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Perspectives Pictet

Euro/USD: things look pretty stable

Competing forces mean the two currencies could remain in a holding pattern for a while.The euro has remained relatively stable relative to the US dollar in the wake of the European Central Bank (ECB) and US Federal Reserve (Fed) September policy meetings. Growth and interest rate differentials, two key drivers for the EUR/USD rate, suggest things could stay this way.The growth differential (based on leading indicators) has barely budged since March after a sharp decline that began in late...

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Goodbye quantitative tightening

Following this week’s sharp movement in the USD overnight repurchase agreement (repo) rate, people are wondering what the US Federal Reserve (Fed) can do to counter a similar event in the future.One measure of the USD overnight repo rate (there exist several) spiked to 6% on Tuesday 17 September, probably due a scarcity of bank reserves at the Fed at a time when US corporates needed cash to pay their taxes as did investors/banks (probably to absorb strong US Treasury issuance. Hence, cash...

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MMT, la nouvelle théorie en vogue à Washington

L’influence du ‘Modern Monetary Theory’ est susceptible d’augmenter dans les milieux économiques et politiques américains.La nouvelle théorie monétaire (Modern Monetary Theory/MMT), théorie macroéconomique défendue par des économistes hétérodoxes, commence à faire son chemin aux Etats-Unis. Cette théorie adopte une approche expérimentale de l’économie, basée sur la conviction fondamentale que la monnaie est créée par le gouvernement à travers les dépenses budgétaires, et non par les banques...

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Powell plays the ‘insurance’ card again

In spite of internal divisions, the Fed may go for a third rate cut in October and step in to alleviate pressure in repo market.The Federal Reserve (Fed) cut rates by 0.25% on Wednesday, as widely anticipated. The new fed funds target range is 1.75%-2.00%. The interest rate on banks’ excess reserves was cut by 0.30% to 1.80%. Fed Chairman Jerome Powell again justified this second rate cut since July as “insurance” against risks to the US outlook – mostly the weak global growth picture and...

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What more QE means for Bund yields

In spite of an initial rise in 10-year Bund yields after the ECB’s latest stimulus, our central scenario is for a renewed decline by year’s end.The 10-year Bund yield moved up from its recent lows of -0.71% to -0.45% on September 16, driven mostly by an element of disappointment regarding the European Central Bank’s (ECB) latest stimulus measures and some renewed hopes for a US-China trade truce. In particular, we suspect the rebound in yields was triggered by the ECB’s failure to increase...

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Modern Monetary Theory

This new theory is now in vogue in Washington DC, and its influence could grow.Modern Monetary Theory (MMT), a macroeconomic theory advocated by heterodox economists, is gaining traction in the US. The theory adopts an experimental approach to economics, underscored by the fundamental belief that money is created by the government via budget spending – and not via money creation by central and private banks, as per traditional theory.Proponents of MMT in the US interpret current low...

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September Fed meeting preview

A rate cut is on the cards, but communication will be more difficultThe Federal Reserve (Fed) is very likely to cut rates again on 18 September, a follow-up to its 25-basis point (bp) rate cut at its last meeting in July. The explanation is likely to again be the need to take “insurance” against growing downside risks to the outlook, including from President Trump’s erratic trade policy as well as weaker foreign growth.Fed Chairman Powell is unlikely to pre-commit to a third rate cut at this...

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Oil market: supply disruption is here

The risk that similar attacks to the ones seen this weekend in Saudi Arabia could disrupt oil supplies, but it does not fundamentally change our medium-term scenario. We still forecast USD50 per barrel for Brent in 2020.After this weekend’s drone attack on the world’s most important crude oil facility, the Saudi Arabian authorities have announced that 5.7 million barrels per day (mbd), half of its daily oil production and 5% of the world total, will be taken off-line. Iran-aligned Houthi...

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Weekly View – The ECB’s last bazooka

The CIO's view of the week ahead.Mario Draghi has now done (nearly) all that it takes to support the euro area economy. With only weeks left in his term as ECB president, Draghi deployed almost all that remains in the central bank’s toolkit. Following last Thursday’s meeting, he confirmed not only the expected interest rate cut, but also the relaunch of the quantitative easing (QE) bond-buying programme. He fell short of lifting issuer limits, which markets took negatively. Christine...

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US-China – Towards a trade truce?

Our central scenario has long been that we would see some lowering of US-China trade tensions ahead of the US presidential elections. But deep-seated issues may prevent a major breakthrough.President Trump is considering offering a ‘limited’ or ‘interim’ trade agreement to China as his advisors prepare the ground for face-to-face talks scheduled for October. He has notably announced that the additional 5% tariffs on Chinese goods scheduled for early October were being pushed back to the...

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