• European banks are some of the most vulnerable to Turkey’s currency crisis
• Direct financial linkages are large, but the indirect exposure is much bigger
• Spanish lenders are most vulnerable, followed by French and Italian lenders
• The exposure is concentrated in some banks with relatively thin capital buffers
• Yet, the fallout from Turkey does not appear systemic at this point
As the trade war situation has now escalated we now see this as a key political shock. We expect China to retaliate vigorously to any fresh US import tariffs and see the likely battle ground as Foreign Exchange. China’s probable response would be to slash the exchange rate putting enormous pressure on a wide variety of countries and resulting in a major hike in the dollar. An FX War would certainly be damaging for stocks, perhaps bonds too, says Charles Dumas, Chief Economist at TS Lombard.
Despite a nominal depreciation against the dollar, the renminbi has exceeded last year’s highs vs the basket, says Bo Zhuang, Chief China Economist. Xi’s approach of claiming the moral high ground by defending globalization and openness leaves little room for speculation about a major devaluation of RMB in the near term to boost exports. We expect RMB CFETS index to move down towards 95-96 before yearend.
PBoC is moving towards a new interest rate-based monetary policy framework, says Bo Zhuang, Chief China Economist. Banks will increasingly have to fund themselves in the more competitive deposit markets. We expect the PBoC to slash RRRs by another 150bps before yearend. Recent policy moves also suggest a relaxation of unwanted policy tightness along with a less aggressive stance on financial deleveraging. We believe total credit growth will stop falling in 2018H2.
From a calendar perspective, the cycle is certainly old enough. From the perspective of what makes a cycle old – borrowings to finance capital expenditure – the cycle is still relatively young. The current flattening of the yield curve is a sign the economy is finally moving to the middle stages of the business cycle not the end. There is the possibility that by late 2019 the Fed will have pushed rates high enough to begin slowing growth, as it chases rising inflation. If, however, capital spending grows a lot faster than anticipated by the markets and the Fed, this cycle has a lot further to run.
There are increasing concerns about whether disappointing euro-area data since the start of the year reflect a ‘soft patch’ or instead mark the start of a more serious period of economic weakness. We remain optimistic. We think that the underlying picture is of an economy that continues to grow at a healthy pace and still has significant cyclical upside. Some brief points from our quick take on euro area Q1 GDP data realised this morning –
The latest tit for tat measures do not amount to a Trade War, but are nonetheless warning shots, says Jon Harrison, Managing Director EM Macro Strategy. Even if there is no full on Trade War, investors should pay attention to supply chain risks. The US objective of preventing Chinese technological development is unrealistic, which leaves the trade deficit as the most likely way for the US to claim victory. A negotiated settlement remains likely, but in the meantime, the US has yet to formulate a coherent negotiating strategy – and its chaotic negotiating style will ensure that markets remain on edge.
Charles Dumas, Chief Economist comments on:
For market-moving geopolitical risk, Syria matters less than the “geo” element in the US-China ‘trade war’ saga, says Christopher Granville, Managing Director EMEA and Global Political Research. Tariff tit-for-tat is a sideshow compared to US anxieties about Chinese leadership in advanced technology. This will make expected deals tricky to finalise – and precarious. In short, here is a long-term geopolitically-based volatility driver.
Oliver Brennan, Senior Macro Strategist, discusses the US' maneuvering to reduce its trade deficit with major trading partners, and to weaken the dollar. But if the troubles go too far it could induce a risk-off move.
Martin Shenfield, Senior Macro Strategist at TS Lombard views the recent market selloff as a healthy correction. There are 4 fundamental reasons for this:
The short-term risks to the market as rising real bond yields and currency swap basis. The medium-term risk is a genuine bubble developing which central banks will have to clean up.
Steve Blitz, Chief US Economist at TS Lombard on the Fed: Financial Stability Not Inflation to Drive Fed Policy
Steve Blitz, Chief US Economist at TS Lombard talks on US Growth: Tailwind from tax cuts helps Capex lead a strong Growth Year.
Hear what our Chief US economist Steve Blitz and our Senior Macro Strategist Ollie Brennan have to say about currency markets, the impact of the Trump tax cuts, and offshore dollar liquidity.
Larry Brainard, Chief Emerging Markets Economist, highlights our best calls from 2017 as well as what to expect in 2018.
Charles Dumas, Chief Economist, on TS Lombard's outlook for 2018.
TS Lombard was formed in September 2016 following the merger of Lombard Street Research and Trusted Sources.
We have a 29 year track record of successful calls. Many of these calls combined economic, political and market analysis.READ MORE