Julius Baer: Inflación Eurozona, China, mercado de bonos, mercados emergentes, petróleo y platino

Redacción - Martes, 10 de Enero

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ECONOMICS Eurozone: Higher inflation encourages tapering discussion • The ECB has room to reduce its asset purchases on the back of higher inflation, but will use it only later in the year. • Higher energy prices are the main reason for the surge in inflation, while second-round effects are not visible in the eurozone, in contrast to the US. December eurozone inflation has been reported higher than expected, reaching its highest level since 2013. Higher inflation and the solid growth backdrop allow the European Central Bank (ECB) to scale down its asset-purchasing programme without harming the economy. However, the ECB just promised an extension of its programme at a reduced pace until December 2017, making a further reduction over the next few weeks quite unlikely. Tapering should remain rather a longer-term issue throughout the year and the discussion about it is likely to intensify in the second half. The reported surge of eurozone inflation is largely a result of a strong base effect from commodity prices, which have increased by more than 40% in December compared to a year ago. This effect will be even stronger in January and remain significant in February this year: commodity prices will be around 60% higher in an annual comparison. The sharp increase in crude oil prices is the main driver behind this development. As a result, eurozone head-line inflation will climb higher in the first months of 2017, reaching 1.8% or even more in February.The core inflation rate, which excludes energy prices, remained in December stable at 0.9%. Second-round effects like higher wage dynamics are not yet visible in the eurozone and we doubt that they will become an issue over the coming months. With the notable exception of Germany, labour markets in the eurozone countries are still far away from full employment, being a powerful headwind for rising wages. This is in sharp contrast to the US. Full employment is reached and last week’s labour market report showed a 2.9% rise in wages, the highest level in the current cycle. We feel therefore comfortable expecting three rate hikes in the US this year, in contrast to more benign market expectations. The rising interest-rate advantage of the US dollar allows the currency to appreciate further.

 

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

 

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Chinese yuan: No trend change on sight

 

• Last week’s rally of the Chinese yuan against the US dollar surprised investors and was short-lived. We do not see a trend change in the light of the still considerable outflow pressures. 

• After a phase of stable development below RMB/USD at 7.0, we expect more weakening with coming US dollar strength to 7.2, but stability against the Chinese central bank’s currency basket. 

 

The first, rather calm week in the New Year was marked by a short CNH rally. A major reason for this was the significant tightening of CNH liquidity, resulting in an unwinding of CNH short positions. Some short positions are still left in the market and, although unlikely, could cause some hickups in the short term, but we do not believe that this is a trend change.

 

Moreover, the government has been eager to stem against out-flow pressures with recent restrictions on individuals and companies wanting to move money out of the country. These pressures still persist as households and corporates seek higher returns abroad. Recent restrictions may have helped to contain flows and supported last week’s rally, but more outflows, albeit at reduced volumes, are likely over the coming months. Outflows persisted in December, with foreign exchange reserves dropping by USD 41 billion to USD 3.011 trillion. While these reserves are still ample today, they are nearing the upper amount of USD 2.8 trillion, necessary to defend an attack on the currency, according to the International Monetary Fund. Thus, we expect the Chinese government to continue its slow and cautious depreciation of the Chinese yuan as long as possible, while looking to ease outflows via new regulation. They are likely to avoid a sudden drop in the currency, as calm and stable conditions will be paramount, before president-elect Trump takes power on 20 January and the country takes a break around Chinese New Year a week later. Luckily, economic growth has likely remained stable in December and will be permitted to slow only mildly during 2017, from last year’s 6.7%, with the help of fiscal support.

 

Susan Joho, Economist, Julius Baer

 

 

 

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FIXED INCOME

 

 

China no longer exports disinflation

 

According to the figures released this morning, the annual rate of advance of China’s producer price index has surged to 5.5% in December, up from 3.3% in November and in sharp contrast to the -5.9% recorded in December 2015. China’s factory prices had been declining for almost 5 years prior to turning positive in August, mainly as a result of higher prices in the mining sector. We still see the overcapacity in the latter sector as a major problem for the Chinese economy. Yet the positive readings show that the administration’s effort to curb production and to mothball capacity in the steel and other basic industries are efficient. Consumer prices, meanwhile, were up 2.1% on an annual rate in December, slightly down from 2.3% in November, mainly thanks to lower food prices. Excluding food and energy, the annual rate held stable at 1.9%. With China’s factory prices rising again, the outlook for corporate profitability is improving again. More importantly, China is no longer seen as an exporter of deflation, which at the margin will make it easier for central bankers in Western economies to achieve their inflation targets.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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EUR government bond scarcity: Volatility, not lower yields

 

• The absorption of eurozone government bonds by the European Central Bank creates some bout of scarcity on the market, but not necessarily resulting in lower yields.

• Investors should stick to segments that the ECB has not distorted, such as subordinated bonds of banks with solid fundamentals or corporate sector hybrid bonds. 

 

From their temporary lows after the Brexit shock, yields on European government bonds have rebounded in a material way. In the case of 10-year German Bunds, the increase was from -0.2% to +0.3%, while their French counterpart moved from 0.1% to 0.9%.

At first glance, the bond yield increase seems to be in line with the improving economic outlook and the decision of the European Central Bank of early December to reduce the amount of monthly purchases from the current rate of EUR 80 billion to EUR 60 billion from April. What is disturbing, however, is the reported scar-city of bonds, which normally results in a price increase, not a decline. Prices of bonds move inversely to yields. 

 

The scarcity of government bonds is most obvious on the money market, where most trades among banks are done on a collateralised basis. According to data collected by Bloomberg, the fees to borrow German and French government bonds have widened materially in recent weeks, with fees in year-end trading up to 6%. From the point of view of a trader, this is a very stark sign of scar-city of government bonds. It should be kept in mind that the ECB is only lending out EUR 50 billion of the bonds it has in its portfolio against cash, while a big part of the bonds “rests in its vaults”.

