ITAÚ: Brexit Is the Canary, US Election the Coal Mine

Back in the day, the canary in the coal mine served as an early warning signal for when air quality became too poor to support the miners: when the canary hit the ground, it was time to exit. Nowadays, this saying is used to suggest when one event is a warning of another. In today’s financial market context, the uncertainty surrounding the UK’s Brexit debate is the canary for what the US and global markets more broadly are about to experience in the run-up to November’s US presidential election.

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ITAÚ: Waiting for Fiscal

In Samuel Beckett’s famous play “Waiting for Godot,” the actors wait endlessly and in vain for someone who never materializes. That feeling of endless waiting is on full display in economic and financial circles; hopefully the wait for fiscal policy to join the fight against global economic weakness will not be in vain. The perverse coupling of ever more fearful IMF global growth warnings and new year-to-date highs in global equities suggest an unstable state of affairs. Self-levitating financial markets on one side, and on the other, fretting policymakers worried that it’s all about to implode and wanting to be sure history shows they gave the warning.

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ITAÚ: Where to Next?

If one had departed the market scene at year-end and returned at March month end one could be forgiven for thinking that not much had transpired. A point-to-point look would suggest flat global equities, slight USD weakness and rallies in sovereign credit and broad commodities ( chk). Having not departed the scene, we know all to well that such a comparison fails to recognize the violent sell off across assets in the first 6 weeks of the year followed by an equally violent cross asset rally over the last six weeks. Where do we go from here is the question of the day; an answer will require a look at where we have been and some thoughts on various paths forward.

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ITAÚ: Why the World Needs a Weak Dollar (The Case for a 21st Century Plaza Accord)

There has been much discussion over the past few years about a currency war but one party has been missing in the discussion and that’s the US dollar (USD). Euro weakness, yen collapse, EM FX crash, a Yuan mini devaluation and its all good. The USD approaches new highs as money flows back into the US and its (relatively) high yielding US Treasury market and until quite recently its strong equity market.  The world ex US gets to live in a fantasyland of endless US consumption that they can sell into with cheap currency. One doesn’t have to be Donald Trump to see that is not sustainable.

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ITAÚ: What's the Bull Case?

It has certainly been a challenging start to the year – even for someone like myself who has been quite cautious (see “2016 Outlook: And the Chickens Come Home to Roost,” published on December 21, 2015). Bearish predictions abound, and market participants have been shaken by the violent sell-off across risk assets and around the globe.


Market psychology appears damaged, and the muscle memory from the Great Financial Crisis has kicked in like a bad cramp in the middle of the night. Negative feedback loops seems to be trending, and while the bears are loud and proud, the bulls seem to have been taken to slaughter. The good news is that we are set up for a nice bounce in asset prices; the bad news is that such a bounce is likely to be just that – a bounce.

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ITAÚ: 2016 Outlook: And the Chickens Come Home to Roost

The tough choices that were not taken in 2015 come home to roost in 2016. These include: the implications of the Fed’s decision to  tighten; China’s decision to fully take on SOE reform; and sovereign/corporate decision making in the commodity complex. Perhaps most important is SOE reform in China - the context for the latest decision to increase stimulus. The key takeaway for the global economy: all three of these decisions are negative for growth and inflation and moreover all three reinforce each other. The big surprise for 2016: a period of USD weakness which will lead to a sharp counter trend rally in all the assets punished in the past few months: commodities, EM equity, US high yield. What the world needs now is a weak dollar and it will get it - at least for a little while. Cross asset allocations discussed inside include the sighting of a rare twofer.

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