Rob Rennie, Westpac’s head of market strategy, has just spent the last two weeks in the US and Canada talking to clients about a huge range of topics.
He’s given Business Insider the green light to share the highlights. Here are the key takeaways:
When will the Fed raise rates?
“There seemed to be no clear consensus.”
But, “it did feel that the majority view was that low inflation would be the key factor driving the Fed to start the tightening cycle later rather than sooner”.
Some investors even thought US dollar strength and commodity weakness might see deflation for a few months.
“But the consensus view here was a period of softer data did not really matter – absolute growth divergence between the US economy and G10 would continue strongly through next year,” Rennie wrote. “Year-end weakness was simply an opportunity to buy into 2015.”
On bank lending in the US
This is really interesting with many clients arguing that bank leverage remained low “because banks are not getting return on assets… Once the Fed starts to raise rates and the return on debt increases, banks will be incentivised to put cash to work and lend. This might see credit multipliers rise and leverage ratios increase. Thus, this argument goes, the Fed might have to hike rates more aggressively/withdraw stimulus earlier than markets were pricing. This could be an important driver of sentiment through 2015.”
Oil and OPEC
“With OPEC showing no clear signs of cutting quotas, crude prices were likely to stay weak.”
Investors thought that “even if OPEC was ultimately successful in stabilising prices, stable prices would be the most we could really see until we saw clearer signs of global growth strengthening through late 2015 and into 2016”.
Japan and liquidity
Rennie said that investors agreed with his view that “risk sentiment in the Japanese household had clearly stepped up a gear and this was a positive for risk sentiment/ global liquidity”.
“GPIF portfolio changes and the recent iteration of BoJ policy would continue to drive a weaker yen and targets of 120, 130 and even 140 vs USD were discussed,” Rennie said but added that “many believed this was a story for next year and this was dependent on the path of reform being clear”.
Importantly, the view from the States was that the “US administration was unlikely to support further aggressive yen weakening as a means to an end without fresh impetus on reform. So the outcome of the Japanese election and the reform timetable post the election would be important for the ¥.”
Draghi and the EUR
“On the EUR, it was seen as just a matter of time before Draghi reached and bought government bonds. A structural weakening in the EUR lies ahead and targets as low as 1.00 were possible according to some of the more bearish clients.”
China and iron ore
“On China, most tended to agree that recent macro and monetary policy developments were designed to shore up 7.25 to 7.5 growth rates rather than lift growth sharply into next year.”
Rennie argued the supply shock would ease but noted that “it was the demand shock that was the key driver here. For iron ore to move back into the $80/100/tonne equilibrium region we see, Chinese demand would have to recover. This makes real estate and credit data key in the near term.”
Aussie dollar outlook
Investors had mixed views but “there was a consensus on the RBA… it was that rates would not be touched at all next year. And clearly, most felt that with iron ore soft and oil slumping, small short AUD was the default.”
But investors think Japanese demand will keep the Aussie not far below 85 cents against the US dollar and the view was then that “that AUD offered excellent value in the 0.80 to 0.85 region and that it would outperform through next year as the goods and services balance started to move into secular surplus and the current account headed back to levels last seen in the late 1990s”.
There was a small cabal who “argued the next rate move would be down as the housing market stimulus was set to wane and with mining investment set to roll over hard and the AUD to stay frustratingly above most measures of fundamental value, the RBA would have little choice but to cut rates. However, this was very much the minority view.”