Dealing with higher uncertainty and opportunities in 2020

Yvan Berthoux - 31 October 2019

Three main factors have been associated with the global growth slowdown in the past two years: global monetary tightening led by the 225bps hike by the Fed in addition to the USD 800bn of QT, the contraction in Chinese credit impulse and the rise in uncertainty around the world. Our uncertainty measure, which includes both economic and political news, first started to increase significantly in 2016 following the Brexit referendum and the US elections and diverged from the price volatility (VIX). Then, the persistence of elevated uncertainty globally has started to lower growth expectations; a recent study from Ahir et al. (2019) found that the rise in uncertainty could knock out up to 75bps to 1% of global growth in 2019.

As a consequence, the sharp rise in uncertainty pushed preference for ‘safe havens’ in the past 18 months. Figure 1 (left frame) shows that the annual change in the EPU (Economic Policy Uncertainty) index developed by Baker et al. (2016) co-move strong with the broad US Dollar index; higher uncertainty is associated with a stronger Dollar. In addition, higher uncertainty tends to be also associated with lower US 10Y yield (figure 1, right frame).

Figure 1

Data source: Eikon Reuters, Baker et al. (2016)

However, we think that the situation is about to change in 2020. First, we observed that central banks have switched from a tightening to an easing mood globally; figure 2 (left frame) shows that central banks’ net rate cuts have started to rise significantly since the beginning of the year and are currently pricing a pick up in the economic activity as net rate cuts tend to lead global manufacturing PMI by 9 months. Second, credit conditions have eased in China as the annual change in the Total Social Financing (TSF) has reversed from -14% in December 2018 to 12% in September this year. Figure 2 (right frame) shows that the YoY change in TSF also leads the change in global manufacturing PMI by 6 months.

Figure 2

Data source: Eikon Reuters, Bloomberg, EP Calculations

Therefore, if uncertainty starts to ease in the UK and in the US following smooth negotiations around
Brexit and an agreement between US and China in order to walk back tensions in the trade war
dispute, demand for ‘safe havens’ should decrease and the US Dollar should start to weaken. Our two
favourite candidates that can offset some of the USD weakness in 2020 are the Euro and Sterling. Check
out the entire interview from Yvan Berthoux on Real Vision in the link below.

Click here to see the slidepack related to the interview.


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