Etikett: GDP

What is behind the rise of global bond yields?

What is behind the rise of global bond yields?What is behind the rise of global bond yields?

Fixed Income Research  – What is behind the rise of global bond yields?

Highlights

  • The rise of US yields is driving up yields around the world.
  • We expect higher volatility in global rates, amplified by geopolitical risks and commodity price movements.
  • Structural headwinds and accommodative foreign monetary policies will likely limit the rise US yields over the medium term.

Since last November, investors’ sentiment has turned into ‘risk-on’ mode, favouring risky assets and equities relative to bonds. The rise in global yields and the steepening of yield curves has fuelled fears about the end of the 35-year bond bull market.

US yields drive up global yields

Since the early 2000s, the rise of global financial integration (i.e. the increase movements of capital between economies) has been reflected in higher co-movement in global yields. The chart below shows that almost 60% of the changes in bond yields of advanced economies (US, UK, Germany, and Japan) may be explained by a common factor.
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The recent rise of global yields was predominantly driven by the rise of US yields along with cyclical factors (such as inflation, geopolitical risk and market volatility). However, we believe the ongoing accommodative monetary policies in Europe and Japan are likely to keep bond yields low in these regions, limiting the rise of US yields over the medium term.

What is driving US yields higher?

Long-term bonds yields are a function of the expected future short-term interest rates and the bond term premium that investors require to buy long-term bonds rather than roll over a series of shorter maturity bonds (i.e. inflation risk premium). The trend decline in global yields in the past 35 years mostly reflects the trend decline in bond term premium, while expected short-term interest rates fluctuate along with the changes in monetary policies.

Expected short-term rates started to increase in December 2013 when the Fed announced the tapering of its monthly bond purchases. However, US bond term premiums continued to decline and then slipped into negative territory in the first half of 2016 – for the first time in history. Deflation fears fuelled by the 70% drop of energy prices between 2014 and 2015 negatively affected inflation risk premiums, which declined from 0.5% to -0.5%. The sustained rebound in energy prices since February 2016 enabled inflation premiums to bounce back in Q4 2016, leaving both forces – bond term premium and expected short-term rates – trending upward. As a result, US long-term yields started to rise.

We evaluate the current mispricing of the 10yr treasury yield at 10bps tighter than its estimated value, based on the gap between the current 10yr yields and the sum of its two components. Thus, we believe most of the expected three rate hikes from the Fed this year have already been priced into 10yr yields. However, we expect higher rates volatility amplified by elevated volatility in energy prices and geopolitical risks. The MOVE index (an indicator of bond markets volatility) has increased 20% since Q4 2016.

Structural headwinds push yields down

The recent tightening in US financial conditions has been driven by the prospect of a better economic outlook in the US, reflecting current expectations of larger fiscal policy stimulus. In our opinion, the efficiency of the fiscal stimulus and its effects on bond markets will crucially depend on its fiscal neutrality and on its capacity to boost productivity and labour force growth. While the labour force growth has rebounded since 2012 under the accommodative monetary policy of the Fed, US productivity growth remain low from an historical perspective and continue to weigh on the economy.

Historical data reveals a strong positive relationship between investment and labour productivity.

The decline trend of investment in advanced economies can be partly explained by high credit constraints. The Debt Service Ratio (DSR) or the share of income used to service debt has not yet return to the pre-crisis levels, weighing on consumption and investment.

Subdued long-term economic trend limit yields’ rise

The gradual decline in the US GDP growth trend has led to gradual similar decline in the neutral real interest rate (i.e. the federal funds rate that neither stimulates nor restrains economic growth), which, in turn, has caused the decline in long-term interest rates. The US Congressional Budget Office (CBO) forecasts a stable 2% potential real GDP growth – the highest level of real GDP that can be sustained over the long term – for the US economy over the next 10 years. Accordingly, the neutral real interest rate for the US is expected to pick up and move in tandem with the potential real GDP. Although, both remain lower from a historical perspective.

