term rate. ‘The market now knows the Fed is going to ease unless the data dramatically reverse,’ said Steven Blitz, chief U.S. economist at TS Lombard.”
While China is on pace to run a small current account deficit this year after decades of posting a sizeable current account surplus, its appetite for foreign assets remains elevated. What's more, at 42 per cent, foreign exchange reserves comprise the predominant share of these assets, as Shweta Singh at TS Lombard points out in a recent note.
TS Lombard’s Chief Economist, Steven Blitz, “We believe St Louis Fed President Bullard’s dissent was made public to underscore that, barring a dramatic turnaround in the data, the next move is a cut - perhaps even a 50bp reduction. “The Fed is not in the business of validating market pricing except when they are both heading in the same direction, and that is what the central bank did yesterday.”
“The FOMC reinforced the market’s conviction,” said Steve Blitz, chief U.S. economist at TS Lombard, in a note. “Barring a dramatic turnaround in the data, the next move is a cut - perhaps even a 50bp reduction.”
"[...] it does seem a matter of ‘when’ rather than ‘if’ – another full-blown sovereign debt panic will happen," states a recent report from London-based financial firm TS Lombard. The report continues bluntly: The bottom line is that as and when a serious new crisis blows up, the Italian government is positioning itself to demonstrate to its voters that it has not sought to leave the Eurozone, but rather that the Eurozone is leaving Italy.
The US Federal Reserve opens its two-day policy meeting on Jun 18 to decide the course of interest rates. The meeting opens amid widespread speculation the central bank is closer to changing course as the global economy slows and trade tensions drag on.
The Fed is set to meet next on July 30-31, and investors in interest-rate futures markets have priced in at least a quarter-percentage-point cut then in the central bank's benchmark short-term rate. "The market now knows the Fed is going to ease unless the data dramatically reverse," said Steven Blitz, chief U.S. economist at TS Lombard.
Hong Kong “will benefit from Beijing’s programme of measured credit and fiscal easing, which includes boosting infrastructure spending and encouraging banks to ramp up on-balance sheet lending,” wrote Eleanor Olcott, China Policy analyst at research firm TS Lombard last week. “The expected Fed cuts … will help ease monetary conditions in [Hong Kong], which imports US monetary policy owing to the US dollar/Hong Kong dollar peg.”
TS Lombard Chief U.S. Economist Steve Blitz explained how that all fits together in a note released late on Tuesday. The pace of job growth has slowed, making it less crucial for home builders to keep construction going at the same pace, possibly leading to some loss of jobs and putting less upward pressure on pricing, which may help convince the Federal Reserve to cut rates, and so on.
But a TS Lombard report on emerging markets last Monday noted the Trump administration still presents a risk for Mexico despite the tariff relief. In particular, it highlighted that the ratification of the United States-Mexico-Canada Agreement by all three governments still “will not automatically guarantee companies a tariff-free environment for regional trade”.
TS Lombard’s Konstantinos Venetis expressed concerns that rising inflation expectations create a messaging issue for the MPC. “Essentially what the market seems to be discounting is a stagflationary outcome in which the bank largely looks through a currency-induced jump in inflation. The chief reason behind this configuration is persistently high uncertainty surrounding Brexit and domestic UK politics more generally.
Rory Green of TS Lombard in London points out that the usual debt-to-GDP figures generally “vastly exaggerate the level of corporate debt by including debt from local government financing vehicles, centrally controlled state-owned enterprises (SOEs), and provincial SOEs, all of which are at least implicitly backstopped by the state.” Making this adjustment drastically changes the composition of China’s debt.
Eleanor Olcott, China policy analyst at the research provider TS Lombard, said that Hong Kong, in the short term, would remain an attractive centre for international finance and trade even if the extradition bill passes. “But in the longer run, those benefits will become harder to discern as Hong Kong becomes increasingly entangled in the geopolitical struggle between the two Pacific Rim powers,” Olcott said in a research note. “The US administration is currently reappraising its China policy and has drifted away from its pre-Trump strategy of deepening economic ties with allies in the region as a hedge against the [People’s Republic of China].”
There’s much at stake for Hong Kong, a special administrative region in China, with the risk that it is increasingly perceived as a “weak link” amid the U.S-China trade war, Eleanor Olcott, China policy analyst at research firm TS Lombard, wrote in a note on Thursday.
Sudan’s political crisis was sparked by an economic crisis that continues today. A military administration will not be able to take the steps needed to fix Sudan’s economy, says Marcus Chenevix, MENA analyst at TS Lombard..
Research firm TS Lombard said this week “export dependent economies in the Pacific Rim and Europe are badly hit and close to recession,” with the United States also “heading towards slower growth.” TS Lombard warned an unresolved Sino-American trade war “has the potential to trigger a recession in 2020, if not before.”
Konstantinos Venetis, senior economist at TS Lombard, said exchange rates were a lesser issue than some years ago when “currency wars” saw countries actively try to influence exchange rates to get an edge over rival nations.
“What you really need is to see global demand picking up. If that happens, euro even at $1.20 won’t be so painful,” Venetis said. “Currency depreciation can be a way to help your exports only if the world is growing briskly and demand is healthy.”
“The move to support and facilitate the use of special purpose local government bonds for infrastructure projects is more of an enhancement of an existing fiscal stimulus rather than a new measure,” Rory Green, an economist at TS Lombard, tells Barron’s via email. “However it is important as it will speed up transmission of fiscal policy to the real economy and will have a clear impact on investment. We should see a further pick up in the continuing strong recovery in fixed asset investment, which is being led by infrastructure and state firms.” Green notes that the projects favored for these investments are those related to China’s national strategy, such as the Belt Road Initiative, developments along the Yangtze River to combat pollution, railways, roads, energy, and health care.
While Chinese diners — who account for half of the world’s pork consumption — may get upset about higher prices, the development is not an something that would cause wider market panic, said Bo Zhuang, chief China economist at TS Lombard. “Chinese pork prices have been on a roller-coaster for the last decade,” Zhuang told CNBC.
Jonathan Fenby, chairman of the China team and managing director of European political research at TS Lombard, discusses Boris Johnson's chances of winning the race to replace Theresa May as Prime Minister and the possible consequences for Brexit.Speaks on "Bloomberg Surveillance." (Source: Bloomberg)
Jonathan Fenby, chairman of the China team and managing director of European political research at TS Lombard, discusses the backdrop to the mass protests in Hong Kong as its leader Carrie Lam pledged to press ahead with Beijing-backed legislation easing extraditions to China. Fenby speaks on "Bloomberg Surveillance." (Source: Bloomberg)
“We’re in an interim holding pattern that has the potential to go on for some time with Nazarbayev in his old age holding the reins in the background and Tokayev minding the shopfront,” said Christopher Granville, managing director at consultancy TS Lombard. “There’s no evidence of deeper fissures within Kazakhstan society but there’s a desire for change and renewal, which the current holding operation does not really deliver on.”
Eleanor Olcott, China policy analyst at TS Lombard, tells Barron’s that legislation “is seen as a step too far” for the business community in Hong Kong “that has historically been reticent to get on board with political protesters.” She said that “it will have an impact on business confidence.”
Though Hong Kong is still an attractive destination for international trade, Olcott says the latest developments are symptomatic of things that could shift and add to the uncertainty created by the trade war. The concern is whether Beijing’s moves will push global businesses to reassess their operations or investments in Hong Kong.
Separately, Christopher Granville, managing director of global political research for TS Lombard, in London, told OilPrice.com, Russia’s President, Vladimir Putin, reminded his audience at a Moscow investment conference that Russia’s fiscal policy is framed around a US$40 per barrel price, based on the estimated US$35-45 per barrel marginal cost of producing shale oil in the U.S.
Shweta Singh, economist at the consultancy TS Lombard, said that market pricing reflected a perception “that the ECB does not have enough instruments to fight low inflation or that the central bank is willing to tolerate low inflation for longer”.
Steve Blitz, chief US economist at TS Lombard, warns that Mr Powell will have to move quickly to cut rates. "The tariff clash obviously complicates their thinking about what to do next, given that a monetary response alone is ill-suited to fight a trade war. Nevertheless, an insurance cut was promised, and September increasingly looks like it will be a cut too late if the trade war rolls on, as it now looks set to do," Mr Blitz said.
Los economistas de TS Lombard explican en una nota que "a la cantidad que pueden pedir los bancos se le debe restar la que tomaron prestada en las TLTRO-II. Esto implica que la capacidad de las entidades italianas y españolas para beneficiarse de estas subastas es muy limitada al principio".
Konstantinos Venetis, Ökonom beim unabhängigen Researchanbieter TS Lombard, schreibt: «Dabei handelt es sich nicht bloss um Gegenwind eines sich in die länge ziehenden Handelsdisputs mit China. Der US-Abschwung ist in vollem Gang und wird längere Zeit andauern. Das ist konsistent mit der Verschlechterung unserer Frühindikatoren und der inversen Zinskurve.»
Konstantinos Venetis et Davide Oneglia, économistes de TS Lombard, soulignent ainsi la divergence entre le consensus des prévisions de croissance du produit intérieur brut (PIB) des Etats-Unis et les anticipations de marché sur le nombre de baisse de taux par la Réserve fédérale aux Etats-Unis.
Kallum Pickering, economist at Berenberg, and Shweta Singh, managing director for global macro at research firm TS Lombard, talk about the standoff between Italy and the European Commission. The European Commission confirmed it will take the first step in a disciplinary process that would put Italy at risk of financial penalties. Pickering and Singh speak on "Bloomberg Daybreak: Europe." (Source: Bloomberg)
Kallum Pickering, economist at Berenberg, and Shweta Singh, managing director of global macro at research firm TS Lombard, talk about President Donald Trump's decision to impose a 5% tariff on Mexican goods until that country stops immigrants from entering the U.S. illegally, and the implications for the global economy and markets. They also discuss the trade disputes between the U.S. and China on "Bloomberg Daybreak: Europe." (Source: Bloomberg)
“It’s clearly negative for Mexico, but with this being escalated at a time when the China situation is still not resolved it shows that Trump views tariffs as a weapon he can use without damage to the U.S. economy,” said Jon Harrison, managing director, emerging markets macro strategy at TS Lombard. “That’s worrying and sends a bad signal for the outlook for global trade overall.”
“This being escalated at a time when the China situation is not still resolved shows that Trump views tariffs as a weapon he can use without damage to the U.S. economy. That’s worrying and sends a bad signal for the outlook for global trade overall,” said Jon Harrison, a senior macro strategist at TS Lombard.
TS Lombard believe the uncertainty triggered by the trade impasse between the US and China will extend the global economic slowdown into the second half of the year. One danger is that US capital expenditures slow materially and weigh on the economy from here. They also highlight how the pain spreads globally:
Trump dealt a double blow to Huawei, writes Eleanor Olcott of London-based TS Lombard, by denying the Chinese company access to the rollout of U.S. 5G data networks, but more importantly, also blocking all exports to Huawei.
Buying bank bonds would be a game changer, said TS Lombard senior economist Shweta Singh. “This would release a lot of assets for the ECB to buy but it is next to impossible, as it would complicate the ECB’s role as bank supervisor,” she said.
Indian stocks bucked the regional trend to trade at historic highs on May 23 as Prime Minister Narendra Modi's BJP party looked set for a landslide win in the country's general election. Shumita Deveshwar, Director of India Research at TS Lombard, spoke on the latest development.
Rory Green, economist at research firm TS Lombard, noted that there has been little material progress in the yuan's use as a global currency for trade recently. ‘We do not expect to see an improvement in trade-based measures of renminbi internationalisation in 2019. The trade war, and weaker global demand will limit renminbi usage for transactions,’ he said.
The global economic slowdown is caused by the foreign exchange effects of trade war fears, says Charles Dumas, chief economist at TS Lombard. Speaking to Daybreak Europe’s Caroline Hepker and Yousef Gamal El-Din, Dumas also says the Federal Reserve will need to cut rates mid-year because the global slowdown is spilling into the U.S.
Huawei's CEO has played down the significance of US restrictions. Ren Zhengfei said he and Google are discussing emergency measures to find a solution after Google announced it would comply with a US order to stop supplying Huawei. Eleanor Olcottt, China Policy Analyst at TS Lombard, told CNA how Huawei's lack of access to Android updates would affect consumers.
China is in a stronger position now, following a wave of stimulus measures such as tax cuts, infrastructure investments and more flexible loan standards, says TS Lombard economist Rory Green. And more stimulus is expected to cushion the latest rates, including possible subsidies for cars and appliances, and cuts in banks' reserve ratio requirements to stimulate more credit.
But while tensions have flared up, strategists still expect the two sides to strike a trade deal eventually. Trump and Chinese President Xi Jinping are expected to meet at the G-20 summit next month. Bo Zhuang, chief China economist at TS Lombard, noted “the fundamentals call for [a] deal.”
In 2018 tariffs had an “economy-wide” net cost to the US of just 0.04% of GDP, says The Economist. The immediate effects on China will be similarly minor, Bo Zhuang of TS Lombard says in the Financial Times. As the Middle Kingdom has developed its domestic economy, the relative importance of exports to the US has fallen sharply in recent years to just 4% of GDP.
Restrictions on Chinese investment in the U.S., especially in technology-related areas, risk stalling the transfer of technologies and foreign know-how, slowing China’s move up the value chain, said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard.
But companies will still have to adapt. "Trade frictions would deter business investment in China or incentivise companies to reallocate capacity to other regional economies or back to the US," said Mr Zhuang Bo, chief China economist in Beijing at research firm TS Lombard.
“Coeure is very much an economist that markets favor, but it’s often overlooked to what degree the role of the president is a political one,” said Constantine Fraser, European political research analyst at TS Lombard in London.
“I was just playing with my old model of trade war impacts,” said Bo Zhuang, chief China economist at TS Lombard. According to Mr Zhuang’s estimates, the latest tariffs, if implemented for a full year, would reduce China’s exports to the US by $75bn — and by $170bn if Mr Trump follows through on his threat to impose a 25 per cent tariff on all Chinese imports.
“Global supply chains will be reshaped, with the likely relocation of clusters and producers to avoid tariffs,” said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard. “Trade frictions would deter business investment in China or incentivize companies to reallocate capacity to other regional economies or back to the U.S.”
"The moment Trump announces a date for tariffs on all Chinese goods, that's the moment the yuan will drop," says Bo Zhuang, an economist at research firm TS Lombard. He estimates authorities would allow the currency to swing to as weak as 7.6 yuan to the U.S. dollar, a level that would roughly offset the impact of 25% tariffs on all Chinese imports.
Bo Zhuang and Eleanor Olcott, economists at the consultancy TS Lombard, say the costly implications for both sides of a prolonged fight means a deal is still likely.
“Even if the tariffs remain in place, the fundamentals call for a deal. Trump will maintain talks with China, just as he has done with North Korea following the fallout from the Hanoi summit. The rising bankruptcy rate of US farmers and greater volatility in the markets will sharpen his resolve for a deal,” they say.
“Some commentators have said Beijing will now call for boycotts of US goods and place non-tariff barriers on US goods. At this stage, we believe that such harsh retaliatory measures are unlikely. This week’s events have pushed back our timeline for a deal but the conciliatory language and the measured response from Beijing is reassuring,” they add.
In qualunque caso la patrimoniale sarebbe una mera redistribuzione del reddito, per lo più inefficiente, e in quanto tale non servirebbe per la crescita e l’occupazione perché non farebbe aumentare la produttività del lavoro - vero problema del Paese - che, secondo le elaborazioni di Ts Lombard su dati Ocse, è diminuita del 3,5% negli ultimi 20 anni, a fronte di un aumento medio del 15% negli altri Paesi europei.
“Beijing’s policy focus is sticking to stabilization, rather than chasing a rebound,” said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard. “Some parts of the economy are recovering and there is evidence of green shoots. Obviously, if the trade negotiation goes south with tariff hikes this week, China’s economic policy priority will shift back to easing and stimulus.”
That trend is likely to continue. “There is a very strong incentive [for China] to decouple [its trade] from the US,” said Larry Brainard, economist at TS Lombard. “What we have seen so far is the tip of the iceberg.”
“Following Trump’s weekend intervention, we expect the US-China trade deal will be delayed. However, the Friday deadline for a hike in existing tariffs will likely be extended as the two sides try out various end-game negotiating tactics,” said Jon Harrison at TS Lombard.
“Beijing’s policy focus is sticking to stabilization, rather than chasing a rebound,” said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard. “Some parts of the economy are recovering and there is evidence of green shoots. Obviously, if the trade negotiation goes south with tariff hikes this week, China’s economic policy priority will shift back to easing and stimulus.”
Looking forward, TS Lombard Chief Economist Steven Blitz notes that two-thirds of April’s new jobs were generated in lower-wage services industries such as administration and support services, health and social services, leisure and hospitality, among others. The flip-side of this dynamic is that high-paying job growth has been nearly halved to 1.6 percent since peaking in 2015.
“This looks like Trump exercising ‘Art of the Deal’ tactics and threatening escalation to get more out of China,” says Eleanor Olcott, China policy analyst at TS Lombard in London. “It is also a response to the negative press that has painted him as desperate for a deal leading him to drop key demands. He wants to appear tough both to the Chinese negotiators and the U.S. domestic audience,” Olcott continued in an email to Barron’s. “But this round of threats, the kind of which we haven’t seen for six months, will surely make any deal that is eventually signed appear even more uncertain and fragile. It also makes any signing of the deal between [President] Xi and Trump even more unlikely.”
But Olcott says a sea of red in markets Monday morning could lead to a change of tune since Trump wants a buoyant stock market and economy before the electoral cycle starts. Olcott still expects a deal though perhaps later than most expected. What to watch now: “The key signal now as to whether the tariffs will actually go up from 10-25% on Friday is if [Vice Premier and China’s lead trade negotiator] Liu He comes to Washington this week. If he is in town there is still time to avoid escalation.
It looks like skittish investors are approaching his tweet like the latter rather than, as TS Lombard’s Eleanor Olcott described it to Barron’s, Trump merely exercising his “Art of the Deal” tactics to deliver some surprise to the upside.
The Brexit Party’s likely success in these elections won’t change EU policy. But it might “take some of the wind out of the sails of the campaign for a second referendum, and perhaps make a still-more-Brexity turn more enticing for the Conservatives,” European political research analyst Constantine Fraser, from TS Lombard, says. This could mean the party electing a leader like Boris Johnson, who would push back on demands from Brussels. “At the same time, the more moderate voices in the Conservative party will see this as a reason to get Brexit out of the way as soon as possible—even if that means compromising with Labour. In a sense, the Brexit Party tugs the different wings of the Conservatives in different directions.”
That policy torpor may turn out to be a big misreading of the economy, according to Steve Blitz, chief US economist at TS Lombard. "Our reading of recent economic data suggests that the time to be pre-emptive should be now. A slowdown strong enough to pull inflation lower is in the making," he said.
Global trade could remain subdued even if the US and China reach a deal to end their trade war later this month, according to the research firm TS Lombard. In its latest report on emerging markets, the firm said it expects a decline in emerging markets export growth to get even steeper in April despite a strong recovery in Chinese exports in March. “The model suggests that there will be a sharp downturn in China’s export growth in April followed by a smaller decline in May, while exports may contract at a slower pace in June,” Jon Harrison, managing director for emerging markets macro strategy at TS Lombard, said in the report. “A US-China trade deal appears likely in the coming month, but there will continue to be a lagged impact on world trade.”
“Russia’s bottom line is to stop regime change by external intervention, but if it falls from within they’ll go with the flow,” Christopher Granville, managing director of EMEA and Global Political Research at TS Lombard, told CNBC Wednesday. “If the political situation evolves internally and a new regime emerges that is strong and stable I’m sure they would pragmatically support it,” he noted. “But a driving force for Russia is to stop a process of regime change by outside forces ... and the U.S. using its power to overthrow governments it doesn’t like.”
Steve Blitz at TS Lombard has an interesting chart that helps explain the lack of inflationary pressure, in this case showing how “consumer demand for credit in this cycle pales relative to disposable income, in marked contrast to the prior cycle”.
"The purpose of the imminent Aramco bond issues is to facilitate extraction of cash from the company and into MBS’s [ruling Crown Prince Mohammed bin Salman] pet projects," states a recent report from London-based financial firm TS Lombard.
“This stimulus will be of a far lesser magnitude than previously. It will be about half the size,” says Rory Green of TS Lombard. The regime’s leadership, the politburo, has signalled that enough firepower may already have been spent on boosting the economy. Green places great weight on the Chinese leaders’ use of the term “structural”. This suggests they believe they have done enough to stabilise the slowdown in growth and that preventing more leveraging – the build-up of debt – is now more important than higher rates of expansion.
Other analysts, however, believe that the fragmentation of the Spanish party landscape will lead to lengthy coalition negotiations. Whether this is a pity for the economy, however, may be an open question, according to the British analyst TS Lombard. Once before, in 2015 and 2016, Spain was without a government for nearly ten months, and there were two elections without any negative impact on the economy.
Once the source of global liquidity, China will in the future likely try to attract more of those capital flows itself. "China is moving toward becoming a net capital importer from being one of the largest exporters of capital globally," notes Shweta Singh of TS Lombard in a recent report.
Businesses are expected to work down elevated inventories in future periods, while the U.S. trade balance probably will return to a deficit, said Steve Blitz, chief U.S. economist for the forecasting firm TS Lombard. "Beyond the headline number, when I look at this report, I see nothing that tells me that growth momentum is going up," Blitz said. "It sets us up for a weak second quarter."
That is a potentially risky move, warns Shweta Singh of TS Lombard. She pointed out to Lomb Alphaville: If you are investing in dollar-denominated assets unhedged, there is a pressure point when the dollar depreciates, because your asset value decreases.
Fiscal stimulus margins are also reduced with a consolidated budget deficit that Bo Zhuang, the Chinese economist at TS Lombard, estimates will exceed 5% of gross domestic product this year and even exceed 9% by taking into account quasi-fiscal levers, such as local government financing vehicles or private placements.
Economists at research consultancy TS Lombard on Monday said sub-par indicators released so far this year suggest the economy may even have contracted in the first quarter, with uncertainty over reforms putting company investment plans on hold.
“In recent months, the lack of progress on structural reforms has eroded confidence for consumers, industry, retail and services,” Wilson Ferrarezi, the firm’s Brazil economist, wrote a note to clients.
Economic consultancy TS Lombard notes that surveys also show German companies are holding inventory levels that are higher than at any time since the eurozone sovereign debt crisis hit, a measure that implies it will take a long time for growth to return.
The problem has been exacerbated by the trade war with U.S., with tariffs driving up prices of soybeans — used for animal feed — and leading Chinese farmers to slaughter costly breeding swine rather than risk forced culling, said research firm TS Lombard.
Economist Dario Perkins is reminded of 1998, when central banks stepped in to shore up economic growth, only to help add fuel to the final stages of a stock-market boom that came to an abrupt end. “Central bank stimulus helped prevent recession in 1998, triggering a two year ‘melt-up’ in risk assets,” said Perkins, managing director of global macro at TS Lombard in London. “But disappointing earnings meant the resulting stock-market bubble was unsustainable. Corporate profits could again play a decisive role in determining how long the current cycle lasts.”
