A Rafter of Market Themes
9th September 2020
Macro Strategies Portfolio Management Team
John Floyd, Head of Macro Strategies, Portfolio Manager [email protected]
Andrew Bloomfield, CFA, Associate Director & Assistant Portfolio Manager [email protected]
RECORD CURRENCY MANAGEMENT2
Cementing an era of depressed growth and real rates
Pandemics depress real interest rates for prolonged periodsEuropean real natural rate of interest following pandemics and wars
A half-century explosion in debt underpins global economic fragilityContributions to global debt, % of GDP
Source: Federal Reserve Bank of San Francisco, IMF calculations. Shaded bands are 1 and 2 standard error bands.
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As growth falters, financial repression prospers
As growth falters, financial repression a tried and tested strategyUS contribution to debt stock as % of GDP
Source: Record, Markit, Federal Reserve Bank of San Francisco.
-30
-20
-10
0
10
20
30
40
50
30 40 50
60
70
80
90
00
10
Implied Real yield
Growth
Budget
Debt / GDP
The economic recovery is losing its steam Markit Composite PMIs
0
10
20
30
40
50
60
70
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
United States Euro Area United Kingdom
Germany France Italy
Spain Japan Australia
RECORD CURRENCY MANAGEMENT4
Yet markets priced optimistically
Source: Record, Shiller, Macrobond.
Latest: 30.63
0
5
10
15
20
25
30
35
40
45
50
1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015
10th percentile 90th percentile
US high yield spreads divorced from realityICE BofAML option-adjusted spread, basis points
0
500
1,000
1,500
2,000
2,500
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Thrice in a century has CAPE been hereCyclically adjusted P/E on real S&P 500
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0.1
1
10
100
1000
0 20 40 60 80 100 120 140 160 180 200
Log
scal
e
Days since >0.1 per million
US COVID-19 cases stabilising as European cases grow7-day rolling average daily cases per million
United States Australia Germany
Spain France Japan
UK South Korea Italy
The US dollar hasn’t lost its hegemony yet
Source: Record, Google mobility reports, European Centre for Disease Prevention & Control.
USD a function of relative COVID dynamics and financial conditionsUS dollar index and relative mobility
92
94
96
98
100
102
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
DX
Y (l
agge
d 1
0 d
ays)
US/
EU r
ela
tive
mo
bili
ty (g
oo
gle
dat
a)
US - G9 Mobility (LHS)
DXY (RHS, lagged 10 days)
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No challengers for reserve status
Source: Record, Macrobond.
-20
-15
-10
-5
0
5
10
15
Per
cen
t o
f 2
01
9 G
DP
US is a large economy with an open capital accountGeneral government balances and current account deficits, % of GDP
Fiscal Balance (2020 IMF etc.) Current Account (latest) Dual Deficits
-200
0
200
400
600
800
1000
-15 -10 -5 0 5 10 15 20ch
ange
in U
SD R
eser
ves
hel
d b
y ce
ntr
al b
anks
Quarterly % change in trade-weighted US dollars
Central banks accumulate more reserves when USD weakTrade-weighted USD (% y/y) vs. USD COFER reserves (y/y)
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USD down cycle requires exceptionalism elsewhere
Source: J.P. Morgan, Record, Macrobond.
80
90
100
110
120
130
140
150
160
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Secular downtrend in dollar yet to be confirmedUS real effective exchange rate
-25
-20
-15
-10
-5
0
The US: best of a bad bunch?1H 2020 GDP growth, % quarter-on-quarter
2Q 2020
1Q 2020
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The euro’s strength should concern the ECB
Source: Record, J.P. Morgan.
80
85
90
95
100
105
110
115
1.0
1.1
1.2
1.3
1.4
1.5
1.6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Strong trade-weighted euro a worry for the ECB inflation mandateEURUSD and trade-weighted euro
EURUSD (LHS)
Euro nominal trade-weighted index (RHS)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2012 2013 2014 2015 2016 2017 2018 2019 2020
US
Euro Area
The ECB should act to avoid a deflationary mindsetUS and Euro Area 5y5y inflation swaps (inflation expectations)
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Euro optimism excessive
Source: Record, CFTC, Macrobond.
