High bar for further improvement in US manufacturing

The last seven months have seen an impressive improvement in US manufacturing. Almost all components of US manufacturing have been growing strongly and the US ISM has staged an impressive comeback from sub-50 in May last year to 57 in December. However, our growth diffusion index now implies the potential for short-term disappointment.


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The Fed and QE – An almost impossible balancing act

A nice series of articles from Bloomberg news alerts us to the fact that the Fed is anything but united when it comes to QE. There is consequently ongoing confusion, disagreement and general apprehension surrounding whether and how the Fed is supposed to end QE . Quite simply; the powers that be do not see eye to eye on this one and this is slightly worrying (if completely understandable).


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Forward Guidance: “Stronger and Longer”

Yesterday’s FOMC saw the first tapering of bond purchases by the Fed, by $10 billion per month. To soothe markets, the Fed also reinforced its forward guidance, making it “stronger and longer”, by a promise to leave the Federal Funds rate close to the zero bound “well past the time that the unemployment rate declines below 6.5%”.


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EM could benefit if the Fed disappoints the tapering consensus

One of the points we have emphasized to clients in the past two months is that many of our indicators suggest that long rates in the US may not rise as aggressively as the consensus expects. In other words, the Fed might stay more dovish than the market expects and tapering, should it occur, is already priced in.


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Strong euro starting to bite on European exporters

Nothing comes for free and with the eurozone periphery deflating its way to a currency account surplus the aggregate external balance of the euro area has increased to its highest level ever at more than 2% of GDP. Coupled with tighter liquidity (less euros sloshing around), improved sentiment and repatriation ahead of AQR the EUR has seen strong support this year.


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Strong equity returns usually on offer in December

December is indeed a good month to be long the stock market especially in Decembers that follow strong annual returns. We have seen a couple of such analyses in the past few weeks and thought that we would chime in here.


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Small-cap outperformance in the US likely at an end

Amid the choppy grind higher in US equities one key aspect for investors to look for is the prospect of the long-run relative bull market in small caps to end. If we look at the straight price ratio between the S&P 500 and the Russell 2000 it is now close to an all-time low (only piped by the trough in 1984).


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Morbidly Obese Australian Banks

Australian banks have grown in size hugely in recent years.  Astonishingly, Commonwealth Bank of Australia is the tenth largest bank in the world, despite Australia having a far smaller population than China, the US and the UK – the other…


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The case of the disappearing liquidity in corporate bond markets

One of the themes that we have been highlighting this year is the growing bubble in corporate bonds. It is pointless in the first instance to discuss whether super easy monetary policy that has fueled this bubble is appropriate or not. The main thing for investors to countenance is that the current monetary policy regime is having unintended consequences through the formation of a bubble in increasingly scarce liquid fixed income instruments.


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Inflation to hold UK recovery back

There are some notable reasons for near-term reasons for optimism in the UK. The housing market seems to be picking up, industrial production growth is looking up together with PMI data and the equity market has done well. All these are real and significant signs of a better economy in the UK, but the structural challenges remain.


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