“The key question … is what is the true severity of China’s African Swine Fever outbreak? And, actually, no one, not even Beijing, knows the answer,” Rory Green, an economist at TS Lombard said. “Chinese authorities have actively downplayed the severity of the disease. Meanwhile small and medium-sized farmers are incentivized to hide [African swine fever] outbreaks for fear of massive livestock and commercial losses. The result is at best [a] murky picture of the domestic pork market.”
“This is clearly positive. Investors have been nervous about the risk of a change of government and policy. Investments that people have been putting off will now be prepared to go ahead, says Jon Harrison, Managing Director, EM Macro Strategy. “Particularly if (Widodo’s share of the vote) is 55 percent, that is a decisive mandate. A narrower margin could give rise to accusation of (election) fraud and so on. This is a good outcome for the market.” “The (Indonesian) central bank is going to be very cautious about letting the rupiah rally too much, and the bond market as well. But foreign investors should be relieved about this. It is in line with opinion polls and expectations.”
“The government is still lacking a viable strategy to promote financial stabilization,” Larry Brainard, chief emerging markets economist at TS Lombard, wrote in a note this week. ”(Its) new plan ... is unlikely to make progress in cleaning up banks’ balance sheets. This suggests a prolonged financial and economic squeeze lies ahead,” he added.
"Infrastructure will likely see a large rebound this year," says Rory Green, an economist for China and North Asia at financial firm TS Lombard in London. He notes that already local governments have made their largest first-quarter bond issuance on record.
A Chinese commitment to import more from the U.S. could hurt companies including Brazilian soy exporters Terra Santa Agro (TESA3. Brazil) and SLC Agricola (SLCE3. Brazil), Rory Green, an economist at TS Lombard, tells Barron’s.
Based on TS Lombard elaboration, the recent rebound in the data on German industrial production could be short-lived and not structural at all, given that not only foreign orders are at the lowest level since the 2008 financial crisis- 2009 but inventories have experienced an increase that has brought the figure to a maximum since 2012 . A warning also for certain triumphalisms at home compared to the latest industry data. For this reason, the word recession itself is no longer a taboo .
“Admittedly, President Trump is much more public and obvious about seeking to bend the Fed to the White House’s will, but he is far from the first to do so and unlikely to be last,” said Steven Blitz, chief U.S. economist at TS Lombard. “Noises aside, this Fed will do what it believes is right, regardless of the praise, brickbats, or nominees that may come its way.”
Brazil, Russia, India and China were coined the BRICs in 2001 by Jim O'Neill, then chief economist at Goldman Sachs. For a while, everybody wanted a piece of the fast-growing emerging markets. But a few years after the financial crisis, the economies started diverging.
Some of the impetus to raise funds comes down amid a slowdown in wage growth. As noted by TS Lombard’s Steven Blitz, average hourly earnings for all workers slid to 3 percent in March on a three-month annualized basis from 3.6 percent in October.
Shweta Singh, economist at TS Lombard, an independent research provider, says that operations such as TLTROs are “helpful when banks are constrained in their ability to meet demand for credit. But it is mainly weak demand, especially in Italy, that has held back bank lending in this cycle. So the boost from TLTROs is limited”.
The back story. One of the first market watchers to make the comparison was Dario Perkins, global macro strategist with TS Lombard. He published a piece about it in August, when tightening Fed policy and a strengthening dollar were raising financial pressure on emerging markets (Argentina and Turkey in particular).
“This bond is being issued for two reasons: to establish Aramco’s status as an independent corporate identity and to enable the transfer of wealth out of the company,” said Marcus Chenevix, analyst, MENA and global political research at TS Lombard.
Investors hoping for the German "economic locomotive" to bounce back quickly from its factory woes "will have to wait a bit longer", according to TS Lombard managing director Shweta Singh. She pointed out that forward-looking indicators for German manufacturers "point to continued weakness in the coming months". Ms Singh also argued that an overhang of stock built up in its factories will weigh on production. Business survey data has indicated that companies are holding the most stock since the eurozone debt crisis.
Steve Blitz, chief U.S. economist at TS Lombard, noted that hiring has been especially strong in health care, leisure and hospitality, areas of the economy that tend to employ more low-wage workers. Hiring has tapered off, he said, in most industries that offer higher pay.
Larry Brainard, emerging markets economist at consultancy TS Lombard, drew a comparison with Argentina, which last year ran into similar financing difficulties, but has since managed to stabilise the peso after calling in the IMF. “It was horrendous in Argentina, too, but they made all the numbers public. The IMF brings transparency,” he said. By contrast, Mr Brainard added, Turkey was currently “uninvestable”.
“Why would you wait for a definitive sign that the economy is falling down before actually cutting rates?” Steve Blitz, chief U.S. economist at TS Lombard, said in an interview. “There’s no inflation to worry about. If there is an inflation problem next year, so what?”
Italy’s anti-establishment coalition has already clashed with Brussels over immigration and its spending plans. Its deal with China is likely to be another source of conflict. But for China’s president, Xi Jinping, the deal is “fantastic”, says Rory Green of TS Lombard. “It’s a really big coup for Xi and it will give him a foothold in the heart of Europe.”
Analysts believe that the victory will be for a Brexit softer than the one proposed by May. "According to the voting record so far, the most likely option to win is a permanent customs union with the EU," says Christopher Granville of TS Lombard.
Rory Green, a China and North Asia economist at TS Lombard, told CNBC Wednesday that the deal with Italy was “fantastic” for President Xi Jinping. “It’s a really big coup for Xi Jinping and it will give him a foothold in the heart of Europe.”
Even with a trade deal, China would still like to reduce its dependence on the U.S. and could diversify its sources of supply, says Bo Zhuang of TS Lombard. Weighing in on China-Europe relations, he also says Beijing wants to ensure that a global alliance isn’t formed against China.
For Steven Blitz, economist at TS Lombard, the question remains whether the pause in the normalization of the Fed's monetary policy and the stimulus measures announced by China in the face of the slowdown in its economy will be sufficient to revive growth or if its weakening will continue. "We believe that the series of bad indicators is not over yet and therefore the next Fed initiative will be a rate cut in the second or third quarter," he warns.
Several senior ministers said Monday they do not want May to resign, casting doubts over the rumored coup. Nonetheless, her position remains “fragile,” according to Constantine Fraser, a European political research analyst at TS Lombard. “Despite her Cabinet seemingly abandoning an attempt at a coup over the weekend, May’s position is still extremely fragile,” he said in comments emailed to CNBC.
"Not only will they have less policy space compared to previous economic downturns, but they face all sorts of political pressures which - in the extreme - could seriously dilute their independence," said Dario Perkins, Managing Director of Global Macroeconomics at leading London-based economic consultancy TS Lombard. "Officials know the next recession will require a large fiscal response and the only question is how subservient central banks become as part of this transition."
Dario Perkins, at TS Lombard, argues the rapid response from central banks to December’s market bloodbath shows they are “seriously afraid of the next recession” amid signs that new, radical ideas are coming to the fore.
For Dario Perkins, economist at TS Lombard, the much faster and sudden reaction of the central bankers to what he calls a stock market crash at the end of 2018 can be explained by their lack of room for maneuver and their fear of losing their independence.
The spread between three-month bills and 10-year notes last turned negative in August 2007, just as the financial crisis was deepening, so the precedent is obviously worrying. The spread also turned negative in September 1998, Dario Perkins, managing director for global macro at TS Lombard, says in a research note. But thereafter, the stock market went on to party like it was 1999 until the 2000 peak.
Charles Dumas, chief economist at TS Lombard, discusses the Federal Reserve's rate path as he expects an interest rate cut later this year. He speaks with Bloomberg's Matt Miller on "Bloomberg Markets: European Open." (Source: Bloomberg)
“If the Fed does maintain a dovish bent, it will give more of an inflation premium and push long-end yields higher, steepening the curve a bit,” said Shweta Singh, managing director for global macro at T.S. Lombard, in an interview with MarketWatch.
The government and the central bank are responding with growth-supporting measures. For example, a further reduction in the minimum reserve ratio of commercial banks and tax relief was announced. However, according to Bo Zhuang, China economist of the independent economic research institute TS Lombard, such measures will not be fully effective until the second quarter.
“When FOMC members meet this week, they will find that since their last get together at the end of January short-term yield relationships are still forewarning lower growth despite concerted jaw-boning efforts that include the promise of ending balance sheet reduction early,” said Steven Blitz, chief U.S. economist at TS Lombard.
But economics goes in cycles, even if these cycles are sometimes extremely long. Dario Perkins of TS Lombard notes that economists in the 1930s came to the conclusion that central banks had done all they could. Cutting interest rates when they were already low was like “pushing on a piece of string” and, as a result, governments needed to use the power of the state to shorten dole queues.
Shweta Singh and Oliver Brennan, analysts at TS Lombard, agree on this point: "Only the Italian banks took 33% of the funds offered in the TLTRO-II, followed by the Spanish ones that took 23%. exceeded 80% of everything they can borrow under this program, so their ability to request new funding in the TLTRO-III could be very limited. "
“As a result, Chinese [venture capital] firms are adapting their investment strategy and are turning to other markets; we expect investment in Germany, the [United Kingdom], South Korea, Taiwan and Japan to receive a boost,” Eleanor Olcott, China policy analyst at TS Lombard in London, said in a research report. One area of uncertainty for the technology industry is how the US will implement new export control legislation that targets “emerging and foundational technologies”, Olcott said.
“The fact we have higher interest rates and a weaker currency means there’s a rising probability of corporate defaults and non-performing loans,” said Jon Harrison, managing director, emerging markets macro strategy at TS Lombard.
Steve Blitz, chief U.S. economist for the forecasting firm TS Lombard, said in a phone interview that consumers might be more inclined to put off purchases if they don't see imminent signs that prices are going up. "If people think the price is going to be higher a year from now, they'll buy it today," Blitz said. "If people's expectations of inflation start to drop, they can wait till tomorrow."
“Weakness in capex and exports, much of it tied to knock-on effects from the tariffs and trade-war confusion generally, are likely behind the slowdown in hiring by the manufacturing sector,” said Steve Blitz, chief U.S. economist at TS Lombard in New York.
Shweta Singh, managing director of global macro-economic research at consultancy TS Lombard, said the move would give banks time to rebuild their financial buffers. It does not, she said, address the problem of weakening eurozone growth and loan demand.
Shweta Singh, economist at the consultancy TS Lombard, said the latest round of cheap loans would ease funding pressures on Spanish and Italian banks and help them to continue lending to the real economy. But it would make little difference if Italian businesses did not want to borrow — the main problem in recent months.
Steve Blitz, chief U.S. economist at T.S. Lombard, thinks the Fed will probably view the data as a “glass half-full” for now and maintain its patient pause on interest-rate increases and proceed with its adjustment of its pace of balance sheet reduction. “Our probability bias is that the weakness in the economy is evident enough by summer that they cut policy rates by 25 [basis points],” he writes in a research report. A basis point is 1/100th of a percentage point.
Steven Blitz, chief U.S. economist at TS Lombard, thinks the Federal Reserve will likely view that data as “glass half-full” for now, and will maintain its patient pause on interest rate increases and proceed with its adjustment of the pace of its balance-sheet reduction. “Our probability bias is that the weakness in the economy is evident enough by summer that they cut policy rates by 25 [basis points],” he writes in a research report. (A basis point is 1/100 of a percentage point.)
The dollar has strengthened more than 2 percent since President Donald Trump began slapping tariffs on Chinese goods last July. That raised the cost of imports for products priced in dollars, such as oil, noted Charles Dumas, chief economist at TS Lombard in London. Over the same period, the yuan has weakened just about 1 percent, though it was down about 5 percent at the end of October. A weaker Chinese currency made the exports of other countries less attractive, said Dumas. The combined effect of a stronger dollar and softer yuan has contributed to growth slowing outside the U.S. and China, he said.
“The fascinating thing to me is the degree of damage being done outside the two main principals, the U.S. and China,” said Dumas. Other countries “were kind of being squeezed on both ends.”’
The ECB will cut forecasts for growth and inflation again today. Huawei sued the U.S. for penalizing it without a fair trial. Blackstone may hit about $20 billion when it completes the first phase of capital raising for its flagship fund. TS Lombard’s Shweta Singh discussed what to expect from the ECB on Bloomberg TV. Erin Roman hosts.
“Near term ... it is hard to get very bullish on oil prices. The market is still working off the surpluses built in H2 2018, keeping OECD commercial inventories stuck above the five-year average,” said energy analysts at economic research firm TS Lombard.
“The rebound we saw in January and February was largely the reaction to prior excessive selling,” says Konstantinos Venetis, a senior economist at London-based financial firm TS Lombard. Now, he says, the markets are free to trade based on fundamentals, and it is clear that the world economy isn’t growing as fast in 2019 as it did last year. China, traditionally a major buyer of oil and materials, is stimulating its economy, but “it is more of a defensive move, and any positive economic effects won’t get felt until next year,” Mr. Venetis says
The 1-to-5-year spread is as good an indicator of economic slumps as the more commonly monitored 1-to-10-year gap, according to Steven Blitz, chief U.S. economist at TS Lombard, a London-based research provider.
The 100 companies in the MSCI USA index that have bought back the most stock have also boosted capital investment by 45% in the past year, said Andrea Cicione, head of strategy at the global investment advisory firm TS Lombard.
“The change in the tax law reduced the tax-advantage of mortgages, especially in high-tax states, and this has had its negative effect. The latest survey data covering new-home builders has improved some, in line with lower mortgage rates, but the turn in sentiment did nothing to alter the downtrend in builder sentiment that began last March,” noted Steve Blitz, chief U.S. economist for TS Lombard. “Builders have a good record of forecasting the unemployment rate 18 months out,” Blitz added. “Not wanting to dismiss the prescience of builders now, the relationship implies a 5% or so unemployment rate by the middle of next year.”
“China is probably going to get worse before it gets better, and the U.S. will feel that slowdown,” said Andrea Cicione, head of macro strategy at TS Lombard, who believes the Fed is likely to lower rates by the end of the year.
As TS Lombard, a research firm, points out, share prices are not the only determinant of spending but they count more than they used to because equities make up a bigger percentage of household net worth than real estate for only the third time since the end of the second world war. An important difference in the current cycle compared with the previous two occasions is that so much of the increase in ownership reflects net purchases as opposed to simply being the passive result of a valuation uplift in a strong bull market.
With inflation subdued at around 2%, there's no incentive for the Fed to raise rates this year, especially since doing so would likely cause the economy to slow further, said Steve Blitz, chief U.S. economist at the forecasting firm TS Lombard.
"While it seems probable that Trump will extend that deadline to avoid derailing the substantive negotiations now in progress, this cannot be taken for granted," said Christopher Granville, managing director of global political research at TS Lombard. "The second round of talks in Beijing at the end of last week produced no breakthrough, but equally — and perhaps more important — no breakdown either." "On balance, then, trade war risks remain skewed to the upside," Granville added.
"China is also in the driving seat; when China coughs everyone catches a cold and that's particularly true for emerging markets," says Jon Harrison, managing director of emerging market macro strategy at London-based financial firm TS Lombard. China's softening economy is being made worse by the still unresolved trade war with the U.S. and that is having a knock-on effect. "There's been a synchronized slowdown in trade between the U.S. and China," says Harrison. "And emerging markets exports are now much lower."
Markets have recovered from the recent turbulence due to deaf-headed central banks and hopes of resolving the trade dispute with a brilliant rally. The economist Charles Dumas, however, fears the "buy the rumor, sell the fact".
"The overriding point is that there is a genuine lack of momentum in German manufacturing, and things are unlikely to improve unless global demand - especially Chinese demand - strengthens," said Shweta Singh at economic consultancy TS Lombard. "The transitory factors holding back growth will fade, but those expecting a swift, healthy rebound in Germany will be disappointed," she said.
Investment advisory firm TS Lombard believes that a no-deal exit could see the pound fall to around 1.20 to the dollar and 0.925 pence to the euro. It believes that parity against the dollar is pushing things too far and that if parity were hit against the euro it would not last long.
Constantine Fraser, an analyst at the London firm TS Lombard, explains that "the consensus in economic policy in Spain is still quite broad, and there is little prospect of a big change of direction." A center-right coalition could be something more pro-business while a center-left could be more pro-consumer, but there is nothing radical on the table. " In his opinion, the big risks are a political vacuum, such as that of 2015-2016, that prevents the formation of a stable government, or an increase in tensions in Catalonia, especially if a stronger executive with the separatists emerges. "The current context is less positive due to the end of purchases of ECB bonds and the slowdown in global growth, whether due to a confrontation in Catalonia or the fragmentation in Madrid,
Constantine Fraser, an analyst at the London firm TS Lombard, explains that "the consensus in economic policy in Spain is still quite broad, and there is little prospect of a big change of direction." A center-right coalition could be something more pro-business while a center-left could be more pro-consumer, but there is nothing radical on the table. "
The obvious loser from a ban is Huawei, but the company would likely try to offset lost sales by intensifying its push into emerging markets, while continuing to reduce its dependence on U.S. companies, says TS Lombard China policy analyst Eleanor Olcott. Huawei didn’t respond to a request for comment about a potential ban.
By contrast, at the other end of the lending market, bankers are tightening their credit standards, according to Steven Blitz, chief U.S. economist at TS Lombard. This is a response to the Fed’s previous rate hikes, which have boosted the central bank’s target range for federal funds to 2.25%-2.50%, as well as narrowing the spread versus the two-year Treasury note, which yielded 2.533% Wednesday. The Fed sets the overnight fed-funds rate, while two-year note yield reflects expected future rates.
The global corporate bond market has a volume of almost 12 trillion euros. $, of which 60% had a rating below investment quality or were not rated at all. Overall, company balance sheets seemed to be in good health, commented TS Lombard in November. US corporations would look better than European ones.
"Confidence levels have increased steadily since October, backed by the government's liberal agenda," Larry Brainard, chief economist for the EM team at TS Lombard, wrote in a note. "The confidence boost is crucial to sustain the rebound but it must be followed by concrete progress on reforms. Longer-term, sustainable growth is possible only if structural reforms are made."
‘In effect the government has abandoned its promises to achieve fiscal consolidation,’ said Lawrence Brainard, chief emerging market economist at research firm TS Lombard. He noted that the budget deficit had already surpassed the target 3.3% of GDP for the fiscal year ending March.
Shweta Singh, senior economist at TS Lombard, said the design of the TLTRO programme would have much bearing on the rate path. “If they decide to go for a fixed interest rate on the TLTRO loans then that does suggest the ECB expects policy to remain low for a longer period,” she said.
“Global demand will remain soggy this year, keeping a lid on underlying inflation pressures,” said Shweta Singh, managing director of global macro at research firm TS Lombard. “Subdued global inflation could mean that policy will remain easier for longer.”
“We are at a point when the yield curve shift begins to impact future growth by slowing credit extensions or even throwing them into reverse … Credit standards for commercial and industrial loans tightened in the fourth quarter … Tighter standards and weaker demand were also in evidence in real estate and consumer loans,” writes research firm TS Lombard.
Dario Perkins, managing director for global macro at TS Lombard, finds himself in the middle. The Fed could cut rates by the second half of 2019 as exports weaken and the economy begins to feel the delayed, full effects of the previous tightening in financial conditions, he said, in a Thursday note. But he doesn’t expect the U.S. economy to fall into a recession, which means that the Fed could resume hiking rates as the global economy strengthens into 2020.
Steve Blitz, senior economist at TS Lombard, said the Fed wants to err on the side of caution and avoid anything that undercuts the economy. The plunge in the stock market DJIA, -0.25% SPX, +0.07% in December and tighter restrictions on credit for consumers and businesses gave them quite a fright. “To them inflation is not a 2019 problem,” he said.
Jon Harrison, managing director, emerging markets macro strategy at TS Lombard, said that the outlook for growth in China and the timing of when further stimulus measures by Beijing affect the economy are the biggest risk to emerging market investors. As a trade war with the United States escalated last year, China’s economy grew at its weakest pace since 1990, with the gross domestic product growth rate at 6.6 per cent in 2018. “We met with 20 institutional investors in London in late January during our China macro marketing trip,” Harrison said in a research note. “In general there was greater optimism than during our previous visit in November, centred on the prospect of new stimulus. We caution first that stimulus policy is not yet sufficiently strong to stabilise growth and second that there is a growing risk of deflation.”
“We think the consensus is probably still a bit too optimistic in terms of expectations for earnings growth this year,” said Andrea Cicione, head of macro strategy at TS Lombard, who noted U.S. multinationals’ exposure to foreign markets makes them vulnerable to slowdowns in China and other emerging markets. “The slowing of growth in China and the rest of Asia—well, that’s having an impact on profits.”
"At this stage, it seems almost inevitable that Brexit will have to be delayed in one way or another, at least for a few weeks," said Constantine Fraser, European Policy Specialist at the research firm, TS Lombard.
A broader improvement in risk sentiment should keep oil prices well-supported, despite near term demand headwinds due to the Lunar New Year holidays in Asia this week, says Konstantinos Venetis, senior economist at TS Lombard. The combination of lower oil output from OPEC and its allies as well as the lingering risk of a greater disruption in Venezuelan production could take WTI closer to $60/barrel, he says. Oil futures have pared their modest gains in early Asian trading and March WTI is trading flat at $53.66/barrel and April Brent is down by a cent at $61.97.
"A legal headache would arise if the two sides wanted to extend past the beginning of July, which is when the new European Parliament would take up its seats, as neither side expects the U.K. to participate in May's European elections," Constantine Fraser, a European analyst at TS Lombard, told CNBC via email. "But the two sides' lawyers are already looking at how this could be managed, and if a longer extension was clearly needed the two sides would almost certainly work something out."
Meanwhile, the Fed's moves to raise rates had started to bite. Steven Blitz, chief U.S. economist at TS Lombard, traces the market's recent swoon and the ensuing Fed pivot to late September, when the central bank pushed interest rates above the inflation rate for the first time in a decade.
Jerome Powell is responding to the shape of the yield curve, says Steve Blitz, Chief U.S. Economist at TS Lombard. He spoke to Daybreak Europe’s Nejra Cehic and Markus Karlsson after the Federal Reserve’s dovish turn at its January meeting, saying the FOMC is taking its cue from credit markets.
In the money market, however, there are no signs of too tight liquidity. "The refinancing of the banks was never a problem during the reduction of the Fed balance sheet," says US economist Steve Blitz of the research house TS Lombard. At present, there is little difference between the interest rate at which banks lend money (with short-term securities-backed repo loans) and the interest rate at which banks park excess reserves at the Fed.
‘The confirmation of the election date has already boosted markets. We expect a smooth transition to the new constitutional arrangement, which will further attract foreign investors,’ said Krzysztof Halladin, Southeast Asia analyst at London-based research provider TS Lombard.
‘The tourism and consumer sectors are the most likely to benefit from political stability,’ he added.
A formal proposal has not been presented yet and time is of the essence for Bolsonaro. The Bolsonaro administration has its best shot at implementing meaningful pension reform in the next six months, according to Elizabeth Johnson of TS Lombard. After that, it becomes more of an uphill battle.
The drop in reserves has yet to slow the pace of lending in the broad economy by banks, but as TS Lombard cautions: “If the Fed persisted with QT at the current pace, credit creation could soon start to face headwinds.” A lower level of bank reserves also reduces the scope for funding short-term lending activity in the repo and commercial paper sectors.