This analysis is consistent with the gradual downward revision of long-run projections from the FOMC. From 2012 to today, the FOMC gradually revised downward its estimates for the long-run potential GDP growth rate and the terminal fed funds rate (or neutral interest rate) from 2.4% to 1.8% and from 4.25% to 3.00% respectively. Fed Chair Yellen reiterated in January1 that the Fed expects to increase Federal Funds rate target a few times a year until, by end of 2019, it is close to its longer-run neutral rate of 3%. Accordingly, we expect the Fed to hike rates three times this year.

We expect the trend rise of the US yields to be gradual over the medium term toward 2019 amid higher volatility. The upside risks to this view would come from a significant and quicker-than-expected rebound in productivity growth and inflation.
For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

The analyses in the above tables are purely for information purposes. They do not reflect the performance of any ETF Securities’ products . The futures and roll returns are not necessarily investable.

General

This communication has been provided by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

This communication is only targeted at qualified or professional investors.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Industrial Metals Rally on Chinese Data and Stimulus

Industrial Metals Rally on Chinese Data and Stimulus

Industrial Metals Rally on Chinese Data and Stimulus – ETF Securities Commodity ETP Weekly

•    Third consecutive week of inflows into long oil ETPs.

•    ETFS Nickel (NICK) sees largest outflows since January on profit taking.

•    Rising US dollar and Greece’s survival in the currency union weigh on precious metal prices

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China’s better than expected GDP reading for Q2 helped industrial metals (with the exception of copper) gain. Policy stimulus in the country is likely to see demand continue to remain solid, while cuts to mining capex will help tighten the supply-demand balance further in the months ahead. The Chinese central bank announced its gold holdings for the first time since 2009 last week, revealing a 57% increase from its last announcement. It confirms that China’s official sector demand for the metal is strong and forms part of its US dollar diversification programme. A mixture of profit-taking and performance disappointment in the case of gold drove outflows from commodity ETPs this week.

Third consecutive week of inflows into long oil ETPs. Bargain-hunting continued with WTI and Brent slipping a further 3.5% and 1.9% respectively. A landmark deal struck between Iran and world superpowers to lift sanctions against the country opens the prospect of increasing oil supply from Iran. While it will take time for Iran to build the infrastructure to materially increase production, according to the IEA Iran has 17 million barrels of oil ready to ship and further 22 million of condensate that will weigh on prices in the short-term. An antagonized Saudi Arabia will also continue to pump oil at a break-neck pace to protect its market share and make it difficult for Iran to rebuild. The upshot is that high cost producers elsewhere will have to accelerate their plans to cut back on production. Prices should eventually rebound when supply is cut, and that is what ETP investors have positioned for. We saw US$16.3mn of inflows into long WTI ETPs and US$2.8mn of inflows into long Brent WTI ETPs. At the same time we saw US$6.3mn and US$3.1mn outflows from WTI and Brent short oil ETPs, respectively.

ETFS Nickel (NICK) sees largest outflows since January on profit taking. US$14.1mn outflows from nickel followed the 1.2% gain in price as Chinese data lifted the industrial metals complex.

Rising US dollar and Greece’s survival in the currency union weigh on precious metal prices. Greece managed to pass an austerity budget through parliament, satisfying its creditors’ condition for more bailout money. Meanwhile the ECB confirmed it will be dolling out a further €900mn in Emergency Liquidity Assistance (ELA) to its troubled banks, a step which will help its banks reopen. The new support increases the chances Greece be able to pay the €3.49bn it owes ECB today. Gold, historically a hedge against worst-case scenarios materialising, fell 1.7% last week, and slumped a more than 1.5% today. However, it had failed to gain any traction even when Grexit risks were at their highest. Meanwhile Federal Reserve Chair Yellen’s confirmation that the US central bank is keen to raise interest rates at a measured pace this year led to US dollar strength, weighing on all commodities – particularly the precious metals complex. Investor faith in gold as a haven asset faded further with US$175.6mn of outflows from long gold ETPs last week. However, with German finance minister Wolfgang Schäuble putting Grexit back on the political agenda on Friday, we fear that we are not out of the woods yet on the Greek debt saga.

