Which US states have greater GDP than other nations?

Unlike many countries where public infrastructure is planned, financed, construct and maintained by national governments, the majority of US infrastructure is the responsibility of states, cities, counties and public agencies. Each can issue their own bonds, which gives investors opportunities to invest in quasi-sovereign debt from jurisdictions whose economic output rivals that of many countries. This map shows how the individual states’ GDP equals the national GDP of various countries. With sovereign debt yields around the world remaining stubbornly low, higher yielding US municipal bonds can present an attractive, higher yielding, quasi-sovereign option for global investors.

Standish, a BNY Mellon company

Unlike many countries where public infrastructure is planned, financed, construct and maintained by national governments, the majority of US infrastructure is the responsibility of states, cities, counties and public agencies. Each can issue their own bonds, which gives investors opportunities to invest in quasi-sovereign debt from jurisdictions whose economic output rivals that of many countries. This map shows how the … read more

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Tracking Frexit fears: Overblown or underestimated?

Investors are on alert for French election risk. It’s a medley of scandal, gaffes, and general uncertainty which is spooking markets as polls show Marine Le Pen and Emmanuel Macron neck and neck in the first round of what is one of the most unusual French elections in modern history. French spreads are largely tracking Le Pen’s chances of securing the presidency.

The scenario may be unlikely, but it is not impossible for Marine Le Pen to win this election. We currently assign an 85% probability of Le Pen losing the presidency with our base case being that either Macron or Francois Fillon will take the presidency. Nevertheless, we consider the 15% alternative: Le Pen wins the French presidential election.

In the wake of her shock win, market volatility would surge. She may first call a European Summit and make nationalistic demands to the European Union (EU) but such demands would not likely be well received. While she has threatened a referendum on EU membership, support from the parliament would not likely legitimise any such vote. Even so, the threat of EU/eurozone breakup would be be quite real as the eurozone’s second largest economy and founding nation could stumble toward Frexit.

Therefore, a Le Pen victory would likely result in a spike in sovereign credit spreads across much of Europe, as negative sentiment spills over into vulnerable periphery markets.  On the other hand, if Macron or Fillon were to win, then we would expect French sovereign spreads to fall roughly 30 bps, as the expectation of economic reform would raise potential output growth.  Any spike in spreads is likely to present alpha opportunity in either France or related markets once the election outcome is known.

Rebecca Braeu – Standish, a BNY Mellon company

Investors are on alert for French election risk. It’s a medley of scandal, gaffes, and general uncertainty which is spooking markets as polls show Marine Le Pen and Emmanuel Macron neck and neck in the first round of what is one of the most unusual French elections in modern history. French spreads are largely tracking Le Pen’s chances of securing … read more

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2016’s best and worst performers

The past year has presented something of an up-and-down ride for investors.

Despite a China-led sell-off at the start of 2016, equities over the course of the year benefited from a combination of central bank support and reduced volatility. A November/December rally was driven largely by events in the US and the perceived pro-corporate policies of President Trump. A lot of this optimism has now been priced in, especially for financials and the energy sector. Nevertheless, we retain a generally positive outlook for global equities on the assumption that central banks can continue to maintain the current stable policy environment. In the US this means slow but steady increases in the interest rate rather than sudden moves in either direction.

In commodities, there were two significant factors at play in 2016. In China, the ability of the Chinese Communist Party to engineer stability even in the face of decelerating growth was a crucial tailwind for demand. On the supply side, OPEC’s tentative agreement to curb production helped oil return to the US$50-a-barrel range, a level of support we expect to extend into 2017 assuming output can be curtailed.

In debt markets, a post-US election government bond sell-off was interpreted by some as part of a “great rotation” into higher risk assets. Nonetheless, we would note the sell-off was largely restricted to sovereign debt while niche areas such as inflation-linked bonds actually performed well. Looking forward, we would highlight long-term structural factors such as pension deficits and global ageing that argue for sustained demand for fixed income products.

Meanwhile, political risk remains key – with uncertainty over everything from US trade policy to rising Chinese capital outflows, European elections to the need for continued reform in emerging market economies.

Raman Srivastava – Standish, a BNY Mellon company

The past year has presented something of an up-and-down ride for investors. Despite a China-led sell-off at the start of 2016, equities over the course of the year benefited from a combination of central bank support and reduced volatility. A November/December rally was driven largely by events in the US and the perceived pro-corporate policies of President Trump. A lot … read more

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Power to the people: What Italy’s referendum means for markets

Italy will hold a much-anticipated referendum on constitutional change on the 4 December. While the passing of the referendum would bring greater electoral stability in the future, there is an increasing risk that the referendum will result in a ‘No’ vote as the populace use it to declare their dissatisfaction with Prime Minister Renzi and his Partito Democratico (Democratic Party) led government.