Eleanor Olcott, a China policy analyst at TS Lombard, says the Huawei situation shouldn’t hinder progress on a trade deal because, as the global economy slows, both sides want a resolution to the conflict.
TS Lombard U.S. economist Steven Blitz. recall that what most shocked the market at Powell’s December post-Federal Open Market Committee press conference was his assumption that the reduction of the Fed’s balance sheet (or quantitative tightening) was not even a monetary policy tool, and could continue on a sort of auto-pilot. As Blitz notes, Powell has sent some signals that he has had a change of mind.
"The euro's main achievement is still being here, and it's very likely that it's here to stay," Constantine Fraser, European political research analyst at TS Lombard, told CNBC. "This slightly mad project of a supranational currency union with wildly different economies within it has lasted 20 years and brought these economies and countries closer together." Fraser said that the biggest impact the euro has made in the region is that "it has enormously raised the cost of backtracking on the European project."
The Fed “needs a graceful way to back off” a three-year-old tightening cycle that was expected to continue into next year, wrote Steven Blitz, U.S. economist for TS Lombard. He said he anticipated the Fed will signal its new plans by changing the balance sheet program at this meeting or the next one in March, then be forced to cut rates later in the year.
The governing council expects key interest rates to remain at their present levels at least through the summer of 2019. But markets have already pushed out the first hike expectations to June 2020, wrote Shweta Singh, Managing Director, Global Macro at TS Lombard, in a note published on Monday.
Steven Blitz at TS Lombard says the Fed needs to respond to the signal from asset prices and prevent a deterioration in markets that would raise the risk of a sharper economic slowdown. Besides signalling a pause in rate rises, that also means slowing the pace of the bank’s balance sheet reduction, also known as “quantitative tightening.” ‘’This is the critical year in terms of recession risk, not 2020,” says Mr Blitz, who is chief US economist. ‘’A recession starts this year; then a pause from the Fed and cutting the pace of QT along with China stimulus helps the economy regain altitude. That’s what Europe and Japan are waiting for.‘’
Eleanor Olcott, a China policy analyst with research firm TS Lombard, said rhetoric from both Beijing and Washington had been “less belligerent and more cordial in the run-up to these talks” with officials “keenly expressing optimism for the negotiations to culminate in a deal”.
“There are some signs of investment revival in certain sectors, and therefore it’s entirely possible that demand for jobs in those sectors will be rising,” said Amitabh Dubey, a political analyst with consultancy TS Lombard. “The important point politically is that it’s the lower-end jobs that matter, because that is where the job destruction had happened since demonetisation,” he said, referring to the government’s overnight removal of high value bank notes from circulation in late 2016 in a bid to curtail the shadow economy and criminal activity. “It’s not clear that Naukri.com would be picking up what’s happening at that level,” Dubey said.
Idiosyncratic factors explain much of the euro area’s slowdown, but structural factors are weighing in, says Shweta Singh, Managing Director for Global Macro at TS Lombard. She spoke to Daybreak Europe’s Anna Edwards about Europe’s loss of momentum, seeing continued weakness throughout 2019.
Retailers like Macy's and Nordstrom complained of sluggish business in December. "There will be some industries that will suffer lasting damage, including restaurant operators," says TS Lombard's Steven Blitz. These include chains like McDonald's, Chipotle and Starbucks.
Steve Blitz from TS Lombard thinks it will take time for the recent policy tightening by the Fed and last year’s slide in equities and credit to work through the financial system and the broader economy. “We are not really out of the woods,” he says, adding that it’s important for investors to focus on leading indicators of activity, particularly that of credit and flows such as those through small bank lending. Across the US, small banks, or those institutions outside the top 25, have been very important sources of business and consumer lending, notes Steve, who adds: “Small-bank loans have increased from 55 per cent of large-bank loans when this cycle began to 75 per cent.” And since the Fed funds rate rose above 2 per cent in September, Steve says there has been a slowdown in lending from small banks and this is a very important factor to watch in the coming months.
"In the end, it will all depend on how Trump decides between a short-term outcome and longer-term aims," Jonathan Fenby, chairman of the China team at TS Lombard, said in a note Sunday. "If Trump wants a deal for his own purposes, he can side with those in the administration who think a broader agreement can be constructed to enable the two countries to revert to a less confrontational relationship which will spare US companies from further trade war damage and cheer markets while setting Beijing on a more resolute path of reform."
The government shutdown, sparked by a debate between President Trump and Congress over funding for Trump’s proposed border wall, is the latest political action to affect the economy, according to Steven Blitz, chief U.S. economist at TS Lombard. Other “missteps” that could hurt the economy include the U.S.’s trade battle with China and the Federal Reserve’s pace in future rate increases, the economist said.
Andrea Cicione, head of macro strategy at TS Lombard for one thinks “earnings are likely to grow more slowly than consensus currently anticipates” and adds: “Taking a more realistic assumption of 5% EPS growth this year (as opposed to 10-15% consensus estimates), US equities trade at 17x forward earnings — in line with the long-term average.”
"The U.S. does not need this quasi-public forum to communicate its thoughts, in fact I think it would be better if the current administration would communicate it's every thought a little less often," Steven Blitz, chief U.S. economist at TS Lombard, told CNBC via email. "The bigger loser of the U.S. not attending in some official capacity is Davos, as Trump basically is telling them it is an expensive boondoggle that is nice to attend, but not necessary for the U.S. government. He is right," Blitz said.
Steven Blitz, chief U.S. economist at TS Lombard said the economy appeared to be slowing down, noting reports from Macy’s, Nordstrom and other retailers talking of a weak December, and he expected the shutdown to hurt first quarter growth. “Some of it will come back in the second quarter, but there will be some industries that will see lasting damage such as restaurant operators,” he told Reuters.
In the next few days, May will try to start some concessions to Brussels to try to seek again the ratification of the House of Commons in a vote scheduled on January 29. Christopher Granville, an analyst at TS Lombard, stated that "the Brexit date will be delayed, it will take more time to implement Brexit, since the game between the parliamentary factions will last until February."
Dario Perkins at TS Lombard in his latest Macro Picture writes: “The Chinese are gradually moving towards policy easing but are reluctant to introduce a stimulus on the scale of their previous credit splurges. We think they will stabilize their economy by midyear, but they won’t do enough to generate a powerful global revival.”
Steven Blitz, chief U.S. economist and managing director of TS Lombard, a research company, agreed with Yellen, saying "uncertainty makes people less willing to invest in their business and to invest in certain supply channels, because they don't know if that supply channel is going to suddenly become more or less economic than the one that existed before."
Oil has bounced into bull-market territory following 4Q’s plunge. But the rebound is still fragile, says TS Lombard’s Konstantinos Venetis, with ongoing uncertainties like US-China trade, the Fed and China’s economy.
“Bad things come in threes, or so goes the old saying, and the government shutdown looks like the third in a series of a policy missteps that have undermined the expansion and pushed the probability of a recession to the highest level since early 2007,” said Steven Blitz, chief U.S. economist at TS Lombard, in a Wednesday note, citing New York Federal Reserve Bank data.
Constantine Fraser, European analyst at research firm TS Lombard, said that Greece will probably avoid a snap election in the coming months, given that some lawmakers of Anel will continue to support the government. "Greece's creditors and the EU will be looking closely not only at the vote of confidence, but at the numbers in parliament on the government's other business," Fraser said.
"The protests matter to Hungary, and to Europe, because so far Orban's government has been going virtually unchallenged," Constantine Fraser, European political research analyst at TS Lombard, told CNBC via email on Thursday. "Despite occasional waves of protest in Budapest, the Hungarian opposition has been in disarray for years and Fidesz (Orban's party) has been able to gradually tighten its grip on the country and suborn its institutions," Fraser said.
"The window to pass reform in Brazil is never open for long," said Elizabeth Johnson, a managing director at TS Lombard, in a note Friday. "Sentiment could shift if the administration fails to make headway on pension reform over the next six months, thereby missing this historic opportunity."
Saying the past week’s oil bounce came after the market was deeply oversold, TS Lombard senior economist Konstantinos Venetis says the bar for a sustained rally remains high due to lingering trade tensions, Brexit uncertainty and a slowing world economy.
Some economists argue that there is room for accelerated infrastructure spending. “China has over-invested in industrial infrastructure, but I do not think it has over invested in infrastructure overall,” said Bo Zhuang, China economist at TS Lombard in Beijing. “It is under-invested in urban and consumption related infrastructure, urban metros, sanitisation, and anything to do with urban services”.
“EMs were doubly hit in mid-2018 by the US-China trade war,” said Charles Dumas, chief economist at TS Lombard. “The sharp dollar rise pushed up the cost of imports, while the yuan slump made exports less remunerative — for non-oil economies that have been in large deficits for 12 years.”
“The big picture is that of an economy transitioning to a lower-growth equilibrium, marked by deficient domestic demand,” said Konstantinos Venetis, of the consultancy TS Lombard. “Political instability only makes matters worse.”
As Charles Dumas of the research firm TS Lombard put it in a report: “The global slowdown seems to have started in mid-2018, and shows the now-decisive importance of emerging markets... China and other emerging markets account for 40% of world GDP and their slowdown led to a sharp mid-year reduction in world trade growth... In Europe, export dependence led to a negative third-quarter GDP change in Germany and Italy.”
China is eager to seal a deal while at the same time is intent on preserving its economic system, said Jonathan Fenby, chairman of China research at TS Lombard in London. It aims to give Trump enough to be able to claim victory by March, enabling it to get on with the business of modernizing its economy, he said.
Larry Brainard, chief emerging market economist at investment research firm TS Lombard, feels that while the Xi-Trump meeting has helped de-escalate trade tensions, the China-US economic conflict “has moved beyond trade into the area of technology”.
TS Lombard’s China policy analyst Eleanor Olcott noted last month that previous US administrations have considered that only exports of sensitive military technology to China constitute a “national security risk” but that Washington is now proposing to widen “this definition to include a wide array of emerging technologies, including AI, robotics and biotechnology”.
The consensus among investors is that the suppression of government bond yields via QE boosted risk assets such as equities and credit. As the Fed unwinds its balance sheet and the European Central Bank ends its own bond-buying this year, analysts at TS Lombard estimate that “net liquidity provision by the G4 central banks will start to contract by the start of next year”.
Shweta Singh from TS Lombard said European banks lack access to stable dollar deposits and rely on short-term funding from the wholesale capital market to plug the gap, leaving them “particularly vulnerable to bouts of stress.” The STOXX 600 Banks index in Europe has crashed by 18pc over the last three months.
The Federal Reserve raised borrowing costs for the fourth time this year, ignoring a stock-market selloff and defying pressure from President Donald Trump, while dialing back projections for interest rates and economic growth in 2019. We break down the news and market reaction with Steve Blitz, Chief U.S. Economist at TS Lombard.
“The immediate market reaction has been that the statement is less dovish than anticipated,” said Steven Blitz, chief U.S. economist at TS Lombard. “Perhaps people had unrealistic expectations about what the Fed would say.”
"This year you don't have any more tax cuts, but you created the deficit that now has to get funded," said Steve Blitz, chief U.S. economist at the forecasting firm TS Lombard. "It'll require an inflow of capital and that means higher rates."
This comment from Steve Blitz of TS Lombard makes the point clearly enough: Critical for Powell and the FOMC is to not be seen as responding to equity market volatility, a necessary price-discovery exercise the economy requires to efficiently direct capital. With the return of money markets as a viable asset class (something we have been writing about for a while), a re-pricing of risk assets after 10 years of zero yields was always going to be necessary (somehow that thought got lost along the way among market participants) and was never going to be easy, or necessarily quick.
So draghi is in a dilemma, says Shweta Singh, a euro zone economist with TS Lombard. While growth prospects allowed quantitative easing to end, Draghi also saw growing risks. Part of the dilemma, Singh emphasizes, is that the euro area has been too much limited to monetary stimulus.
“Liquid assets were shifted out quite quickly after the purge,” said Marcus Chenevix, an analyst at investment research firm TS Lombard in London. The crackdown targeted wealthy members of the business elite from Jeddah in particular, a group -- Al Amoudi included -- who prospered in part through ties to King Abdullah and King Fahd. King Salman was a former governor of Riyadh and things were “tense from the moment he came in,” Chenevix said.
Shweta Singh, managing director, global macro, at TS Lombard points out that the trade has really shifted to the eurozone, where French and Spanish bonds offer a meaningful yield pick-up. The euro hedging costs are negligible for yen-based investors, courtesy of the ECB’s negative interest rate policy. Indeed, adds Ms Singh, Japanese investors are still getting paid to hedge out euro risk.
The government has also been asking the RBI to provide more liquidity support to help non-bank finance companies as well as small- and medium-sized firms, but the central bank has seemed wary of risking longer-term financial stability for a short-term push to economic growth. “Banks’ non-performing assets (NPAs) are expected to continue rising in the current fiscal year, having increased sharply since the RBI forced banks to proactively declare their stressed assets as bad,” Shumita Deveshwar, a New Delhi-base senior director with TS Lombard wrote in a note to clients on December 10.
Powell "has a clear path from the marketplace to raise 25 basis points. There's no reason for him not to," said Steve Blitz, chief U.S. economist at TS Lombard. "Given all the noise from Trump, it would probably do his credibility and the Fed's credibility more harm if they skipped December."
Practicalities for any programme are a challenge. “Implementation remains frustratingly slow,” notes Shumita Deveshwar, an analyst for research house TS Lombard. “Corruption is rampant at lower levels.”
“When considering the record high levels of optimism, one would think small firms would increasingly opt for capital over labor, especially given the unplanned increase in wages, complaints over the quality of labor candidates and the easy availability of capital (contrary to what they say). Perhaps confidence is not quite as strong as the survey suggests,” said Steve Blitz, chief U.S. economist for TS Lombard, after the release of the October NFIB survey.
“Whenever we see sentiment run up so fast to such high levels, we suspect it can reverse just as quickly,” Blitz added. “This possibility may very well be the signal small businesses are sending given how their commitments to expand increasingly focuses on labor rather than capital. Opinions are cheap and machinery is much more expensive than labor.”
Bo Zhuang, chief China economist at TS Lombard, said that Beijing's intentions to cut auto import tariffs is simply "a small step in de-escalation."
"The car import tariffs in other countries, currently they're all 15 percent. The reduction from 40 percent to 15 percent is just an equal level with other countries, that's all," he told CNBC's "Street Signs."
An emphatic defeat for May by a margin of around 100 votes leaves her withdrawal agreement in tatters and propels sterling into the unknown. Such a conclusive thumbs-down could convince markets that Britain is heading inescapably towards a no-deal Brexit and will push sterling below $1.20, Oliver Brennan, a strategist at TS Lombard predicts.
For Constantine Fraser, expert in European politics at TS Lombard, the main reason for delaying the vote is, for the executive, "to try to obtain other concessions, even symbolic, to give his deputies who still hesitate a excuse to vote this agreement ".
An emphatic defeat for May by a margin of around 100 votes would leave her withdrawal agreement in tatters and propel sterling into the unknown. Such a conclusive thumbs-down could convince markets that Britain is heading towards a no-deal Brexit and push the currency below $1.20, said Oliver Brennan, a strategist at TS Lombard.
Negotiations on US-China trade relations and the arrest of Huawei's chief financial officer Meng Wanzhou on Saturday are a reflection of two separate conflicts between the two powers, says chief US economist Steven Blitz at TS Lombard.
The rise of part-timers is paralleled by the upturn in initial unemployment claims, adds Steven Blitz, chief U.S. economist at TS Lombard. Those data don’t jibe with the “universal mind-set of too many job openings and not enough qualified applicants,” he adds in a client note.
Here is an important point from Jonathan Fenby, a long-term China expert at TS Lombard: "At heart, Trump knows that the audience wants him to play a presidential role. And so he delivered the tariff pause. This also serves to underscore China’s view that Trump’s electoral headaches allow them to play for time until the next president arrives. China may be miscalculating: what Trump let loose is not going away; it will just be handled differently by the next administration, regardless of party."
Eleanor Olcott, a China policy strategist at investment research firm TS Lombard, argued that the trade war has “morphed into a broader economic confrontation which is set to be long and ugly”, adding that, for example, “the [Trump] administration is capitalising on grievances against [intellectual property] theft to push through moves to block China from acquiring cutting-edge expertise”.
Chinese President Xi Jinping is likely to continue lending state support to targeted industries, particularly in technology under the "Made in China 2025" program, according to TS Lombard's Eleanor Olcott.
“The move from unilateral action by the U.S. to bilateral negotiations is a process Beijing has urged since talks broke down in the early summer. But there is no evidence that a start has been made on bridging fundamental differences, in particular the ambition of the president’s trade team to get the People’s Republic to dismantle its Party State system and abandon the economic modernization ambitions of its Made in China 2025 program. Ninety days seems much too short a time to achieve much on this front given the political implications of any systemic change in the China model. With the path to a deal extremely unclear on structural issues laid out by the White House, such as forced technology transfer, IP protection, cyber theft and non-tariff barriers, the Trump administration will face the choice between reverting to 25% tariffs or declaring that enough progress has been made to merit a further postponement for more negotiation.” — TS Lombard economists.
"In sum, what happens next is watching Powell act out on his belief that he can let the economy manage itself and thereby hold the funds rate steady for an extended period, as [Alan] Greenspan did in the mid-1990s," Steven Blitz, chief U.S. economist at TS Lombard, said in a note, referring to the former Fed chairman. "We think [Powell's] belief will prove misguided — the situation today is so very different," Blitz added.
“There is a growing momentum behind the campaign for a second referendum,” said Constantine Fraser, an analyst research consultancy TS Lombard. “It will become a serious option on the table if, or more likely when, Theresa May’s deal is voted down. “I wouldn’t say it’s a probability, but it’s a likelihood that’s growing fast.”
“Uncertainty over U.S. sanctions against Iran had made the market fixated with supply. The waivers changed the arithmetic, raising the possibility of a supply glut developing in 2019,” said Konstantinos Venetis, senior economist at TSL Research.
The economy is slowing already, and some predict growth could dip below 2% soon, according to a recent report from London-based financial firm TS Lombard. That would be a sharp slowdown from 4.2% and 3.5% in the second and third quarters.
“If the economy manages to right itself with real wage growth expanding and housing affordability holding relatively steady (prices and mortgage rates), there is a sufficient backlog of demand to reboot housing for this cycle,” Steve Blitz, chief U.S. economist for TS Lombard, after the release of October housing starts data earlier in the month. “Pay your money and take your chances, this is the bet to be made if your view on housing leans towards ‘soft patch’. Our outlook is that because the buildup in housing was never big enough for a ‘collapse’, the coming downswing in residential construction, and the housing sector more broadly, will drag down GDP growth but not enough to flip total growth negative.”
Steven Blitz of TS Lombard argues that the Fed is likely to tread a middle path. The next big meeting is on 18 and 19 December. They will raise rates as planned, but they will adjust the “forward trajectory for policy rates”. In turn, that could “cause the dollar to fall some, and in turn, help stabilise the US and global economies”.
“I would say the trade war is a major risk that will probably counteract or play down any positive sentiment that comes out of this election,” said Eleanor Olcott, China policy analyst at the research firm TS Lombard, who described the trade war as the “greatest headwind” for Taiwan’s economy.
Steve Blitz, chief U.S. economist at the forecasting firm TS Lombard, wrote Monday in a report that the central bank may pause its rate-hiking cycle after March 2019 and then "take a bow for a job well done." As for the Fed's December meeting, the central bank is likely to "take a middle road, raising rates as planned but easing the adjustment process by lowering the forward trajectory for policy rates," Blitz wrote.
"Even assuming generously that half of the conservative rebels are forced to support the government, this still implies that if there is not a sudden change of dynamics, the agreement will be rejected," says Constantine Fraser, political analyst at TS Lombard. "This conclusion is quickly becoming almost a consensus in London."
“The reality is that consumption is slowing at the same time as crude production is rising,” said Konstantinos Venetis, senior economist at TS Lombard. “Softer restrictions on Iran have changed the arithmetic, however, raising the possibility of a supply glut developing in 2019.”
There will be temporary market relief from the much-touted meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping at the G-20 in Buenos Aires, Argentina, said Bo Zhuang, chief economist and director of China research at TS Lombard.
“This conclusion – that the base case is that the (House of) Commons will vote against the deal - is rapidly becoming something approaching a consensus in London,” TS Lombard analyst Constantine Fraser wrote in a research note.
Given the importance of housing, it’s not surprising that it’s a leading indicator for overall growth. Builders’ sentiment has a good record of forecasting unemployment 18 months out, according to Steve Blitz, chief U.S. economist at TS Lombard. Their more negative view points to a rise in the jobless rate to around 4.5% by mid-2020, he adds. (A glance at the calendar shows the presidential election campaign would be in full swing then.)
“Intensifying risks to world growth constitute a drag on the oil price,” said Konstantinos Venetis, senior economist at TS Lombard. “Both Opec and the International Energy Agency have trimmed their consumption estimates for this year and next. Coupled with tighter global dollar liquidity and souring financial market sentiment, this is a bearish combination for oil prices.”
Here’s TS Lombard: “Short term, unexpected weakness in the tech sector could have a significant impact on the global economy, adding to what already looks like a soggier macro environment.” They add: “The lesson of recent weeks is that the tech sector is also vulnerable to global monetary tightening and a more generalised widening in risk premiums.”
"Short term, unexpected weakness in the tech sector could have a significant impact on the global economy, adding to what already looks like a soggier macro environment," said Dario Perkins, managing director of global macro at TS Lombard, in a note. "Additional retrenchment in the FAANGs could also undermine the broader US stock market."
One big concern about tech stocks is the possible smartphone saturation, as various Apple suppliers cut sales forecasts last week. “With 70% of people already owning a smartphone, you can see why this is a worry,” writes Dario Perkins from TS Lombard. The weakness in the industry could spill over well beyond just Apple and its suppliers to the entire global economy, suggests Perkins.
Jonathan Fenby of TS Lombard says U.S. President Donald Trump is showing "signs of caution" about raising tariffs on Chinese goods to 25 percent because the move could hurt American companies more than it hurts China.
“The pound is simultaneously high and low,” said TS Lombard, likening the Brexit conundrum to “Schrodinger’s Cat” - a concept borrowed from quantum mechanics. “The current price of sterling on your screens can be characterised as the superposition of all possible Brexit end states.” TS Lombard’s Christopher Granville says sterling would crash 20pc in a Brexit bust-up, but is more likely to rise by 10pc when the opera buffa in Parliament is over and people discover that Theresa May is still there, and that nothing has really changed. Britain will still be in the EU in all but name for years to come. Such asymmetric forms of risk are very hard for markets to trade.
"For decades regional banks have made a healthy profit of simply recycling oil rents – the whole idea of building a mass consumer base is relatively new," said Marcus Chenevix, a Middle East and North Africa analyst at London-based financial firm TS Lombard.
But as Dario Perkins from TS Lombard writes in a note today: "...history suggests it is economic downturns, not debt repayment, which causes a major spike in defaults." The debt burden could make a downturn worse, but probably won't cause the downturn itself, he says. And currently, signs of trouble in the U.S. economy are scarce.
Christopher Granville, a managing director at TS Lombard, still thinks a so-called hard Brexit will be avoided. "The fact that the U.K. government is risking its political life by agreeing the present draft deal implicitly recognizes that the alternative of heading for a crash-out would certainly be an act of political suicide," Granville said.
