Macro Highlights May 11th 2015

Analysis - 5/11/2015

Our Investment Research Department publishes a weekly newsletter with a round-up on the main economic developments and news flow.

Yellen borrows a line from greenspan

Last Friday and over the weekend geopolitical analysts wrote lengthy columns on the UK election, which instead of resulting in a hung parliament unexpectedly ended with the Conservatives holding a clear majority. The outcome is excellent news as it rules out the need for horse-trading between members of a strained coalition. The incumbent prime minister, David Cameron, remains in power along with the two heavyweights of his former government, George Osborne as chancellor of the exchequer and Theresa May as home secretary.

Cameron has vowed to call a referendum on membership of the European Union and will probably do so in 2016—or at the latest in 2017. But that issue is still too remote to create any concern among investors for the time being. Also at this stage, the rallies staged since the election by the pound and the Footsie equity benchmark merely counterbalance the drop in both beforehand. Rather than odd behaviour, they are an illustration of short-term volatility. (...)

Why have yields moved up?

Apart from the US Federal Reserve (Fed), which is set to raise short-term interest rates by the end of 2015, the leading central banks continue to relax credit conditions and inject liquidity into the financial system. This generally accommodative bias is unlikely to change in the months ahead and could even become more pronounced.

Despite this highly buoyant environment, bond markets have been under heavy pressure over the past three weeks. There are several reasons for this. (...)

The recent upturn in long-term sovereign bond yields supports our strategy of diversifying into corporate and emerging issues, where generally higher yields cover the cost of bumpier periods like the one we are seeing now.

Of currencies and savings

Notwithstanding a notable rally by the rouble and a handful of Asian contrarians, the US dollar has far outperformed the emerging currencies year to date. More remarkable still, none of the emerging currencies has appreciated against the greenback since it began its comeback in July 2014. On the face of it one would think that the emerging currencies’ en masse retreat reflects common market dynamics, but that is not at all the case. Even though they are depreciating by and large, the emerging currencies are fundamentally divided.  

The balance of payments on current account is usually regarded as one of the key factors underlying a currency’s movements, and rightly so. But another variable that holds considerable sway in the emerging regions is the relative size of the country’s savings.  (...)