1.04
1.06
1.08
1.10
1.12
1.14
1.16
1.18
1.20
1.22
-80
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
200
220
EUR
USD
(lag
ged
10
day
s)
US/
EU r
elat
ive
mo
bili
ty (g
oo
gle
dat
a)
Relative COVID-19 case curves reversing in favour of USRelative COVID-10 new cases and EURUSD
US-EU new COVID19 cases per mil, 7-day average
EURUSD (RHS, lagged 10 days)
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Investors positioned for Eurozone dynamismNet Non-Commercial futures positioning (% open interest)
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Italian and peripheral spreads mispriced
Source: Record, Macrobond.
Peripheral spreads10-year government yields minus Germany 10-year yield
60
70
80
90
100
110
120
130
1/1/
2006
1/1/
2007
1/1/
2008
1/1/
2009
1/1/
2010
1/1/
2011
1/1/
2012
1/1/
2013
1/1/
2014
1/1/
2015
1/1/
2016
1/1/
2017
1/1/
2018
1/1/
2019
1/1/
2020
1/1/
2021
Italy has been unable to adjust competitivenessUnit labour costs index, 2006 = 100
Italy Spain Greece Portugal Ireland
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Canadian maple leaves late to bloom early to fall
80
100
120
140
160
180
200
95 97 99 01 03 05 07 09 11 13 15 17 19
Household debt % of disposable income
Canada
United States
Source: Record, StatCan, Macrobond. “Changes in wealth across the income distribution, 1999 to 2012”, Uppal, LaRochelle Côté (2015).
• Canadian household debt is particularly high
• Residential debt to equity has grown from c. 1x pre-GFC to c. 1.5x
• CMHC downside economic scenario sees house prices drop by 18%
➢ Corresponds to c. 45% loss of homeowner equity
➢ Knock-on effect of approx. 2.2% drag on consumption,
1.3% drag on GDP growth
60
100
140
180
1970 1980 1990 2000 2010 2020
House price to income ratios, index
Canada United States
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The challenged three – Turkey, South Africa, Brazil
Source: Federal Reserve Bank of San Francisco
0
10
20
30
40
50
60
70
80
90
100
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
2018
2019
General government debt to GDP (%)
Turkey
South Africa
Brazil
-14
-12
-10
-8
-6
-4
-2
0
2
4
20
04
20
05
20
06
20
07
20
08
20
09
2010
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
Fiscal balance as % of GDP (IMF WEO)
Turkey
South Africa
Brazil
-10
-5
0
5
10
15
20
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Real policy rates (%)
Turkey
South Africa
Brazil
-20
-15
-10
-5
0
5
10
15
19
98
19
99
20
00
20
01
20
02
20
03
20
05
20
06
20
07
20
08
20
09
20
10
20
12
2013
20
14
20
15
20
16
20
17
2019
20
20
Real GDP annual growth rates (%)TurkeySouth AfricaBrazil
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Pandemic exposes vulnerabilities within EM
Source: Record, Macrobond.
BRL
CLP
CNY
COP
CZK
HUFINR
IDR
MYR
MXN
PEN
PHP
PLN
RON
RUB
ZAR
KRW
TWDTHBTRY
0
10
20
30
40
50
60
70
80
90
100
-14 -12 -10 -8 -6 -4 -2 0
Gen
eral
go
vern
men
t d
ebt
% o
f G
DP
(4Q
19
)
Fiscal balance as % of GDP (2020 IMF estimate)
Debt / Deficit dynamics worrying in some EMsEM government debt vs. fiscal balance
The largest deficits are in countries with already high debt levels e.g. South Africa, Brazil.
BRL
CLP
CNY
COP
CZKHUF
INR
IDR
MXN
PEN
PHP
PLN
RON
ZARKRW
TWD THB
TRY
-4
-3
-2
-1
0
1
2
3
4
0.0 2.0 4.0 6.0 8.0 10.0 12.0
Rea
l po
licy
rate
Reserve adequacy (Reserves / STED + CAD)
Some facing choice between economy and external stabilityEM real policy rate versus international reserve adequacy
Turkey stands out as having inadequate reserves without a sufficiently supportive rates
RECORD CURRENCY MANAGEMENT14
Real policy rates
Source: Record, Macrobond.