“The stocks that were sold were also very volatile, which means if there wasn’t a concurrent buy as part of the rebalance, then they would probably move a lot more than average,” said Oliver Brennan, a London-based macro strategist at TS Lombard, who wrote a note arguing that sector rebalancing helped stocks roll over. “I’m not trying to suggest the trigger and the sole cause for the selloff was the rebalance, but it happened at the exact worst time.”
The Federal Reserve won’t chase inflation next year, says Steve Blitz, chief U.S. economist at TS Lombard. He told Daybreak Europe’s Markus Karlsson that policymakers will refrain from rate hikes after March to avoid inverting the yield curve. He foresees U.S. growth slowing to 2 percent next year.
The prospect of another OPEC-led production cut would be more likely if global inventories make another extended stay above five-year averages, said Konstantinos Venetis, senior economist at TS Lombard.
“The deleveraging continues on the shadow banking side of things, but the credit is still flowing for local government and bank lending,” said Rory Green, economist at TS Lombard, who estimated the year-on-year rate of credit contraction within the shadow banking sector was 6.9 per cent. Mr Green said he expected “deleveraging and financial risk control to remain a key focus for Beijing. We are told Liu He, president Xi’s top economic adviser, is fixated on this, almost to the expense of the economy,” he added.
The looming end of global quantitative easing also means that the global liquidity surge is coming to an end. At least for US government bonds, there is an imbalance, as Shweta Singh of TS Lombard points out. The Fed has become a net seller of net buyers, international demand is falling, and the US government is increasing its debt.
"The upshot is that there will be more noise and volatility on China," TS Lombard's chief U.S. economist, Steve Blitz, said in a note on Thursday, commenting on the post-election environment. Many Democrats, including Sen. Chuck Schumer, are "China hawks," Blitz said.
According to economist Steve Blitz of analyst TS Lombard, the central bank will face a dilemma in the late phase of the upswing in 2019, as inflation picks up and the boom is likely to slow down: "Sometime next year, Powell will have to decide on: prices stay on the heels or react to weaker growth. "
Since 1929, U.S. stocks have suffered an average drawdown of 30 percent on 28 occasions, only 15 of which involved recessions, according to Dario Perkins at TS Lombard. Sometimes, like 1987, steep market declines don’t precede recession, while sometimes, like 2008, they do. There have been peak-to-trough declines of at least 15 percent in 11 calendar years since 1980. Five coincided with recession, six did not, according to Perkins.
An acceleration in the U.S.-China trade war continues to loom large after the midterm elections delivered a split Congress, says Andrea Cicione, Head of Macro Strategy at TS Lombard. He spoke to Daybreak Europe’s Markus Karlsson about how bipartisan consensus over a tough stance on China won’t lead to a change of agenda. He also spoke about the likelihood of the Fed putting rate hikes to a halt early next year as U.S. growth is expected to slowdown.
“The U.S. economy is looking more late cycle. You are seeing a slow-motion cleaving of price and activity. Prices are turning up and activity is starting to slow,” TS Lombard chief U.S. economist Steve Blitz said. “Sometime next year Powell will face the choice. Chase prices or react to slower growth.”
Perhaps Speaker Nancy Pelosi will give Trump a partial reprieve of sorts. Common ground exists on spending for roads, bridges, and infrastructure. But the Democrats will keep him on a tight leash before the next election. “They are not going to give him anything to run on, any victories,” said Steve Blitz from TS Lombard.
“As the economy slows, demand is falling and activity is declining, you would expect corporate profits to decline and the pressure on these smaller less politically connected corporates to increase,” says Rory Green at TS Lombard. If debt dramatically increases “it is something to worry about” but the fact that Beijing has “recognised” the risk is an important step, he argues. “That shows the risk is still there but they are aware of it and they are very much on top of what’s going on. There is a risk of policy missteps but the risk of a sudden financial crisis is declining.”
"The divergence in economic performance within the euro area is also increasing, limiting the ECB's options," said Shweta Singh, MD of Global Macroeconomics at advisory firm TS Lombard in London. "The central bank will likely downgrade its growth assessment in December and adopt a more dovish end to its quantitative-easing programme than previously expected."
But Christopher Granville, managing director at TS Lombard, a research consultancy, says that while the relationship proved more enduring than analysts expected, short-term shared goals mask longer-term divergence on both oil and geopolitics. A higher oil price encourages production elsewhere, and giving up market share to other producers, mainly the US shale oil industry. While Saudi Arabia, which needs $70 oil to balance its budget, is happy to make this sacrifice, Moscow breaks even at just $40 a barrel. “Russia has no such need” to give up market share for higher prices, Mr Granville said.
Technology stocks “were priced beyond perfection,” said Ollie Brennan, a senior macro strategist at T.S. Lombard. He said losses in the tech sector represent a healthy adjustment of expectations, even if the size and duration of the recent market decline have been surprising. “The selloff was warranted in the bigger picture,” said Mr. Brennan. “There’s still impetus for equities to rise. But it’s not going to be a 15%-per-year rise.”
“The main implication concerns underlying political risk," such as doubts about the country's stability, says a recent report from London-based financial firm TS Lombard. “The implication affects our view of the investment case for Saudi Arabia making sense only in the long-term.” The report also notes that “chronic government instability would impair” investor returns, and, “this is not a market that can shrug off government turmoil”.
Abe is accompanied by a 500-strong business delegation, which is expected to pitch aggressively in hopes of reaching China's burgeoning middle-class consumers, said Rory Green, an Asia economist at TS Lombard.
“Rising real mortgage rates and zero Y/Y growth in real average hourly earnings is not what builds strong housing markets,” wrote Steven Blitz, chief U.S. economist for TS Lombard, after the release of the new-home sales data Thursday.
“While we are upbeat about wages in the coming year, as wage growth is a lagging indicator, 10-year Treasury yields (the price basis for mortgages) are not dropping off anytime soon,” Blitz added. “With a large budget deficit to fund and the Fed far from shifting to an easing trajectory, the only direction for the real cost of money is up.”
Charles Dumas is a British macroeconomist. He is an unconventional and often penetrating analyst of the global economy, as chief economist at TS Lombard. His latest book "Populism and Economics" helps illuminate aspects of the important, complex and often threatening contemporary developments.
Private entrepreneurs enjoyed considerable freedoms under Deng, recalls Jonathan Fenby from consulting firm TS Lombard. He does not expect Xi's visit to herald the same period of easing. 'Under Xi the role of the party state has been strengthened and we see increased political control over the private sector.'
“The easy answer isn’t, however, always the right one (remember the SATs),” quips Steve Blitz, chief U.S. economist for TS Lombard. Affordability is dropping to where it was around the turn of the century, before the lowering of lending standards set off the never-to-be-repeated housing boom and ensuing financial crisis of a decade ago.
“There is a view which is not really consensus yet, but there is momentum towards the view that the ECB will probably adopt a more dovish exit than what has been priced, as a result of Italy and also because of expansion not being that strong,” said Shweta Singh, senior economist at TS Lombard.
“Cool heads have prevailed, and cool heads will keep prevailing,” says Konstantinos Venetis, a senior economist at London-based financial firm TS Lombard. He says that getting to a point where the U.K. leaves the EU without some form of a trade deal, also known as “hard Brexit,” isn’t likely. “The bar for a hard Brexit is pretty high,” Venetis contends. Instead, he sees a deal before the March deadline. Without one, Britain has much to lose, and so does the EU. “If tomorrow we get a smooth deal, then you would see a jump in sterling to $1.40,” he maintains. At that point, U.K. stocks, especially domestically focused ones, would rise in dollar terms.
The Yuan needs to go down a further 10-15 percent just to accommodate the impact of the tariff war says Charles Dumas, Chief Economist at TS Lombard. Speaking to Daybreak Europe’s Nejra Cehic he argues that there’s nothing justifiable about the tensions in pure trade-terms. It’s a question of who’s number one in the world.
“The flattening of housing construction is essentially in place,” said Steven Blitz, chief U.S. economist at TS Lombard in New York. “Wage growth has begun to improve but not enough to give people the necessary income to carry a mortgage - especially for younger families, many still working out from under student loans.”
According to Andrea Cicione, Head of Investment Strategy of the research house TS Lombard, the difference is "unusually high". "Unusual is not only the height, but that the growth and the inflation difference between Germany and the US can not explain the difference," he says.
For all EU Member States considered by TS Lombard, this risk premium is closely related to the average credit rating of the three major agencies Standard & Poor's, Moody's and Fitch. The only outlier is Italy, where the spread is significantly higher than the rating justifies.
In order to regain balance in the longer term, either the spread to Germany would have to fall by 2 percentage points or the rating of Italy would have to be reduced by three levels.
The rating agencies, which should be reclassified toward the end of the month, are unlikely to ban Italy from junk (non-investment grade, Ba1 or worse), according to TS Lombard. Too massive would be the market distortions that would trigger such a step.
TS Lombard analyst Dario Perkins has highlighted the four conditions for a recession to occur: 1) accelerating inflation 2) a squeeze on corporate profits 3) tight monetary policy and 4) macroeconomic imbalances such as asset bubbles.
Dario Perkins, managing director of global macro strategy at TS Lombard, called rising oil prices one of two “main threats to an already soggier outlook,” along with the prospect of a trade war between the U.S. and other major economies. “Rising oil prices could eventually sap U.S. real incomes, undermining the world’s consumer of first and last resort,” he wrote in a research report.
"Trump's sanctions have raised the stakes, and the market is now driven by fear," Konstantinos Venetis, senior economist at TS Lombard, said in a research note published Monday. "But at this juncture we think it makes sense to lean against further oil price strength instead of chasing this rally. And if we see $100 on short notice, it would probably be as good a selling opportunity as in July 2008," he added.
“The cost of borrowing dollars, especially offshore dollars, will continue to rise. Putting considerable pressure on global financing conditions.” Says Shweta Singh at TS Lombard. “The main threat to global financing is an offshore dollar squeeze.”
"The European Parliament elections are going to return an unprecedentedly fragmented result, with the big center-right and center-left families smaller than ever, and new parties — from liberals and greens to left and right radicals — doing better than ever," Constantine Fraser, a European political analyst at TS Lombard, told CNBC via email.
Debt has been cheap and plentiful, but companies may also have been encouraged to borrow by high and rising stock prices. Steven Blitz, U.S. economist at TS Lombard, thinks public companies and their lenders have gotten too comfortable with high equity valuations when thinking about debt levels, rather than focusing on income or cash on hand. This is a bit like mortgage lenders relying on home values rather than households’ ability to repay, even if public corporate equity can’t literally be used as collateral in the way homes are.
“We think the key worry for markets right now is not an ‘Italexit’, but the impact from a wider fiscal deficit on Italy’s debt sustainability, especially given the backdrop of a fast-approaching end to ECB QE,” said TS Lombard senior economist Shweta Singh.
In reality, neither Beijing nor Washington may think a return to the trade relationship of the recent past is possible or desirable. “China’s leaders have been forced into a fundamental reassessment of the country’s development strategy,” Larry Brainard, chief emerging markets economist at investment research firm TS Lombard, wrote last month.
Emerging markets already have a lot of problems as it is, and when you throw an oil price spike to the mix, that creates another big risk factor,” said Jon Harrison, managing director for emerging markets strategy at TS Lombard
"Emerging markets already have a lot of problems as it is, and when you throw an oil price spike to the mix, that creates another big risk factor," said Jon Harrison, managing director for emerging markets strategy at TS Lombard.
“The cost of borrowing dollars, especially offshore dollars, will continue to rise, putting considerable pressure on global financing conditions,” says Shweta Singh at TS Lombard. “The main threat to global financing is an offshore dollar squeeze.”
In actuality, the greatest beneficiary of ultraeasy monetary policies, which have been the central aspect of the recovery, has been the stock market. In the second quarter, equities surpassed real estate as the biggest source of households’ wealth for the first time since the dot-com boom late in the last century, according to Fed data parsed by Steve Blitz, TS Lombard’s chief US economist. That’s a reversal from the last decade during the housing bubble and during the 1970s, ’80s, and ’90s, when the notion that home prices only went up became seared into America’s consciousness.
Increased support in the polls for Mr Haddad would “exacerbate market jitters, especially because the PT’s current economic platform denies the need for reform”, said research group TS Lombard in a note.
Yet over time, China could overcome those disadvantages. It "has all the necessary prerequisites to make an Asian-based trading bloc work without the U.S.: a large domestic market, political support for open markets and manufacturing expertise," writes Larry Brainard of TS Lombard, an investment advisory. China already does more trade in manufactured and intermediate goods with the European Union than the U.S., and twice as much with the rest of Asia, he notes.
Larry Brainard, chief emerging-markets economist at TS Lombard, and Tony Crescenzi, market strategist and portfolio manager at Pimco, discusses the outlook for emerging markets and China's growing force as a trading power.
The U.S.-China economic conflict will be long and ugly “with little chance of a deal anytime soon,” TS Lombard economists Larry Brainard and Charles Dumas write in a note to clients. While China was prepared in late May for talks on trade, that has changed given the events of the subsequent months.
“The new horizon for Italy’s political parties is May 2019 and the European Parliament elections,” said Davide Oneglia, an economist at TS Lombard. “Expect limited stimulus [in the budget] and high volatility as Lega and M5S go back to full electoral campaign mode.”
According to TS Lombard, the current period is now only the third time in US history - after 1968 and 1999 - in which equities have made up a larger percentage of net worth than real estate. While this may be good news for holders of stocks, it may not last: as TS Lombard observes, sharp bear markets followed shortly after 1968 and even sooner after 1999. And with housing peaking - if BofA is correct - share prices remain the only driver behind continued economic growth, prompting TSL to conclude that "the US economy can not afford a bear market."
The long-term impact of the tariffs is still far from settled. Jon Harrison, an economist at the consultancy TS Lombard, notes that when the EU and US imposed penalties on Chinese exports of solar panels in 2012, Chinese companies swiftly moved production to Malaysia, the Philippines and Vietnam. Similar relocation this time round could therefore benefit south-east Asian economies.
"Households have a lot of net worth," said Steven Blitz, chief U.S. economist at TS Lombard, adding however that "hasn’t generated an increase in leveraged spending" compared with earlier periods in which net worth was rising sharply.
TS Lombard, an economic forecaster, says China is "feeling aggrieved" over the Trump administration's demands, since the assault represents a threat to the ruling Communist Party's power. "As a result, Beijing has also shifted to a harder line and is likely to shun new talks, blaming the U.S. for a lack of sincerity to engage in negotiations," according to a report this week from the London-based firm.
Brazil is another EM to keep an eye on. The country is running a fiscal deficit — although mostly domestically funded — that is twice the size of Argentina's; it has now run five consecutive primary deficits. With growth in Brazil having stalled in the run-up to October's elections, TS Lombard analysts Elisabeth Johnson and Larry Brainard have sounded the alarm. "Unless the new administration moves quickly to pass a credible fiscal programme, Brazil runs the risk of following down the same path as Argentina and Turkey," they said.
"We still don't know what the outcome will be," said Cristobal Arias, Latin America economist at TS Lombard. "But regardless of who wins, the country faces major economic problems." Economic reforms are needed for Brazil to move forward.
TS Lombard chief US economist Steve Blitz believes the Democrats are "likely to eke out a majority" in the House of Representatives. "Whenever US presidents lose Congress, their focus shifts to global affairs, where the constitution gives them much more latitude to take the initiative," Mr Blitz said. "Trump will do the same."
"One month is not a trend, but it plays to the Fed's view that the runup in inflation in the earlier part of this year is going to reverse itself," said Steve Blitz, chief U.S. economist at the forecasting firm TS Lombard.
One advocate of extreme measures is Charles Dumas, chief economist at TS Lombard and author of Populism and Economics. Mr Dumas believes that many nations, particularly Italy, joined the single currency far too soon. This undermined their competitiveness and pressed home the advantage of strong players such as Germany. As a result, Germany has effectively operated under a much lower exchange rate than it otherwise would have.
Displacing the US, China has become the main export destination for many emerging market countries — Brazil, South Africa, Malaysia and the Philippines. The relationship has become so pronounced that China's import growth correlates closely with the export growth for many emerging economies. While this does not imply causation, TS Lombard points out that it illustrates just how synchronised global trade has become with Asia's biggest buyer.
For the euro to take on the greenback as a more powerful global force, there would have to be considerable efforts to address imbalances generated by member states' public debt and Germany's large surplus, according to Charles Dumas of T S Lombard. "Something is going to have to be done about the eurozone surplus and the imbalances within Europe that create that surplus. They are pursuing an Italian exchange rate in an economy in which Italy is a very small proportion of the total," he said.
Ten years on from the crash of Lehman Brothers that heralded the Great Recession, market watchers are looking for clues as to where the root of the next crisis might lie. Steve Blitz, chief U.S. economist at TS Lombard, sees a giant red flag in corporations' debt versus their means to pay that debt off. "The real biggest problem lies, if I'm looking at the U.S., I look at debt-to-cash ratios, and I take out the top ten companies," Blitz told CNBC's Squawk Box Europe on Wednesday, noting his exclusion of highly capitalized companies like major tech and pharmaceutical firms who are well-stocked to service their debts. "Debt to cash is very very high, but debt equity is very very low. What that tells me is corporations are borrowing against their net worth, as opposed to borrowing against cash flow and income, which in effect is the same thing households were doing in 2004, 2005 and 2006."
Since the peak in late 2017, price-to-earnings ratios have tended to decline - a trend that, according to TS Lombard analysts, is likely to be attributed to US government bond yields, which are likely to rise significantly at the short end, with some delay have started.
The trade stand-off remains the biggest challenge for emerging markets, says Jon Harrison, managing director of EM at TS Lombard. He told Daybreak Europe’s Nejra Cehic and Markus Karlsson why he thinks that India is a relative safe haven.
“If we had a global environment that was very pro-risk, emerging markets were doing well, and there was ample global liquidity, then investors may be able to forgive Argentina and allow it time to make the required fiscal adjustment,” says Jon Harrison, managing director, macro strategy, at TS Lombard. “That was the case over the past few years but this year that has changed.”
"The economy's not slowing down," said Steve Blitz, chief U.S. economist for the forecasting firm TS Lombard. "It certainly keeps consumption strong in the third quarter and into the fourth." The report is likely to buttress the Federal Reserve's case for increasing interest rates by a quarter point later this month, and again in December, to prevent a surge in inflation, Blitz said.
One option, some economists say, is a move by China's central bank to further devalue its currency, making its exports cheaper and more attractive and thereby offsetting the costs of the tariffs. The yuan has depreciated around 8 percent against the dollar since April, and economists Bo Zhuang and Rory Green of TS Lombard believe that the 25 percent levies placed on the bulk of Chinese goods "would damage China's trade enough to provoke over the next six months or so a further 15 percent depreciation."
"The evident economic difficulties that have hit Turkey and Argentina this year have so far been viewed by markets as largely confined to those two countries — with limited spill-over potential to other emerging markets," Jon Harrison, managing director of emerging-market macro strategy at TS Lombard, told CNBC via email. "What has changed is Brazil. The likelihood of a market friendly outcome in the Brazilian election first-round has receded (and that) has the potential to shock markets out of their complacency," he added.
President Donald Trump's "trade tactics are more likely to slow the economy, certainly in the near term, because of damage done to capital spending plans," said Steven Blitz, chief U.S. economist at TS Lombard. "The seemingly random aspect of his tactics, including the uncertainty of how long tariffs will be in place and their direct impact, will cause firms to pause before starting up capital projects – just when investment spending looked set to surge, aided by Trump's tax cuts."
"Talk of the flatter yield curve presaging recession continues to run rampant among the chattering classes,” Steve Blitz, chief US economist at TS Lombard, wrote in a research note. And it’s not just the more closely-watched yield gaps, like the spread between 10- and two-year notes. What counts is not whether the curve is flat but whether it’s negative, and the negative curve that counts most is the spread between the yield on two-year Treasury notes and the federal funds rate, Blitz writes. "We have long made the point that the shape of the curve is not a talisman. It works because when short-term money earns more than lending, the flow of loanable funds moves away from credit."
“If the administration goes ahead with the threats that it’s made … then we can see really major risks for risk assets like the stock market over the balance of the year,” said Charles Dumas, chief economist at TS Lombard. More tariffs on China could trigger further falls in the Chinese currency and add to pressure on emerging markets while pushing up the dollar, he said.
“If the administration goes ahead with the threats that it’s made...then we can see really major risks for risk assets like the stock market over the balance of the year,” said Charles Dumas, chief economist at TS Lombard. More tariffs on China could trigger further falls in the Chinese currency and add to pressure on emerging markets while pushing up the dollar, he said.
Developing countries are facing a perfect storm, according to Larry Brainard, TS Lombard's chief EM economist. In the research firm's September message to clients, he warned would-be bargain hunters that emerging markets have not neared a bottom. While problems in Turkey and Argentina haven't been "systemic," Brainard wrote that a combination with several other crises now brewing could lead to a broader problem.
Jon Harrison, managing director of EM macro strategy at TS Lombard, wrote in a separate note that India and Mexico stand out as relative safe havens among developing countries. The iShares MSCI India ETF (INDA) is down 4% so far this year, half as much as the broader EM index, while the iShares Mexico ETF (EWW) has inched up 0.44%.
"For several months our view has been that it is the cumulative impact that matters when assessing the effect on EM economies and markets of tighter global liquidity conditions, the escalating trade conflict between the US and China, and crises in Argentina and Turkey," Jon Harrison, managing director of emerging-market macro strategy at TS Lombard, said in a note Wednesday. "These drivers are likely to intensify in the coming months."
"While you can say the motivation [for the measurement adjustment] was political, what comes out at the other end is a legitimate issues regarding mis-measurements," said Steve Blitz, an economist at TS Lombard, a research firm.
The stakes are high: Italy is the eurozone’s biggest government borrower. While foreigners and households sold Italian debt this summer, Italian banks were buying it at the fastest pace since the eurozone debt crisis. That means any losses in Italian bonds puts more pressure on the banks’ already modest capital ratios, driving them to buy even more debt, according to research firm TS Lombard.
Turkey’s euro-denominated borrowings means it’s collapse could portend trouble for EU members with financial linkages to Ankara. European banks like Spanish BBVA are on the hook via Turkish subsidiaries. If they’re forced to write off their loans to Turkish firms, then their capital buffers could take a sharp hit, according to analysts from TS Lombard.
The odds of a recession in Argentina later this year are rising while Turkey is headed for an inevitable “substantial deterioration” in its creditworthiness and the country's economy is set for a hard landing, according to a note fromJon Harrison, part of the emerging-markets team at TS Lombard.
This has a wider impact on global trade which is hitting the eurozone particularly hard, according to economist Shweta Singh at TS Lombard. “Growing protectionism is taking a toll on global demand. The eurozone remains one of the regions most vulnerable to trade wars,” she said. “President Trump’s tariffs have been largely directed towards China so far. But the eurozone’s supply chain linkages with China and the rest of the world are weighing on its exports.”
“They proposed an IPO at the worst possible time to sell an oil company, and then called it off at quite a good time to sell an oil company,” said Marcus Chenevix, analyst for EMEA and global political research at financial firm TS Lombard in London. “Nothing more clearly illustrates the way that this project was never a normal IPO.”