In contrast to gold, the 2.9% fall in silver prices (0.5% further today) was seen as a bargain hunting opportunity as the metal’s industrial qualities bode well for demand in an environment of continued cyclical growth (the precondition for interest rate increases). US$3.3mn flowed into long silver ETPs.

Video Presentation

Nitesh Shah, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

For more information contact

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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Risk Off to Risk On

Risk Off to Risk On

ETFS Multi-Asset Weekly – Risk Off to Risk On

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Highlights

Historic accord on Iran deal paves way for lower oil prices.

Positive Chinese data, Q2 earnings and central bank meetings help fuel equity rally.

Declining commodity currencies underscore growth path divergence within major developed economies.

With Greece’s survival in the EU extended, and Greek banks partially opening today cyclical assets rallied. However, banking restrictions remain after being shut for three weeks and the ECB has injected €900m worth of fresh liquidity taking the country’s emergency liquidity assistance to €89.9bn. With Grexit fears easing and the US ready to raise rates later this year, gold has fallen out of favour and its price fell sharply today. However we believe that rate rises will be gradual and are more than priced-in to gold already and we are clearly not out of the woods on the Greek saga.

Commodities

Historic accord on Iran deal paves way for lower oil prices. The landmark deal of the six world powers with Iran to ease nearly a decade of sanctions in exchange for restricted nuclear enrichment activity is expected to apply further downward pressure to the price of oil. The International Energy Agency has said that Iran has at least 17m barrels of crude oil stored at sea ready to be shipped to an already oversupplied global market. In addition Saudi Arabia reported its crude oil production hit a record 10.6m barrels a day in OPEC’s latest monthly oil report. Meanwhile, US Crude stockpiles remain almost 100m barrels above the five-year average for this time of the year according to U.S. Energy Information Administration. We believe that after an initial correction, high cost oil producers will cut back on production paving the way for price increases in the future.

Equities

Positive Chinese data, Q2 earnings and central bank meetings help fuel equity rally. China dominated the data landscape with better-than-expected annual GDP (7% vs consensus expectations of 6.8%), industrial production (6.8% vs 6%) and retail sales (10.6% vs 10.2%) figures. Although viewed with skepticism, the releases helped reverse some of the losses on major global equity bourses. The Q2 earnings season added further momentum as 60% and 70% of the companies that reported earnings so far beat estimates in Europe and US, respectively. Central bank comments in the US and UK echoed the possibility for a rate rise on the back of improving economic data. While in Europe ECB president Draghi confirmed the asset purchase program was proceeding smoothly and helped allay investor concerns over Greece’s exit.

Currencies

Declining commodity currencies underscore growth path divergence within major developed economies. The Canadian dollar declined nearly 2.5 per cent against its US counterpart on the back of rate cut by the Bank of Canada and downward revisions in its growth forecasts. The Pound advanced to its highest level against the Euro since 2008 although there was no change in policy underlined in this week’s Bank of England monetary policy meeting except the Bank of England governor Mark Carney’s warning of a possible rate rise to reflect economic momentum. Looking ahead weaker dairy prices and lower CPI reading in June lead us to expect a rate cut by the Reserve Bank of New Zealand by 25bps to 3.00% this week. Antipodean currencies, AUD &NZD, are likely to remain under pressure as long as negative sentiment pervades the outlook for China.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E  info@etfsecurities.com

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).

Investments may go up or down in value and you may lose some or all of the amount invested.  Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FSA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

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Markets Focus on Greece as Finance Ministers Meet

Markets Focus on Greece as Finance Ministers Meet

ETFS Multi-Asset Weekly

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Markets Focus on Greece as Finance Ministers Meet

Highlights

  • Rig count drop drives oil price rally.
  • Developed equity markets rise on growing optimism.
  • USD lifts on jobs, but can it sustain upward momentum?

