CSM’s What to Watch Report: CSM’s Signals Overseas Risks … · 2014. 12. 10. · December 10, 2014 What to Watch in India: Interest Rates, Stocks, and Commodities. "India has

Economic Research

December 10, 2014

Nancy Lazar (212) 257-4960

[email protected]

Karina Mayer (212) 257-4961

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Chris Menzenski, CFA

(212) 257-4962 [email protected]

Arif Haque (212) 257-4963

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Stephanie Needell (212) 257-4964

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Chris Seter (212) 257-4966

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Copyright 2014 Cornerstone Macro. All rights reserved. This report is prepared exclusively for the use of Cornerstone Macro clients and may not be redistributed, retransmitted or disclosed, in whole or part, or in any form or manner, without the express written consent of Cornerstone Macro. CornerstoneMacro.com

CSM’s Signals CSM’s What to Watch Report: Overseas Risks Resurfacing.

Over the past week, strains have intensified in both the Eurozone and China. There's concern the extreme left could gain control of the Greek govt. In China, the govt appears to be concerned the financial markets have become too exuberant. And increasingly wobbly Russia remains a significant risk to the global outlook, because of its potential hit to the Eurozone.

A snap general election won by Syriza would be likely to disrupt relations with international lenders who would confront a new government led by fiercely anti-bailout politicians.

FT, Dec 9

300400500600700800900

100011001200

13 14 15

Greece 10-Year Bond Yieldminus German 10-Year Bond Yield

Dec 10: 792 BP

Greece’s Yield Curve Inverts as Return to Bond Markets Unravels

Bloomberg, Dec 9

ECONOMIC RESEARCH

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December 10, 2014

What to Watch in the Eurozone: Bank Stocks and Commodities.

S&P has cut Italy’s rating to BBB-MNI, Dec 8

S&P has raised Ireland’s credit rating to A.MNI, Dec 8

Decoupling within the Eurozone is accelerating. The unexpected call for Greek elections pressured Greece's bonds, reintroducing risk into peripheral assets. S&P cut Italy's credit rating, and boosted Ireland's, demonstrating the importance of structural reforms. Roberto Perli believes there will be additional QE early next year (link), which may help growth some, as would the decline in oil. That said, without significant structural reform, and easing of the Russia turmoil, growth in the Eurozone is likely to remain anemic.

Austrian Airlines reported a drop in sales of5.9% due to weak demand in Ukraine, Russiaand eastern Europe. In October, Austrian hadreported sales up 1.1%.Reuters, Dec 9 Declining Russian activity is

impacting European sales.

Down 3.1% w/w

ECONOMIC RESEARCH

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December 10, 2014

What to Watch in Russia: Ruble, Bonds, Reserves, and Consumer Confidence.

Inve

rted

If the price of crude oil continues to decline, it’s only a matter of time before Russia is once again facing the prospect of default. The last time the country suffered a major default was 1998.WSJ, Dec 8

Russia is in crisis mode. Govt bond yields have surged near 13%, and the ruble continues to be in free-fall. Consumer confidence is plunging. Govt revenues are crumbling with the decline in oil prices, and Ukraine-related sanctions are squeezing businesses. FX reserves are falling ... now down 18% or $90 billion YTD. The risk of capital controls is being priced into Russian assets traded on-and off-shore. And people are hedging their bets against the ruble decline via buying hard assets, including cars.

Russians are snapping up Porsche sportscars and Lexus sport-utility vehicles toprotect against the falling ruble fromeroding their savings.Bloomberg, Dec 8

-18%

Evidence is surfacing in Russia’s bondmarket that investors are concernedPresident Putin will impose capital controlsto stem the ruble’s plunge this year.Bloomberg, Dec 9

ECONOMIC RESEARCH

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December 10, 2014

What to Watch in Japan: Eco Watchers, Consumer and Business Confidence.

Recently released Japanese confidence surveys show declines for 4Q. Although the Nikkei has had a significant rally reflecting QQE, business and consumer confidence have declined. Why? Well, the lack of structural reform seems to be more than offsetting the "wealth" effect of the stock market rally. Have Japanese businesses and consumers been "fooled" too many times? As Draghi has said, and perhaps Abe needs to listen, "No monetary stimulus, indeed no fiscal stimulus, can be successful unless accompanied by the right structural policies -- policies that foster potential growth and instill confidence."

