Julius Baer: sobre el Brexit y bancos centrales

Redacción - Jueves, 30 de Junio

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​Government bonds - no quick fix from central banks to deflation problem

 

Overshadowed by the Brexit crisis, the European Central Bank (ECB) holds its annual meeting in Sintra, Portugal. ECB President Mario Draghi yesterday delivered a speech with the title “the international dimension of monetary policy”. He could not agree more with the notion that all “central banks across advanced economies have been engaged in the same task, namely raising inflation and inflation expectations back to levels consistent with price stability”. In fact, his favourite measure of market-based long-term inflation expectation, the 5-year forward 5-year inflation swap rate, was down to a record low 1.26% yesterday, compared to 1.5% in March, 1.8% last year and 2.25% in 2012-2014. The Fed’s favouritemeasure, the 5-year forward 5-year break even inflation rate, is not much higher. It currently stands at 1.39%, more than a full percent below its long-term average of 2.5%. Draghi continues that global factors are at play, depressing inflation, in particular “large negative output gaps generated by the financial crisis” and falling import prices. Given the global dimension of the challenges, Draghi calls for a globally coordinated monetary policy. Yet, Draghi, Fed Chair Janet Yellen and Bank of England Governor Mark Carney all cancelled their panel discussion scheduled for yesterday. Draghi attended the EU summit and Carney had more urgent things to do at home. We regard this as symptomatic of the level of global coordination at this stage and the likelihood that the market gets strong signals from the central bank. In the absence of such hints of a global coordinated policy move, however, bond yields will remain low globally, and the search for yield will remain the dominant theme.

Bond yields are low but as long as central banks lack the recipe against falling inflation expectations, no change is expected anytime soon. The search for yield will continue, and we remain positive for riskier segments of the bond market.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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FIXED INCOME

 

China’s central bank lets CNY slide to respond to GBP’s decline

 

Post Brexit-vote, the CNY declined 1.2% against the USD since last Friday before recovering 0.13% to close at 6.65 yesterday due to slightly improved sentiment in the global markets. The People's Bank of China (PBoC) said the CNY remains stable versus a basket of currencies and will stick to the market-oriented mechanism for determining the CNY exchange rate. For the past few months, the central bank has been maintaining a slight strengthening stance against the USD to promote confidence in CNY stability, while managing depreciation against the currencies of its trading partners for export competitiveness. However, since the recent decline of the GBP and EUR, the PBoC has lowered its daily CNY fixing by 0.91% to 6.6375 per USD on Monday and a further 0.23% to 6.6528 yesterday, marking the lowest level the CNY has reached against the USD since December 2010. We note that in the past, the PBoC has sold USD and showed verbal support for the CNY to address depreciation concerns and control volatility. The PBoC’s action this week seems to point to allowing offshore CNY to react to Brexit risk without too much intervention. While China’s local credit market had a rather muted response to Brexit, its economy will still feel the impact of an European slowdown, with 15.6% of its exports going to the European Union (EU) and 2.6% to the UK. Based on Bloomberg estimates, a 1% point drop in the EU’s gross domestic product (GDP) growth could take 0.2 percentage points off China’s GDP growth. An unexpected devaluation in the CNY last August led to an estimated USD1trn of outflows from China as investors sought after foreign assets and companies hastened to pay down foreign-denominated debt.

 

China has limited direct trade exposure to the UK, but a slowdown in the EU’s GDP will impact China’s GDP growth. The CNY still face downward pressure from USD strength (which may lead to capital outflows), competitive depreciation of the GBP and EUR, while global trade outlook looks increasingly uncertain. We still believe that thePBoC will step in to slow CNY depreciation if necessary to prevent any drastic changes to capital markets or outflows.

 

Magdalene Teo, Fixed Income Research Asia, Julius Baer

 

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COMMODITIES

 

Oil: Recouping lost ground on Norwegian strike threat

 

The Brexit shock waves are abating on commodity markets. Oil prices have recouped some of the lost ground and are being pushed higher by a potential strike and the risk of a supply outage in Norway. Oil workers threaten to shut-down a tenth of Norway’s oil production, the leading European producer, by the coming weekend to safeguard current employment conditions. Supply disruptions including Canada’s wildfires and Nigeria’s pipeline attacks were a key driving force of the run up in oil prices earlier this year. Norway’s supply threat should be seen in perspective as strikes usually are not lasting and North Sea oil output temporarily declines in summer due to maintenance work. Elsewhere, the Brexit vote should not meaningfully shift the supply and demand balance of the oil market but the strength of the US dollar should weigh on prices for the time being. We stick to our cautious view and see more downside than upside from today’s levels. The market remains awash with oil as the anecdotes of full floating storage in Asia reveal despite the strength of global demand.

 

The Brexit shock waves abate. Oil prices recoup lost ground as Norwegian oil workers threaten to cut supplies. With Middle Eastern exports growing and US shale coming back to live we see more downside than upside from today’s prices and maintain our cautious view.

 

Norbert Ruecker, Head Commodities Research, Julius Baer

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