Morning Commentary: The World is Joining Japan

Foreign Exchange - Morning Commentary
The World is Joining Japan
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Over the past two decades, sustained super-low bond yields have spread around the world. Japanese yields broke lower after two recessions and the onset of deflation in the 1990s. The Euro area was left vulnerable after the Great Recession and was dealt a heavy blow by the 2012 Euro Area crisis. Now COVID-19 has solidified low interest rates in Japan and Europe and pulled the U.S. down to join the super-low bond group. While we have focused on Japan, Europe and the U.S., it should be noted that developed market yields in general have bond yields in the same range.

Looking forward, normal inflation and normal real and nominal rates are not in the foreseeable future. Further, almost all central banks are failing on both inflation and employment objectives.

This seemingly structural change has both good and bad implications. On the positive side, low interest rates help with debt service and raise the level of sustainable debt for individuals, corporations and governments. This takes on additional importance given the explosion in public debt with further borrowing expected. Low rates also support a re-rating of risk assets, including stocks and home prices.

But that doesn’t mean asset prices can rise indefinitely. Instead, it is more likely a one-time shift to allow for a higher ratio of equity prices to earnings or home prices to rent. Once this adjustment is complete, the normal rules should apply.

On the negative side, ultra-low rates leave central banks without many policy options. It also makes it difficult for investors to find safety. In essence, investors are left to choose between accepting negative real returns on safe assets or holding risky ones. While the Fed has been criticized for hurting people on a fixed income, there isn’t much the Fed can do about this new abnormal of lower rates. Should the Fed, or any other central bank, try to raise rates prematurely, it would lead to lower inflation and even lower rates later on.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The U.S. dollar finds itself back under pressure. It is notable that despite all the uncertainty in the markets, last week lacked a significant safe-haven bid. This is likely due to markets placing a greater probability on a Democratic sweep and Congress’ inability to reach a compromise on further fiscal stimulus in an increasingly partisan environment. Trump’s positive COVID-19 test grabbed most of the headlines last week, but the reality of Trump trailing in the polls and running out of time is the firmer driver.
  • Polls after Trump’s illness have started to come out, and the initial results are not good for the president. A Reuters/Ipsos poll taken Oct. 2–3 showed that 65% of respondents agreed that “if President Trump had taken [the] coronavirus more seriously, he probably would not have been infected.” This same poll showed Biden with a 10-point lead.
  • European currencies are leading gains in the G10 on the back of strong economic data. Eurozone retail sales jumped 4.4% in August against expectations for a 2.5% increase. This pushed the year-over-year increase up to 3.7%, marking the strongest reading since November 2017.
  • The British pound has been volatile in overnight trading as Brexit talks continue. This time it was France’s turn to take a hardened stance, with the long-standing fishing issue the main source of disagreement. Further, state aid and the UK’s Internal Market Bill remain unresolved and are likely to be two of the more difficult issues to overcome. On the positive front, the UK’s PMI numbers were revised higher.
  • Governments around the world are taking increased steps to combat rising COVID-19 numbers. New York City has shut schools and nonessential businesses in nine areas where infections have spiked. In Europe, France has declared a maximum alert zone, with bars, dance halls and sports halls closing. Italy and the UK have both warned of new restrictive measures.
  • According to the Saudi Arabia’s fiscal plans, the country is not bullish on crude prices, as it is budgeting for oil prices around $50 for at least the next three years
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog

Are tax hikes coming?