For Charles Dumas, economist at the research house TS Lombard, an escalation of the trade to currency war would be a "probable scenario". The US could then continue to escalate against China with tariffs - but would only allow the dollar to appreciate further. Investors would have to adjust to turbulence: A stronger dollar would weigh on stocks and probably on bonds.
“Powell is not worrying about whether inflation is coming or not coming or whether unemployment is too high or too low,” said chief U.S. economist Steve Blitz at TS Lombard. “He’s worries about whether money is too cheap or too expensive” for borrowers on Wall Street and Main Street.
Steven Blitz, US economist at the research house TS Lombard, also expects an adjustment of the program. Things went well for him until President Donald Trump implemented his fiscal policy and "exploded" the supply of government bonds due to heightened debt. Thus, "the abundance of safe papers became an abundance". According to Blitz, this can be seen by the difference between the interest that can be achieved in the market with the lending of securities and the simultaneous repurchase guarantee (repo rate) and the interest on the surplus reserves that are parked at the Fed (IOER). Since the Fed balance sheet has decreased, the difference is positive.
Markets should expect bilateral tit-for-tat trade actions to continue for the foreseeable future as both the U.S. and China have managed to convince themselves that they wouldn't "lose out in this trade war too much," said Bo Zhuang, chief China economist at investment research firm, TS Lombard. Beijing will allow the Chinese yuan to "passively devalue" in order to cope with the impact of the U.S. tariffs although authorities will likely blame any decline in the currency on the markets, Zhuang said. "One way or the other, they have to do something. Otherwise the Chinese economy is going to tumble," Zhuang added.
Economists at TS Lombard note that the US economy “has yet to find reason for output to push above its 2014 highs, at least in the goods sector, and housing is beginning to soften”, and add that “Trump’s trade tactics should slow rather than accelerate activity, but they have yet to show through meaningfully in the macro data”.
Christopher Granville, director for EMEA and global political research at TS Lombard, discusses the potential economic impact of new U.S. sanctions being imposed against Russia. He speaks with Bloomberg's Francine Lacqua on "Bloomberg Surveillance." (Source: Bloomberg)
During a recent dinner with foreign diplomats, Chinese President Xi Jinping suggested that China would win the US trade war because it is simply a one-party state. "Giving up would undermine the power structure and long-term focus of leadership," says Jonathan Fenby of TS Lombard. His conclusion: 'China will persevere.'
“The risk is probably not systemic for the European banking system in itself,” said Jon Harrison, an analyst at TS Lombard in London. “The bar could be lower for someone in Germany to take their money out of a Turkish bank and deposit in a German bank, than for someone in Turkey to remove their funds from Turkish banks -– raising the risk of a bank run.” Though that point hasn’t come yet, that could be a way the situation could deteriorate, he said.
This type of economic sanctions, using the power of U.S. treasury in global finance to try to throttle other economies is a powerful card to play, but with diminishing effects, says Christopher Granville, managing director, global political research at TS Lombard.
However, some analysts argue that this is more a "symbolic" moment and there is plenty yet to do to improve the Greek economy. "Both the EU and the Greeks will try to put a positive spin on the end of the bailout, but there is little to celebrate," Constantine Fraser, European analyst at research firm TS Lombard, told CNBC via email.
It's "common sense" to assume the crisis will calm, said Christopher Granville, managing director of global political research at TS Lombard in London. "If you look at Erdogan's track record, he does tend to back down in the end, although it takes time," he told CNBC's "Squawk Box Europe" Monday. But even the resolution of political tensions with the U.S. wouldn't solve Turkey's problem on its own from an investor point of view, "though of course it would help on the margin," Granville added. "Some political resolution is likely but that's not very helpful advice for investors," he said. "Because that takes a long time, which Turkish markets don't have."
Turkey has recovered from previous bouts of volatility brought on by political and economic instability and analysts tend to think it can do so again, but they noted that resolving its dispute with the U.S. was crucial. Christopher Granville, managing director global political research at TS Lombard, told CNBC on Monday that "there's a huge amount at stake for Turkey in its basic alignment with the U.S. and these things are not dissolvable overnight." Still, he noted that even solving the dispute with the U.S. quickly would not "solve the Turkish problem from investors' point of view."
President Donald Trump said he expected Jerome Powell to be a cheap-money Fed chairman and lamented to Republican donors at a fundraiser his nominee instead had raised interest rates, according to three people present. Steve Blitz, chief U.S. economist at TS Lombard, weighs in on "Bloomberg Daybreak: Australia." (Source: Bloomberg)
"The responsibilities still have to be determined by the judiciary, (but) the most striking thing of this story is mostly the initial reaction of the government after the disaster," Davide Oneglia, economist at TS Lombard, said. "The fact they have immediately taken Atlantia and investor as a scapegoat, or they are trying to bring in the European Commission, which is their usual target, might end up in the long run undermining the confidence of investors on Italian institutions," Oneglia told CNBC's "Squawk Box Europe." "If this proceeds, it has long lasting effects on investor sentiment," he said.
'Limited direct contagion from Turkey is little comfort,' said Jon Harrison, strategist at TS Lombard. 'The collapse of Turkish markets raises investors' fears even when there are few direct linkages, and could certainly be the one crisis too many that prompts some to take a decision to scale back exposure — coming at a time when broad-based emerging markets risk-off is already taking shape.'
The tariffs will open up currencies as a second front in the conflict between the world’s biggest economies, risking a 15pc depreciation in the Chinese Yuan, according to an analysis from TS Lombard. Bo Zhuang, of TS Lombard, said: “A decision by Trump to double down on his tariff tactics would have adverse effects on inflation and global markets. This possibility is the main reason why we maintain a strong negative call on the environment for global risk.”
“Spanish lenders are most vulnerable to the worsening currency crisis, followed by French and Italian banks,” noted Shweta Singh at TS Lombard. “With Europe’s large exposure to Turkey through banking sector flows, investors are increasingly worried about the fallout as the crisis unfolds.”
Shweta Singh, an analyst at TS Lombard, a London research house, points out that the European banks with the most significant exposure to Turkey — BBVA, BNP Paribas and UniCredit — are among the weakest in the eurozone in terms of their equity cushions.
According to a new report, China now appears willing to undertake a major currency devaluation - similar to the policy changes that roiled global markets in late 2015 and early 2016. The move by the Chinese government would help to offset the effect of the Trump administration's enacted or threatened tariffs on some $250 billion of imports from the country, writes the economic forecaster TS Lombard.
"Now that economics is political, it is no surprise that they are seeking clamp down on inconvenient discussion," Marcus Chenevix, a Middle East analyst at TS Lombard, told CNBC of the government's campaign. The move, he said, is indicative of the state's attempt to control all political discussion online.
There is a more significant message here though, Chenevix added. "In a currency crisis it is in the end ordinary people who do the heavy lifting. A serious run on a currency is not driven by foreign speculators but by ordinary people going to their local FX bureau and buying some dollars. The government knows this, and is trying very hard to stop it."
“If BBVA is forced to deleverage, inflicting wider damage on the Spanish economy and the banking system, the repercussions could be quite severe due to the complex financial linkages among European banks,” said Shweta Singh and Davide Oneglia, economists at TS Lombard, in a Monday note.
"The euro growth cycle is in a phase when it needs more (capital expenditures)," said Shweta Singh, a managing director at economics consultancy TS Lombard. "That's why the impact of the trade wars on sentiment is so worrying."
Marcus Chenevix of TS Lombard said: “It is a damaging and stupid dispute, it is unclear why they [Saudi] couldn’t have taken more private action.” The Kingdom could quit its arms deals, worth half a billion dollars each year for Canada, as a means of further escalation, according to Mr Chenevix. Based on the track record of Crown Prince Mohammed Bin Salman, the 32-year-old de facto ruler of the Kingdom, the row is unlikely to be swiftly resolved. “MBS has not finished any dispute that he has started,” Mr Chenevix added.
Investment research firm TS Lombard feels China is holding a strong set of cards, publishing “Trade War: Why China Won’t Surrender” on August 2. TS Lombard’s China Watch team feels that “the impact of Trump’s trade war on [China’s economic] growth will be manageable”, with Beijing having “rolled out a series of limited measures to sustain domestic growth” and with its currency policy aimed partly at “offsetting the impact of US tariffs on [Chinese] exporters”. Indeed, If Trump imposes additional tariffs on US$200 billion of imports from China, then “further yuan depreciation is likely”, TS Lombard feels.
“It’s going to be a shock of one type or another: either a policy shock or a macro shock or some combination of the two,” said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London. “But the way to sugar that pill,” he said, would be a “political accommodation with the West. That would make the pain much less."
"This is a shot across the bow," said Marcus Chenevix, an analyst at TS Lombard. "Now, I think the U.S. will give them time to respond. It's not like the U.S. sees this as a pressing political matter, it just can't seem to be backing down to these hostage tactics."
But not everybody’s suffering. In a recent research note, economists from market-research firm TS Lombard observed that “global trading firms will easily skirt China’s soybean tariffs and leave U.S. growers the primary losers” and that “the big winners will be Brazilian farmers and the big grain companies.” That’s because China consumes 60 percent of the soybeans produced around the world. The country still has a strong need for soybeans, which are crushed to feed its huge livestock industry. With the tariffs rendering U.S. soybean prices suddenly uncompetitive, China is turning elsewhere—especially to Brazil.
The U.S.-China trade war is not Beijing's top priority, investment research firm TS Lombard said. Rather, China is likely focused on more domestic concerns, such as stabilizing its economy and maintaining the power structure, said Jonathan Fenby, the firm's China research chairman. TS Lombard sees growth in China coming in at a rate of 6.3 percent in the second half of the year, for an average full-year growth of 6.5 percent.
“There isn’t any organised movement against Xi or any real threat for him, in my view” says Bo Zhuang, chief China economist for TS Lombard. In private, however, more Chinese officials and intellectuals are expressing doubts about his handling of relations with the US. Mr Zhuang says that among the Chinese bureaucracy’s rank and file, “more people are now questioning whether it was right for Xi to go against the US so openly”.
Christopher Granville, managing director at TS Lombard, an investment research firm, said although the new measures came close to “a worst possible list” for Russia, “the Treasury has already concluded that they don’t want to sanction sovereign debt”. “Investors have made some adjustments since the turmoil in Helsinki, so a large amount of worry is already priced in at this stage,” said Mr Granville. “A further negative correction would only follow if there is evidence that there is unanimous momentum to pass this bill, like we saw with CAATSA.”
Economic fundamentals have greatly improved since quantitative easing was deployed following the financial crisis. But with fiscal conditions tightening, dollar rates climbing, the Fed shrinking its balance sheet and the European Central Bank ready to taper its asset purchases, "withdrawal symptoms will be inevitable," wrote Andrea Cicione, managing director of macro strategy at TS Lombard. Trade uncertainty will only compound this, creating the uncertainty that investors don't like.
“What we have seen is quite a big depreciation [in the yuan] so I think, as we’ve seen in the past, when there are big moves the Chinese authorities are very anxious to ensure the market doesn’t see the renminbi as a one-way bet,” said Jon Harrison, head of emerging markets macro strategy at TS Lombard.
"Normally, Turkey might be able to shrug off this kind of story; however, right now the Turkish economy is already in the terminal stages of a descent into crisis," said Marcus Chenevix, Middle East analyst at TS Lombard. "To say the least, things are fragile right now."
The outlook for trade in EMs does not look as positive as it once did. Jon Harrison at TS Lombard, a research group, has noticed a recent reversal in the rising share of global trade accounted for by EM countries. “While there was a small uptick in the EM share in May, this did not reverse the sharper decline in the preceding two months,” Mr Harrison said. “EM economies are no longer taking an ever greater share of world trade.”
A political spat between Turkey and the US has led to sanctions on two Turkish ministers. Marcus Chenevix, Middle East analyst at TS Lombard, explains the effect the row is having on Turkey's currency.
At the margin, it is fair to say that a fourth rate rise this year grew a little more likely, but that is about it. To support this notion, growth is now described as "strong" rather than solid. As ever, every choice of word in an FOMC communique must be examined minutely, and Steven Blitz of TS Lombard draws the following conclusion: "If you upgrade your description of the economy six weeks after having raised the funds rate 25 basis points and still call policy rates “accommodative”, there is no place else to go but to raise rates another 25 in September and again in December, assuming the economy is still rolling along. One could ask why the Fed didn’t just raise rates in August, based on stronger growth and inflation assessments. The answer is simply habit. Shifting to a faster calendar pace would unsettle markets, especially after a meeting without a press conference."
TS Lombard’s Steven Blitz makes clear, there is a stark divergence between after-tax profits, which are rising, and pre-tax profits, which are falling. Generally, net investment by businesses, which stimulates the economy, is led by profits. But it is unclear as yet what impact the rise in post-tax profits will have:
Economists at forecasting firm TS Lombard argue that a key driver of growth will be spending by businesses on new equipment, which leads to higher employee productivity and output. And so far, there are few signs that companies are rushing to invest their tax savings in new equipment. TS Lombard analyzed railcar loadings of cargo that typically rises and falls with the economic cycle - things like chemicals, metal, nonmetallic and forest products. Such loadings have narrowed to prior-year levels. "We suspect that no great expenditure boost is in the offing," the economists wrote.
TS Lombard senior economist Konstantinos Venetis said Chinese oil purchases are a big question for markets as it's a significant importer of U.S. crude. Trade friction between the two countries remain high, with not even an agreement yet in place for officials from both to meet.
It is thanks to a combination of factors that India is a "relative safe haven for equity investors," according to Jon Harrison, managing director for emerging markets macro strategy at research firm TS Lombard. "India is a relatively closed economy," he explained to CNBC, adding that the country was "less involved in regional supply chains than some of the more high-tech Asian economies." The World Bank puts India's export figure for 2017 at 18.9 percent, meaning that it is more cushioned from fluctuations in international trade flows than, say, China, South Korea and Vietnam.
Analysts at research provider TS Lombard said the ECB will "deliberately talk down the prospect of rate hikes until QE (quantitative easing) is well out of the way." "And looking that far out (mid 2019), Europe's main central bank becomes hostage to wider global developments well beyond its control," analysts said in a note Thursday, citing higher rates in the United States and trade wars as two potential examples. "The ECB might get round to raising rates in 2019, but only if this global cycle keeps defying the gloomy consensus," they added.
As Charles Dumas, author of a compelling new book on the economics of populism argues, it is people’s perception of their relative position rather than actual financial loss that matters — not least perceptions of inequitable sharing of the pain in the 2007-8 financial crisis, where bankers continued to draw bonuses while in receipt of bailout money from the taxpayer.
Housing sales in China totalled 1.4bn square metres in 2017, an annual increase of 5 per cent. But subsidies accounted for a quarter of housing purchases last year, estimates Bo Zhuang, China economist at TS Lombard in Beijing, implying that without this support sales would already be in decline.
“He understands how to read markets,” said Steven Blitz, chief US economist at TS Lombard. “He is trying to push interest rates to a level that he believes accurately reflects growth in the economy. As the yield curve flattens the market is telling you that you are reaching the high-water mark.”
“The potential damage to the global economy extends beyond trade,” Jon Harrison at TS Lombard said in an emailed note. “Uncertainty may already be discouraging investment and emerging-market assets will react to U.S. threats of further escalation even if the threatened actions are not ultimately implemented.”
“(The 2014 ISDA definitions) took care of lots of questions about sovereign CDS... in terms of restructuring and what happens in case of a redenomination,” said Andrea Cicione, head of strategy at financial research firm TS Lombard.
“Suddenly the world is facing the most serious outbreak of protectionism since the 1930s,” said Dario Perkins, a managing director at TS Lombard, the London-based economic consultancy. “Protectionism didn’t cause the Great Depression but it certainly prolonged it.”
Economists at TS Lombard think the recession prognosticators actually are watching the wrong yield curve. They say that rather than looking at the spread between 2s and 10s, the more meaningful pair is the three-month bill's spot price and its 18-month forward, or the market-implied price. That gap "is rising, suggesting a recession is not imminent," the firm said in a note. The reason TS Lombard prefers that spread as a gauge is that it reflects monetary policy "and therefore inverts when the market anticipates an easier monetary stance in response to the likelihood or onset of recession." As things stand, the Fed is indicating that it will continue to raise rates, or tighten policy, something it would not do if it was anticipating a substantial slowdown in growth.
Steven Blitz, chief U.S. economist at TS Lombard, talks about the nation's economy, Federal Reserve policy, and Treasury yield curve. He speaks with Ramy Inocencio and Paul Allen on "Bloomberg Daybreak: Australia."
Christopher Granville, Russia expert and managing director at TS Lombard, doesn’t see any sea-changes ahead for U.S. policy in the area. “I don’t believe that Trump will actually ‘do’ anything on Ukraine,” he told CNBC. “At most, he may say that it’s a European problem.” Granville added that the most important topic for the president on Monday will likely be Syria, especially as it pertains to conflict between Israel and Iran.
As hard as Putin may try for sanctions relief, removing them is no longer in Trump's power since their codification into law under CAATSA, said Christopher Granville, Russia expert and director at TS Lombard. "However, Trump does have the power not to impose any new ones," Granville noted. The American president has long been suspected of wanting to lift the sanctions, citing the need for improved relations with Moscow, and has deliberately missed previous congressional deadlines to impose them. "That is certainly valuable in itself for the Russian economy, since what causes damage is not so much particular sanctions measures in themselves, but lack of visibility of what new sanctions escalations might be on their way," Granville said.
“May seems to have emerged stronger — at least in the short term — from Davis and Johnson’s high profile resignations,” said Constantine Fraser, an analyst at TS Lombard, an economic research consultancy.
“This really resulted from the escalation in trade tensions on multiple fronts,” said Jon Harrison, director of macro strategy at TS Lombard. “This is also taking place against a backdrop of tighter monetary policy as central banks raise rates.” “A lot of emerging markets have seen export growth in the past year, which helps their economies,” Harrison said. “But that is dependent on increases in global trade. If you see lower world trade, the big EM exporters will be hurt.”
Without the trade war, everything was in place for capital spending to rise and pull up real yields and wages, according to TS Lombard analysts Steven Blitz and Andrea Cicione. “But trade ‘war’ has arrived, mostly raising uncertainty that, in turn, stifles capital spending by business and households,” they wrote in a recent note.
Steve Blitz, chief U.S. economist for the forecasting firm TS Lombard, says Trump's flurry of policy initiatives - with countervalent effects on the economy - could ultimately undermine businesses' willingness to invest in new plants or hire more workers. That's especially true since many of the president's moves could be reversed by Congress or his successor. When it comes to foreign and economic policy, Trump may be trying to tackle too much at once, Blitz says: Fight trade wars, cut taxes, rip up nuclear-disarmament agreements, shake up healthcare laws, rail against allies like Germany for not paying their fair share of defense spending. The list keeps growing. "As a business guy, what are you going to do?" Blitz said. "You're going to put your hands in your pocket and do nothing, until you understand what is the permanent path of all these policies."
“Like most investors, we were assuming Trump’s trade war was mostly ‘noise’. We thought the likeliest outcome was a series of skirmishes, full of inconsequential measures and symbolic victories, which wouldn’t ultimately undermine the macroeconomic outlook,” wrote Dario Perkins, managing director of global macro at TS Lombard. “Now, as trade tensions escalate — perhaps even to the brink of a full scale trade war — the risks to markets are obviously increasing,” he said.
"The outcome that looks so unlikely as to be negligible is the one that many, including business and financial markets, fear whereby Britain crashes out of the EU with no treaty," Christopher Granville of TS Lombard, a London-based investment research firm, told Xinhua on Friday. "This is the so-called No Deal outcome. That is a very unlikely outcome to happen, so unlikely as to be negligible," said Granville.
Analysts at TS Lombard write: “Capex is likely to remain subdued as long as US companies are unsure about the global trade environment.’’ As analysts at TS Lombard note: “Credit investors tend to be more sensitive to cycle turns than equity investors because of the negative skew of their expected returns. The more credit spreads widen, the harder it will be for stocks to keep rising.’’
“The underlying fundamentals in the euro zone remain solid. The expansion is still in the relatively early stages, and has room to run. The most recent set of data and sentiment surveys suggests that the worst may be behind us,” said Shweta Singh, managing director of global macro, at TS Lombard “There is one big caveat, however: the risk of higher trade barriers, which is already weighing on export orders and manufacturing, is rising.”
“So what do trade wars mean for financial markets? Clearly they are negative for equities. Economic growth would suffer, both short and longer term,” said Dario Perkins, managing director of global macro research at TS Lombard, in an note. “If we are also facing ‘de-globalization’, then we are probably talking about a lower equilibrium profits share,” he said.
“We are not saying that a major trade war is now inevitable, or even that this is the likeliest outcome. But rather that the chance of a quick resolution—the working assumption of most investors in 2018 — is fading away,” said Perkins.
Investors return to the markets Thursday ill-prepared for the bottom to drop out when $34 billion in tariffs on China goods kicks in on Friday. And that's unfortunate because there is likely to be pain felt sans a last-minute reprieve from team Trump. So with that, the quotes of the day come compliments of TS Lombard strategist Dario Perkins. If this isn't enough reason to move to cash or gold, I don't know what is.
“As he ratchets up the trade conflict with China, President Trump’s protectionism will inevitably start to damage the global economy,” said Dario Perkins, managing director at TS Lombard. “Markets are understandably skittish and a protracted period of tension could both undermine the macro outlook and produce a much nastier endgame.”
Bo Zhuang, chief China economist for research firm TS Lombard, believes China can afford concessions to the US with regard to protecting intellectual property, enlarging market access and reducing the US merchandise trade deficit, but will baulk at changing its industrial policy. “There is a technological arms race between China and the developed world that will last 10 or 20 years. China won't give up. It’s more likely China will double up or triple up on investment in technology,” said Mr Zhuang.
Besides boycotts, Beijing could consider creating costly administrative bottlenecks for U.S. imports or impose punitive measures against U.S. companies operating in China, analysts at research firm TS Lombard wrote in a June 20 note.
Bo Zhuang, chief China economist at TS Lombard, a research group, said that Beijing was probably allowing a tactical depreciation to send a signal to Washington but that a deep devaluation would be counterproductive for China. "Many market participants speculate... that China may have weaponised the renminbi, opting for a devaluation to offset the impact of US tariffs. We disagree, though policymakers are now considering devaluation as an option," said Mr Bo. The PBoC burnt through roughly $1tn in foreign exchange reserves in 2015-16 in order to fight market expectations of depreciation. Reviving those expectations now would carry big risks, Mr Bo cautioned. "Any benefit from a major renminbi devaluation would be far outweighed by the negative consequences: accelerated capital flight, domestic liquidity tightening and the possibility of increased credit stress,” he said.
“Riyadh and Moscow are calling the shots, being the largest producers with the capacity to adjust output readily and in size,” wrote Konstantinos Venetis, senior economist at research firm TS Lombard Research, in a note earlier this week. That position, however, isolated some OPEC countries eager to reap more revenue from higher prices.
As Iranian supply is squeezed by sanctions and Venezuela’s production hampered by a relentless deterioration in its economy, “Saudi Arabia with the [Gulf Cooperation Council Countries] and Russia are easily able to take up this kind of slack – Aramco alone has spare capacity of 2 million barrels per day, according to its CEO,” Venetis said, referring to Saudi’s massive public oil giant.
