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More moves lower

By Henry Adams on 2020-11-06

It has been quite a week, with significant event risk. We have heard from the FOMC, Bank of England and Reserve Bank of Australia.

News in Oz was not brilliant, needing to cut rates to an all-time low of 0.10% as well as initiating a quantitative easing program much like many others. Whilst negative rates were also ruled out here, never say never. Throw in the US election, which at the time of writing is still undecided, and in markets we have seen considerable volatility. From conversations with our banking relationships, this has brought a great deal of flow which should feed in nicely to those dividends which aren't yet being paid. Strong performance from almost all investmentment bank trading desks looks set to continue this quarter. A resilient financial sector can only be a good thing, look out for a deterioration in credit though as we remain around all-time highs.

China's latest ambitions have emerged, following the last 10 year plan of doubling growth from 2010 all but done. President Jinpings' sights are now firmly set on repeating the exercise by 2035, as well as measures to increase wages to a high-income country (defined as gross national income per capita exceeding $12,375/year). By then addressing this increased spending power the idea is to grow domestic consumption alongside it. In addition, there is a strong appetite for self-reliance on technology. A recent survey of economists from Reuters predicts 2021 to bring a staggering 8% growth from the mainland.

Recent speeches coming from senior figures within the ECB are telling markets that more stimulus by way of monetary policy is coming in December. Expectation is for this to take the form of more bond-buying alongside even cheaper lending to banks. Just when you thought levels for deposits couldn't get more punitive...if this is once again large-scale and for term, it is hard to see how this part of the market could remain unaffected. With short-dated German Government debt now (not) yielding around -0.80% and the cheapest investment grade issuer (Italy, BBB/Baa3/BBB-) in the minus 50's, not only are rates terrible (unless you are borrowing) but there is also no real additional reward for jumping from AAA all the way to the cliff-edge of what is deemed investment grade.

A busy day for those of us in Sterling Thursday. The Bank of England shifted the timing of the announcement of results following the latest policy meeting to 7am. Luckily it was actually light already as frankly it was gloomy reading. Whilst the base rate has remained unchanged at 0.10%, quantitative easing is being stepped up by £150Bn in January. Disappointingly this new lockdown is predicted to drag growth into negative territory for this last quarter of the year, to -2.00%. Next year does look brighter from this perspective at around 7.5%, but coupled with peak unemployment expected at 7.75% in Q2 '21 there are further headwinds on the horizon. It was also made clear that rates would not be hiked until significant progress had been made, with risks to the downside. Most traders of interest rates see levels very much going the other way. Brexit continues to be kicked down the road, but time really is running out now, although the risk of this being a messy affair has been all but priced-out of assets across the investment universe. With furlough extended, at least the spike in unemployment has been averted for now, but not without considerable cost.

Yesterday's FOMC saw no change in line with expectation with rates bound in the existing range of 0.00% to 0.25% and QE continuing at the existing pace of $80Bn Treasuries and $40Bn in Agency MBS per month. Some wild swings in US government debt arose off the back of the "Blue Wave" trade unwinding, where speculators wagered that the Republicans would be facing a wipeout and purse strings would loosen. This has sent yields higher, but as we draw to a close and the potential for a Democat government but Republican Senate rises, this will not be helpful for getting anything done as one blocks the other. Progress is already slow, as the second stimulus package which was due to come months ago remains in neutral. Money markets have remained pretty calm throughout, with some movement in US government repo, by literally just a handful of basis points and liquidity has been solid throughout. Even year-end seems to be priced as a non-event this year as the record levels of cash injected remove any potential squeezes that have often beleaguered banks at this time of year. The only remaining question for now is who will be President and when might there be an official inauguration?

Articles of Interest:

A disturbing new signal from the CDS market

Some Irish money market funds came close to danger in March

Regulators begin to sift through wreckage of market’s COVID-19 collapse for clues about what went wrong

*(in order of timing) Ecuador (three times and now in default), the Maldives, Columbia, Gambon, South Africa, Guatemala, Nigeria, Argentina (into default but now technically back out, "restructuring"), Aruba, San Marino, Mexico, Zambia (three times, now just above default) Cabo Verde, Hong Kong, Sri Lanka, Italy, Seychelles, The UK, Slovakia, Tunisia, Costa Rica, Laos (twice), Peru, Namibia, Canada, Suriname, Oman, Bahrain, and Angola.

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