reports
- Olivier Desbarres
Market snapshot, theatre of war
Since the Russian army’s full-scale invasion of Ukraine on 24th February most equity markets, government and corporate bond yields, commodity prices (energy, metals and agriculture), CDS spreads and major currencies have recorded significant intra-day volatility and outsized daily moves. Moreover, for all the “noise”, the current geopolitical crisis has accentuated multi-week trends in a number of financial market and economic variables. Price of Brent crude oil, natural gas and gold has risen...
- Olivier Desbarres
Fed hikes not immune from equity collapse
The Fed is widely expected to hike its policy rate 25bp to 0.25-0.50% (its first since December 2018) at its meeting on , by which point it is due to have ended its asset purchases. Some FOMC members will likely push for a larger 50bp hike. Markets, as of 4th February, were pricing in a total of 120bp hikes in 2022, up from 117bp as of 28th January. In line with our forecast 2-year US Treasury yields have risen to their high since January 2020, albeit with regular and sometimes sizeable pull-b...
- Olivier Desbarres
Japanese Yen – Myths and realities
The Yen depreciated about 13% versus the US Dollar between 5th January 2021 (a 9-month high) – and 4th January 2022 (a 4-year low) but has since rebounded about 0.7%. The Yen Nominal Effective Exchange Rate (NEER), which provides a more accurate overall picture of Japan’s currency and trade competitiveness and of the risks of imported inflation/deflation, has appreciated about 1%. Yen weakness in past year has been partly due to deterioration in Japan’s goods trade deficit to a still modest 1....
- Olivier Desbarres
United Kingdom: Inflation without benefits
Consumer demand in the United Kingdom remains modest, which we attribute to a combination of factors. These include still curtailed opportunities to spend on goods (stock constraints) and services (social distancing restrictions), an erosion in real earnings, wealthy households’ low propensity to spend and a paradigm shift in spending habits. We expect falling Covid-19 cases and an ongoing easing of already moderate social distancing rules, including a shorter self-isolation period, and of tra...
- Olivier Desbarres
Light at the end of long Eurozone tunnel?
Eurozone countries, including Germany, France, Italy and Spain, and the number of deaths since 11th December has either risen materially from the previous corresponding period, albeit from low levels (France, Italy, Portugal and Spain), or been broadly stable (Germany). The majority of Eurozone governments, in a bid to protect health systems, have therefore on the whole adopted a conservative path of least regret in the past six weeks and either maintained or in some cases even intensified str...
- Olivier Desbarres
US: High inflation, rising yields, repeat
The will release US CPI-inflation data for December today at 13.30 London time. Consensus forecast is for another set of record-breaking data but US CPI-inflation figures have been volatile since Spring 2021 and thus more difficult to accurately predict. Our take is that US companies have been rapidly raising the prices they charge consumers, particularly for goods, because they have had to – as a result of rising input costs – and importantly because they have been able to without hurting t...
- Olivier Desbarres
2021’s last (major) roll of the data and policy dice
Markets’ focus has in the past three weeks understandably been on the Omicron variant and the reaction function, present and future, of governments and central banks. The multiplication of social distancing restrictions and acceleration in booster jab programs in many major economies since late-November suggest that policy makers’ conviction that the Omicron variant will prove benign is still quite low. The central bank policy meeting and in particular macro data calendar was reasonably light ...
- Olivier Desbarres
Don’t forget Delta
Our last FIRMS report was entitled (18th November 2021) and less than a week later a storm hit with South Africa reporting the Omicron strain of Covid-19 to the on 24th This is what we know so far about the Omicron strain, albeit with differing levels of certainty. 57 countries, including 21 EEA countries, have confirmed cases of Omicron. The number of recorded Omicron cases is still very small but the actual number is likely to be larger. Omicron is more transmittable than previous strai...
- Olivier Desbarres
FX round-up – Calm before the next storm
The spike in US Treasury yield volatility last week, following the release of gangbuster US CPI-inflation data for October, partly fed through to other asset classes. However, volatility in US asset prices, including Treasuries , the US Dollar and S&P 500, has since subsided while global FX volatility is still low in absolute and historical terms. Depressed volatility in FX markets does not of course imply a lack of FX directionality. A number of major currencies have indeed trended higher or ...
