Julius Baer: Libra y Brexit, Trump, bonos Méjico y materias primas

Redacción - Martes, 17 de Enero

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ECONOMICS GBP: The harder the Brexit, the weaker the pound • Japan’s Abe had three arrows, but ‘thinking big’ Donald Trump has three cruise missiles: tax cuts, spending and reforms. Hence: growth and inflation will be up. • The odds of a consumer-led boom increase as the economy goes into late stage in the cycle. GBP: The harder the Brexit, the weaker the pound.

The longer it continues, the more this feels like a replay of the 1980s – with a twist of course. This time around it is not Russia the president-elect is bullying, but Europe and China. And the punitive tariffs are not only against Japanese car-makers but also against German ones. Yet all of this has a ‘been there, done that’ note to it. The most revealing part last week was not the media conference, which could be narrowed down to a tweet when it came to the economic programme. Rather, the real eye-opener was the degree to which the new government team does not respond to the reckless statements of its boss.

That said, we strongly advise against underestimating the power of the economic stimulus the new team will put into place. Japan’s prime minister Shinzo Abe referred to three arrows to shoo away the deflationary ghost. Adjusting for cultural differences and the higher firepower of the US, Donald Trump in contrast has three cruise missiles to extinguish sluggish growth and pricing pressure: tax cuts for both corporates and consumers, heavy government spending in infrastructure and other areas such as defense and finally reforms in areas like finance and healthcare. So the message is unchanged: do not mess with the US government.

At the same time, the reflationary efforts will pave the way for wage growth – in line with the mandate of the new government. Therefore we think the odds of a consumer boom have risen for the US and elsewhere. This is in line with the usual end-of-cycle patterns where wages rise most before rate hikes cool off the excess demand. But given the Federal Reserve has been overconfident in the past few years, we think a Fed-induced cooling-off is more of a story for 2018. As for the Brexit speech tomorrow: the harder the Brexit, the weaker the pound. Although the final result is hard to guess, perception of it will weaken or strengthen the British pound.

 

Christian Gattiker, Chief Strategist and Head Research, Julius Baer

 

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UK: May to lift the lid on her Brexit strategy?

 

• It remains to be seen whether financial markets will have more guidance on the UK’s Brexit strategy after Tuesday’s speech.

• Pound volatility will likely remain elevated as “hard Brexit” vs. “soft Brexit” expectations continue to dominate fundamentals.

 

Markets were almost deadly calm about the looming Brexit during the last weeks of 2016, but things are likely to change. With UK Prime Minister (PM) Theresa May’s planned date of invoking “Article 50” fast approaching (end of March 2017), markets could again show more volatility on Brexit-related news flow. The “hard Brexit” vs. “soft Brexit” expectations remain of particular interest: Will the UK sacrifice its access to the EU single market in order to secure an independent immigration policy (hard Brexit)? This Tuesday’s speech from PM May seems like her last chance to convince markets of a clear Brexit strategy and to shake off her reputation as “Theresa Maybe”. However, we doubt that significant information will be available, enabling financial markets to better assess the shape of Brexit. First, the Supreme Court’s decision on whether parliament has to approve the triggering of Article 50 is due within the next two weeks. As even PM May believes that the previous High Court’s ruling in favour of this approval will be backed, we fear that the press conference could get lost in details on how the PM wants to pass an approval bill through parliament and offer less detail on May’s expectations for future trade relationships. Second, investors should keep in mind that the closer the negotiations get, the harsher the political tone will become. We call this “political capital building”, meaning that parties communicate extreme positions in order to build bargaining power ahead of the negotiations. Therefore, information given in the next weeks should also be taken with a grain of salt. While the economy is still profiting from the pound weakness, a stable monetary policy outlook suggests that the “hard Brexit” vs. “soft Brexit” expectations will continue as main GBP drivers over the next weeks. The Supreme Court’s ruling, seemingly priced in, will hardly offer stability. Beyond this short-term volatility around our neutral 3-month outlook of EUR/GBP at 0.88, we stick to our long-term bearish pound outlook, reflecting uncertainty and economic headwinds once the Brexit process gets started.

 

David A. Meier, Economist, Julius Baer

 

 

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Trump: Inauguration keeps policy risks elevated

 

• Statements of president-elect Trump are unsettling, as they keep policy risks, including their geopolitical implications, high.

• The upcoming fiscal boost under Trump is underestimated due to a lack of details and the sloppy communication strategy.

