Global Economic Outlook and Risk Management Challenges

Transcription

1 Global Economic Outlook and Risk Management Challenges The research views expressed herein are those of the author and do not necessarily represent the views of CME Group or its affiliates. All examples in this presentation are hypothetical interpretations of situations and are used for explanation purposes only. This report and the information herein should not be considered investment advice or the results of actual market experience. Blu Putnam Chief Economist, CME Group March 2014

2 Risk Disclosures Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. The Globe Logo, CME, Chicago Mercantile Exchange, and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules. Current rules should be consulted in all cases concerning contract specifications. 2

3 Global Economic Outlook and Risk Management Challenges Rates Fed QE Exit and Future Rate Policy Equities Mature Economy Earnings Growth Pressures, Emerging Economy Political Risks FX G4 Revolves around Zero Rates and Lack of Inflation, Emerging Markets Learning to Live with Volatility and Contagion Energy Geo-Politics, Supply Concerns, and Trade-Offs Metals Demand shifts from Emerging Market Growth Outlook Agriculture Drought (or not)? Options Enhanced volatility management 3

4 US Rates Sector: Federal Reserve Challenges: QE Exit and Future Rate Policy 4

5 US$ Trillions Changing Asset Preferences at the Fed $4 Composition of Federal Reserve Assets $3 $2 $1 Other MBS UST 10+ Years $0 US Treasuries Less Than 10-Years Source: Federal Reserve Bank of St. Louis FRED Database 5

6 Assets as Percent of US Nomimal GDP Fears QE Has Made the Fed too Large? 30% Federal Reserve Assets as a Percent of US Nominal GDP 25% 20% 15% 10% 5% 0% Source: Bloomberg Professional (GDP CUR$ and CERBTTAL) 6

7 Trillions of Dollars The Fed Can Drain Reserves or Pay Interest $3 Excess Reserves of Depositary Institutions at the Federal Reserve $2 Excess Reserves $1 $0 Source: Federal Reserve Bank of St. Louis "FRED" DataBase (EXCESS = RESBALNS - RESREQNS) 7

8 Annual Percentage Rate No Inflation Pressure 18% US Core Inflation and 10-Year Treasury Yield 16% 14% 12% 10% US 10-Year Treasury Yield 8% 6% 4% 2% 0% US Core Inflation Source: St. Louis Federal Reserve FRED Database. 8

9 Rolling averae 62 business day trading volume compared to the same period one year ago. Interest Rate Futures and Options 80% Rates: Futures & Options Trading Growth 60% 40% 20% 0% -20% -40% -60% Source: CME Group InfoSource Database -- Futures & Options. 9

10 US Equities Sector: Earnings Growth Pressures Relative to Higher Hurdles 10

11 US S&P500 Index US S&P500: Impressive Recovery 2,000 1,500 Tech Revolution US S&P500 Index Housing Expansion Earnings Driven or Quantitative Easing 1, Source: Bloomberg Professional (SPX) 11

12 Analyzing QE Exit Implications for Equities Equity Index Growth ~ Expected Earnings Growth (1 + Treasury Yield + Risk Premium) 12

13 Billions of US Dollars (Log Scale) US Non-Financial Corporate Profits (GDP Data) $10,000 Non-Financial Company After Tax Profits (GDP Data) $1,000 $100 $10 $1 Source: St. Louis Federal Reserve FRED Database (NFCPATAX) 13

14 Rolling averae 62 business day trading volume compared to the same period one year ago. Equity Futures and Options Equities: Futures and Options Trading Growth 60% 40% 20% 0% -20% -40% -60% Source: CME Group InfoSource Database -- Futures & Options. 14

15 FX Sector: G4 FX is about Zero Rates while Emerging Markets FX copes with Volatility and Contagion 15

16 Trade-Weighted US Dollar (DXY from 1967) Phases of FX Markets Since WWII Bretton Woods - USD fixed to Gold Phases of FX Markets Strong USD, Volcker Fed Plaza-Louvre Accords to Weaken USD Greenspan Fed 1% Rates ZIRP - No Trends Weak USD, Inflationary 1970s Euro Convergence, Disinflation 0 Source: Blooomberg Professiola (DXY) 16

17 ZIRP = Zero Interest Rate Policies Came Together, Leaving Separately 17

18 Japanese Yen per US Dollar Nikkei 225 Japan FX and Equity Relationship 115 Japanese Yen and Nikkei 225 Nikkei 225 (right scale) Japanese yen per US dollar (left scale, rising line = depreciation Source: Bloomberg Professional (JPY, NKY) 18

