This is the week of the ECB – or rather – it's the week where we probably get the see ECB move back into a crisis mode as an EM crisis, deflation and continued high unemployment seems to have shocked our central planners.
We could not have had a worse start to the year than the January just past. ECB, IMF and World Bank all increased their growth projections in January and before the ink of the press releases where even dry, the EM markets started tanking. Talk about an inverse indicator, so get this IMF, World Bank and ECB goes directly from an upped growth forecast which stated the recovery is coming to a crisis alertness. Will this persuade them to revisit their models? Hardly……
Hungarisation
I have seen the future…..Well almost, I have seen where we could end if this paralysis continues. The thing to fear is not Japanisation, but rather Hungarinisation. Hungary have a government and policy hell bent on reducing its fiscal deficit, it methods being increased direct and indirect taxes, meddling with the independence of the central bank, underinvesting and forcing its banks to pay levy in the name of securing its customers from the pain of risk taking entirely on their own device. Yes, please read IMF's Chapter IV report from March 2013 and exchange Hungary with EU in each sentence: IMF Executive Board concludes 2013 Article IV Consultation
Here is IMF recommendation for Hungary (read: Europe)
· It's scary! Fiscal consolidation – tick
· Strengthen Fiscal Council (Read Fiscal union & Banking union) - No significant measures were taken…
· Contain financial sector risk and bank resolution – Several initiatives to help the banks often without consultation of voters, EU treaty – still under discussion overall
· Structural reform – No major structural reforms..
Hungary Article IV consultation is the least diplomatic and openly critical report I have ever read from IMF – or in other words – IMF is not happy, but it begs the question – why are the picking on Hungary when clearly all of their recommendation is being ignored by EU as a whole. Is that why IMF and EU is increasingly at different end when we talk about crisis resolution and talks? Latest seen by this headline in Wall Street Journal: Top officials held private meeting on Greece bailout
I can recommend reading the full IMF report to understand where Europe ends if nothing changes.
ECB will cut 15 bps and move to negative deposit rates
The ECB will cut rates this week, seems to be consensus. I see 15 bps and a potential move to negative deposits rates, and a new discussion on the leaked proposal from Bundesbank on stopping sterilizing the bond purchases: Bundesbank would favor end of ECB sterilization
Consensus is a 15 bps cut – no change in deposit. Inflation slump tests ECB's readiness to act.
Trading wise I personally think this is the biggest sell signal in the last three years:
· EURUSD at an average of 1.38/1.4000 guarantee both deflation and recession
· Deflation risk should be met by monetary easing according to Economics one-on-one (That it doesn't work is another thing)
· Unemployment is stubbornly high and growth is merely showing a dead cat bounce before EM crisis, Asia growth slow-down starts to hit Europe exporters.
· EM crisis is new since last ECB meeting – I think even ECB know the impact on export relative prices.
Fed and central banks
The key event in February, except for ECB meeting, is to hear Fed new chairwoman Yellen in front of Congress February 11 and 13.
Watch out for Yellen's priorities, which is likely to be more on employment than inflation.
We are also in the world of central bank moving paradigm:
· 1940s to 1970s we were in the Gold standard
· 1980s to 2000s we are in inflation targeting
· 2010s to ? will be about employment targeting
The move to employment focus is socially understandable, but at the same time scary! Show me any book on economics that tells you monetary policy, the primary remit of any central bank, can impact employment levels medium- and long term, please? You will not find any.
The move for central banks to an employment focus also means the end of traditional central banking. Tracking a new diluted goal, employment, which is not impacted by monetary policy, means the central banks are the new paradigms new economic leaders, and the old leaders, politicians are at best impotent at worst irrelevant. Democracy is under pressure from the neglect of politicians, and policy maker environment overreaching in their believe in being able to correct an inevitable Schumpeter moment. Taking the cyclically out of a business cycle leaves only the business with no one to sell to a true Hungarisation.
EM crisis
I have written plenty of the EM crisis over the last month or two, but do realize that this crisis is now entering phase three, the final wave. The first crisis was the US housing and banking crisis, which spilled over to a European debt crisis, and finally now in 2013, but starting in 2012 it has become a full EM crisis. There is more to come and Gavin Davies, does an excellent job in his FT blog today: The EM's "fragile 9" must save themselves. The headline says it all, and the EM countries needs to realize that it is not Fed's tapering that have them in trouble, it's their lack of reform and economic openness.
The crisis may take a break this week as we await ECB and Yellens speech next week, but as in Europe, the problems remains whatever the rhetoric.
Conclusion:
Macro core view:
Fixed income: New low in yields by Q4-2014/Q1-2015
Equities: Top in place in Q1 – correction globally of 20-30%
FX: Stronger US dollar from end of Q1 as global growth gets adjusted down. USDJPY to fail on 105.00 (94/95 test), CNY/HKD to weaken, Fragile Five will perform poorly (+ Russia)
Commodities: 2014 will be ok year for commodities as deflation in H1 will be replaced by higher core inflation end of year. Aluminum, Copper long-term value here. Like Gold to 1500.
Economics:
Europe – 50/50 risk deflation. Export volumes will tank in Europe. Asia incl. and excl China will continue to cool off. World growth will be 2% not 3%
Asia – Dramatic change of priorities away from growth to consolidation and rebalancing
US – Sub-par growth on lack of housing demand, a subtle change higher in unemployment and maxed out consumers.
Africa – Expect bad year. Export volumes falling.
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Positioning:
Changed overall risk exposure so now I am:
Equities: Net small long through DAX calls – took profit on downside today.
FX: Short EURUSD, short USDJPY, short GBPUSD, and now small short USDTRY through options, long AUD options, and looking to sell NZD and buy CAD.
Commodities: Short Natural Gas, Gold, Copper – Long Corn.
Performance INDEX: 116
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Med venlig hilsen | Best regards
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