Idiosyncratic Global Economy Produces Mixed Foreign Appetite for US Assets
June’s Employment Situation report provided mixed signals for Fed policy due to continued low wage inflation and an uptick in the U6 broad measure of labour underemployment. Glacial increases in the federal funds rate remain the baseline outlook for US monetary policy under Chair Yellen.
The latest G20 summit is unlikely to produce huge changes in policy stance in stark contrast to Shanghai last year when China threatened to devalue the yuan unless the Fed backed off its planned interest rate rises. Meanwhile, current economic outlooks for G20 countries do not suggest violent tightening of monetary policy that could significantly impact capital flows.
UK and Eurozone investors have taken different views about the US corporate bond market in 2017, as testified with sizeable net purchases by the former vis-Ã -vis net selling by the latter. Aggregate foreign net buying of US corporate bonds does not suggest that these institutions are the marginal buyers of this asset class.
Institutions in the UK have been the largest single foreign net buyer of US equities during 2017, while French buyers have been the most vibrant in the Eurozone. Meanwhile, Asian net purchases have been negative, notably by Singapore, while Japanese investors have also modestly liquidated holdings.
The desynchronised global economy since the early-1990s has reduced the competition for global savings, resulting in excessive liquidity chasing limited investment opportunities. Liquidity gravitates to asset classes with the highest expected returns, which rationalises the original bullish sentiment towards the US dollar under President Trump’s promised reflationary fiscal programme. The subsequent failure to quickly fulfil expectations, and improved perceptions about the outlook for the Eurozone, has weakened the dollar, thereby highlighting the need for economic fundamentals to fulfil both fickle and elevated expectations.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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