ECONOMIC RESEARCH

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What to Watch in China: Bank Stocks and Bond Yields Following Collateral Regulation.

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10 11 12 13 14 15

China 3-Month SHIBORDec 10: 4.25%

December 10, 2014

3.03.23.43.63.84.04.24.44.64.8

10 11 12 13 14 15

China 10-Year Bond Yield Dec 10: 3.76%

90

100

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130

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150

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China Bank Stock Index 5 Biggest Lenders in China

2007=100 Dec 10: 133.7

+6bp w/w

+5.7% w/w

+16bp w/w

China Tightening Curbs on Opaque Local Debt Spurs Market Tumble The China Securities Depository and

Clearing Corp.’s move means about $75.8 billion of outstanding debt can no longer be pledged in repo agreements.

Bloomberg, Dec 9

China November Prices Weaker Than Expected, Deflation Risk Rises

New Tang Dynasty TV, Dec 10

Monday night’s surprise tightening of repo collateral rules rattled China’s markets. Bank stocks were hit particularly hard, now down 7.0% since the move, more than the Shanghai’s 2.7% loss. Thanks to today’s weak PPI and CPI readings, bond yields fell 7bp, and are likely to stay under downward pressure. More policy easing is likely, as policymakers try to combat deflation, but lower rates will have a very limited impact on activity, as China continues to unwind its credit and investment bubbles.

ECONOMIC RESEARCH

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5.0

5.5

6.0

6.5

11 12 13 14 15

U.S. CEO Confidence Index(Chief Executive Magazine)

Seas. Adj. by CSM 3 Mo. Avg. Oct: 6.51

0.8

1.2

1.6

2.0

2.4

2.8

3.2

11 12 13 14 15

U.S. Real Income ProxyPayroll Employment x AHE x Workweek

div by PCE Deflator3 Mo. Avg. Y/Y % Nov: 2.8%

December 10, 2014

Both business and consumer pictures are looking increasingly solid with rising business confidence helping explain the improvements in both personal income and employment. And, obviously, the decline in gas prices is a big boost to consumer confidence.

What to Watch in the U.S.: CEO Confidence, Consumer Confidence, Employment, and Income.

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0

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20

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98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

U.S. Manpower Employment Survey 2015:1Q: 16.0%

Energy Department gasoline price forecast for 2015 falls again, to average of $2.60 a gallon

AP, Dec 9

55

65

75

85

95

105

10 11 12 13 14 15

U.S. Consumer Confidence (Rasmussen)1 Wk. Avg. Dec 9: 105.0

ECONOMIC RESEARCH

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December 10, 2014

What to Watch in India: Interest Rates, Stocks, and Commodities.

"India has been the region's brightest spot since our last report. After a modest beginning, Prime Minister Modi's government has picked up the pace of reform, eliminating the diesel subsidy in early November, liberalising foreign investment into the insurance sector, and curbing discretionary government spending for the second half of the current fiscal year," S&P said.

Economic Times, Dec 9

India currently enjoys multiple tailwinds: plunging oil prices, lower borrowing rates, and the stock market remains at elevated levels. S&P described India as Asia’s “brightest spot”. However, some are worried about the pace of Modi’s reform agenda.

-40% -196bp

+73% -201bp

Initial euphoria wanes, India Inc worried about Modi government's 'lack of boldness' Economic Times, Dec 10

ECONOMIC RESEARCH

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December 10, 2014

What to Watch in Brazil: CPI and Real.

Crop, economy worries hurt Brazil tractor sales

Agrimoney.com, Dec 9

The government adopted a more-realistic, market friendly prediction for GDP growth in the 2015 budget bill, after having been widely criticized for overstating its official forecasts.

Last week’s nomination of a former head of the treasury to lead Latin America’s largest economy appeared to signal that Ms. Rousseff is putting its focus on fixing the economy, rather than pursuing a political agenda, investors said.

WSJ, Dec 4

Up 450 bp

Log

Scal

e

Despite market-friendly signals from Brasilia, the Bovespa continues to weaken, and the Real remains near its lows. Last week the BCB raised its overnight Selic rate 25bp to 11.75%, for a cumulative 450bp of tightening over the past 20 months. Perhaps indicating confidence the tightening would impact Brazil’s stubborn inflation, 2-year bond yields retreated and steadied.

Stagflationary economic backdrop.