 

With the inauguration at the end of this week, Donald Trump will become the 45th president of the United States. Trump’s media conference last week already dampened risk appetite. Recent interview comments that NATO is obsolete and sympathy for EU divergence are unsettling as well. The same goes for the threat to apply import duties on car producers and the rumours about compromising material in the hands of Russian intelligence services. In contrast, further details of the growth-supportive policy initiatives, like the tax reform with substantial tax cuts for the corporate sector or infrastructure plans, are still missing. These initiatives are decisive for a more determined rate-hiking path of the Fed, not currently priced in by financial markets, and therefore for further US dollar appreciation as well. The current news flow is forcing USD-supportive factors to take a back seat for now. 

Overall, the sloppy communication style of the next US president results in a considerable underestimation of the upcoming fiscal boost, while the policy risks, including their geopolitical implications, are increasingly acknowledged. The potential for more negative policy-related news surprises is therefore receding. It is also possible that much of Trump’s statements are part of a negotiation strategy to achieve “better” deals for the US in various fields. Prominent cabinet nominees, such as Rex Tillerson as Secretary of State and James Mattis as Defense Secretary, have already diverged from Trump’s unsettling geopolitical rhetoric, supporting the view that the actual policy outcome will be more benign than Trump’s statements lead financial markets to fear. Hence any hit to risk appetite as a result of the most recent comments will be transitory. We stick to our bullish US dollar view.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

 

 

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FIXED INCOME

 

Mexican bonds: Reducing exposure to consumers

 

• In recent years, the consumer has been the pillar of stability in the Mexican economy and the corporate sector.

• High interest rates and lower foreign investment and remittances could become headwinds for issuers in the consumer sector.

 

It is no news by now that Mexico’s outlook has become a lot more uncertain since Trump’s victory in the US presidential elections last November. The country not only has very strong trade ties with the US (with whom it enjoys a trade surplus and where it sends more than 70% of its exports), but also receives a large amount of remittances from Mexicans working in the neighbour economy (close to USD25bn in 2015). Mr. Trump has strongly criticised aspects of the bilateral relationship and has threatened to take some drastic measures such as forcing many companies to shift their production to the US, building a wall along the national border or even pulling out from the North American Free Trade Agreement (NAFTA). 

What does this all mean for Mexican companies? First, it is important to understand where the country stands. The economy has been one of the most stable and highest growing in the region in recent years, thanks to a strong consumer that compensated for reduced government spending and the impact of lower oil prices in investment and exports. Mexican companies have highly benefited from the Mexican consumer and, with some exceptions, even low credit-quality issuers have enjoyed a high degree of financial stability. Recent unemployment, retail sales and inflation figures have all surprised positively and suggest that not much has changed.

 

However, we think these recent improvements may have been driven by a temporary acceleration in US remittances (reaching record highs) as uncertainty over potential taxes on them triggered the acceleration in flows. A higher flow of US dollars and a weaker Mexican peso could be the drivers of the current consumer strength, but that may not last long. While we still do not know whether Trump will go ahead with all his campaign promises, we know for certain that several companies are committing to shift production back to the US. Reduced foreign investment, in combination with potentially higher interest rates, could affect unemployment. Along with a deceleration in remittances, this could in turn quickly impact consumers and ultimately corporate issuers in the sector.

 

Alejandro Hardziej, Fixed Income Analyst, Julius Baer

 

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COMMODITIES

 

Commodities: Reflation euphoria bears short-term setback risks

 

While trading on commodity markets was generally quiet yesterday, the price moves in the Chinese ferrous metals complex stood out. China domestic iron ore and steel prices rose to new highs on capacity curtailment announcements and restocking. As usual, the rationale remains elusive and the price move rather points to increasingly excessive bullishness in these markets. However, fundamentals are easing as domestic mining, seaborne imports and observable stocks increase and steel demand enters a seasonally soft period over the coming weeks due to the Chinese New Year holidays. We maintain our cautious view. Oil prices traded sideways and supply cut compliance remains in focus. Saudi Arabia and its closest allies seemingly delivered the production reductions while Iraq and Russia continue to show mixed signals. Historically poor compliance, Libya’s export growth and the shale boom revival are reasons enough to remain sceptical on the deal’s impact. We see oil prices trading at the upper end of a fundamentally justified range. The palladium rally has stalled, possibly because of the rather lacklustre global car sales outlook for 2017. Among the few common denominators across commodity markets is the stretched bullish positioning, which mirrors today’s reflation euphoria but bears short-term profit-taking risks.

Capacity curtailments fuelled the Chinese ferrous metals complex while supply cut compliance remains the focus of the oil market. The common denominator across commodities is the reflation euphoria mirrored in stretched bullish positioning. Short-term setback risks loom over the asset class. 

 

Norbert Ruecker, Head Commodities Research, Julius Baer

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