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GLOBAL OUTLOOK
CENTRAL BANKS DIVERGE
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MACROECONOMICS OF POLICY DIVERGENCE
WHAT’S AHEAD
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Global Overview: Roots of Divergence
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Federal Reserve Preparing for Liftoff
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QE in the U.S. Versus the Euro-Zone
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CENTRAL BANKS:
The Federal Reserve and Bank of England are Preparing to Raise Rates
• Aggressive monetary and occasionally aggressive fiscal policies bearing fruit.
• U.S. is about on par with Reinhart & Rogoff averages for financial crisis recoveries.
Central Banks for Other First-Tier Large Economies are Easing
• The ECB and BOJ have launched their own large-scale QE programs.
• China faces a delicate and multi-faceted process of restructuring and readjustment,
but has plenty of room and plenty of tools for providing accommodation.
EMEs and Commodity-Based Economies are Easing Too
• Structural weaknesses revealed, including dependence on:
o Demand from China
o Capital flows from developed economies
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FEDERAL RESERVE LIFTOFF
Is the market ready?
• The IMF is voicing concerns, while the Fed is projecting optimism.
• Smooth sailing so far – sign of success, or delaying the inevitable?
Outlook for Rate Hikes
• Emphasis on clear communication and flexibility since the taper tantrum.
• Every step of the exit under the Yellen Fed has been carefully telegraphed well in
advance.
• Q1 data have been soft, but the
second half of 2015 is still in play.
o 5 months of data left between now
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FOMC DOT PLOT:
Median FOMC
member projections
Market-implied rate path
FOMC rate expectations continue to decline, but so do the markets.
Values listed at bottom
1
2
3
XLTP XDOTS<GO>
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KEEPING TRACK OF THE SLACK
ECST<GO> à Custom Views
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QUANTITATIVE EASING AND ITS EFFECTS
U.S. & EURO-ZONE
Program Size
• ECB: €60 ($65) billion per month: €1.2 ($1.3) trillion over 1.5 years
• Fed: $85 billion per month: $1.6 trillion over 2 years
Effects of QE
• First-order effects: financial conditions and foreign exchange
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EMERGING MARKET ECONOMIES (EMES)
EMEs during U.S. tightening cycles
• Economic performance generally good (industrial production up 7.5 to 10% in 12
months after liftoff), because U.S. growth usually strong.
• Financial performance uneven: strong post-2004, weak post-1995 was weak, due to
gap between market expectations and actual Fed monetary policy.
EMEs Are Better Prepared After the 2013 Taper Tantrum & 1997 Asian Financial Crisis
• Better fiscal, monetary, and foreign exchange positions
• More robust financial systems
• ECB easing will provide additional cushion
• Note that initially, the taper tantrum led to broad-brush moves, but markets became
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WHAT’S AHEAD:
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IMPACT OF THE FED ON EMERGING MARKETS
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THE USD MOVE TO 10-YEAR HIGHS
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THE IMPACT OF THE USD’S MOVE ON VOLATILITY
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TRENDS IN FDI FLOWS
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EMERGING MARKET CORPORATE DEBT
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FED RATE HIKE CYCLES:
THE IMPACT ON EMERGING MARKETS
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WHEN CENTRAL BANKS DIVERGE,
VOLATILITY
SURGES
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THE DOLLAR:
DECADE AND HIGHS
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LT FX VALUATION: PPP VS USD/CAD
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FOREIGN DIRECT INVESTMENT:
OUTWARD BOUND
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EM CORPORATE DEBT:
ROLLOVER RISK?
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EM DEBT ISSUANCE:
ORIGINAL SIN PART 2?
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SHORT TERM FLOWS: THE RISE OF ETFS
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