Likelihood of a ‘Frexit’ decreases, but geopolitical risks abound closer to home
Yesterday saw the much-awaited presidential election in France, and many advocates of the European Union are breathing a collective sigh of relief. Centrist Emmanuel Macron and far-right candidate Marine Le Pen garnered the most votes — 23.75% and 21.53%, respectively — and will therefore advance to the runoff election on May 7. For those who wanted to see as little impact on capital markets as possible, a Macron–Le Pen matchup is as close to a “best-case scenario” as possible. (The “worst-case scenario” for the continuation of the EU was a matchup between Le Pen and far-left candidate Jean-Luc Melenchon, who are on opposite sides of the political spectrum, but both anti-EU.)
Many pundits are now expectingContinue
Uncertainty leads to a drop in stocks and a boost for gold
The last six months have been notable in that political developments have had a far greater impact on capital markets than they did for the past several years. That doesn’t look like it will stop any time soon given recent events.
Last week we experienced greater geopolitical uncertainty involving the US:
- The US bombed Syria, which in turn resulted in a deterioration in American relations with Russia.
- The US sent warships off the coast of North Korea and implored China to take a tougher stance on the country, offering trade incentives.
- The US dropped its largest non-nuclear bomb on ISIS in Afghanistan.
Adding to the uncertainty is thatContinue
FOMC minutes reveal an unexpected focus on unwinding its balance sheet
Interest rate hikes may not be the only form of monetary policy tightening we’ll see from the US Federal Reserve (the Fed) this year. After the release of the Federal Open Market Committee’s (FOMC) minutes last week, a new catch phrase should be gaining popularity with economists: “balance sheet normalization.”
Balance sheet normalization is a fancy term for the unwinding of the Fed’s bloated balance sheet. The minutes from the FOMC’s March meeting, released last week, revealed that the FOMC is contemplating this approach. This came as a surprise to some investors. Below, I look at how the Fed got to this point, and what balance sheet normalization could mean for the markets.
How did we get here?Continue
Analyzing the ‘Bradley Effect,’ the ‘Shy Tory Factor’ and the US consumer
Last week the Conference Board’s Consumer Confidence Index was released, showing that consumer confidence is at a 16-year high. We saw slightly less effusive but similarly positive attitudes from the University of Michigan’s Consumer Sentiment Index. (It is worth noting that the former was conducted before the failure of the health care bill while the latter was conducted after.)
Digging down into the consumer confidence report, we see that consumers today are much more positive about their current situation as well as their expectations for the near future. Not only do consumers expect more jobs to become available in coming months, they also expect their incomes to increase.Continue
Without a surge in monetary growth, fiscal policy alone doesn’t indicate inflation
Financial markets have reacted strongly to the election of US President Donald Trump. While equities in the US and elsewhere have risen strongly (reflecting expectations of stronger growth and therefore improved corporate earnings), bond prices have fallen (reflecting higher yields, in turn a result of higher inflation expectations). As debate continues around President Trump’s fiscal stimulus program, a key question has emerged: What role might his policies play in creating inflation?
A large fiscal deficit does not necessarily lead to inflation
Among the main drivers of higher inflation expectations, one isContinue
China faces two main options in dealing with its economic distortions
The Chinese currency has been depreciating since January 2014, and the balance of payments has weakened. There has been a substantial decline in the current account surplus relative to gross domestic product (GDP) since 2010 and, more recently, persistent private sector capital outflows.
The question is: How long will the Chinese yuan continue to depreciate and how much will China’s exchange reserves decline?Continue