The Chinese bond market opens

Co-authored with Zouhoure Bousbih

The Chinese bond market is becoming more international and opening up to foreign investors. Coinciding with the 20th anniversary of the handover of Hong Kong to China, the Chinese authorities are displaying their aim of shaping world affairs, acting directly on the largest and most important financial market worldwide.
The Chinese bond market is the third largest worldwide after the US and Japan, with assets of $9,000 billion (source FT) if we combine sovereign bonds, agencies and corporates.
Foreign investors only account for 1.5% of this market, which is ridiculously small for an economy the size of China’s. The magnitude of the Chinese economy in the world and the proportionate weighting of its bond market are not yet comparable. But this is set to change, and this shift in balance will mark a lasting transformation compared to the current situation.   Continue reading

The global outlook in 8 graphs

In April, there are still a lot of questions related to the strength of the global economic activity for the coming months.
Companies’ surveys in April from ISM and Markit do not show an improvement in the manufacturing sector. Nevertheless the momentum is stronger in the non manufacturing sector. The first point is worrisome as a slow dynamics in the manufacturing sector will lead to a poor performance in world trade. We cannot expect an impulse from this sector and therefore no spillover can be anticipated to the non manufacturing sector. The main source of improvement in the economic momentum always comes from a change in the manufacturing sector profile. This is not the case yet. Continue reading

The importance of oil – My weekly Column

First graphA lower oil price will drive inflation rates down
With Iran back on the oil market, the price dropped below 30 dollars for a barrel. This could have an important impact on the inflation rate and therefore on monetary policy strategies in Europe and in the US.
The graph shows, for the Euro Area, the energy contribution to the inflation rate. It also shows the one year change of oil price (Brent) in euro. The two curves have consistent profiles.
With an oil price at 50 and the EURUSD exchange rate at 1.07 (red line), the oil price change is consistent with an energy contribution that could be close to 0 on average in 2016. It was a good hypothesis to put the price at 50. In that case, the headline inflation rate was able to converge to the core inflation rate. It was a comfortable situation for central bankers.
If on average, the oil price is 35 USD and 1.07 (green line), the contribution could be close to -0.6%. In that case, the inflation rate would be circa 0%. With 30 USD and 1.07 it would be probably negative.
These simple calculus show that the oil price trajectory will be important in 2016 (close to 30 or below?) and that there is no guarantee that inflation rates could converge to 2% in a finite time. Continue reading