19 Annual Yield (Percent) European Yields Reflect Debt Challenges Spain and Germany: 10-Year Government Bond Yields 12% 9% Pre- Euro Spanish Bond 6% Debt 3% Debacle German Bond 0% Source: Bloomberg Professional (GDBR10 and GSPG10YR) 19

20 US Dollars per Euro Euro Responds to the Policy/Political Winds Euro Trades Politics and Policy Commitments US Avoids Fiscal Cliff Italian elections remind markets that voters do not like austerity. Merkel Wins Reelection 1.15 ECB vows to do whatever it takes to preserve the single currency. Source: Bloomberg Professional (EUR) 20

21 Implications for FX: Major Industrial Countries FX persistent FX trends can be created by a combination of inflation, growth, and policy differentials. Inflation and real GDP performance tensions among major currencies are expected to rise over the next several years. Policy differences are already emerging, although not yet in short-term rate policies where it matters most for FX trends. Economic environment is slowly becoming much more conducive to the development of more sustained FX trends with the major currencies. 21

22 Implications for FX: Emerging Markets Emerging market central banks migrated toward a model of setting short-term interest rates with a modest premium to the prevailing inflation rate. This model was highly successful in helping to bring credibility to the country s management of monetary policy, to encourage capital inflows, and to allow for an accumulation of foreign reserves. More recently, though, this model has been called into question by risk reductions by global market participants, which have resulted in a certain amount of contagion (meaning simultaneous) in terms of FX and equity market declines in emerging markets. The range of responses has been wide, from currency intervention, to increasing rates, with the general concern that too much currency weakness will lead to unwanted inflation pressures. 22

23 Emerging Market FX Contagion Chinese Renminbi Malaysian Ringgit Mexican Peso Colombian Peso Thai Baht Russian Ruble Indian Rupee Chilean Peso Brazilian Real South African Rand Indonesian Rupiah Turkish Lira Argentine Peso Selected Emerging Market FX versus US Dollar: 30 April January % -35% -30% -25% -20% -15% -10% -5% 0% 5% Source: Bloomberg Professional. 23

24 Year-over-Year Inflation, Percent Annual Rate Brazil: Rates and Inflation 30% Brazil: Inflation versus Overnight Rates 25% 20% SELIC Overnight Money Market Rate 15% 10% 5% 0% Inflation Source: CPI (BZPIIPCA) and Overnight Rate (BZSELICA) from the Bloomberg Professional. 24

25 Mexico: Rates and Inflation 40% Mexico: Interest Rates & Inflation 35% 30% 25% 20% 15% 10% Interest Rate 5% 0% Inflation Source: Bloomberg Professional (MXIBTIIE and MXCPI) 25

26 Chinese RMB 6.5 Chinese RMB versus US Dollar Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Source: Bloomberg Professional (CNY). 26

27 Billions of US Dollars Chinese Holdings of US Treasuries $1,500 Chinese Holdings of US Treasury Securities $1,000 $500 Currency Challenges Are Reflected in More Volatile US Treasury Accumulation $

28 Rolling averae 62 business day trading volume compared to the same period one year ago. Currency Futures and Options Currencies: Futures & Options Trading Growth 120% 100% 80% 60% 40% 20% 0% -20% -40% Source: CME Group InfoSource Database -- Futures & Options. 28

29 Energy Sector: Geo-Politics Versus Increased Supply 29

30 Production Indexed to 100 at 1970 US Energy Revolution Started about Seven Years Ago, Reversing Decades of Decline 120 US Crude Oil and Natural Gas Production 100 Natural Gas Crude Oil Source: British Petroleum Statistical Review of World Energy 2013 Workbook. 30

31 Consumption Indexed to 100 at 1970 US Consumption Patterns for Oil and Natural Gas are Quite Different US Oil and Natural Gas Consumption Oil 80 Natural Gas Source: British Petroleum Statistical Review of World Energy 2013 Workbook. 31

32 1000s of Short Tons, Annual Rate Increased Domestic US of Natural Gas Has Worked to Increase Coal Exports 160, , , ,000 80,000 60,000 40,000 20,000 0 US Coal Export and Imports Exports Imports Source: Exports: U.S. Department of Commerce, Bureau of the Census, Monthly Report EM