Our base case scenario is for a narrow ‘No’ vote and rejection of the electoral and constitutional changes, and while Renzi has said he will resign, we will likely see the President seek to install a caretaker prime minister to lead a technocrat government until scheduled elections in May 2018. We believe this is currently priced into Italian spreads, although we would likely see a widening in spreads if a significant defeat for Renzi leads to increased speculation regarding early elections (particularly given the significant gains recently of the populist Five Star Movement).

Rowena Geraghty – Standish, a BNY Mellon company

Italy will hold a much-anticipated referendum on constitutional change on the 4 December. While the passing of the referendum would bring greater electoral stability in the future, there is an increasing risk that the referendum will result in a ‘No’ vote as the populace use it to declare their dissatisfaction with Prime Minister Renzi and his Partito Democratico (Democratic Party) … read more

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US election: Winner takes all?

Elections matter, especially when the choice offers distinct and unpredictable governing outcomes. Here, we consider four election outcomes following 8 November and how they might affect the US political, regulatory and economic landscape.

(1) President Clinton and a Democratic House and Senate

A uniformly Democratic Congress will probably reveal how quickly the gears of the government can mesh. The last time this happened, President Obama signed the American Recovery and Reinvestment Act the month after his inauguration in February 2009. Capitol Hill most likely tugs the White House left of the president’s more centrist leanings, a process that already began during the nomination contest.

(2) President Clinton and a split Capitol Hill

Given the advantage of incumbency, the most likely outcome is a divided government, where President Clinton has to work with a Republican House. An advantage is that she will have leverage that comes from a Senate run by a Democratic majority. Control of the Senate provides the president with some freedom in nominating appointees to her liking, but the voting margin there seems likely to be sufficiently slim that procedural manoeuvring will make some of those nomination battles dramatic. Expect progress on corporate tax reform, some spending on infrastructure, and a preservation of the regulatory infrastructure erected over the past eight years.

(3) President Clinton and a solidly Republican Capitol Hill

With Capitol Hill run by the opposition party, President Clinton will have to curb her party’s ambitions on appointees and compromise on legislation. Look to key appointees, whenever they are finally confirmed, to be well right of the Clinton campaign’s talking points. The major legislative initiatives of the White House may well be the exercise of veto power. Tighter gridlock than we have known before makes it likely that there will be no meaningful progress on tax reform nor an increase in infrastructure spending.

(4) President Trump and a Republican House and Senate

Under an all-Republican outcome, the same party controls the White House, the House of Representatives, and the Senate, but the president, speaker, and majority leader are not really on the same page about policy. The need to show progress will drive them to some compromises, picking the low-hanging fruit common to all involved.

Fiscal stimulus kicks in quickly, with more spending on defence and infrastructure and a restructuring of corporate taxes. After that, expect the slow crawl of tax reform, designed by the speaker to be acceptable to the president. Meanwhile, the White House will be using its executive authority to scale back the nation’s position in international trade.

By Vincent Reinhart – Standish, a BNY Mellon company

Elections matter, especially when the choice offers distinct and unpredictable governing outcomes. Here, we consider four election outcomes following 8 November and how they might affect the US political, regulatory and economic landscape. (1) President Clinton and a Democratic House and Senate A uniformly Democratic Congress will probably reveal how quickly the gears of the government can mesh. The last … read more

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Revving up for Fed action

Domestic economic momentum has been re-established, the UK shock has been distributed through global financial markets with little apparent consequence for the US, resource margins have mostly been eliminated, and inflation is on a modest incline. A 25 basis point higher nominal funds rate, even a 50 basis point higher one, by year end keeps the real federal funds rate negative and monetary policy accommodative even as it reassures investors that the Fed has not mislaid the keys to the monetary-policy-tightening machine.

We think that Chairwoman Yellen accedes to tightening this year because she recognizes that a one-quarter-point hike reminds the world that the Fed is on duty and reassures her colleagues that they are all on the same page. As for timing, Fed planners probably gravitate to December. For the dovish Fed leadership, an action postponed might never happen. Waiting until December gets a free look at the election results, which are surely material to understanding the other sources of policy impetus in 2017 and beyond. Any committee hurt about delaying in September can be salved by reporting in the Summary of Economic Projections that the preponderance of the FOMC prefers a one-quarter point higher policy rate at the end of the year, making the dots matter. After all, if they are willing to publish that, they are virtually contracting on a December move.

Vincent Reinhart – Standish, a BNY Mellon company

Domestic economic momentum has been re-established, the UK shock has been distributed through global financial markets with little apparent consequence for the US, resource margins have mostly been eliminated, and inflation is on a modest incline. A 25 basis point higher nominal funds rate, even a 50 basis point higher one, by year end keeps the real federal funds rate … read more

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Venezuela’s sink-or-swim moment

Determining just when Venezuela might run out of money is complicated by several factors, one of which is the poor quality of official economic data, which makes it difficult to gauge precisely how dire the country’s fortunes are. While many energy-producing emerging markets are struggling due to low oil prices, Venezuela’s unique political culture and fiscal policies leave the country with fewer options than other countries have in order to address a balance of payments crisis of this nature.

