Entries for 2018

Tighter financial conditions, yield curve inversion prompt more bets on a Fed pause. Equity analysts revise down 2019 earnings forecasts; banks underperform. Sharp rebound in EM portfolio flows in November; EM oil importers see the benefit of lower prices. Tax revenues at very high levels—but are governments using them effectively? 

Activity in China is cooling more than GDP suggests, but exports are not the main driver of the slowdown. Tariffs will eventually have an impact on the economy, that we quantify in a simple model of import demand. Growth would fall modestly in a détente scenario, but could drop by 0.5-1pp if trade tensions escalate.

Ongoing geopolitical tensions have created headwinds, but Qatar’s economy has shown signs of resiliency. We expect growth to accelerate to 2.9% in 2019, driven by natural gas production and public investment. Exiting from OPEC sends a symbolic message that the country wants to chart its own course. 

In this edition of Sticky Notes, we look at oil markets ahead of the OPEC+ meeting, consumer privacy laws, U.S.-China trade talks, and end-of-year book recommendations.

Emerging markets saw portfolio inflows of $33.9 billion in November, the strongest inflows since January. Our broader measure of net capital flows remained negative in October, driven by outflows from China. 

2018 has been a difficult year for many emerging markets, but sentiment has recently shifted more positive in many cases, reflecting cheap valuations, a dovish Fed, and a China-US trade “truce.” With sentiment more positive, market focus is squarely on positioning, with people asking how much positioning was cut during the EM sell-off. We develop new data that give a comprehensive look at EM positioning, combining IIF work on capital flows with valuation changes on the stock, where the latter historically account for the bulk of positioning changes.

Equity market volte-face highlights renewed concern about U.S.-China trade tensions; Pace of decline in global central bank asset purchases accelerates; High debt-to-cash levels in the corporate sector—another sign of trouble for credit markets; Carry trade returns still generally sub-par, but looking more attractive for a few emerging markets

This year’s EM sell-off underscored the importance of FX valuation with markets, in dramatic fashion, going after meaningful FX overvaluations. At this point, our models signal neutral or cheap valuations for much of EM, so that currency misalignments are less of a risk factor as we approach 2019. But a positioning overhang in emerging markets remains a material risk factor, given the intensity of capital flows to EM resulting from G-3 monetary stimulus. This piece starts a series of Global Macro Views on EM flows and positioning, which we kick off today by looking at flows over the EM sell-off this summer.

In this edition of Sticky Notes, we look at key issues facing the incoming U.S. Congress, new realities in Mexico, U.S.-China trade talks, and potential auto tariffs.

Euro periphery current account balances have almost all swung into surplus, which is often cited as positive evidence that competitiveness has been restored. But the swing from current account deficit to surplus has a cyclical component, reflecting depressed import volumes due to still large output gaps in some cases. We estimate cyclically-adjusted balances for a range of output gap estimates. Adjusting for slack, Euro periphery current accounts are likely still in deficit.

Looking across the countries we cover in our Global Debt Monitor, non-financial corporate debt is at a record high of $75 trillion—up by $16 trillion since the 2013 taper tantrum.

The Euro zone current account balance is in sizeable surplus, which some see as a sign the Euro is undervalued and needs to rise. But the headline surplus in part reflects persistently large output gaps, which may be inflating the external balance by depressing import volumes. We derive a cyclically-adjusted current account balance for the Euro zone, which turns out to be negative, potentially signaling Euro overvaluation.
 

Estimates for Euro periphery output gaps are oddly small, even where real GDP has fallen substantially in the last 10 years. These estimates implicitly assume lots of activity is permanently lost, with potential “bending” down, almost as if to validate low actual GDP. The reality is that economic slack on the periphery is likely still sizeable, and holding down underlying inflation despite unprecedented ECB easing.

In this edition of Sticky Notes, we look at takeaways from the U.S. mid-term elections, the latest U.S.-China trade talks, Brazil in the wake of a newly elected government, and U.S. soybean exports.

EM bank lending conditions tighten further in 2018Q3. Credit standards and funding conditions weakened more in Q3, as trade finance and the demand for loans began tightening. EM Europe saw their conditions worsen the most, while Sub-Saharan Africa was the only region to improve. Respondents expect less tightening in lending conditions for Q4.

One factor behind global equity market jitters: the growing focus on credit risk. Credit spreads have widened only modestly in 2018, but look increasingly vulnerable to a trigger event. Rising rates highlight vulnerabilities in housing markets. Less reliance on hard-currency debt in EM Asia ex-China, but more in Africa/Middle East. 
 

• Sanctions lowered capital flows to Russia permanently, limiting severely the ability of banks to borrow abroad.
• Risk of new sanctions put pressure on government flows. We assess scope for contagion from expanded sanctions.
• Foreign bank exposures to Russia shrunk significantly, and would be manageable under expanded sanctions.

Private sector balance sheets are susceptible, at varying degrees, to external debt rollover risk and lira depreciation. Under the currently improving, yet fragile, investor sentiment, Turkey’s sizable amortization payments will continue to expose the economy to high rollover risk through 2019.