Market Views For 2016 - page 7
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Odds of another US recession are 100% - BNP Paribas Just the timing that's unclear
The odds of another US recession are 100%; it's just the timing that is unclear, writes BNP Paribas in a note to clients today.
"Clients often ask us the probability of another US recession. We generally answer "100%", but fight giving a precise timing. The fear of recession is one reason the Fed has been so cautious in normalizing its interest rates. Paradoxically, the long wait may have actually increased the probability of another recession in the next few years," BNPP clarifies.
"We expect the Fed to see this and so our expectation is that, after an initial period of denial, in the event of recessionary forces the Fed is likely to quickly move to negative rates, adopt strong forward guidance and also implement another round of QE. Unfortunately, this limited ammunition is unlikely to be enough. More active fiscal policy may have to be the ship that comes to the rescue, which could take some time to be implemented. Despite near-zero growth in Q4 2015, we think a recession is coming, but probably not now. The widening in corporate spreads, beyond the energy sector, has us worried. The global economy is on fragile footing and, with a loss in confidence that US corporate borrowers can pay back their debts, what's already bad now is likely to get a lot worse," BNPP argues.
"We are also concerned that stricter regulatory regimes and a reduction in the capacity of genuine market makers to warehouse financial assets will make for a more-pronounced market reaction to the recession. Banks may also be quick to pull in lines of credit. This risks more market disruption, threatens the ability of firms to raise capital and probably forewarns a larger effect on the real economy. Firms will have to cut capex and jobs quickly, and declining household wealth is likely to crimp consumption, as will job losses. And imagine the effect of a US recession on an enfeebled global economy, particularly on emerging markets. Especially if the USD falls, as is likely, it will present challenges to the euro area and Japan, where policies are currently reliant on cheap currencies. It won't be pretty," BNPP adds.
BNPP thinks the next US recession will probably be longer than is typical, where the average is a four-to-five quarter contraction. A longer recession, according to BNPP, would be likely for a few reasons:
1- The Fed has little ammunition to combat a recession - during the last recession the fed funds rate was 5.25% before the first 50bp cut. While negative real rates are our central scenario in the event of another recession, the cut in rates will have to be much smaller than historically and so the stimulus will be much less;
2- The shock and awe created by QE1 will be lacking - no one in the markets believes in the power of QE to the same extent as when Bernanke first introduced it;
3- Core inflation is lower than prior to previous recessions, meaning deflation risks are larger, with more corrosive effects on activity;
4- Fiscal policy makers appear very reluctant to pass fiscal stimulus, particularly the size of a package necessary to offset a drop in GDP;
5- With investors still licking their wounds from the last crisis, it's unlikely that confidence will be restored very quickly;
6- While US housing does not have the sub-prime distortions of 2007, house prices in relation to incomes are high and could suffer more than most reckon.
7- The global economy looks weaker and there is less room for the sort of stimulatory policy we saw after the GFC (eg, in China).
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2016 is likely to be very volatile, more than 2015. And this has been proven right since the start of this new year. From the first day of trading in 2016, The markets have shown their ridiculous moves, where the major indices moved to their 2013-2012 lows, currencies were down to their multi-year lows and crude oil was sent back to its 13 year lows. In such a scenario, the investors got panicked and sidelined the fundamentals of the economies, all because of the energy complex and slowdown in China.
I hold my view for the following instruments:
1. S&P 500: It will return to the same levels of 2015.
2. Crude Oil: Remain under pressure till the second half of 2016. Rebound can be seen with the improvement seen in the economies like Euro Zone, China and Japan.
3. EURUSD: To remain range bound between 1.05 and 1.15.
Buying The EUR Dip Tactically Around The ECB March Meeting - BofA Merrill We argue the March ECB meeting could be the most difficult in recent years and that more easing could be unable to have a sustained market impact. In contrast to the recent past, the ECB is now dealing with global shocks, which are much more difficult to address. The ECB has to think outside the box, but we do not expect it to. Markets could be disappointed, although for different reasons from those in December.
Our strategy remains to trade the Euro tactically. We expect the Euro to weaken further ahead of the ECB meeting, as the bear market rally continues and investors position for more ECB easing. We would also expect Draghi to do his best to avoid another market disappointment. However, we do not expect that more of the same would be enough to offset the global forces that have been driving the Euro this year.
We would buy the Euro dip after the ECB meeting, or even before if markets overshoot. In a bear market, we expect global forces to be a stronger driver for the Euro than monetary policies.
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Are Dollar Bulls Retaking The Initiative? As systemic anxiety eased, the US dollar got better traction. The dollar-bloc currencies managed to hold their own as cross positions were unwound.
Major bourses posted gains for the second consecutive week. With the recent advance, several markets, including the S&P 500, FTSE and Sweden, China, Korea, and Taiwan are now positive on the month.
The April light sweet oil futures had its highest weekly close this month. More broadly, the CRB Index is nearly 7% off its February 11 low and posted its highest close of the month before the weekend. In addition, the global capital markets appear to be less sensitive to the vagaries of Chinese equities or the yuan as seemed to be the case a few weeks ago.