“AMLO’s expected victory possibly represents the largest change in the political regime of the country in modern times,” Cristobal Arias, Latin America economist at TS Lombard, wrote in a note on Tuesday. “Moreover, his victory could lead to significant gains in congressional seats too, as Mexicans have historically voted for the same party in both the presidential and congressional ballots.”
“AMLO supports NAFTA but would not bet on fostering international relations, particularly in an era of trade tensions,” said TS Lombard's Arias. “While we expect the NAFTA negotiations to resume after the election on 1 July, we believe the next administration will take a nationalist stance on NAFTA while it pursues the trade diversification agenda introduced by the current government in light of US protectionism.”
"The physical oil market is well supplied," said Konstantinos Venetis, senior economist at research firm TS Lombard, although he warned OPEC and Russia were producing at near maximum output "leaving a thinner margin of safety for the future."
TS Lombard's Konstantinos Venetis writes that even with "100% compliance," that boost won't be "nearly enough to drag the market down. Absent a global growth scare, prices remain well supported and biased to the upside."
“Italy is structurally problematic, and the divergence between Spain and Italy is because Spain was in a position to stimulate,” said Andrea Cicione, head of strategy at TS Lombard. “From a fiscal standpoint, it ran a 6 percent deficit and is starting to rein it in. Italy has no such levers.”
China is also a big unknown: in view of the bilateral trade surplus, the Middle Kingdom can not respond with punitive tariffs to the same extent. Most analysts, however, assume that China mainly responds with non-financial measures. For example, according to the research house TS Lombard, Chinese companies could be instructed by Beijing to substitute US suppliers for European or Asian alternatives. Also, administratively, China could inflict some pain on the US - for example, acquisitions involving US corporations to deny the necessary approval of the competition guardians.
Pointed out TS Lombard strategist Christopher Granville: "Trump presumably sees this [pressure on China] as a case of cause and effect. The closer the election, the more attractive it may seem to come out with a victory declaration based on the concessions that China has already signaled - both on increasing imports from the U.S. and liberalizing the environment for U.S. investment in China, particularly as regards intellectual property protections. In addition to this display of keeping faith with his voters, this timing would also minimize the domestic economic losses from escalating trade tensions with China."
Smaller banks "have been much more aggressive" in expanding lending than large banks, causing them to have to borrow from bigger institutions. That is creating most of the demand in the short-term funds market as big banks already have nearly $2 trillion in reserves at the Fed. That in turn is driving the funds rate higher, said Steve Blitz, chief U.S. economist at TS Lombard. Blitz said there remains some confusion about how high the level of reserves needs to be at the Fed, creating uncertainty about how far the Fed should go in tightening. As for the effort to keep the funds rate in check, "it doesn't seem to be working," he added.
"There is, however, good reason to believe Trump's trade tactics are less about blowing up the global economy than they are about pushing global trading dynamics towards a better semblance of balance. The net result, if successful, could be an increase in domestic capital investment," Steve Blitz, chief U.S. economist at TS Lombard, said in a note.
Steven Blitz, an economist at the consultancy TS Lombard, said that while foreign central banks blamed the combination of a shrinking Fed balance sheet and higher US government borrowing for their difficulties, the figures showed that “the greater force draining dollars appear to be the recent change in US tax law”.
“Banks in these countries will not be getting the same growth in dollar deposits as in the past for a given level of activity,” Mr Blitz said, adding that this would limit such banks’ capacity to lend.
Looking ahead, investment research firm TS Lombard noted on Friday that the policy rate gap between the ECB and the Fed “is now 2.4 per cent” and, based on their expectations that the Fed will raise rates by 25 basis points every quarter, it is set to widen by a further 1 per cent in the next 12 months.
“The negative carry associated with [the euro] is becoming a drag on the currency,” TS Lombard’s Europe Team concluded.
“‘Quitaly’ or ‘Italexit’, or whatever you wish to call the possibility of Italy leaving the euro area, is not on the political horizon. But once the seed of risk is planted, financial markets tend to extrapolate,” said Shweta Singh, senior economist at TS Lombard.
“The next step is more important, whether Washington is going for the $100bn tariffs or not,” said Bo Zhuang, an economist at consultancy TS Lombard. The US’s total exports to China were a record $130bn last year, meaning a tit-for-tat retaliation would have to cover all imports from the US and more. Any tariff rounds beyond that could be a “disaster” for China economically, added Mr Zhuang.
In his new book, Charles Dumas says: “It is vital that the label ‘populism’ does not become a sneer. To be sure, demagogues have readily exploited widespread discontent with quack remedies. But centrist politicians and commentators have shown equally widespread lack of empathy with the legitimate grievances that underlie this neo-Luddism. The way combined globalisation, technology, demographics and financial imbalances are developing could only too easily aggravate neo-Luddism in future, as well as false ethnic and/or regional divisions.”
"From the data we look at, there is every reason to believe the economy will more than justify the Fed's proposed trajectory for policy rates," Steve Blitz, chief U.S. economist at TS Lombard, said in a note to clients. "The trajectory for higher policy rates is in place. The market's 'bet' against that happening is what looks wrong."
"Italy is by far the biggest threat to euro area stability … The economy suffers from a dangerous mix of weak growth, poor competitiveness, high public debt and a struggling banking sector," Shweta Singh, the managing director at TS Lombard, said in a report published Monday.
U.S. prices at the wholesale level rose more than expected in May. "The trend is unmistakable. Input prices are going up. The Federal Reserve's on track to raise rates 25 basis points today and raise rates in September and December and probably on a quarterly basis into next year." says Steve Blitz, US Chief Economist at TS Lombard.
Research and research firm TS Lombard also believes the US Central Bank should raise interest rates today and twice more this year in September and December. These increases in addition to that of March will add up to four highs, according to US economist Steven Blitz. Beginning in 2019, the economist also projects "a quarterly rate hike" due to the effects of the economy's acceleration in inflation and wages. The Fed will print a high pace that should push the Fed Funds rate target to "2.5% or even 3% per year" by 2019 "and then see what happens."
The dollar strength is currently directly linked to interest upward move by the Federal Reserve (Fed, central bank), but to the chief economist at consulting and research firm TS Lombard in the United States, Steven Blitz , there is another short-term factor that has made the American currency intensify the appreciation: the repatriation of profits retained abroad by American companies.
In the financial markets, quick and easy-to-remember short formulas are often invented for complex problems. However, unlike, for example, in 2012, when Grexit came forward for the threat of Greece's exit from the euro zone and the reintroduction of the drachma, there still seems to be no consensus on the name of a possible departure from Italy. The traders could not have decided between Italexit, Quitaly or even Europaderci, says with a slight mockery Dario Perkins of TS Lombard.
Whatever experiments the Italian government takes on - the two Swiss banks have little to fear. Their involvement in Italy is insignificant and also focuses on businesses. By far the most exposed French banks are on the Italian peninsula. They hold claims in their books that, according to a compilation of TS Lombard economists, account for 12% of French gross domestic product.
While the repatriation of U.S. corporations’ profits held overseas has helped pay for buybacks, it also has drained those dollars held in banks abroad, causing dislocations in the global banking system. In essence, this shift has hampered the ability of foreign banks to expand their balance sheets, writes Steve Blitz, chief U.S. economist at TS Lombard.
He estimates U.S. corporations’ earnings held abroad fell at a seasonally adjusted annual rate of $632 billion in the first quarter, which he compared to the $160 billion SAAR of decline in the Fed’s securities holdings. Blitz opines this effect has had an even bigger impact on emerging markets than the reduction of the Fed’s balance sheet, which is being blamed by some monetary authorities abroad for the weakness of EM currencies.
The AK Party "is still very strong. However, they made a tactical error," said Marcus Chenevix, an analyst at TS Lombard. "Politics in Turkey are much more entrenched than they are in America. We'll quite likely see a scenario of political paralysis if the current polls are to be believed." "With a country facing an economic crisis, this the worst time for that," Chenevix said.
“So is the euro crisis back? The sad truth is that it never really went away — it just lost all sense of urgency after Mario Draghi promised to protect the single currency [in 2012],” said Dario Perkins, global macro managing director at TS Lombard. The speed of last week’s market sell-off was “frightening”, Mr Perkins added, and it provoked conversations among investors about the possibility of Italy exiting the eurozone which were “a scary reminder of past discussions about Greece”.
Yet many economists say there are few signs so far that the tax cuts are making much of a difference in overall economic output. Steve Blitz, chief economist at the consultant TS Lombard, said he's seen "zero" impact, though he does expect businesses to eventually increase capital spending on such things as new plants, technology and equipment.
"All that's really occurred so far is that it's put more cash on corporate balance sheets," Blitz said in a phone interview. Corporate treasurers are investing much of that money in U.S. Treasury bonds or putting it into accounts at banks, which also often put money into Treasuries, he said. "That money is being lent to pay for the deficit."
"Multilateral tariffs are certainly a warning sign that this is no longer merely a case of US protectionism and that the world is edging towards a trade war," said Oliver Brennan, senior macro strategist at TS Lombard, in a note. "In such a circumstance, global trade growth could fall by 10pp and global GDP by over 1.5pp (according to IMF estimates, after five years). "The impact of tariffs has been mostly restricted to those sectors that are directly affected. Retaliation is likely to widen the impact and increase political risk, but for now the US economy continues to motor on," Brennan said.
"This is Merkel's first attempt to lay out a position on euro zone reform," Constantine Fraser, Europe analyst at TS Lombard, told CNBC via email. "She knows she has to engage with demands for more risk-sharing, but also has to bring onboard the conservatives in her CDU-CSU (coalition), and act, in a way, as the spokeswoman for the skeptical smaller northern European countries."
“The markets appear only marginally concerned about trade at this point, perhaps because investors are assuming that what we are seeing is the typical Trump pattern: announce something drastic, but in the end it’s not so bad,” wrote investment-research firm TS Lombard.
But the fiscal measures were needed, according to Marcus Chenevix, Middle East and North Africa analyst at TS Lombard. "Reform of some kind is certainly necessary. The current deficit is massive, more than 10 percent of GDP, government debt has nearly doubled since 2007 ... The country cannot go on like this," Chenevix told CNBC, adding that the unrest of the last week was a long time coming. "Fundamentally, growth in the Jordanian economy has been slowing for a decade — something had to give."
While experts might be optimistic of a rebound for the asset class, some warn that certain countries should be still be avoided due to very specific conditions. Lawrence Brainard, chief economist for emerging markets at TS Lombard, believes that volatility from the troubled markets of Argentina and Turkey could threaten the space more broadly. "The economic turmoil evident in Argentina and Turkey may be a harbinger of what is in store for other EMs, such as Brazil," he said.
“OPEC’s bias to err on the side of tightening remains intact,” said Konstantinos Venetis, senior economist at TS Lombard. “Easing the restrictions just means that its ‘line in the sand’ moves slightly back.”
“Fundamentally, not much has changed. Oil remains well supported, although the sweetspot has entered a mature phase,” said Konstantinos Venetis, senior economist at TS Lombard. “Some air is fizzling out of the market and position-squaring raises the likelihood of an overshooting to the downside in the run-up to OPEC’s June meeting.”
“It’s a hard indicator to read, but it may be a sign that Saudi consumers and business people feel less uncertain about the future and a bit more secure. It is probably linked to the return to fiscal expansion,” said Marcus Chenevix, a Middle East and North Africa analyst at TS Lombard in London. “However, Saudi Arabia has a comparatively underdeveloped banking sector for its level of per-capita wealth, meaning that this is an area in which we would expect to see pretty strong growth.”
“Absolutely. First it was Argentina, now Turkey. The country has been able to fund very high growth, in the face of large external imbalances, by tapping the easy money created by QE [quantitative easing, by the US Fed or the eurozone’s ECB, among others]. As markets begin to look ahead to an exit from QE, funding conditions are getting systemically tougher for Turkish banks, just as they are for other Ems [emerging markets],” Marcus Chenevix, a financial analyst for Turkey at London-based TS Lombard, told ICIS.
"This policy of isolating Iran runs directly counter to U.S. interests in Afghanistan," said Marcus Chenevix, MENA researcher at TS Lombard. By potentially forcing Afghanistan to sever links with one of its largest trading partners, he said, "the Trump administration is hitting the beleaguered Afghan economy with yet another shock at a time when the government is already struggling against a reinvigorated Taliban." A trilateral memorandum of understanding signed in 2016 between India, Iran and Afghanistan committed $21 billion to the project — $9 billion for the actual port in Chabahar, and the remaining $21 billion for developing Afghanistan's iron ore export capabilities. "This deal was all about Afghanistan," Chenevix said.
Research house TS Lombard said in a note that fund managers could easily adjust their portfolios by buying Hong Kong-listed stocks, meaning they would not need increased mainland exposure. Of the 230 or so A-shares being added to the index, 49 have H-share listings.
With Italy’s incoming populist government certain to block any new European Union sanctions and perhaps even trigger an easing, there’s suddenly a more “constructive atmosphere” for Russia in Europe, said Christopher Granville of London-based consultancy TS Lombard.
Europe’s auto sector, often seen as a potential target in trade spats, fell 1.9%. “The question is whether Europe becomes the next trade target for Trump,” said Andrea Cicione, head of macro strategy at TS Lombard. “If Italy went down the path of putting in place all these measures [in a leaked draft agreement] there would be a massive budget deficit,” said Mr. Cicione. “But a coalition like this one, with a thin majority... is not going to implement anything like the measures they put forward.”
"Having the IMF on board would be one of the best ways to signal to market participants that Greece can now sustainably look after itself," Constantine Fraser, a Europe analyst at research firm TS Lombard told CNBC via email. He added that Germany is also determined to see the IMF sign off on the current bailout. "After all, IMF participation was a precondition for the Bundestag (German Parliament) agreeing to the 2015 bailout."
The concept of symmetry, or the notion that an overshoot of the inflation target is no less desirable than an undershoot by the same margin, is mentioned frequently, and might conceivably be taken to mean that in effect the FOMC has raised the level of inflation it is prepared to tolerate. This comment comes from Steve Blitz of TS Lombard: The doves ruled-the-roost during this meeting with their myriad reasons given for why inflation really is not yet at 2%. By convincing themselves this is so, policy gave way to a symmetrical inflation target (symmetrical might be the most repeated word in these minutes) in order to prevent a policy overreaction that would keep the economy from reaching the FOMC’s “symmetric 2% objective” on a “sustained basis”. Sustained was probably the second most used word in these minutes.
"While we should be careful not to exaggerate the recent deterioration in global economic data - particularly as it follows synchronized, above-trend growth in 2017 - it is clear that there are now scattered signs of weakness," points out TS Lombard strategist Dario Perkins. "While macroeconomic data have proved more resilient at the global level, the outlook has also deteriorated compared to what investors expected at the start of the year."
Even if the two sides work out a deal on trade, the clear evidence that the U.S. is capable of shutting down one of China’s most important tech companies practically overnight has almost certainly made the Chinese more determined than ever to build up their domestic capabilities. “China’s sense of urgency in developing core technologies is now more urgent.” Bo Zhuang, chief China economist in Beijing at research firm TS Lombard, puts it even more bluntly in an email: “We are heading towards a technological arms race between China and the West.”
"A strong result for Sadrists is not great news for the U.S., but it is not the worst news either," despite the violent history between the two, according to Marcus Chenevix, Middle East and global politics researcher at TS Lombard. "Sadr is relatively independent of Iranian control, much more so than Amiri. So this result is going to result in a more difficult relationship with the Iraqi government, but it will not create a rift between Iraq and the West."
“The recent sell-off in EM assets is not a surprise,” said Shweta Singh, a global macro strategist at TS Lombard. “A resurgent dollar and higher yields will raise EMs’ funding and debt-servicing costs. In more extreme cases, it could lead to a reversal of EM carry trades, which have proliferated since the great financial crisis.”
Constantine Fraser at TS Lombard thinks Italy’s “pussycat populists” are no longer the “nightmare” the EU once feared. Expect compromise ministerial candidates and a palatable prime ministerial choice in the days ahead. “The Italian political system is terrible at yielding strong, stable governments with a mandate to take difficult decisions. But it still does well what it was designed to do following the fall of fascism: to diffuse power, deflect political impulses, and generally throw up obstacles to ambitious programmes of all kinds”, adds Mr Fraser.
"Investor attention will very quickly turn to the campaigns in the three big northern states scheduled for polls later this year," said Shumita Deveshwar, senior director for India research at TS Lombard, in a note Monday. "Those polls will be more indicative of the BJP's popularity as northern India is the party's traditional stronghold," she explained.
"The government has no intention of tackling imbalances or overheating," Marcus Chenevix, global political research analyst at TS Lombard, said in a research note this week. "It is this unwillingness to act that leads us to believe that we can now say that Turkey is entering a slow burning crisis."
"For the President to become suddenly concerned about Chinese jobs is quite a volte-face," said Jonathan Fenby, chairman of China research at TS Lombard. "The most probable explanation can only be that he wants to butter up Xi with a concession on the trade front to get China's help to make [North Korean leader] Kim Jong-un amenable to a deal at the Singapore summit, in an application of linkage he advanced last year of Korea and China trade issues."
The UK sees Turkey “as a fast-growing market for exactly the kind of exports that British governments are always trying to encourage, namely cars, machinery and pharmaceuticals, all of which generate jobs in areas where elections are won,” said Marcus Chenevix, an analyst at TS Lombard. But he added that Turkey could become “a bigger part the UK’s supply chain, especially in terms of machinery and parts”, mainly thanks to being cheaper and a “very able supplier of manufactured goods”. The UK “needs Turkey more than ever as an economic and geopolitical partner”, said Mr Chenevix.
“Markets are not yet pricing in a long and ugly US-China confrontation,” said Jon Harrison, economist at TS Lombard, adding: “over the next few months, trade tensions, dollar strength, higher Treasury yields, rising inflation, weaker current accounts and geopolitics will lead to a deeper correction”.
Unemployment is down from almost 28pc in 2014 to just over 21pc. The trend gives more workers money in their pockets and leaves fewer in need of benefits. Economists across Europe are impressed. “For the first time in years, the clouds over Athens seem to be just starting to clear,” says Shweta Singh, at TS Lombard. “Albeit from a very low base, things are starting to look up.”
“The agreement to talk, even if not yet to begin formal negotiations, is ... a step in the right direction, albeit one that brings a risk of negative market reaction when followed by inevitable disappointment as talks enter a more protracted phase,” said Jon Harrison, managing director for emerging markets macro strategy at TS Lombard.
TS Lombard said the backdrop of the FOMC discussion was one of economic growth “with price and wage trends pointing higher and capital spending improving”. While a rate increase was unlikely this week, “we believe a more hawkish statement is coming”, its analysts added.
"As always, the parts of the economy that will be worst hit are the parts that are most internationally-connected," Marcus Chevenix, MENA analyst at independent research firm TS Lombard, told CNBC Tuesday. "And those parts in Iran are oil and banking. If I had to flag up an area that was very vulnerable it would be banking," he said. Chevenix said that if the U.S. decided to impose "secondary sanctions" on Iran, it could prevent European firms doing business with the country, even if they wanted to. Secondary sanctions deter other countries or institutions (such as European banks) from doing business with Iran because they don't want to be blacklisted - or "exposed" as Chenevix said - by the U.S. for doing so, effectively cutting off Iranian business from access to external investment and financial systems. "If Trump was to impose secondary sanctions, he could cut off the Iranian banking system from the rest of the world and that would take us back to a pre-2015 situation. The U.S. has all sorts of unilateral power here," he said.
It was a long-awaited moment. For the first time since January 2014, ten-year US government bonds returned more than 3% on April 24. According to Steven Blitz, economist of the research house TS Lombard, the value of 3% is "not more important than a return of 2.99 or 3.01%". Nevertheless, market observers spoke of a milestone. Because the threshold is psychological. It was last tested several times but not exceeded.
Increased scrutiny from the U.S. on Chinese firms could exacerbate the tension, according to Jonathan Fenby, chairman of the China team at independent research group TS Lombard. "U.S. moves designed to curb China's technological development are likely to act as a fresh spur to its push to expand its cyber capacity," he said in a note Thursday.
Economist Dario Perkins at TS Lombard believes this will give the Fed cause for caution on rate rises. “When there was a 20pc appreciation of the dollar a couple of years ago, it had a much more powerful effect on global economy than everyone expected – the Fed ignored it, and were still in this world where they thought they had basically a closed economy and it didn’t matter. But then they saw these powerful spillovers into emerging markets, then into oil prices, and then back into US again,” he said. “They were planning to raise interest rates quite aggressively, but then the dollar appreciated and they just couldn’t do it." New Fed chair Jerome Powell’s background in financial markets combined with this prior experience may cause the central bank to act more cautiously, he said.
Inflation softened last year, in part because mobile phone service providers slashed prices. That has now washed through the system and Steven Blitz, chief U.S. economist at TS Lombard, said “the great disinflation scare of 2017 appears to have ended” in a recent note to clients.
“With strong growth and inflation beginning to follow, the real story of Q1 GDP data, it is increasingly difficult to argue for the federal funds rate to trade below inflation and, more to the point, that somehow the 2% inflation target hasn’t already been breached. Could the Fed go [next] week? Not likely, but there are no rules preventing it. A more hawkish statement is coming.” says Steven Blitz, TS Lombard.
“It is increasingly difficult to argue that the 2 percent inflation target hasn’t already been breached,” said Steven Blitz, chief U.S. economist at TS Lombard in New York. “Could the Fed go next week? Not likely, but there are no rules preventing it. A more hawkish statement is coming.”
Dario Perkins, managing director of global macroeconomics at the research company TS Lombard, says the US is not alone in having experienced a long period of growth. “Among the developed economies, Australia, Sweden, Germany and Canada all have expansions that match or surpass the US achievement. And if we extend the analysis to the emerging economies, we find several countries with even more impressive performances.” Europe, which suffered a double-dip recession and only began a sustained pick-up in 2013, is the one part of the world where the recovery looks relatively immature, Perkins says.
"Much freight is moved by rail in France, not road, so it will have an effect on the economy," says economist Jonathan Fenby at TS Lombard. "Macron will probably have to say to [EU partners] Germany and to Brussels, 'we'll not do as well this year as last year'. But he has been buoyed by the eurozone economy. Also he does not have a coherent political opposition."
If there is a risk that inflation is being underestimated in the advanced economies, it is at its greatest in the US. The economy is growing at a good pace and is being deluged with fiscal largesse when already close to full employment. Treasury yields are increasingly sensitive to the risk of overheating and that in turn, according to Konstantinos Venetis of TS Lombard, has made Treasuries less attractive as a hedge, diverting some haven flows to the gold market. Gold, of course, was just the place to be in the bear market of 1973-74.
"As the Goldilocks market environment draws to a close,investor interest in gold has picked up," TS Lombard said in a note, referring to an economy that is not so hot that it causes inflation, and not so cold that it causes a recession.
If tighter US dollar funding conditions are to persist or worsen, it might prove uncomfortable for Japan’s banks. Indeed, a piece in February from financial research group TS Lombard was pointedly titled “Is the Next Lehman Japanese?” While “European banks played a decisive role in the subprime crisis,” TS Lombard wrote, Japan’s banks “may have taken over as the main systemic vulnerability”, having greatly expanded the size of their US dollar loan books in recent years, leaving themselves with huge US dollar funding needs, reminiscent of European banks in 2007.
