2011 in 11 slides
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8/8/2019 2011 in 11 slides
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11 slides for 2011
November 2010
Evariste Lefeuvre – Chief Economist for the Americas+1 212 891 6197
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November 22, 20102
1. QE, Dollar and liquidity/capital Flows
1. The Fed will not go into a QE3 but no tightening ahead to reduce liquidity: will the USDcontinue to drive asset prices ?
2. The long end is poised underperform slightly (significant cap due to weak growth ahead – nodouble dip yet as the main issues are structural, not cyclical – unemployment, develeraging,distribution of income, tax system…).
Dollar and risky asse ts: 3-month corre lations
-1.0
-0.5
0.0
0.5
1.0
Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10
-1.0
-0.5
0.0
0.5
1.0
SP 500 OIL
GOLD Future T note
CDX IG
Sources : Bloomberg
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November 22, 20103
2. An ECB early exit to kill the Euro Zone ?
1. The ECB willing to get rid of its non-conventional monetary policy measures: in particular itssubsidies to the non-core banking system. At odd with the EFSF ?
2. The normalization in the monetary market does not imply an early tightening: implication forthe EUR/USD
ECB loans to national banks (€, blns
0
20
40
60
80
100
120
140
05 06 07 08 09 10
300
400
500
600
700
800
900Greece
Portugal
Spain
Ireland
M RO + LTRO - RHS
Sources : Bloomberg
Monetary policies Norm alization and EUR/USD
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
09 10 11 12
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
2-y gov spreads (Natixis)
2-y gov spreads (Fwrds)
EUR/USD - D
Sources : Bloomberg
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November 22, 20104
3. EUR/USD poised to decline ?
1. Surprising resilience to the institutional crisis.
EUR/USD and central banks balance sheets
(2004/2010)
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
50 70 90 110 130 150
FED to ECB balance s heet (100: 2004)
E U R / U S
Since M arch 2009
First leg of the crisis
2007/mid-2008
EUR/USD and institutional risk
100
200
300
400
500
600
Mar-10 May-10 Jul-10 Sep-10 Nov-10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
Co mpos ite CDS Index
EUR/USD - RHS
Sources : Bloomberg
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November 22, 20105
4. Inflation of deflation ? What’s the story for Gold ?
1. Overcapacities, global growth risk ( policy mix tightening in EM and fiscal adjustment inadvanced countries): major risk of deflation
2. What is the next scapegoat for gold ? Fiat money (USD) ? Sovereign debt restructuring?
Global CPI and gold prices (since 1986)
y = 13.613x2 - 4.8115x + 2.8164
-2.00
0.00
2.00
4.00
6.00
8.00
-0.2 0 0.2 0.4
6-month log return of gold
G l o b a l C P I ( y o y , %
)
Gold: an opportunity cost approach
1050
1100
1150
1200
1250
1300
1350
1400
1450
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
Gold
10-year UST - RHS
Sources : B loomberg
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November 22, 20106
5. Equities: on cheapest market on earth?
1. Returns are in line with our model but PER are cheap in absolute terms and according to ourvaluation tools.
2. Divers: M&A, dividends, EM Capex, share repurchases etc…3. Yield relative comparative advantage against credit4. Will corporate go organic ? Low rates, no double dip, idle cash costly…
5
10
15
20
25
30
35
92 94 96 98 00 02 04 06 08 10
PEUP_BOUND
LOW_BOUND
Stock / credit arbitrage
y = 1.2734x + 2.7043
2
3
4
5
6
7
8
9
1 2 3 4
SP 500 Div yield
B B B U S D C o p m p o s i t e 5 y e a r
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November 22, 20107
6. How will Asia solve the capital inflow / domesticinflation equation ? China fears ?
1. In spite of (or due to) the Impossible Trinity (free capital flow, pegged exchange rate andindependent monetary policy) EM governments are unwilling to tighten sharply their monetarypolicies: serious inflation / over heating risk.
2. Capital controls cannot fix the global imbalances issue: short term tool. The currency war willhighly depend on China’s FX policy. We expect a slow appreciation, hence a further widening of global
imbalances…
USD/KRW and Risk aversion
900
1000
1100
1200
1300
1400
1500
1600
05 06 07 08 09 10
0
20
40
60
80
100
USD/KRW
VIX - RHS (inv.)
