Bred On Champagne

In Davos, the global elite
Are gathering midst their conceit
That they know what’s best
For all of the rest
Though this year they’re feeling some heat

As growth ‘round the world starts to wane
This group, which was bred on champagne
Is starting to find
Their sway has declined
And people treat them with disdain

This is Davos week, when the World Economic Forum meets in Switzerland to discuss global issues regarding trade, finance, economics and social trends. Historically, this had been a critical stopping point for those trying to get their message across, notably politicians from around the world, as well as corporate leaders and celebrities. But this year, it has lost some of its luster. Not only are key politicians missing (the entire US entourage, PM May, President Xi, President Macron, AMLO from Mexico and others), but the broad-based rejection of globalist policies that have led to a significant increase in populism around the world has reduced the impact and influence of the attendees. Of course, this hasn’t prevented those who are attending from declaring their certitude of the future, it just puts a more jaundiced eye on the matter. As to the market impact of this soiree, the lack of keynote addresses by policymakers of note has resulted in quite a reduction of influence. But that doesn’t mean we won’t see more headlines, it just doesn’t seem like it will matter that much.

Inflation forecasts
In Japan have been reduced
Again. Is this news?

The BOJ met last night and left policy settings unchanged, as universally expected. This means that the BOJ is still purchasing assets at a rate of ¥80 trillion per year (ostensibly) and interest rates remain at -0.10%. Their problem is that despite the fact that they have been doing this for more than 6 years, as well as purchasing corporate bonds and equity ETF’s, they are actually getting worse results. Last night they downgraded their growth and inflation forecasts to 0.9% for both GDP and CPI as they continuously fail in their attempts to stoke price increases.

While the Fed has already begun normalizing policy and the ECB is trying to move in that direction (although I think they missed the boat on that), the BOJ is making no pretenses about the fact that QE is a fact of life for the foreseeable future. Policy failure at the central bank level has become the norm, not the exception, and the BOJ is Exhibit A. As such, the yen is very likely to see its value remain beholden to the market’s overall risk appetite. If we continue to see sessions like yesterday, where equities and commodities suffer while Treasuries are bid, you can be pretty sure the yen will strengthen. While this morning the currency is actually weaker by 0.3%, that seems more like a position adjustment rather than a commentary on risk. In fact, if equities continue to suffer, look for the yen to regain its lost ground and then some.

As to Brexit, the pound is trading back above 1.30 this morning for the first time since the first week of November, which was arguably more about the US elections than the UK. But the market is becoming increasingly convinced that a hard Brexit is off the table, and that some type of deal will get done, maybe not by March, but then after a several month delay. If this is your belief, then the pound clearly has further to rally, as the market remains net short, but my only advice is to be very careful as policy mistakes are well within the remit of all government organizations, not just central banks.

Beyond those stories, there has been no movement on the trade talks, although Larry Kudlow did highlight that some type of verification would be needed before anything is agreed. US data yesterday showed a much weaker than expected housing market with Existing Home Sales falling 10.0% since last year to just 4.99M in December. The Fed is silent as they prepare for next week’s meeting and the ECB is silent as they prepare for tomorrow’s meeting. In other words, it is not that exciting. Equity futures are pointing modestly higher, about 0.25%, although that is after a >1% decline in all markets yesterday. Treasury yields are higher by 2bps and oil prices are modestly higher (0.7%) after a sharper decline yesterday. Overall, the market remains unexciting and I expect that until we see a resolution of one of the key issues, notably trade or Brexit, things are likely to remain quiet. That said, it does appear that there are ample underlying concerns to warrant a fully hedged position for risk managers.

Good luck