“Karnataka is significant for the BJP because it needs to outperform in the south and the east of the country to make up for expected losses in the north,” said Amitabh Dubey, a political analyst with consultancy TS Lombard. “In the general election they are unlikely to repeat the same result as the last time in states such as Rajasthan and Gujarat.”
Given the mutual bluster, threats and sabre-rattling we got used to from Donald Trump and Kim Jong-un, it may be hard to credit the air of sweet reasonableness that has spread over the Korean peninsula in recent weeks leading to the weekend announcement of an end to weapons testing by the North. The potential for a reversion to confrontation is all too evident. Pyongyang has a long record of reneging on agreements and its announcement contained no mention of a reduction in its arsenal that includes missiles which can hit Japan and South Korea even if it stops development of ICBMs aimed at the USA. But, for the moment at least, this seems a moment when the different interests of the main players have been brought into alignment, not only Trump and the two Koreas but also the big beast in the region – China.
“The repatriation of Russian flight capital is certainly a live theme, but the latest geo-political tensions are just adding fuel rather than being the root cause,” said Christopher Granville, managing director at consultancy TS Lombard. He noted Russia had joined the Automatic Exchange of Information on Financial Accounts, an OECD initiative to crack down on tax dodging, in 2016, but its information exchange process with partner countries, including Switzerland, went live only in January 2018. “Since Russian tax residents can no longer be sure of keeping their money safe in Switzerland, they feel they might as well repatriate and take advantage of a tax amnesty at home - then pay tax at (Russia’s) 13 percent rate,” Granville said.
Other analysts believe that the composition of the Spanish stock market, with the weight of large multinational groups, makes it more dependent on the euro than Catalonia (except hecatomb). "Since last summer, the Ibex has been damaged by Telefónica and Inditex, affected by the strength of the euro and other factors in their respective sectors," says Constantine Fraser, TS Lombard.
Against this backdrop, Bo Zhuang, China economist at the research firm TS Lombard told the BBC that exports growth is the top growth risk in 2018. And while Mr Zhuang said stock markets have already priced in significant risks of a trade war, his firm believes it is feasible and likely that a deal can be negotiated. As such, Chinese growth data through 2018 will be closely watched for any impact of tariffs proposed by the US.
TS Lombard Chief U.S. Economist Steven Blitz discusses the markets and weighs in on U.S. President Donald Trump announcing his intention to nominate Richard Clarida as vice chairman of the Federal Reserve. Blitz speaks on "Bloomberg Daybreak: Asia."
“Much freight is moved by rail in France, not road, so it will have an effect on the economy,” says Jonathan Fenby at TS Lombard. “Macron will probably have to say to Germany and to Brussels, ‘we’ll not do as well this year as last year’. But he has been buoyed by the eurozone economy. Also he does not have a coherent political opposition.”
We’re likely to see $80 within the next three months, but we don’t think that price is sustainable for long. We think Russia is the most likely risk for higher production which would send prices down again, says Marucs Chenevix, Analyst, EMEA and global political risk, TS Lombard
"US officials [had] previously suggested that an agreement in principle could be reached in time for the Summit of the Americas," said Jon Harrison, managing director and EM macro strategist at TS Lombard, in a note Wednesday. "A delay until at least the end of the month now appears more likely. A new NAFTA deal would confirm US willingness to compromise on trade and help offset the rising criticism of Trump's policy from businesses."
Taking that argument into the currency space, TS Lombard’s senior macro strategist Oliver Brennan argued last week that the Brazilian real could appreciate versus the US dollar as the foreign exchange market starts to realise that any tariff-related reduction in US soybean exports to China, as a consequence of the trade tensions between Beijing and Washington, could be to Brazil’s advantage.
“China’s interest in investing in Brazil and its dependence on Brazilian commodities will continue to strengthen in the current environment,” said TS Lombard analysts Elizabeth Johnson and Larry Brainard in a research note.
"The new US sanctions against Russia are a negative game-changer for three reasons: they directly affect portfolio investments; they are de-linked from clear conditionality; and they will be applied 'extra-territorially,'" said Christopher Granville, a managing director at TS Lombard, in a note to clients. The sanctions "justify a higher risk premium in Russian asset valuations."
“Rusal will probably have to be bailed out by Russian state banks,” analysts at TS Lombard wrote, adding that Deripaska may also be forced to sell his stake in Norilsk Nickel, losing a drawn-out battle with Vladimir Potanin for control of the metals giant.
“The new president (of Zimbabwe) can expect to get both financial aid, more help with infrastructure (including the expansion of Harare airport) and technological assistance, as well as Chinese participation in agricultural projects,” Jonathan Fenby, China chairman at research firm TS Lombard, told CNBC last week of the visit.
“In sum, no change in the Fed’s trajectory,” said Steven Blitz, chief U.S. economist at TS Lombard in New York. “If anything, the wage data are beginning to strengthen the argument for three more hikes this year.”
"The fact that he's likely unable to run throws the race wide open," said Lawrence Brainard, chief economist for emerging markets at TS Lombard. "The various polls with [da Silva] as a candidate show him as the leading candidate. The other candidates are sort of spread out."
Brainard notes that, with da Silva likely out of the picture, a centrist candidate pushing for economic reforms could emerge to win the October contest. "But no one knows who that will be," he said.
“The combination of subpar real income growth, fragile household balance sheets and Brexit uncertainty may mean that the housing market is more vulnerable to a quicker pace of monetary tightening than currently anticipated,” said Konstantinos Venetis at TS Lombard.
“The glass is only half-full on the economy. Growth is nowhere near lift-off. Even with rate increases that are ‘at a gradual pace and to a limited extent’, the MPC will be treading a fine line,” says TS Lombard’s Venetis.
Analysts added that there was still room to avoid catastrophe. “‘Trade War’ is a convenient shorthand. We expect the confrontation between the US and its trading partners, particularly China, ultimately to lead to negotiated compromises on a range of trade, tariff, access and intellectual property issues,” said Jon Harrison at TS Lombard. “By contrast, a full-on trade war, which we do not expect, would entail escalating tit-for-tat protectionist measures that would have a deeply negative impact on trade. World trade volumes may not deliver on the optimistic expectations of some analysts, but we do not expect a collapse. Markets will nonetheless remain on edge owing to the chaotic US negotiating style.”
Analyzing the impact of President Trump's trade policy on the US and global economies or on the financial markets is the key point, says Steven Blitz, US economist for TS Lombard. Rather, Trump intended to shake up the world trade system, treating huge surpluses as virtues they are not, and sustaining them with countless impediments from market forces balancing unequal trade flows through currency adjustments. Trump's main concern is China. In particular, he urged the "theft of intellectual property" to prevent the United States from losing its know-how lead through forced technology transfer.
Investors "have been reassessing their stance on the sector," said Andrea Cicione, head of macro strategy at TS Lombard. "There are ever louder calls for tighter regulation, which would likely affect the advertising revenues of the social network company and other internet giants such as Google."
Christopher Granville, managing director of global political research at TS Lombard, discusses international relations after over 100 Russian envoys have been expelled globally. He speaks with Tom Keene on "Bloomberg Surveillance."
That 19th century model doesn’t come close to describing today’s economy, with its intricate supply chains that stretch across borders. Even a moderate rise in protectionism could disrupt these lengthy and complicated supply chains and thus the global economy, writes Dario Perkins, managing director for global macro at TS Lombard.
"Trump's protectionism is making investors nervous," Dario Perkins, managing director of global macro at TS Lombard, said in a note Thursday. "Past experience suggests these policies are flawed, while even moderate trade barriers could disrupt today's complex global supply chains."
“Tensions are likely to escalate further, even without a full-scale trade war. This could disrupt global supply chains and damage investor sentiment,” said Dario Perkins, head of global macroeconomics research at TS Lombard, a London-based economic consultancy.
That is quite a move even if the rise in USD LIBOR is not an indicator of a wider crisis as analysts such as TS Lombard’s senior macro strategist Oliver Brennan have argued. Brennan’s view is that higher offshore US dollar borrowing costs should be seen as primarily a consequence of greenback repatriation related to Trump’s tax legislation.
Christopher Granville of TS Lombard says economic development and US shale oil production will likely come up in today's meeting between President Trump and Saudi Crown Prince Mohammed bin Salman, in addition to national security issues.
TS Lombard note in July from senior macrostrategist Oliver Brennan, writes that White House uncertainty has weighed the most on the greenback. “After six months of Trump, stocks are being made great again, but Russiagate is weighing on the dollar and yields,” Brennan wrote.
Russia votes in presidential elections this weekend, with Vladimir Putin expected to secure a fourth term. We ask Christopher Granville from TS Lombard about the economic and political factors behind his success.
Recently announced targeted sanctions from the U.S. Treasury Department and threats of asset freezes by the U.K. government are making some wealthy Russians nervous, said Christopher Granville, managing director of global political research at TS Lombard.
While the projected increase in wage growth would represent a slight tick downward from the January reading, it would add credence to the notion that wages are set for further gains, said Steve Blitz, chief U.S. economist at analysis firm TS Lombard. "Everything says that wages are beginning to trend higher," Blitz said in a phone interview. "Given the continued expansion of jobs and the economy and the low level of unemployment, you can only assume upward pressure on wages going forward." Fed officials currently project three quarter-point rate increases this year, but TS Lombard's Blitz said he thinks upward wage pressure could spur the central bank to raise rates four times.
Xi, who also serves as leader of the Communist Party and head of its Central Military Commission, has aimed to meld the party and the state more closely together in order "to provide China with the domestic political machine to achieve his global ambitions," said Jonathan Fenby, a researcher with TS Lombard in London.
Xi's consolidation of power will add muscle to his current economic policies. However, the Communist Party's continuing prying into the inner workings of multinationals operating in China is likely to make life more testing for foreign investors, says Jonathan Fenby, a researcher at TS Lombard in London.
Another reason for Xi to remain in the presidential role is because the job is becoming more important than ever, partly thanks to his global ambitions. Xi “could hardly have made his globe-trotting round of state visits as head of the Party… but he also needed the post to have real resonance,” wrote Jonathan Fenby, China chairman at the TS Lombard research service.
"In order to maintain the peg, the Saudi authorities have to move interest rates in lockstep with the Fed," Marcus Chenevix, a London-based MENA analyst with TS Lombard, told CNBC. "If they do not raise interest rates as the Fed raises rates, then the riyal becomes unattractive to hold because the dollar would give a higher rate of return than the riyal, while still being exchangeable for the same amount or riyals, it would be a huge incentive" for investors to bet against the riyal/dollar peg.
The Chinese presidency may be less important within the Communist system than controlling the party or the military, but it is the role that is most visible to Chinese citizens as well as foreign nations. “His frequent foreign visits show he wants to put his personal stamp on the extension of Chinese influence globally,” says Jonathan Fenby, China chairman at the TS Lombard research service.
he early decades of China’s economic expansion and opening-up fostered a comforting feeling in Western circles that the world’s most populous nation would “become more like us” as it bred a middle class which would espouse democratic values. That illusion is now being demolished by a leader who has reverted to a traditional autocratic style of rule, underlined this week by a move to enable him to stay in office for as long as he wishes.
But Steven Blitz, chief U.S. economist at TS Lombard, detected a change of tone in the minutes vis-à-vis the central bank’s relationship with the markets. He cites the following paragraph:
“Regulatory actions and improved risk management in recent years had put the financial system in a better position to withstand adverse shocks, such as a substantial decline in asset prices, than in the past. However, amid elevated asset valuations and an increased use of debt by nonfinancial corporations, several participants cautioned that imbalances in financial markets may begin to emerge as the economy continued to operate above potential. In this environment, increased use of leverage by nonbank financial institutions might be difficult to detect in a timely manner. It was also noted that the Committee should regularly reassess risks to the financial system and their implications for the economic outlook in light of the potential for changes in regulatory policies over time.”
"The minutes convey a clear sense that inflation is more on their minds than the FOMC statement indicated," Steve Blitz, chief U.S. economist at TS Lombard, said in a note. "The minutes gave readers conviction that only a sea change will stay the Fed from four 25bp rate rises in 2018. One might think this trajectory puts the Fed behind economic activity, but market odds-setters still very much lag the Fed, pricing in only about a 25% chance of four hikes this year."
Ultimately the key question boils down to whether he'll be a dove or a hawk and how could he tip the balance of power in Frankfurt. Research firm TS Lombard believes your best bet lies in the middle. "Without a strong background of his own in monetary policy, it is very possible de Guindos will turn out to be more neutral a voice – some might say a malleable one - on the executive board than the dovish Constancio," they write. If de Guindos gets picked, as it seems,, that would add pressure to appoint a northerner to replace Draghi, paving the way for a clearly hawkish German ECB presidency. "The most obvious German candidate is the controversial, hawkish head of the Bundesbank, Jens Weidmann – but with or without him, a shift towards a less dovish executive board by end 2019 looks likely," TS Lombard adds.
Looking more deeply at the January jump in CPI shows definite trends, according to Steven Blitz, chief U.S. economist at TS Lombard. Deflation in the prices of consumer goods we like to buy is ending; the rate of increase in the cost of things we have to buy either is rising, as for food and energy, or remains high, as for services or rent.
Consumers’ paychecks had been keeping up with rising rents and services costs, while prices of goods have been falling, Blitz continues. “With goods prices set to rise and rent showing no signs of slowing down (in the aggregate), consumer finances are set to be squeezed further,” he writes.
“Madrid has been pushing hard for [de Guindos], arguing that Spain is underrepresented at the top of Europe’s institutions,” wrote Constantine Fraser, political analyst at TS Lombard, in a note late last week.
“For the moment I think China will just put out harsher rhetoric,” said Bo Zhuang, an economist at consultancy TS Lombard. “Agricultural sector retaliation is more likely since (China’s) food price inflation is low. The next possible step will be going on further with a soyabean and corn investigation,” he added.
“The global economy remains strong; inflation, while likely to accelerate somewhat this year, is still subdued; and liquidity is still ample, even though central banks are tightening policy at the margin,” said Steven Blitz, chief U.S. economist at TS Lombard, in a research note.
Andrea Cicione of TS Lombard saw no sign that risk-parity unwinding was a culprit in the recent selloff. “Risk parity indices have been flat since November 2017, while the S&P 500 was up 12%; exuberance in plain-vanilla equities, not risk parity strategies, is to blame,” he said in a Tuesday note.
Jonathan Fenby and Florence Biedermann join Monocle editor Andrew Tuck to discuss whether Emmanuel Macron’s diplomatic standing with the US may be putting UK hopes in jeopardy. Plus: French labour laws attract new investment, the delicate challenge of relocating Westminster’s operations and the complex legacy of the man who put together Ikea.
Marcus Chenevix, an analyst at investment research firm TS Lombard in London, says the crackdown will reduce corruption and move the country “away from a confusing system of multiple and competing power centers to one powerful center. ”But Mr. Chenevix also says money managers he advises have been pulling money from Saudi assets, concerned by what they see as the opaqueness and volatility of local politics. “There won’t be a rapid return in confidence in Saudi Arabia,” he said.
One other wrinkle is the impact of a stronger renminbi on the rest of the world. Analysis by Bo Zhuang, chief China economist at TS Lombard, suggests that the prices of China’s exports to the US have been trending downwards in dollar terms since 2011. However, export prices were essentially flat last year and, given the subsequent rally in the renminbi, Mr Zhuang believed Chinese export prices would break out of this trend this year, rising by about 2 per cent in dollar terms. Given the current market panic about the prospect of higher inflation, and thus faster monetary tightening, in the US, the likely role of the rebounding renminbi in pushing prices higher should not discounted.
Shumita Deveshwar, director of India research at TS Lombard said while it is a dampener on sentiment, the move is also being seen as the government trying to increase as much tax revenue as it can before the elections. ‘The budget is very much like that. [The government is] saying that we need to increase spending, we need to do things for farmers and low-income groups and we are going to get the money from those who pay taxes,’ Deveshwar said.
“Stop losses were probably closer to market levels than usual, as nervous investors were keen to protect the downside, said Andrea Cicione, strategist at TS Lombard. “And hedge funds, who had the second highest exposure to equities since 2007, were probably forced to liquidate leveraged positions. Momentum-chasing algos probably did the rest.”
The market was overdue a pullback and rising yields provided the perfect excuse to trigger one. But a 4%+ daily drop like yesterday requires more than that. Technical factors helped accelerate the move, with several key support levels being broken on the day (including the 50d moving average). Stop losses were probably closer to market levels than usual, as nervous investors were keen to protect the downside. And hedge funds, who had the second highest exposure to equities since 2007, were probably forced to liquidate
“He understands what cheap money can do in the marketplace,” said Steven Blitz, chief U.S. economist at TS Lombard, a research firm. In 2006 and 2007, Fed officials were too slow to recognize bubbles by “narrowly viewing inflation as consumer prices only, and Powell won’t do that,” he said.
January was the 88th consecutive month of job creation, the longest streak of continuous hiring on record and a testament to the durability of the economic expansion that began in mid-2009, even though the pace of overall economic growth has lagged behind historical levels. “You’re slowly getting back to a more normally functioning economy,” said Steven Blitz, chief U.S. economist at TS Lombard.
The big story for markets right now is less the declining strength of the dollar, and more the relative strength of non-dollar, according to Steven Blitz, Chief US economist at TS Lombard. He also discussed trade and Trump’s tax plans with Anna Edwards and Matt Miller on Bloomberg Daybreak Europe.
The good news is that "we are not yet in a bubble". The bad news is that "all of its ingredients are together". Andrea Cicione, who is in charge of strategy at TS Lombard, an investment research firm, sums up the dilemma of investors at the beginning of 2018.
Indeed, European monetary officials are maintaining an accommodating policy, arguing that inflationary pressures are weak, but they risk transforming the solid recovery of the euro zone economy into overheating, which will further support the euro, warns Shweta Singh, economist at TS Lombard.
Despite the prospect of an end of quantitative easing, rising oil prices and a stronger euro, Shweta Singh, director global macro at TS Lombard, reckons there might be "more positive surprises in store" for the euro area. And this is thanks to ease of financing, strong consumer confidence, increasing capex and a broad-based recovery which looks "increasingly self-sustaining" and leaves room for more upgrades.
“Personal wealth is extremely private there,” said Marcus Chenevix, an analyst at investment research firm TS Lombard in London. “It’s no one’s business." “In most societies, wealth gets exposed because people want to expose who’s behind it,” said TS Lombard’s Chenevix. “But if the politicians are the wealthy, if wealth and power are the same thing, that political pressure doesn’t exist.”
Andrea Cicione, head of strategy at TS Lombard estimates, that Japanese investors can get a yield pick up of 25 basis points for German bunds, 52 basis points for French debt and 165 basis points for Italian bonds respectively. “That is far more than what investing in Japanese bonds can give them,” Cicione said. Ten-year yields in Japan JP10YT=RR were trading around 9 basis points on Wednesday.
The move is an attempt to set up a "functioning and legitimate" Yemeni government, Marcus Chenevix, Middle East and North Africa (MENA) analyst at TS Lombard, told CNBC in a phone interview Wednesday. Chevenix added that while he anticipated the deposit to be a one-off in terms of its "very large" size, Yemen could expect "continued support" from Riyadh in the future
Companies can also spend to cut costs, which many have avoided since the financial crisis. But the U.S. tax overhaul could be the trigger. Steve Blitz, chief U.S. economist of TS Lombard, believes margins will hold together as companies faced with wage pressure will spend on investment. Capital expenditure (capex) these days, often means buying equipment for automation, reducing the need for as many workers, removing higher wage demands. The President Donald Trump administration has another view that the tax bill will simply create "jobs, jobs, jobs."
TS Lombard's Fenby noted Macron's "ambitious plans" to reform Europe and the euro zone, but said domestic politics and reforms were at the top of Macron's agenda. "Macron's main priority is, of course, at home where he has set a three-year horizon for reform to have its impact," he said. "He started with the labor laws but now moves into the trickier matter of cutting the budget deficit. He sensibly puts stress on job training to cut unemployment." "Macron has often been accused of being the typical 'Davos man,' so this is his opportunity to show how he is using the positive international press to attract investment and improve the lives of those who perhaps didn't vote for him," Fenby said.
“A year ago, [quantitative easing] was the major driver of asset markets, but now its influence is beginning to diminish other macro drivers will come to the fore. This means divergence and volatility will rise, which is good for hedge funds,” said Oliver Brennan, senior macro strategist at TS Lombard. He added that he expected hedge funds to trade more currencies this year.
Steve Blitz, chief U.S. economist at TS Lombard, told CNBC Wednesday: "Rising yields, if they are accompanied by an accelerating economy, an accelerating income and stronger employment, they are not necessarily going to cut off mortgages and cut off growth." In his eyes, as long as the economy keeps growing, companies will have money to pay their employees and invest. Thus, the stock market shouldn't necessarily worry too much with how yields are moving.
Charles Dumas, chief economist, TS Lombard: Feel about the same as 12 months ago. Both sides of the Leave/Remain argument grossly exaggerate the long-term difference.
Michelle Lam, senior economist, TS Lombard: More optimistic than 12 months ago. With a transitional deal increasingly likely the UK can at least avoid “falling off the cliff edge” and avoid reverting to WTO rules. The agreement between the UK and the EU on the Irish border and parliament’s vote to demand a meaningful vote on Brexit terms also point to [a] rising likelihood of a “softer” Brexit outcome.
“Wages and prices generally lag real growth. Sustained real growth in 2018 should consequently shift wages to a higher trajectory,” said Steve Blitz, chief U.S. economist for T.S. Lombard, after December’s rate hike by the Federal Open Market Committee. “Wages could in fact accelerate more quickly than markets are pricing in, considering how the economy is picking up with labor-market supply at its tightest point for this cycle. The prospect of a quick upturn in wages is reason enough for [an increase in the federal funds rate], even though measured inflation remains low.”
The fear of missing out will be especially potent in keeping the momentum going. In a study of S&P 500 peaks from 1929 to 2007, TS Lombard showed that market returns tend to accelerate in the six months before the market rolls over. Missing out on the last year of each bull market would have cost investors on average 20 per cent of gains.
Yesterday’s Fed minute release triggered a discussion about whether or not inflation is the main driver of whether the Fed raises and how fast says Steven Blitz, Chief US economist at TS Lombard. However, he told Daybreak Europe’s Guy Johnson and Anna Edwards that what markets should really be focusing on is the debate on hiking attributable to financial stability. He added that the role of power politics within the FOMC, once Yellen departs, adds to the mystery of Fed trajectory in the coming year.
Shweta Singh, head of global macro at TS Lombard, calls it a “euroboom” and points to strong surveys that indicate “its super-charged economic expansion [is] gaining further momentum”. “The broad-based strength reinforces our view that eurozone expansion is broadening out in terms of the growth drivers and that it bodes well for the sustainability and strength of economic expansion,” she says. “The recovery is spreading out geographically as well, reaching to the erstwhile weaker economies.”
The publicity surrounding the case will likely lead investors to avoid the Turkish lira and possibly depress the country's currency even further, said Marcus Chenevix, a MENA and global political research analyst at TS Lombard in London
With a grand coalition, “the perception would be very ugly. When they inevitably do things you disapprove of, where do you go?” says Constantine Fraser, political analyst with TS Lombard. “If the mainstream parties are partners in the same government, opposition will go to the populists.”
