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2. The equity market will climb a wall of worry
- Publication Date:
- 09-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- The equity market has had a tough few months due to a combination of concerns, including fears that a US-led attack on Syria might lead to a wider Middle East conflict and threaten oil supplies. Of greater concern for equities are worries that a turn in the US monetary policy cycle could eventually kill off the US recovery. However with valuation not looking like a barrier to further gains, this four-and-a-half year equity bull market will in all likelihood climb the wall of worry and set another new high before the year is out.
- Topic:
- Economics, International Trade and Finance, and Markets
- Political Geography:
- United States, Middle East, and Arabia
3. Attack on Syria: the danger is in escalation
- Publication Date:
- 08-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- It is now looking all but certain that the United States will launch some form of attack on Syria. What is unclear is the severity and duration of the attack. Leaving aside the political ramifications, the immediate economic effects are likely to be limited (and are mostly already factored in). Opposing impacts on inflation and activity means that changes to central bank policy could be postponed. A prolonged campaign could have wider ramifications, not least if there is a risk of a geographical widening of the conflict.
- Topic:
- Foreign Policy, Economics, International Trade and Finance, Markets, and War
- Political Geography:
- United States, Middle East, Arabia, and Syria
4. Fighting the Fed
- Publication Date:
- 08-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Since the US Federal Reserve signalled that a turn in the interest rate cycle may be on the horizon, UK and to a lesser extent Eurozone interest rates have tracked US rates higher. But the UK and Eurozone economies are less well placed than the US to cope with higher interest rates. Simulations carried out on our Global Economic Model show that higher rates would be particularly harmful to the UK economy's embryonic recovery. In an attempt to stem the rise in interest rates, the Bank of England and the ECB have introduce forward guidance but with little, if any, success. Markets do not seem convinced by the Bank of England's commitment to forward guidance and are testing its resolve. It seems likely that over time both central banks may have to strengthen their forward guidance, in the case of the Bank of England by augmenting it with further quantitative easing.
- Topic:
- Economics, Markets, Monetary Policy, and Financial Crisis
- Political Geography:
- United States, United Kingdom, and Europe
5. Launching the third arrow of Abenomics
- Publication Date:
- 06-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Shinzo Abe was elected Prime Minister of Japan last December on a programme intended to end two decades of deflation and lost growth in Japan. His regime, dubbed 'Abenomics', consists of three arrows: a monetary stimulus, a fiscal stimulus and structural reform. The first two are well under way. The third has yet to be fired. But following his party's victory in July's Upper House election, Mr Abe has all the backing he will need – or ever get – to forcefully launch the third arrow of Abenomics. This scenario alert examines the potential upsides for the Japanese economy if Abenomics succeeds. Although the economy will not return to the 4%+ growth rates seen in the 1980s, it could secure growth in the 2-3% range. This would be a major improvement on its dismal performance of less than 1% average real growth a year since 1993.
- Topic:
- Economics, International Trade and Finance, Markets, Monetary Policy, and Reform
- Political Geography:
- Japan and Syria
6. If the Fed threshold changes
- Publication Date:
- 08-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- At the end of last week, there were rumours that the Fed may change its unemployment threshold from 6.5% to 6%, either at its 30-31 July meeting or, perhaps more likely, at its 17-18 September meeting. Such a move would confirm that the Fed funds rate is likely to remain in its current 0-0.25% range until 2015, which is in line with our baseline scenario. But while the change would be an acknowledgement that the US labour market has performed more strongly than expected, the change – if implemented – could still be a mistake as it may erode the value of forward guidance by moving the goalposts.
- Topic:
- Economics, Markets, Labor Issues, and Financial Crisis
- Political Geography:
- United States
7. Draghi's "Whatever it takes" speech was turning point in euro crisis
- Publication Date:
- 07-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Mario Draghi's commitment a year ago to do “whatever it takes” to save the euro looks to have been an important turning point in the Eurozone crisis. Systemic risk has fallen, the euro has strengthened, spreads on peripheral debt have narrowed and bond and equity markets have become less sensitive to bad Eurozone news flow. Indeed, to date markets seem to have taken Draghi at his word and seem unwilling to test his resolve. But although confidence in the outlook for the Eurozone among investors has risen over the past year, the real economy is yet to emerge from recession. We continue to expect this to happen in the second half of this year, a view supported by this week's improvement in the PMI data. However, unless action is taken to reduce borrowing costs paid by households and companies in the peripheral economies, the recovery will be anaemic. With that in mind, the ECB's announcement that it will ease its collateral rules only marginally is disappointing.
- Topic:
- Economics, Markets, Monetary Policy, and Financial Crisis
- Political Geography:
- Europe
8. US recovery on track
- Publication Date:
- 07-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Recent US data have been uneven. An improving manufacturing ISM survey was offset by non-manufacturing data being worse than expected. Last week a strong consumer credit number was balanced by weaker small business confidence. The US economy almost certainly went through a soft patch in Q2. However, on balance the recovery–unexciting as it has been–remains on track, with some possible further mileage to be had from equities. This is consistent with the recent dovish statement by Fed Chairman Bernanke, suggesting that the tapering of quantitative easing is still some way off.
- Topic:
- Economics, International Trade and Finance, Markets, Global Recession, Labor Issues, and Financial Crisis
- Political Geography:
- United States
9. Our bond market, your problem?
- Publication Date:
- 06-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Comments from the US Federal Reserve aimed at signalling that monetary policy cannot stay at historically low levels indefinitely have caused bond yields and credit spreads to rise both in the US and abroad. Higher borrowing rates are particularly inappropriate for the Eurozone which, unlike the US, is still struggling to emerge from recession. This tightening of financial conditions will place pressure on the ECB to act. Although surveys show that investors' bearishness on US government bonds is at an extreme level, suggesting that in the coming weeks bond yields are more likely to fall than rise, the longer-term trend in bond yields is now upwards. But we do not expect the rise in yields over the next two or three years to kill off the US recovery. Consequently, we believe that the US equity market is still on an upward uptrend, albeit one that will experience regular spikes in volatility as the Fed gradually moves away from its ultra-loose policy.
- Topic:
- Economics, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
- Political Geography:
- United States and Europe
10. Faster taper – limited impact
- Publication Date:
- 06-2013
- Content Type:
- Policy Brief
- Institution:
- Oxford Economics
- Abstract:
- Markets took fright after Ben Bernanke's press conference on 19 June at the prospect of an early end to QE. Bond purchases might be tapered off sooner, as the Fed now expects unemployment to fall to its target of 6.5% next year rather than in 2015. It is not yet clear whether any of the bonds bought as part of QE will eventually be sold off. While it is obvious that an end to the Fed's purchases will have an impact on output growth and asset prices, our Global Economic Model shows that the effects will be limited.
- Topic:
- Markets, Global Recession, Labor Issues, and Financial Crisis
- Political Geography:
- United States
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