How can prices of bonds decline – the yields increase – when there is a scarcity of bonds on the market for security lending and borrowing as mentioned above? A rising number of strategists – and seemingly also investors – see the scarcity of bonds as a sign that the ECB must scale back its purchases sooner or later. We all remember ECB President Draghi saying that the ECB has sufficient material at hand to continue its purchases as long as need-ed. Obviously, the market has a different view on this.

We share the critical view of the bond market that the massive purchases of the ECB will increasingly be questioned. Accordingly, prices of bonds eligible for ECB purchases will remain subject to massive volatility: government bonds and investment-grade bonds of non-financial issuers in EUR.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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STRATEGY

 

Emerging markets: US bond interest-rate sensitivity

 

• We analysed twelve periods with 10-year US Treasury yields rising between 0.8% to 1.5% over a short-term time period.

• We believe that emerging market performance will be flat over the next three months. Emerging Asia is mostly shielded.

 

Emerging markets are vulnerable to higher US bond yields and a stronger USD. Hence, we analysed the past spikes in 10-year US government bond yields and their impact on emerging market equities. We identified twelve periods since 2000 with the US 10- year Treasury yield rising between 0.8% to 1.5% within three to four months. The median rate hike was 1.2% (yield pickup of 41%) over 125 days. The last one started in July 2016 with the 10- year US Treasury yield at 1.4% and reached a peak at 2.6% in mid-December 2016. In our analysis we are particularly interested in the performance of emerging market equities three months after the peak in 10-year US Treasuries.

The table below shows the average and median (middle number of the twelve periods) USD return at the regional and country levels. As can be seen from the table, the average USD return for the MSCI Emerging Markets Index is -0.7% while the median is 5.1%. For emerging Asia, the average USD return is 1.1% while the median is 7.2%. For Emerging Europe, Middle East and North Africa (EMEA), the two numbers amount to -0.5% and 3.6%; and for Latin America -2% and 1%, respectively. The conclusion of our analysis is that the performance of the EMEA region and Latin America tends to be flat to negative, while emerging Asia is more shielded from higher US yields. One explanation for the phenomenon is that most emerging Asian countries run a current account surplus and are thus less vulnerable to US interest-rate hikes. Our analysis also showed that the global economic cycle is of great importance as emerging markets can more easily digest higher US rates during an upcycle than during a flat or down cycle. To conclude, we believe that over the next three months emerging market performance will be flat with emerging Asia being the least vulnerable region.

 

Heinz Ruettimann, Strategy Research Analyst Emerging Markets, Julius Baer

 

 

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COMMODITIES

 

Oil: Iraq’s exports raise compliance doubts

 

The energy complex fuelled volatility on commodity markets yesterday. Oil prices are down 4% towards USD 55 per barrel and the drivers are the usual suspects. There were mixed signals on supply deal compliance. While the core members of the Organisation of Petroleum Exporting Countries (OPEC) including Saudi Arabia and Kuwait reportedly are reducing supplies, Iraq seems less committed in doing so. The country reported strong exports for December and the buyers apparently are still able to purchase cargoes without restrictions. The positioning in the futures market is very bullish and yesterday’s news likely triggered some profit taking by hedge funds. We remain sceptical about the supply deal’s fundamental impact because compliance will likely be poor and because the deal partially undoes the past months’ overproduction. Natural gas prices dropped more than 5% on mild weather forecasts. Temperatures should remain much above the norm over the coming weeks across large parts of North America which reduces heating demand and eases supply concerns. Meanwhile, the wintry cold in Europe leads to strong Russian gas imports.

Oil prices are down 4% yesterday on concerns about supply deal compliance and profit taking. We remain sceptical that the deal will swiftly erase surplus supplies and see no lasting support to prices.

 

Norbert Ruecker, Head Commodities Research, Julius Baer

 

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Platinum and palladium: Staying on the sidelines

 

• Early in the new year, platinum and palladium are the top performers in the commodity space, benefiting from a weakening US dollar and improving market sentiment. 

• We see limited upside for platinum and maintain a neutral view. We remain cautious on palladium, which does not appear to reflect an expected slowdown in global vehicle sales. 

 

Early in the new year, platinum and palladium are the top per-formers in the commodity space, benefiting from a weakening US dollar and improving market sentiment. After undershooting fundamentally justified levels late last year, platinum prices are up around 8% to USD 978 per ounce. Going forward, we only see limited upside from current levels. We believe the demand backdrop has deteriorated due to ongoing pressure from substitution and a falling share of diesel-fuelled cars. This deterioration should be sufficient to keep the market in balance or push it into oversupply, capping platinum prices at around USD 1,000 per ounce. Hence we maintain a neutral view with the key upside risks related to unexpected weakness of the US dollar.

Palladium has performed even more strongly, gaining around 13% to USD 760 per ounce. While the medium to longer-term demand backdrop remains compelling given its dominant usage in catalysts of gasoline fuelled cars, we still expect a short-term dent. Global vehicle sales grew very strongly last year, primarily in Europe in China. Sales in China werefuelled by a tax cut, prompting consumers to pull forward purchases. The tax cut was halved at the beginning of this year and should result in lower sales over the course of the coming months. This does not appear to be reflected in palladium prices at the current point in time. Sentiment in the futures market has become too positive in our view, leaving prices vulnerable for a short-term correction. Our three-month price target remains unchanged at USD 650 per ounce with better-than-expected global vehicle sales being the biggest upside risk. 

 

Carsten Menke, Commodities Research Analyst, Julius Baer

 

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