BRL
CLP
COP
MXN
PEN
CNY
INR
IDR
PHP
THB TWD
KRW
CZKHUF
PLN
RON
ZAR
TRY
-4
-3
-2
-1
0
1
2
3
4
-40 -35 -30 -25 -20 -15 -10 -5 0
Rea
l po
licy
rate
Latest GDP Growth %y/y minus 5-year average
Real policy rates correspond to economic damageEM real policy rates and economic growth vs 5-year average
BRL
CLP
CNY
COP
CZK
HUF
INR
IDR
MYR
MXN
PEN
PHP
PLN
RONRUB
ZAR
KRW
TWD
THB
TRY
0
5
10
15
20
25
0 50 100 150 200
Tou
rism
as
% o
f ex
po
rts
Trade as % of GDP
Damage likely lasting in open, tourist-dependent countriesTrade openness and tourism as % of exports
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Stuffed Turkey?Negative real rates and excess credit
Source: CBT.
-5
0
5
10
15
20
25
30
2016 2017 2018 2019
% p
.a.
A dollop of negative real rates…negative for the first time since 2017
Policy rate
Expected inflation
Real policy rate
0
5
10
15
20
25
30
35
40
45
50
2014 2015 2016 2017 2018 2019
M2
mo
ne
y s
up
ply
(%
y/y
)
Go easy on the credit…TRY loans and money supply have exploded
RECORD CURRENCY MANAGEMENT16
And a history of external indulgence…that needs
to be rolled over
-60
-40
-20
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Curr
en
t a
cco
un
t d
eficit fin
an
cin
g (
12
m,
$b
n)
A sweet tooth for deficits…funding the deficit is an annual affair
NEOReservesOther investmentPortfolioFDICA deficit
Exte
rna
l d
eb
t re
pa
ym
en
t sch
ed
ule
($
bn
)
Source: CBT, Barclays. Note: NEO stands for net errors and emissions, FDI stands for foreign direct investment, CA stands for current account.
Stuffed Turkey?Debts and deficits
The banking sector and central bank are funding the deficit, with
minimal incoming FDI and portfolio investor outflows
RECORD CURRENCY MANAGEMENT17
-60
-40
-20
0
20
40
60
Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
Tu
rke
y F
X r
ese
rve
s (
$b
n)
Nothing organic about these reserves…as net reserves are now negative
Net foreign assets
Net foreign assets adjusted for forwards and futures
Forwards and Futures position
Qatar swap line
boosts reserves
5.8
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6
US
DT
RY
Sp
ot ra
te
Market forces coming home to roost …the heat at 7.0 is demagnetizing
CBT unofficially peg
the lira, tighten
capital account
Source: Macrobond, IMF. CBT swap book based on monthly data, interpolated through the month.
Stuffed Turkey?What reserves?
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Butterflies flapping above the Bosphorus…feedback
mechanisms are often subtle at first
-10
-8
-6
-4
-2
0
2
4
6
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
Tu
rkis
h b
an
kin
g s
ecto
r n
et
FX
po
sitio
n
More cooks in the kitchen…Turkish banks utilised to stabilise currency
BIS
re
po
rtin
g b
an
ks’ e
xp
osu
re to
Tu
rke
y (
20
19
$b
n)
Source: Banking Regulation and Supervision Agency of Turkey, BIS, Barclays. Banking sector FX position includes both on balance sheet and off balance sheet positions.
Stuffed Turkey?The banking sector
RECORD CURRENCY MANAGEMENT19
USDTRY – sharpest depreciation episodes
Feb-01 to Oct-01 -58.4%
May-06 to Jun-06 -23.0%
Aug-08 to Oct-08 -32.1%
Sep-16 to Jan-17 -24.7%
Jul-18 to Aug-18 -31.3%
Average -33.9%
Source: Macrobond.
Stuffed Turkey?A history of depreciation episodes
RECORD CURRENCY MANAGEMENT20
Additional information
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