- Olivier Desbarres
Fed and US corporates in tussle over inflation
The release of record-busting US CPI-inflation data for October has seriously dented the Federal Reserve’s long-standing argument that high inflation will prove “transitory. What has proved transitory is the rally in short-end government bond yields in developed markets, in line with our expectations. Volatile monthly inflation in the US and fleet-footed developed central banks point to government bond yields remaining choppy near-term. However, we think the likelihood that US inflation will ri...
- Olivier Desbarres
Early EM rate hikes supporting EM currencies
Following key central bank policy meetings last week in Australia, the US and UK, short-end interest rate markets have turned more dovish. We had argued back on 2nd November that “hawkish interest rate markets may have got slightly ahead of themselves.” The Federal Reserve and certainly the RBA cooled market expectations of rate hikes while the Bank of England flat-footed markets by leaving its policy rate unchanged at a record-low 0.10%. This was in line with our view that the Fed would “once ...
- Olivier Desbarres
Hawkish rates markets ahead of themselves
Our measure of global headline CPI-inflation rose further in September to 3.7% yoy but the 0.17pp increase was entirely due to the 0.27pp rise in CPI-inflation in developed economies to a 13-year high of about 3.9% yoy. Headline CPI-inflation in EM economies was unchanged in September at about 3.3% yoy, with the fall in CPI-inflation in China and in particular India countering large increases in Latin America and Central Europe. The consensus view is that the argument put forward by most deve...
- Olivier Desbarres
Sterling – Fuel for thought
We turned bullish GBP/EUR in late-June and re-reiterated our constructive view in mid-July and early-August and the cross duly hit a 76-week high of about 1.182 on 11th August. In line with our expectations, historical monthly seasonal patterns were up-ended thanks in part to the positive impact of international travel restrictions on the UK’s tourism balance and the Bank of England turning more hawkish in absolute terms and relative to the ECB. However, since then Sterling has weakened about...
- Olivier Desbarres
Macro data dog not wagging FX market tail
US macro data, including measures of US inflation, non-farm employment, retail sales, manufacturing output, ISM PMIs and consumer confidence indices, have been far less volatile since the peak in global risk aversion in March-April 2020 when the first national lockdowns decimated global growth. However, volatility in most of these monthly metrics remains high relative to history. This is particularly true for core CPI-inflation, non-farm employment, consumer confidence and the ISM non-manufact...
- Olivier Desbarres
FX markets : Beyond "risk-on", "risk-off"
FX volatility remains subdued but this is not classical “risk-on” or “risk-off”. However, a number of patterns, beyond the Dollar’s obvious recovery, have recently stood out. Commodity currencies, with the exception of the Malaysian Ringgit, have weakened, despite the price of Brent crude oil broadly stable around $75/barrel. Non-Japan Asian currencies have either been stable (Indian Rupee, Singapore Dollar) or posted small gains, with the Philippines Peso up about 2%. This slow, broadly uni...
- Olivier Desbarres
What's driving EM and commodity currencies
Currency volatility remains subdued and European currencies, the Chinese Renminbi and even the Brazilian Real and South African Rand, have done little year-to-date. However, a number of developed and emerging market currencies have seen rapid appreciation or depreciation and a number of explanatory factors are likely, going forward, to keep influencing these currencies’ paths. These include the impact of commodity prices on trade balances, capital account flows, trade-war concerns’ ...
- Olivier Desbarres
Trading Places
The rapid escalation in a potential trade war between the United States and China over the past month continues to dominate the headlines despite proposed protectionist measures having yet to take effect. US President Trump argues that the current trading set-up has led to the rapid rise in the United States’ trade deficit with China to a record high of $375bn in 2017 but whether this deficit is simply due to unfair Chinese trading practises is arguably open to debate. What is perhaps less am...
- Olivier Desbarres
FX MARKETS' NERVES OF STEEL
Rising geopolitical tensions and stress in the US tech sector have strained equity markets. Conversely, FX volatility has eased below its long-term average and is now at the low end of its 12-month ranges with the exception of USD/CAD and AUD/USD. The Dollar remains range-bound despite US-centric geopolitical tensions, White House turmoil and yesterday’s Federal Reserve meeting. We somewhat disagree with the consensus view that FOMC members have stuck to their assumption of three policy hike...
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