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Economics ResearchEconomics Products: Absolute Strategy Weekly, Economics Quarterly, Newsflow Monitor.
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Strategic Asset Allocation: Tripwires for Regime Change
It is too early to say whether the Trump Administration represents a regime change. We are watching four key tripwires: (1) will 10yr US Treasury yields rise above 3%; (2) is policy changing beyond America so that Global Equity Risk Premia break out of their trading ranges; (3) is there evidence of institutional change; and (4) can we identify signs of microeconomic change that support the idea of a macro regime shift? Regime change seldom comes mid-cycle and may only become apparent coming out of the next recession.
PODCAST: Click to hear David’s accompanying podcast
Guest article: A Letter From America, by Gerald D. Cohen: What is the Potential for US Potential Growth?
In the first of six articles written especially for ASR, Gerald Cohen, former Deputy Assistant Secretary for Macroeconomic Analysis at the U.S. Department of Treasury, examines the credibility of the Trump Administration’s claim that GDP will be 17% higher than currently forecast by the Congressional Budget Office (CBO) in 10 years’ time.
Economics, with guest article by Heinz Schulte: Stuck in the middle: EU
Political risk appears to be undermining investors’ confidence in the eurozone recovery. This week’s Economics Weekly looks at two aspects of this. First, in a guest article, Heinz Schulte examines how Germany might respond to the duel threats of President Trump and Marine Le Pen. Second, Michael has looked at the threat deriving from the Dutch election on March 15, where a political standstill could derail the Greek bailout negotiations.
Equity Strategy: French Politics Risk to Region More than Market
The risk that France leaves the Eurozone has implications for the region as a whole and is more a reason to underweight Eurozone vs Global Equities than France vs Eurozone. Within the Eurozone, based largely on our preference for Quality, we recommend being Overweight the Core markets of Germany and Netherlands vs the Periphery markets of Italy and Spain, but stay neutral on France.
PODCAST: Click to hear Zahra’s accompanying podcast
Multi-Asset: Exploiting the Eurozone binary outlook
Euro periphery yield curve flatteners look a compelling way to hedge the elevated political risk without giving up on the robust growth implied by Eurozone PMIs. Also featuring analysis on 10-year DSLs, BTP/OAT yield spread and SEK/EUR 5y swaps.
PODCAST: Click to hear Stefano’s accompanying podcast
• Tripwires for Regime Change, by David Bowers
• What is the Potential for US Potential Growth? by Gerald Cohen
• The shifting of Teutonic plates, by Heinz Schulte
• Dutch courage needed as Greek tensions grow, by Michael Hessel
• France is a Eurozone, not just a local, problem, by Zahra Ward-Murphy
• European bond ideas, by Stefano Di Domizio
Equity Strategy: Sector pairs in Commodities & Defensive sectors
Multi-Asset: Brazil: enjoy it while it lasts
Strategic Asset Allocation: Strategic Challenges to the Trump Rally
Economics: France – En Marche!
Equity Strategy: EPS Growth depends on pricing power recovery
Multi-Asset: Money still matters amid focus on trade and tax
ASR/WSJ Global Composite NewsFlow Index: 61.6 in January (58.8 in Dec)
• The ASR/WSJ Global Composite Newsflow Indicator (CNI) of macro activity rose in January to stand at 61.6, compared with a 58.8 reading in December. Global CNI readings of around 50 have tended to be associated with stock returns keeping pace with bond returns on a year-on-year basis (see Chart 1). This month’s CNI reading of 61.6 – the highest since 2011 – is in line with the equity-to-bond returns ratio, which continues to climb higher.
• Our proprietary NewsFlow indicators are created by searching the Dow Jones Factiva database for ‘positive’ and ‘negative’ macroeconomic news stories, counting them, and then calculating the difference (the ‘net’ news flow). The searches are done in English, so the global series will be dominated by stories from and about the Anglo sphere. But they still capture global trends well.
• The Global CNI is built up from six sub-indices – see Charts 2-7 on pages 2 & 3. At the global level, every sub-index increased on the month, a very rare occurrence, suggesting that news media have fully bought into the global reflation trade. The inflation measure is perhaps the most remarkable sub-component, moving from neutral to its highest level for 6 years in a matter of months (Chart 6).
• Supplementing the usual set of NewsFlow indicators, we have included our policy uncertainty heatmap, by sector and type. The table suggests that the drivers of policy uncertainty are things like protectionism and tax, as opposed to regular economic factors (Chart 50).
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