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February 9, 2023

FTSE rally, debt ceiling drama and deciphering job strength in the US

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Nicolas Tremel
Arnaud Lieugaut
Karl-Philip Nilsson
Patrick Malm
Usama Karatella
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FTSE 100 peaks and troughs

It took four years, but Britain’s key stock index has started setting records again.

This chart visualises the FTSE 100 through various “eras,” book-ended by market peaks and crises. In retrospect, the 1990s were golden; the benchmark tripled between the “Black Monday” crash of 1987 and the peak of the dot-com bubble. Returns since then are unimpressive. 

The positive run recently might seem at odds with the drip-feed of doom-and-gloom UK news. However, many big multinationals in the FTSE 100 make most of their income abroad (and can benefit in headline terms when profits are converted back into devalued pounds). The FTSE 100 is probably set for more gains if global growth rebounds.

The divergence between the FTSE 100 and smaller companies more exposed to the domestic UK economy is stark. FactSet Market Aggregate data shows that profit estimates for larger companies are being raised by analysts, while being downgraded for small-caps – even as smaller equities remain more expensive on a price/earnings basis.

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Capital is flowing into Chinese stocks

Last week, we examined how China’s great reopening was lifting metal prices and prompting the IMF to upgrade Chinese – and global – economic growth forecasts. 

The end of the zero-Covid policy is also encouraging international investors to take a punt on Chinese stocks.

This chart tracks net equity inflows into emerging market equities so far this year. Barely a month into 2023, flows to China are dwarfing the rest.

Recent Chinese economic data releases have been positive, with manufacturing and non-manufacturing indicators suggesting expansion over the next three to six months. 

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Conflicting traffic signals for the US economy

US job figures this month showed hiring surged, suggesting the economy is more resilient than many expected. But is there reason to be wary of excess optimism? 

This chart is a visualisation of selected US economic barometers, showing where they stand relative to history in percentile terms.

Bright green areas highlight indicators signaling a low recession risk: financial conditions, consumer confidence and, indeed, employment. 

In fact, all three indicators have improved significantly when compared with six months earlier (the smaller, purple dots). Indeed, the IMF is still forecasting growth of 1.4% for the US this year.

Other indicators are in the red zone, i.e. suggestive of recession – and falling. These include the OECD’s leading indicator, business confidence, and the spread between 10-year and 2-year bond yields (a classic predictor of recession when negative).

Industrial production – moving from neutral to borderline red over the past six months – might be the tiebreaker.

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The US job market refuses to roll over

Back to that surprise jobs number, which reflects how tight the US labour market has been despite a string of interest-rate increases.

This chart tracks the ratio of job openings to unemployed people over the past two decades. The latest figure is 1.9 jobs available for every unemployed person – barely below its recent peak. By comparison, even in the mid-2000s economic boom, there was less than one job available for every person searching for work.

This ratio is an important barometer. It could presage long-lasting wage inflation, and, therefore, higher interest rates for longer, even with a weak economy. On Feb. 7, Federal Reserve Chairman Jerome Powell said employment trends suggest the fight against inflation could last “quite a bit of time.” 

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Emerging market interest rates diverge

As the Fed hiked interest rates over the past year, emerging markets had to choose whether to follow suit. Their central bankers have taken divergent paths, based on specific economic conditions.

This chart tracks emerging markets by inflation rate (the dots, measured on the left-hand scale) and deviation from their 10-year real interest rate average (the bars). Green and orange dots reflect lower- and higher-than usual inflation, respectively. 

Five countries have higher-than-usual real rates: Brazil, Mexico, Saudi Arabia, Chile and India. (Mexico recently surprised markets with a greater-than-expected hike to control inflation, outpacing the Fed.)

Ten countries have a lower interest rate than their 10-year average: China, Colombia, Peru, Indonesia, South Africa, Vietnam, Malaysia, the Philippines, Thailand and Poland (whose central bank has left rates unchanged for five straight meetings, despite elevated inflation).

With the Fed widely expected to slow the pace of tightening, that means more flexibility for emerging market central bankers, and possibly stronger economic growth for their nations.

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Visualising national exposure to the energy crisis in Europe

As we wrote at the start of this year, the EU dodged a energy-shortage bullet. It sourced LNG supply and benefited from an unusually warm winter, meaning gas stocks stayed high even after the Russians shut Nord Stream and the pipeline was later sabotaged.

But it’s worth examining the region’s structural exposure to Russian gas before the war in Ukraine. Dependence differed widely. 

This visualisation – which annualises 2021 figures – shows how much given nations used gas as a percentage of total energy use (the x-axis) and the percentage of Russian supply in gas imports (y-axis). The bubble size reflects GDP.

As ever, Germany stood out, receiving a greater share of its gas from Russia than all but Finland, Latvia and Bulgaria. The Dutch were by far the most exposed to gas prices in general, but imported relatively little from the Russians. (They are now in the midst of a debate on when to close Europe’s largest gas field.)

The chart shows the challenge of weaning Europe off Russian supply following decades where gas was considered a cheap, abundant, dependable and relatively clean alternative to coal. 

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A Saudi foreign trade dashboard

Saudi Arabia’s trade breakdown is, perhaps, predictable. It exports petroleum, and imports a wide range of everything else, as our chart shows. 

While the desert kingdom’s leadership has moved to diversify the economy, change is coming slowly. In most categories, the nation is importing more (as measured by value) than it did a year earlier.

However, the value of petroleum products exported has surged 70 percent from a year earlier. As China reopens its economy, that trend could continue.

Over the longer term, a transition to greener economic models that would require less Saudi crude remains a risk – as our dashboard illustrates.

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A history of debt ceiling drama

The “debt ceiling” fight dominates US news headlines, as we discussed last week. But does it really affect the stock market? There is evidence that it does.

In theory, if Republicans and Democrats cannot agree on raising the debt limit, the US would be unable to borrow, and thus unable to make some of its payments owed to people and companies. 

This chart examines the performance of a basket of industries deemed sensitive to such a scenario: pharma, biotech and life sciences, healthcare equipment and services, commercial and professional services, and capital goods. 

We tracked the debt-ceiling dramas of 2015, 2013, 2021 and 2011 – the year the clash led S&P to impose its first-ever downgrade of the US credit rating. 

There is a distinct pattern: the “black swan” possibility of a US debt default is seemingly enough to cause our basket to underperform versus the S&P 500 in the ten weeks before the debt-limit deadline. In the weeks after the deadline, there has tended to be a relief rally.

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Our European inflation heatmap is finally turning green

We’re revisiting our inflation heatmap for Europe, which breaks down the momentum for price increases month-on-month by country. 

Dark red means the highest inflation; dark green the lowest. The most recent values are on the left side of the heatmap – showing a wave of disinflation is washing across Europe.

That’s in stark contrast to the sea of red when we ran this heatmap in June. Sharp monetary tightening has finally started to tame inflation after it hit record highs. 

The 0.4 percent month-on-month drop for the eurozone in January represents a third consecutive decline.

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