Shweta Singh, head of global macro at TS Lombard, calls it a “euroboom” and points to strong surveys that indicate “its super-charged economic expansion [is] gaining further momentum”. “The broad-based strength reinforces our view that eurozone expansion is broadening out in terms of the growth drivers and that it bodes well for the sustainability and strength of economic expansion,” she says. “The recovery is spreading out geographically as well, reaching to the erstwhile weaker economies.”
Charles Dumas, Chief Economist, TS Lombard About 1.5 per cent, vs. US and EA both 2-2.5 per cent. The UK needed to rebalance after the 6 per cent-of-GDP current account blowout under George Osborne, and the Brexit vote secured the necessary devaluation, cutting real consumer incomes and thus spending; but Brexit uncertainties are also inhibiting the capex response to the stronger competitiveness and profitability.
Michelle Lam, Senior Economist, TS Lombard I expect the UK to grow at 1.6 per cent in 2018. That is a tad faster than 2017, but still slower than the euro area and the US. Strong global growth, slower pace of austerity and an end to real income squeeze are reasons why I think growth of the UK economy will hold up next year.
Charles Dumas, chief economist, TS Lombard We expect wage inflation to reach 3 per cent by end-2018, a mild acceleration in nominal terms, rather more in real terms. This assumes either a continued subdued public mood about Brexit or restrictive interest rate action by the Bank of England sooner than expected.
Michelle Lam, senior economist, TS Lombard I expect British workers will get a pay rise of 3 per cent in 2018. It is true that the relationship of wage inflation and unemployment (also known as the Phillips curve) has become less apparent due to globalisation and technological advancement. But I believe demand for hiring could remain rather resilient as firms hope to substitute labour for capital due to Brexit uncertainty. Meanwhile, slower migration from the EU, either due to Brexit or sterling depreciation, would keep the labour market tight. These factors should keep wage growth on a modest uptrend next year.
There are also some indications that wage growth is picking up following a fall in unemployment to a 42-year low of 4.3 per cent: “As long as wage growth is improving, policy normalisation is the right thing to do,” said Michelle Lam of TS Lombard.
Michelle Lam, senior economist, TS Lombard I expect the BoE to hike once in next year, probably in August. If wage growth quickens faster than expected, say to 3 per cent in spring 2018, and holds up, the BoE could even raise interest rates twice, beginning from May. As long as wage growth is improving, policy normalisation is the right thing to do. The benefits of keeping policy loose are probably fairly limited. Right now, businesses are holding up capital expenditure because of Brexit uncertainty, not because of tight credit conditions or costs of financing.
The world’s major central banks are pursuing the wrong policy and the obsession with a 2% inflation target is a mistake, according to Charles Dumas, TS Lombard chief economist. He tells IGTV that this could have repercussions in the years to come.
The euro zone is experiencing a “super-charged economic expansion,” wrote Shweta Singh, director of global macro at London-based TS Lombard in mid-December. That expansion surely owes much to the ECB’s continuing attempts to kick-start inflation via its adherence to ultra-accommodative monetary policy settings. The flash euro zone composite purchasing managers’ index has “surged to 58.0, the highest since 2011,” TS Lombard wrote, with the manufacturing sector “leading the bounce, strengthening to 60.1 which is the most optimistic reading on record.” With the good economic news from the euro zone seemingly broad-based, why wouldn’t investors want a piece of that euro-denominated action?
“Europe is turning, the emerging markets are turning, and a larger percentage of S&P revenue comes from global sources as opposed to say 10, 15, certainly 20, 25 years ago,” Steven Blitz, Chief Economist at TS Lombard said.
‘The developments in China probably had some impact on this, as well as the domestic situation in India,’ said Jon Harrison, managing director for emerging market macro strategy at research firm TS Lombard. ‘Up until the middle of the year, India and China were moving in sync in a very positive emerging market sentiment globally. But from mid-year we had two things - GST implementation in India and in China, there was a strong improvement in global sentiment.’
However, TS Lombard’s director India research, Shumita Deveshwar, is optimistic on the market for next year despite political risks in the last year of Modi’s first term and the potential for oil prices to rear their ugly head. ‘These have been painful adjustments but the government has gone ahead and done them. That's why the mood is upbeat because maybe the government is going to do further reforms, especially if Modi gets re-elected in 2019,’ she said.
Oliver Brennan, at TS Lombard, thinks that the franc is more or less at its fundamental fair value. The yen and the krona are still below their fair value, deliberately weakened by central banks attempting to stave off deflation.
How long could the central banks, in particular the ECB, still control the development, asks Charles Dumas of TS Lombard. The true aim of the ECB's monetary policy is the exchange rate. But now the economy of the euro zone has developed so strongly and the foreign trade surplus has become so large that the central bank can do little against an appreciation of the euro. If it continues the excessively loose monetary policy, the euro zone's economy and foreign trade surplus continue to grow. But if it removes the stimulus, the bond yields rise. In both cases, the result is a higher euro exchange rate.
The influence of millennials has been especially pronounced in the retail business. “Their fingerprints are increasingly everywhere,” said Steve Blitz, chief economist at TS Lombard. “Millennials are the first generation in which internet shopping is ingrained in their DNA,” said Blitz, who’s been tracking the spending of baby boomers and millennials. “The 32-year-old is the more aggressive acquire of assets,” Blitz noted. “They are filling up their closets. Baby boomers are emptying theirs.” Blitz says spending on discretionary goods — the things people want to buy — clearly show the shift under way. As millennials become a bigger part of the workforce, sales have risen for restaurants, sporting goods, books, hobby items and home furnishings, among other things. He counsels investors to put their money into the areas where “the wallet share is going.”
Oliver Brennan, senior macro strategist at TS Lombard, notes that correlations between markets accounted for less than half of the variability in developed-market bonds before quantitative easing began. The figure rose above 70 per cent this year. With QE poised to reach a tipping point late next year, Mr Brennan echoes many other investors and observers with his concern that bond-market volatility could resurface. Good news if you like break-out trading themes. Less good if you like dull predictability.
Putin has established Russia as perhaps the single-most important external actor in the Middle East," Christopher Granville, managing director of EMEA and global political research at TS Lombard, told CNBC on Wednesday. Granville agreed that Russia could assert itself as a key player in a regional peace process, although tensions are running so high between Israel and Palestine, let alone the wider Islamic world, that the process looks unlikely to see progress any time soon. "Russia is certainly better positioned to have constructive contacts with different countries and players on both sides of the barricades… wheras the U.S. has cast in its lot — lock, stock and barrel — with one side, broadly that of Saudi Arabia and Israel," he said. Granville said that while Russia was in a good position to deal with all parties involved, it might not want the difficult role of peacemaker, or "honest broker," in peace talks. "Russia is better placed to deal with everyone — although the role of an 'honest broker' in the peace process is an invidious and somewhat doomed role," he said.
The publicity surrounding the case will likely lead investors to avoid the Turkish lira and possibly depress the country's currency even further, said Marcus Chenevix, a Middle East, North African and global political research analyst at TS Lombard in London.
Oliver Brennan, Macro Strategist at TS Lombard in London, wrote that the “year-end turn has clearly increased Europeans’ demand for dollars,” but cautioned that “there are structural factors which mean the squeeze can be painful and that the basis swap may not bounce back all the way.” So a rising tide of US dollar liquidity might return in 2018, but access to that liquidity pool could be more expensive than previously. One of the structural factors highlighted by TS Lombard is the introduction in January of rules under the Basel III regulations that urge banks to hold collateral “against [over-the-counter] transactions including FX swaps [which] will on average increase the cost of FX swaps and therefore widen the euro basis.”
While Germany's Chancellor, Angela Merkel, is still seeking to form a coalition government, TS Lombard analyst, Constantine Fraser, says markets would take a minority government, or even a new election, in their stride.
Education is a critical part of this equation, as many citizens lack the type of technical knowledge needed to kick-start certain industries, noted Marcus Chenevix, a MENA analyst with the London-based economics consultancy TS Lombard. "Oman has a great deal of potential to diversify, probably in many ways more than its neighbours, especially in terms of tourism and in terms of the natural resources that Oman has available - things like access to an enormous fishery," he told Al Jazeera. However, the focus on areas such as manufacturing may be problematic, as the country "has no real institutional memory of having that kind of industry and it's very hard to develop that from scratch", Chenevix said.
“That the lion’s share of the gains boosting household net worth were in equities, and financial assets more generally, rather than in real estate is another reason why leverage remains low. Households historically borrow more off of improved home values than rising wealth from stocks and bonds – at least before 2008,” said Steven Blitz, chief U.S. economist at TS Lombard.
"The House tax plan looks like a plan to us; the Senate version looks more like an agglomeration of bits and pieces designed to either capture needed votes (which it did) and/or be bargaining chips in negotiating with the House," Jonathan Fenby of TS Lombard said in a note this week.
Marcus Chenevix, Middle East and North Africa (MENA) analyst at TS Lombard, told CNBC that with Saleh dead, Iran was likely to be able to consolidate its influence in Yemen and that the war was not likely to end any time soon. "It's generally bad news for Yemen and probably good news for Iran," he said Tuesday. "I think we'll see the step-up of Iranian involvement in Yemen now and it will become very intense." TS Lombard's Chenevix said that Saudi Arabia could step up its bombing campaign against the Houthis but that Saleh's death, ultimately, had helped Iran because it simplified "the anti-Hadi cause" represented by Houthi rebels, taking away the forces loyal to Saleh. "Now that Saleh is temporarily out of the picture, unless we see his son try to come back (as Saleh's successor), the Iranian proxy is now the only opposition to Hadi. They are the sole patron to the anti-Hadi government," Chenevix said. "Saleh's death now pushes Houthi rebels into needing more Iranian support too," he added.
Meanwhile, central-bank policy elsewhere, particularly in Japan, is in the mix. Since the Bank of Japan is holding yields down, Japanese investors need to look elsewhere for returns. But the cost to hedge against moves in the dollar has risen, making U.S. bonds less attractive, notes TS Lombard. European bonds may be benefiting from Japanese purchases, holding yields down but supporting the euro.
Steve Blitz from TS Lombard said there will not be enough fiscal stimulus to move the needle, and it is far from clear what the dollar will do given that Europe and Japan are both rebounding. Complex hedging practices in the derivatives markets suggest that the euro will strengthen against the dollar next year. The tax holiday for US companies in 2005 did lead to a 15pc rise in the dollar index (DXY) over a fifteen month period but the circumstances were very different. Mr Blitz said it was a zero-tax holiday and it was only offered for a short window of time. The Republican package today is open-ended and entails a 14pc tax. It may be a damp squib.
“This week’s sterling bounce on reports that the UK has accepted a higher financial divorce settlement with the EU seems based on the false assumption that the way is now clear for the European Council on 14-15 December to authorise moving on to the next phase of the Brexit process,” said Christopher Granville, managing director at investment research firm TS Lombard. “To get to that next stage (the transitional deal), however, two further agreements are required. One – on citizens’ rights – looks relatively easy. The same cannot be said of the other – on the Irish border,” he added.
The publicity surrounding the case will likely lead investors to flee the Turkish lira and possibly send the country's currency down even further, said Marcus Chenevix, a Middle East, North African and global political research analyst at TS Lombard in London. "This case has the capacity to seriously damage relations between Turkey and the US," said a recent report from TS Lombard. "From a US perspective, Turkey has been working to subvert American interests by secretly doing business with an enemy and is now insulting the American Judiciary and threatening American officials." The impact on the lira has the potential to be swift, possibly pushing it past 4 lira to the US dollar, according the Lombard report.
“New restrictions on the resale of property and fading support from shantytown redevelopment will keep weighing on housing sales. This spells further downside for residential investment growth,” wrote research firm TS Lombard, in a report.
Much of the recent selloff in Asian shares has come from companies that have already posted strong gains this year, said Andrea Cicione, head of strategy at TS Lombard, noting investors are questioning whether they are willing to pay up front for all the growth that these companies will deliver. "But we haven't seen anything for the moment that worries us," he said, noting fundamentally, the outlook for the economy and global equities remains sound and investors generally feel they can't afford to miss out on this market.
Marcus Chevenix, Middle East and North Africa (MENA) analyst at TS Lombard, told CNBC that Saudi Arabia's foreign policies, under the aegis of Crown Prince Mohammed bin Salman, are hard to understand. "Domestically his (Mohammed bin Salman's) actions are radical but comprehensible, but on a foreign stage they're very hard to make sense of at all," Chevenix said. "His intervention in Yemen was rash yet we could at least see what he was trying to do. His intervention in Qatar was, yet again, maybe a little reckless maybe a little quick but it was certainly effective against Qatar. But in Lebanon it's really hard to see what this does for him at all." The analyst believes that it might have been a "reactive move" aimed at bringing down the coalition government of Lebanon to somehow destabilize the position of Hezbollah. He perceived it as a pushback against Iran by whatever means available, but suggested that war was not currently a possibility. "It's hard to see where Saudi Arabia could get to a position where its actions were intolerable to the Iranians. Iranian actions are already intolerable to Saudi Arabia, we know that, but the Saudi Arabians struggle to really find a way to aggravate Iran, that's why we're not looking at a hot war situation right now," he told CNBC.
Some analysts and investors are perturbed, and in a note to clients, TS Lombard said this new conundrum could have important implications for the outlook for markets in the coming year: “With the yield curve continuing to flatten, some investors are talking about the curve inverting in 2018, traditionally a leading recession signal. Others disagree, arguing we are on the brink of a dangerous 1994-style selloff. The resolution of this debate will have a powerful influence on a wide range of global asset prices.”
Dario Perkins, a senior economist at TS Lombard, contends the Fed has effectively outsourced control of when to raise interest rates to bond markets. If so, he argues in a new report, the Fed is unlikely to raise rates as much or as many times as the central bank has indicated. “This is an odd situation because it suggests central banks are now ‘rate takers’ rather than ‘rate setters,’ ” he wrote. Only a sharp rise in inflation itself or inflation-adjusted bond yields, he added, will force the Fed to be more aggressive.
“Some investors are talking about the curve inverting in 2018, traditionally a leading recession signal,” said Dario Perkins at TS Lombard. “Others disagree, arguing we are on the brink of a dangerous 1994-style sell-off. The resolution of this debate will have a powerful influence on a wide range of global asset prices.”
“This is a repricing of systemic political risk. Just as we saw with Qatar, this will not be a short-term bounce in yields, but a long-term step up to a slightly higher risk bracket,” said Marcus Chenevix, regional analyst at TS Lombard.
"For investors who don't know Saudi Arabia so well, this news will be a rude awakening to the fact that Saudi politics are actually quite unstable," said Marcus Chenevix, a Middle East analyst at the London-based economics consultancy TS Lombard. "But for investors who know the kingdom well, they'll see this as a positive sign for long-term reform." Those arrested, according to TS Lombard's Chenevix, primarily hail from the city of Jeddah on the Red Sea, a rival commercial and power center to the central capital of Riyadh. Prince Mohammed announced last month that the country planned to spend $500 billion -- roughly equivalent to Sweden's gross national product -- to erect a brand-new mega-city on the Red Sea.
Demanding and conscious of appearances—including his standing on global rich lists—Alwaleed has had “something of a mixed reputation” outside the kingdom, says Marcus Chenevix, an analyst at investment research firm TS Lombard in London. “International investors see him as a man who talks a very big game and sometimes performed, but often didn’t,” he says.
TS Lombard, one of the leading independent analysis houses in the City, has been located on the first of these sides. In a note to investors, he recommends investors to bet on Spain, hoping that a next solution to the Catalan debate will allow Spanish parquet to gain ground lost during the last months in front of other places. TS Lombard predicts a strong rise until the end of the year of the Ibex 35, recovering the 13% that has been left in front of the Italian Stock Exchange since the summer. TS Lombard predicts that the Spanish index will reach 11,500 points, from the current 10,300 points.
"The Ibex is the cheapest exchange in the euro zone," says Oliver Brennan, market analyst at TS Lombard. The PER (number of times the price of the listed companies contains annual profits) is among the lowest in the developed countries, according to the report. "The weakness of recent months was caused by falls in six stocks, mainly banks, and is likely to recover now thanks to greater political clarity."
“The price of oil is spiking because of market dynamics, not because people are genuinely worried about the stability of Saudi Arabia,” said Marcus Chenevix, an analyst with TS Lombard. “What this is, is a turn back to absolute rule by one man and away from rule by princes. That is not such a bad idea. In an absolute monarchy that does not have constitutionally guaranteed rights, it is better for our business clients. There is a single ruler making single rules rather than answering to a whole class of princes.”
Chenevix, the TS Lombard analyst, said the corruption crackdown will definitely affect investment. “As we saw with the Qatar crisis, as the controversy comes to the surface, investors will realize the political risk of the Gulf coast states,” he said. Last summer, several counties including Saudi Arabia cut diplomatic relations with Qatar and imposed trade and travel bans, alleging that Qatar was a supporter of terrorism. Chenevix said fixed-income investors will see a decline in Saudi bonds. “Your fixed-income assets in Saudi Arabia will be worth less,” he said, “because basically they have been underpricing political risk.”
Marcus Chenevix, MENA analyst at TS Lombard called Alwaleed bin Talal’s arrest “hugely concerning”. “What it tells investors is that Saudi politics can’t be ignored. And that’s worrying because Saudi politics is a black box,” he said
Ken Wattret, an economist at TS Lombard in London, said “political hullaballoo over Catalonia has taken its toll,” and the softer services activity tallies with reports about a “sharp drop in tourist-related activity.”
Investors are "extremely concerned by the weekend's events and we'll see further falls on Kingdom Holding in particular as it's very hard to define what the company is without Prince Alwaleed," said Marcus Chenevix, a Middle East analyst at TS Lombard.
Charles Dumas at TS Lombard asked this question: “With the S&P at 2580, which is more likely over the next 12 months: 3000 or 2160?” His answer was that there are at least three reasons in the short term why the risk of prices heading upwards to form a bubble were greater the downside bear risk of prices collapsing. One was that the world economy was strong, with Europe now adding to demand from the US and China to generate synchronised growth for the first time this century. The second was that commentators were, on the whole, still defensive, advancing reasons for the market to sell off despite there being buying power from investors. And the third was that the combination of very low underlying inflation rates in the US, Europe and Japan, coupled with central banks’ desire to push inflation to 2% was likely to brew a bubble.
“This is about political instability, not about corruption,” said Marcus Chenevix, MENA analyst at TS Lombard, adding the arrest of Prince Alwaleed was “hugely concerning”. “What it tells investors is that Saudi politics can’t be ignored. And that’s worrying because Saudi politics is a black box.”
TS Lombard’s US Watch, penned on October 29 by their chief US economist Stephen Blitz and their head of strategy, Andrea Cicione, gave an evaluation of the direction of the US economy that should lead the Fed to “raise policy rates in December, March and June” pushing the Fed funds rate to 2 per cent.
“A lot of what’s in this plan are bargaining positions; we have to see how the final bill morphs as time goes forward,” Steven Blitz, chief United States economist with TS Lombard, said. “There’s a lot of horse trading to come, so an overreaction doesn’t make a lot of sense.”
"Nothing is easy, however, and there is still tension over what tax provisions can be limited or eliminated to offset aggressive cuts in marginal corporate and personal rates. A balance will need to be struck," Steve Blitz, chief U.S. economist at TS Lombard, said in a note.
Any significant upward move in production could bring the prices even further down, according to a recent report from TS Lombard. “They can’t get any more money from oil,” said Marcus Chenevix, a Middle East and North Africa analyst at TS Lombard in London, in August. “Saudi is stuck with regard to oil production.”
A survey of US investors last month showed that more than 60 per cent expected shares to be higher in a year’s time than they are now. A new paper by Charles Dumas at TS Lombard explains why. His argument is that there are three big drivers that make the upside more likely than the down. First there is the synchronised recovery noted above. Second, while most commentators are warning about a fall, investors have buying power – and had they listened to the warnings they would have lost out on a 25 per cent rise in share prices over the past two years. Third, the underlying inflation rate in the US, Europe and Japan is still very low. So the central bank commitment to pushing inflation up to 2 per cent will keep them pumping out the money that will fuel the boom.
This comment from TS Lombard’s Steven Blitz captures the mood well: The nation’s growth rate has been upgraded to “solid” from moderate, underpinned by sustained “moderate” growth in household spending and acknowledgement again that business capex “has picked up”. This same phrase was used six weeks ago. Does this mean capex has picked up further? Based on the data, we would say yes. What then holds the Fed (Yellen) back with policy rates still set below core inflation? Simply put “. . . inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent.” What then to make of all this? We knew going in the Fed wasn’t going to do anything, so no disappointment there. The upgrading of growth indicates to us that the Fed goes in December. Beyond that, the Yellen doctrine (holding back policy rates while waiting for inflation to rise even though its natural rate appears to be well below 2%) has all the markings of the same mistake Bernanke made in the last cycle – namely ignoring asset inflation because price inflation was well behaved. We could get more exercised about this if Yellen was going to continue as Fed Chair. She isn’t. For all intent and purposes, this makes the statement more swan song than road map -- especially if its Powell and therefore sitting in the room when the next couple of statements are crafted. Fed goes in December, March and June.
Charles Dumas, chief economist at TS Lombard, and Simon Derrick, chief currency strategist at Bank of New York Mellon, discuss economic data from China and overall outlook for the country. They speak with Nejra Cehic on "Bloomberg Surveillance." (Source: Bloomberg)
John Authers’ Note today gives Charles Dumas credit for his brave and timely stock market call in March 2009 and highlights his bullish call on US stocks now.
"Charles Dumas of TS Lombard has a reputation as a contrarian, and as something of a bearish curmudgeon. But on Tuesday he produced a note clearly stating that he saw more risk of a bullish "melt-up" than of an imminent bear market. Headline: S&P 3,000 - a big upside the big 'risk'."
“If the point of looking at Q3 data is to confirm whether the Fed is on track for a series of quarterly 25bp increases in policy rates, consider the point was made,” added Steven Blitz, chief U.S. economist at TS Lombard.
China’s financial reforms are unlikely to be a priority in President Xi Jinping’s second five-year term, says London-based TS Lombard. The research firm noted in its latest China Watch report that despite the Chinese central bank governor, Zhou Xiaochuan’s call for a more market-oriented economy, China’s top leadership has learnt the lessons from poor execution of financial reforms back in 2015, which resulted in the country’s equity bubble burst. Chief emerging markets (EM) economist Lawrence Brainard said, ‘This has convinced China’s top leadership that more, not fewer, controls are needed at present.’
“The door is left open to extend the asset-purchase program yet again,” said Ken Wattret, an economist at TS Lombard in London. “Though the likelihood of this happening for a fourth time looks rather lower now for various reasons, including the positive economic outlook.”
“The closer the ECB gets to stopping QE altogether, the more the market will focus on a rise in interest rates,” adds Ken Wattret, an economist at TS Lombard, a research firm. “If that leads to more currency strength, as seems likely, then the downward pressure on core inflation creates a headache for the ECB.”
Jonathan Fenby speaks on Monocle Radio: Are senior Republicans plotting to remove President Trump? We also discuss Xi Jinping’s ambitions for himself and China's Communist party and remember Hollywood's greatest speeches.