Technical considerations favor further US dollar gains in the week ahead. The RSI and MACDs for the Dollar Index are trending higher, and the five-day average crossed above the 20-day moving average. The Dollar Index is testing an important resistance near 98.00. A convincing break would immediately target the 98.75-99.00 area.
Support is seen a little ahead of 97.00. Encouraged by favorable economic data (upward revision to Q4 GDP, a larger than expected rise in the January core PCE deflator to three-year highs, and an uptick in consumer confidence), before the weekend, the Dollar Index recorded an outside up day by trading on both sides of the previous day's range and closed above the high.
Similarly, the euro finished poorly, posting an outside down day ahead of the weekend, and closing below the uptrend line drawn off the early December lows. Recall, that low was set near $1.0525 before Draghi disappointed and/or sell-the-rumor, buy-the-fact type of activity took hold. The weekly close below $1.0950 and the technical indicators suggest immediate potential for another cent lower. Although it had been penetrated before, the $1.0800 level still has technical significance. On the upside, the $1.10 area likely becomes resistance again.
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EUR, JPY: A Tale of Two (Failed) Easings - CIBC In December, the ECB announced a cut to its deposit rate and extended the timeframe for QE purchases. While the effects on domestic demand can’t be quantified yet, the move in the exchange rate has been less than encouraging.
The story’s similar for the BoJ’s recent foray into negative territory. In part, this may reflect the markets’ lack of confidence in these central banks’ abilities to affect the money supply.
With a binding constraint not far off in negative territory and bonds in both Germany and Japan already yielding less than zero well out the curve, the limit for rate cuts does seem near. But with fiscal policy not on the table, central banks might have to continue down the easing path even if it might prove largely ineffectual.
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Quant Signals & Targets: Short AUS/USD, Long USD/CAD - BNPP BNP Paribas' quant model 'STEER' maintains a short AUD/USD and a long USD/CAD signals.
"USD looks cheap versus the commodity bloc currenciesSTEER remains short AUDUSD, targeting a move to its short-term fair value of 0.6990, reflecting the recent underperformance of Australian equities.
STEER remains long USDCAD targeting a move to 1.3760. The recent rise in oil prices and rebound in global equities have pushed down the fair value of USDCAD, but the fall in spot has overshot the fair value: STEER is signalling USDCAD looks undervalued," BNPP clarifies.
USD: The Return Of The King - Credit Agricole The USD-decoupling trade is staging a return on the back of improving US data, the abatement of global risk aversion and the growing resilience of the US domestic demand-driven recovery to persistent global headwinds and future Fed rate hikes.
The USD should regain more ground because better US data and easing global financial conditions should help the Fed keep its constructive economic outlook, and signal further gradual tightening.
USD should do well against EUR and JPY as flows related to the policy divergence trade continue with Eurozone and Japanese excess savings heading to the US, and EUR-funding replacing pricey USD-funding.
...We have argued in the past that our bullish case for USD is partly based on the expectations that FX flows triggered by the persistent policy divergence between the Fed and other major central banks, like the BoJ and ECB, should continue to support the USD against EUR and JPY. We further argued that these flows will likely continue even if policy divergence does not intensify from here but so long as the Fed remains on course to hike gradually, and the ECB and the BoJ maintain their highly accommodative stance:
1. Investor outflows from the FI markets of Europe and Japan, where negative bond yields make EGBs and JGBs less attractive compared to USTs. As shown in Figure 7, the US mutual funds flow data has been pointing at persistent outflows from global portfolios in recent months. The outflow could intensify as further easing by the ECB and the BoJ drives yields deeper below zero, and bull flattens domestic bond curves.
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USD-Decoupling Or Just Risk-On; Sell EUR Rallies - Credit Agricole On the whole, we think that the USD-decoupling trade should remain the biggest beneficiary of the latest improvement in market risk sentiment. Indeed, we think that the US recovery continues and that it could accelerate from here, and that should keep the Fed on course to hike twice this year.
The USD should gain more ground as markets front load rate hike bets ahead of the March FOMC meeting. Indeed, we expect that the combination of improving US data as well as the relatively easy financial conditions in the economy will allow the Fed to maintain its constructive outlook on the economy and signal further gradual tightening from here.
The EUR remains relatively offered. This is due to both, firm expectations of the ECB considering more aggressive policy action next week and stabilizing risk sentiment. Keeping in mind that inflation in February surprised lower and that price expectations as measured by 5y inflation swaps remain close to multi-year lows, such prospects appear likely. However, it must be noted too the ECB will have to respond to the view that a more aggressive policy stance may have negative implications to the banking sector.Nevertheless, we remain of the view that the single currency should be sold on rallies.
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China development planning Chairman: Jan-Feb data showed positive signs National Development and Reform Commission Chairman Xu Shaoshi:
All the top Chinese policymakers are meeting, that's why there has been so much news out of China this week.