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1/17/2017 0 Comments

Inflation fights politics

The Dollar is down to the pound and euro from better than expected inflation numbers out of the UK and upbeat remarks from the ECB. In about 30 minutes Theresa May is set to outline her Brexit plans which could send the pound back in the other direction.

We have seen the inflation pick up in many regions that were plagued with slow growth and low inflation since the crisis, which has allowed the Fed to raise rates and the look to do so more aggressively this year. But the political landscape it talking about some policies that could derail these early signs of normalcy.

​The hard Brexit speech coming up within the hour will be the first we can see the headwinds that the UK might face over the coming years and how this will affect growth.

Chinese President Xi Jinping has also make some strong comment at the World Economic Forum in response to Trumps trade talks. The rhetoric isn't the main reason for concern, but the fact that Xi is at the forum is a sign that China looks to take a more active role in the global economy. If America starts to isolate itself now it will be ceding regional power and economic potential to countries that are looking for a more outward role.

Through this week's inauguration and the months beyond we will see if the politics of the Eurozone, UK, and US will have the same effect that the November elections did for the reflation trade or if the skepticism of trade and globalization start to pull back growth expectations.
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1/9/2017 0 Comments

Rising inflation may not be welcome by all

Eurozone inflation numbers came out higher than expected which gave the ECB signs that their stimulus is working. The bank now believes they will reach their goal of 2% inflation by 2019. While this is a welcoming sign of the Eurozone returning to normalcy Germany might not be as welcoming to staying the course to 2%.
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Inflation in Germany is out pacing that of the greater Eurozone, the government will have to make a choice to absorb higher inflation for the greater good of the Eurozone, or push for a dampening of stimulus. What Germany decides is an important part of the equation because their lack of leadership in the fight to stem inflation will prevent the transfer of the debt burden off of the southern countries to the bond holders (namely Germany). Failure to do so will create a greater rift in the two speed Eurozone recovery and put strains on periphery budgets and growth. 

​It will be interesting to watch the Euro and how it reacts to news of Germany not willing to accept more inflation for the greater Eurozone. What should come to strengthen the currency through a more unified economy would start to unravel, with talks of a t class euro and Germany or other leaving the bloc starting to pull the currency down. Spreads on Eurozone debt will also tell the story, with a rise in German Bunds narrowing the spreads with other countries being a sign of markets feeling the country is in lockstep with the measures taken by the ECB.
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1/3/2017 0 Comments

2017 starts

Markets are starting a new year. The US markets look to be opening higher, oil has hit a high not seen since the middle of 2015, and the dollar is rallying. The news is talking of a lot of the news that could de-rail the current rally, and while there is merit to it the factors to watch can be boiled down to a few data points.
  • US Dollar: The trend of the dollar has the ability to exacerbate many of the issues that are festering in the markets now. From capital flight in China to the decline of US multinational companies' revenue, a sharp rally or decline will have an affect around the globe.
  • Chinese debt: Corporate sector debt in China has been a worry over the past year, but the government has found ways to curb speculation in a way that didn't shock the market like the end of 2015. This year more will have to be done to limit capital flight out of the country and manage the large debt load. Whether through government intervention or defaults, the steps taken (or not taken) by the government will dictate how the deleveraging will occur and how global markets will be affected.
  • European elections: More of a slow burn in 2017, the elections will determine if the status quo of the EU will remain intact. If euro-skeptics get a majority it would break the social contract that has kept the Eurozone together in terms of bailouts, austerity, and immigration.
​As a partial hedge against this, you can look to invest in emerging markets with good growth prospects and healthy debt profiles (not China) to take advantage of the dollar decline potential, higher yielding assets, and lower stock valuations. Taking gains and buying value (not to mention taking a longer term view) are the only other safe plays so far this year.
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