An upside surprise in US jobs figures provided a lift to cyclical assets and the US Dollar last week. This week the market will focus on the Chinese inflation, money and loan supply data for signs that its central bank will have to ease policy further. Last week, the People’s Bank of China made broad cuts to the Reserve Requirement Ratio for the first time in over 2 years, making it easier for banks to lend. The Euro area Q4 2014 GDP release and Finance Ministers meeting on Greece this week will likely keep volatility in Europe high.

Commodities

Rig count drop drives oil price rally. Brent and WTI rallied 13% and 15% respectively last week on signs of tightening supply. According to Baker Hughes’ rotary rig count, there was a 16% contraction in US rig counts in January 2015. We believe that OPEC countries will see these developments as a positive move and will motivate a cut in its June 2015 meeting. We believe that the cartel will move with caution recognising that despite the recent reduction in rig counts, US production could easily rise once again. Saudi Arabia, the largest producer in the cartel is reluctant to give up market share and will wage the price war as long as it takes to reassert its market dominance. News that Saudi Aramco has reduced its contract price for March Arab light crude in Asia may take some of the steam out of the recent rally. Elsewhere lean hog prices fell by 9.5% as the industry is showing signs of recovery from the Porcine Epidemic Diarrhea virus that led to mass culling last year.

Equities

Developed equity markets rise on growing optimism. Developed equity markets regained ground lost from the disappointing Q4 US GDP release the week prior. The week ended with an upside surprise in jobs numbers in the US. With an increasing number of central banks across the globe willing to switch to an easing mode, equity markets are becoming confident that growth will not be allowed to stall. Poor manufacturing PMI data in China led to a 3.3% slump in the MSCI China A-Share index, which was only temporarily reversed by the cut in reserve requirement ratio by the country’s central bank. The recent rebound in oil has lifted sentiment toward Energy infrastructure Master Limited Partnerships with the Solactive US Energy Infrastructure MLP Index TR gaining 4.5% over the week. Gold miners advanced 4.2% last week, with gold price stability aiding their ascent.

Currencies

USD lifts on jobs, but can it sustain upward momentum? After the boost for the USD on the back of the better-than-expected payrolls numbers and with retail sales the only notable economic release in the US this week, moves against the USD are likely to be determined from other currency news. Eurozone GDP is likely to keep the pressure on the Euro. There is no evidence to indicate the Eurozone economic situation is improving and downside risks to the Euro are expected to increase going into the release. Both the UK and the Eurozone release industrial production data, giving an idea of whether the growth momentum in the UK is following downward in the wake of the Eurozone. Meanwhile, Governor Carney will again have to explain the reasons behind inflation falling well below target. Certainly oil price weakness is not helping and if the Governor indicates that lower oil prices could be a persistent cause of deflationary pressure, then the GBP will suffer as a result of fading rate tightening expectations.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E  info@etfsecurities.com

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).

Investments may go up or down in value and you may lose some or all of the amount invested.  Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FSA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

Other than as set out above, investors may contact ETFS UK at +44 (0)20 7448 4330 or at retail@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.

Third Parties

Securities issued by each of the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A., Deutsche Bank AG any of their affiliates or anyone else or any of their affiliates. Each of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A. and Deutsche Bank AG disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this document or its contents otherwise arising in connection herewith.

”Dow Jones,” ”UBS”, DJ-UBS CISM,”, ”DJ-UBS CI-F3SM,” and any related indices or sub-indices are service marks of Dow Jones Trademark Holdings LLC (”Dow Jones”), CME Group Index Services LLC (”CME Indexes”), UBS AG (”UBS”) or UBS Securities LLC (”UBS Securities”), as the case may be, and have been licensed for use by the Issuer. The securities issued by CSL although based on components of the Dow Jones UBS Commodity Index 3 month ForwardSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME Indexes, UBS, UBS Securities or any of their respective subsidiaries or affiliates, and none of Dow Jones, CME Indexes, UBS, UBS Securities, or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such product.