Venezuela’s relationship with the IMF and other international institutions has been so strained by the anti-free market policies of former president Hugo Chavez and his successor that getting assistance from multinational institutions is not an option. Any sort of international financial assistance would likely come with conditions that would require a massive revamping of an economy that has diverged sharply from international norms over the past 14 years. While a similar package of reforms imposed by international donors kept Greece from defaulting last year, Venezuela is not politically capable of doing what Greece did in accepting an international bailout, which was the introduction of painful cuts to government programs.

Venezuela is an idiosyncratic case. It is not the same as any other oil producer. Most other oil producers are suffering just as much, but they have flexible exchange rates and better managed economies. The fact that the foreign exchange in most cases is floating has helped those countries to alleviate the pressures of a low oil price. While the oil price has fallen, the government in Venezuela has kept spending just the same, so the country has a huge fiscal debt. This is a self-imposed crisis, and I cannot think of many countries in the world that have managed to destroy their economy in such a short period of time.

Javier Murcio – Standish, a BNY Mellon company

Determining just when Venezuela might run out of money is complicated by several factors, one of which is the poor quality of official economic data, which makes it difficult to gauge precisely how dire the country’s fortunes are. While many energy-producing emerging markets are struggling due to low oil prices, Venezuela’s unique political culture and fiscal policies leave the country … read more

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A countdown to the referendum

On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union.  Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits.  Our baseline is predicated on the assumption that the “remain” campaign wins, but we assign only a six-in-ten probability to that outcome.

Our inclination is to trim our 2016 forecast of real GDP growth from 2% to 1% in the event of exit.  This mostly owes to the drag of increased uncertainty on consumption and investment.  The UK avoids recession, we think, because domestic demand, especially from households, provides a floor for growth.  The British pound is the asset most exposed to a vote to leave the EU, but the response is not clear.  The Bank of England will no doubt closely monitor the situation, but there is no reason to expect a knee-jerk reaction.  On balance, the Bank is likely to leave the door open to an easier stance of monetary policy through dovish communication.

Aside from some general market strains and potentially large changes in bilateral exchange rates, the direct global economic consequences of a Brexit are likely to be limited.  The UK’s share in world GDP stood under 4% last year, and its bilateral trading relationships are mostly regionally diversified and limited in scope.  Finance bulks especially large in its economy, and adjustments within banking organizations to the changed trading regime would be still another drag on an already troubled industry.

Vincent Reinhart – Standish, a BNY Mellon company

On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union.  Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits.  Our baseline is predicated on the assumption that the “remain” … read more

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Policymakers’ March missives may burn bondholders

With market expectations for future US interest rate hikes increasingly diverging from the median forecasts of Federal Reserve (Fed) members, something is going to have to give.  Recent concerns over global growth and inflation outlooks and the negative spillover effects to financial markets have caused expectations to be lowered to just about one 25bp hike over the remainder of 2016.  Bond markets are likely to be disappointed by policy makers who we expect to maintain a more optimistic view of the economy and thus continue to communicate their expectations for several rate hikes later this year.

The Fed is unlikely to raise rates following its March meeting, choosing a cautious approach to rate hikes in response to the disappointing growth in Q4 2015 as well as heightened growth risks globally. While it is likely the Fed lowers their forecasts for rate hikes over the course of the year, we believe they will do so modestly. Recent indicators for growth show a rebound in Q1 2016 and, importantly, measures of core inflation as well as the unemployment rate are already at or near the Fed’s year-end forecasts. As the Fed reaffirms their forecasts for multiple rate hikes in 2016, we see scope for rates to rise across the curve which will disappoint bondholders expecting continued low rates.

Robert Bayston –  Standish, a BNY Mellon company

With market expectations for future US interest rate hikes increasingly diverging from the median forecasts of Federal Reserve (Fed) members, something is going to have to give.  Recent concerns over global growth and inflation outlooks and the negative spillover effects to financial markets have caused expectations to be lowered to just about one 25bp hike over the remainder of 2016.  … read more

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Crossing the threshold

The Asian growth story is an enduring multi-decade shift that belies the recent short-term noise around Chinese stockmarket volatility and falling demand for commodities. Even taking into account a slowdown in growth, the populations of Asian countries are still increasing their levels of wealth faster than their Western peers. In China, meanwhile, the transition to a consumption-based economy continues apace – with news that for the first time ever the size of its middle class population exceeds that of the US.

This kind of development supports our view that investors would be well placed to focus on the long term trends and consider adding exposure to Asian economies. This is especially the case at current valuations where the debt of even profitable, blue chip companies enjoying strong government support is trading at attractive yields.

Sarah Percy-Dove – Standish, a BNY Mellon company

The Asian growth story is an enduring multi-decade shift that belies the recent short-term noise around Chinese stockmarket volatility and falling demand for commodities. Even taking into account a slowdown in growth, the populations of Asian countries are still increasing their levels of wealth faster than their Western peers. In China, meanwhile, the transition to a consumption-based economy continues apace … read more

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