The Global Markets Weekly – 10/3/16

Posted October 3, 2016 by rvillareal

(Un)-Greasing the Global Skids?

After a few weeks where investors focused on monetary policy meetings, two factors with the potential to spill across borders dominated events last week: banks and oil prices. While we believe parallels between DB in 2016 and Lehman in 2008 were significantly overblown, and indeed look increasingly-so given signs on Friday that a lower settlement amount with the U.S. government may soon be reached, events raise some key points.

It is somewhat ironic that fears of a 2008 replay–a fresh counterparty-risk crisis and discussion of government bailouts–were a direct result of a sizeable regulatory fine to settle mortgage security claims dating back to the very same crisis to which parallels are being drawn. Second, there hasn’t been a clear answer as to whether when push comes to shove, countries will still be expected to step in as backstops—even those that have taken a hard line against bailouts in the past. In this case, markets were set to continue to push to a breaking point, but the U.S. Department of Justice may have removed the need. Third, we can take some solace in the fact liquidity, funding, and a collateral chain risks never reached a fever pitch–then again, the underlying drivers were far different than those that might prevail in a systemic crisis.

In the U.S., lawmakers managed to rally in a massive display of bipartisanship during an acrid political season, but at the expense of one of the largest U.S. banks. Stepping back, the good politics of hammering on banks–or the Federal Reserve–is rather unlikely to lead to stronger growth. The operating, legal, and regulatory environment remains challenging, and it isn’t clear that capital requirements (while there can be little doubt about the need to boost capital relative to pre-crisis norms) and negative interest rate policies taken together haven’t at least contributed to the sapping of bank profitability and lending that still plagues global growth.

Another key event last week was a jump in oil prices on a tentative OPEC agreement to cut production (by roughly 2% relative to July output). Investors risk reading too much into the deal as individual oil producing countries’ budget woes may still argue against cooperation, and U.S. producers are likely to view any rise as a boon. Still, while not DE’s expectation, a market that swings into balance more quickly in 2017 causing a rise in prices may, while raising inflation around the globe to the applause of inflation-targeting central banks, work as a brake on global growth amid very modest potential growth rates. The financial system and oil are the lubricating grease on the global growth skids, so we and investors will need to monitor any sign negative shocks persist for longer, hardly what the global economy needs at the moment.

• S.: The September employment report (Fri), ISM Surveys (Mon/Wed), and light vehicle sales (Mon) will dominate on the hard data front. Key Fed speakers include Evans (Wed), Fischer (Fri) and Brainard (Fri).
• Eurozone: While banking sector concerns may remain the focus, there are some important pieces of data adding to the emerging Q3 GDP backdrop. Business surveys such as the Final PMIs (Mo/We) have offered mixed, but still resilient messages. A clearer picture will emerge with August German Industrial Production (Fri). Elsewhere, the Minutes to the September 8 ECB meeting (Th) will make interesting reading, partly in order to see the extent to which the pros and cons of negative rates are more clearly expressed, something all the more relevant given the fresh banking sector woes of late!
• UK: A wide array of key data this week, with the various PMI survey data likely to attract the most attention. Even so, the BoE while using such data to assess better the true state of the post-Brexit vote state of the economy, the MPC will surely look at the Q2 Productivity data on Thursday where yet another weak numbers is expected. If so, the BoE may have to acknowledge that domestically-generated price pressures are already running in line with its inflation remit.
• Japan: The Tankan Survey (Mo) may hold at a very moderate level, weakest since 2013 as cross currents of a stronger yen and a lack of clearer economic acceleration leave expectations restrained.
• China: A light week, with just services PMIs due Tuesday.

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