33 BTUs of Energy per 1 US Dollar Energy Transformation is underway in the US 600,000 BTUs per US$1 by US Energy Source 500, ,000 Natural Gas 300, , ,000 WTI Oil Source: Bloomberg Professional for prices (USCRWTIC, NGUSHHUB), CME Economics Research for BTU conversion. 33

34 US Dollars per Million BTUs of Natural Gas Global Natural Gas Prices Still Far Apart $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Natural Gas Prices: US, Germany, Japan Japan Germany US Source: Bloomberg Profressional (NGUSHHUB, NGIMGEP2, LNGJLNJP) 34

35 Natural Gas Production By Regions US Natural Gas Production: 2005 vs 2012 Rest of the USA Colorado, Wyoming, Utah Pennsylvania, West Virginia, New York Texas, Louisanna, Oklahoma, Arkansas, New Mexico Gulf or Mexico Trillion CF. Source: Energy Information Administration. 35

36 Rolling averae 62 business day trading volume compared to the same period one year ago. Energy Futures and Options Energy: Futures and Options Trading Growth 40% 30% 20% 10% 0% -10% -20% Source: CME Group InfoSource Database -- Futures & Options. 36

37 Metals Sector: In the Crossfire of Multiple Long Run Transitions 37

38 US Dollars per Ounce Gold Has Stabilized After its Slide No Long-Term Trend Has Developed $2,000 Spot Gold Price $1,600 $1,200 $800 $400 $ Source: Bloomberg Professional (GOLDS) 38

39 Fine Troy Ounces of Gold (Millions) Central Bank Gold Holdings 1,200 1,150 1,100 Central Bank Holdings of Gold Central Banks Stopped Buying Gold in ,050 1, Central Banks Stopped Selling Gold in Source: IMF Data through the Bloomberg Professional ( ) 39

40 Year over year Percent Change Little Immediate Fear of US Dollar Inflation 3% US PCE Core Inflation (ex-food & energy) Average Annual Core Inflation for two decades ( ) = 1.74% 2% 1% 0% Source: St. Louis Federal Reserve FRED database (PCEPILFE). 40

41 India and China 41

42 Rolling averae 62 business day trading volume compared to the same period one year ago. Metals Futures and Options Metals: Futures and Options Trading Growth 100% 80% 60% 40% 20% 0% -20% -40% Source: CME Group InfoSource Database -- Futures & Options. 42

43 Agriculture Sector: Drought (or not)? 43

44 Unisys Ocean Temperature Anomalies 44

45 Degrees Centigrade 1.0 Northern Hemisphere June Ocean Temperature: Annual Anomalies and Smoothed Lagged Trend Source: NOAA National Climatic Data Center 45

46 Rolling averae 62 business day trading volume compared to the same period one year ago. Agriculture Futures and Options 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Ag: Futures and Options Trading Growth Source: CME Group InfoSource Database -- Futures & Options. 46

47 Options: Enhanced Volatility Management 47

48 Changing Volatility Regimes Black-Scholes Original Version Assumes that Volatility Regimes Never Change But, Volatility Regimes are Dynamic (and so are Correlations) Which economic events can shift volatility environments? From where will the Black Swans appear? 48

49 From where will Black Swans appear? Perhaps Not from the Financial Sector Elections? Scotland, EU Parliament, India, South Africa, US Congress Political Turbulence? Ukraine, Turkey, Eqypt, Thailand The Weather and the Earth? Volcanoes, Earthquakes, Droughts 49

50 Rolling average 62 busines day tradiing volume compared to the same period one year ago. Rates Options 80% 60% 40% 20% 0% -20% -40% -60% Rates Sector: Options Trading Growth Source: CME Group InfoSource Database -- Options Only. 50

51 Rolling average 62 busines day tradiing volume compared to the same period one year ago. Equities Options 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Equities Sector: Options Trading Growth Source: CME Group InfoSource Database -- Options Only. 51

52 Rolling average 62 busines day tradiing volume compared to the same period one year ago. Energy Options 40% 30% 20% 10% 0% -10% -20% -30% Energy Sector: Options Trading Growth Source: CME Group InfoSource Database -- Options Only. 52

53 Global Economic Outlook and Risk Management Challenges The research views expressed herein are those of the author and do not necessarily represent the views of CME Group or its affiliates. All examples in this presentation are hypothetical interpretations of situations and are used for explanation purposes only. This report and the information herein should not be considered investment advice or the results of actual market experience. Blu Putnam Chief Economist, CME Group March 2014