Sources : Bloomberg
Emerging market overperfornance and USD
(100: jan 2010)
60
70
80
90
100
110
07 08 09 10
92
94
96
98
100
102
104
106
Emerging As ia (M SCI) vs . US
AD XY - RHS
Sources : Blo omberg, Natixis
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November 22, 20108
7. Commodities: back to fundamentals?
1. “Assetification” and USD trend will give the trend.2. Yet, China growth poised to remain elevated. Moreover, Supply & Demand is back on track!3. On the oil side the oversupply remains
Base metals: inventories and prices
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
-0.1 -0.05 0 0.05 0.1
2-months inventories changes (against 1-y avge)
2 - m o n t h s c h a n g
e i n p r i c e s
Copper
Nickel
Tin
Aluminium
Lead
Zinc
Net US crude imports vs stocks of crude
300
310
320
330
340
350
360
370
380
390
Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
7.5
8
8.5
9
9.5
10
10.5
11
11.5
Crude stocks (mn bbl, lhs)
Net imports (mn b/d, rhs)
Sources : Bloomberg
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November 22, 20109
7. Will momentum continue to drive the FX market ?
1. Our Momentum index overperformed in the last months of 2010: liquidity driven.2. USD/JPY below 80?3. Inflation threat in EM coupled with monetary policy status quo in G3 should bust carry trades
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November 22, 201010
9. Spanish tail risk: debt restructuring and Bankingcrisis in Europe?
1. Fiscal balance improvement can hide structural problems. Huge contribution of real estate tofiscal revenues in the 2000ies. Structural fiscal loss.
2. Core banks hold b 700 USD of assets of peripheral Europe.3. ECB holds directly approx. 450 EUR of peripheral debt (through MRO, LTRO, direct
purchases…): 6X its capital & reserves.
Current account and fiscal position change between
2002 and 2007
-5
-4
-3
-2
-1
0
12
3
4
-10 -5 0 5 10
Current account
F i s c a l b a l a n c e BEL
IRE
GRE
SP
PORT
FIN
FRA
ITA
LUX
NTL
AUS
GER
Spain: Employment, re al estate prices and
household and corporate debt
8
9
10
11
12
13
14
02 03 04 05 06 07 08 09 10 11
100
120
140
160
180
200
220
240
Employment in construction (as %of to tal employment, LH scale)
Real estate pr ices (2002:1 = 100 , RH scale)
Household and co rpo rate debt (as %of GDP, RH scale)
Sources: Datastream, INE, Natixis
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November 22, 201011
10. Where is the next crisis: MUNIs ?
1. The ARRA had a very low purchase multiplier as most of the spending materialize through federaltransfers to state and local government.
2. S&L government suffer from: debt servicing ; federal mandates and medicare co-payments ;pensions contributions ; compensations of state workers ; falling revenues (stamp duties on real estatetransactions…) ; creative finance… Broadly an ALM mismatch…
3. Options: higher taxes, layoffs, end of federal program spending, federal government subsidies…
default…4. Liquidity, outstanding breakdown…
Changes in receipts and purchases of goods and
services of States and Local governments
(b USD annual rate)
-100-80
-60
-40
-20
0
20
40
60
80
100
J u l - 0
8
S e p - 0 8
N o v - 0
8
J a n - 0
9
M a r
- 0 9
M a y - 0 9
J u l - 0
9
S e p - 0 9
N o v - 0
9
J a n - 1
0
M a r
- 1 0
receipts ex ARRA
Purchases
recepiuts ex medicaid
Distribution of revenue by tax types (2006)
Federal State Local
Property Tax 0 3 97General Sales Tax 0 80 20Selective/ excise tax 36 52 12Individual income tax 80 19 2Corporate income tax 87 12 1Motor vehicle license 0 93 7Social insurance/ret 100 0 0Other taxtes 54 30 16Total taxes 67 20 13
Sources: Bruegel.org
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November 22, 201012
11. 2011 tail risks
1. Commodities: The return of backwardation?2. Asset allocation: will the equity/bond correlation mean revert ?3. EM growth to decelerate sharply? Side effect of Chinese
tightening ? EM outflows?4. End-of-Q2-driven UST bear market ?5. Widespread social unrest? Political / Sovereign risk?6. Protectionism?
7. Any candidate for EMU exit ?8. Deflation spread ?9. KRW/CNY/JPY raw ?10. Capital shortage ? (Basel III)
11. Any suggestion welcome…
-.2
-.1
.0
.1
.2
.3
.4
.5
.6
.7
2007 2008 2009 2010
CONTANGO_CLUP_BOUND_CLLOW_BOUND_CL
Corre lation btw SP500 return and UST 10-year
change (weekly frequency)
-1.0
-0.5
0.0
0.5
1.0
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
-1.0
-0.5
0.0
0.5
1.0
Sources : Blo omberg, Natixis
Risk avers ion and long term interest rates
2.0
2.5
3.0
3.5
4.0
09 10
10
20
30
40
50
60
10-Y UST
VIX - inverted scale (RHS)
Sources : B loo mberg, NA TIXIS
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November 22, 201013
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