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Bloomberg Market Concepts
Economic Indicators Measure size of economy: GDP Investors use Eco indicators
- Primacy of GDP - Monitoring GDP - Forecasting GDP Primacy of GDP: - Main measure of eco activity - Backdrop for financial market - WW index + GP Graphic function ➔ Bloomberg terminal - 8% growth per year compounded (world GDP) - US: largest economy - Main unit: Nation state o WW2: Better economic data to support world economic efforts - Including black market increases GDP - US: Tech spending as an essential part of the economy - GDP can change - No matter what investors’ interests: There are a lot of data, it reflects what’s important for that economy. - Personal cons: 2/3 US GDP Analyze consumption and macroeconomic indicators - Analyzing a security with a lot of exposure to a country: Helpful to use a country’s data - ECOW: Eco data watch function Most important data per country, use the dropdown ➔ matters a lot for investors - Essential indicators: o Eco growth: MARKET VALUE of all final goods and services produceD in a country, most, GDP = C+I+G+X-M ➔ ECST Function Bloomberg WW ECONOMIC STATISTICS ▪ C = Pers consumption (US GDP 2016: 69,2%) ▪ I = private investments (17,1%) ▪ G = Government consumption (17,3%) ▪ X = Exports ▪ M = Imports ▪ X-M = Net Exports (-3,6%)
Max the date range chart content nonfarm payrolls NFP % Change depending on the country o Inflation ▪ Used as a mean to unveil the real growth of the economy ▪ It’s the general increase in prices of good and services which results in the decrease of the buying power of money. A unit of money tomorrow buys less than today. ➔ Rise in cost of living ▪ 2 primary sources of GDP Data US:
- GDP REPORT: GDP price deflator, based on the whole economy, used by policy makers
- CPI: Representative basket of P&S like food, housing, automobile. It must be representative of spending habits in the country. Food 15% US, housing 40% US. Bloomberg: CPI YOY Index ou ECST et select CPI
- Representative baskets change with time ex: DVD Replaced by streaming services. o Unemployment: ▪ Consumer spending is driven by salary. ▪ Unemployment statistics important ▪ Increase Unempl decrease GDP ▪ Important even for politics ▪ ➔ STRONG RELATIONSHIP BETWEEN GDP AND UNEMPLOYMENT o Business confidence ▪ Indiv BL make bigger decisions than individuals: BP large investment and hire more when they feel confident of additional demand for their G&S ▪ ISM: Most widely followed index: Purchasing manager index (PMI)
- +50 ➔ Optimism, below, pessimism
- Good leading indicator of GDP Growth TCH Index (one of the most important indices, measures the number of employees in the US w/o seasonal agricultural workers) US REAL GDP GROWTH Bloomberg GDP CYOY GP Line chart
- 1 st^ step: World economic calendar WECO ➔ click on US it gives a chronological order of indicator to be released since jan 1 st o PMI business confidence indicator: Published on the 1 st^ business day of the following month. o Actual: Published economic indicator value, column to the left: is the survey = estimate of analysts of what the value of the eco indicator will be upon release. If >= estimate: good, sinon bad Comparer la gauche et celle du milieu Milieu actual et gauche c est survey - Change in nonfarm payroll monthly, published on the 1 st^ Friday after the month. Same reflexion. - Housing starts: Middle of the month - Inflation CPI: In line with estimates (depend), middle of the following month - GDP is released every quarter, a month after the end of the quarter. o Should come as no surprise given other indicators - Actual GDP growth lost its power to surprise. o PMI was the one statistic to use for conducting policy decisions. Forecasting GDP: - Indicators can move markets - Relevance colum: Volume of alerts that each user have set up for an indicator, greater the investor interest, greater the relevance o ISM and change in NF Payroll are full - Survey column contains the analysts forecasts consensus for that specific indicator - Right click on the amount survey: View how it was calculated o Median estimate: Average of estimates o Yellow diamond: Where the result was upon release (analysts were optimistic of the economy in January) Above expectations - 2 roles of economists when creating estimates: o Maintain estimates of what they think key economic indicator values will be ST. o Form opinions on the LT future for the most important economic statistics.
ECFC Economic forecasts function ➔ white: previsions and consensus estimate for real gdp, growth, inflation, unemployment LT Forecasters must take into account demographics, government policies, technology… Changes in the economy are the bedrock for financial markets ➔ LT estimates are critically important as they are used as inputs to financial modules.
- Spotting turning points o Politicians can spin anecdotes to their own end o Plural of anecdotes is “data” o Material change in economic estimates signifies that an important turning point has been reached. o Eco analysts offer a useful running verdict on how an economy is being managed o Eco forecast function Bloomberg: GDP Growth, chart estimate, see how it evolves. White line is the median forecast of the speed of growth, green high, red low Dip white line trend= Pessimistic economists Increase white line trend = Optimistic analysts around thee time there were good economic indicators Thus ➔ Good performance of the economy, positive surprise - Brexit referendum: Analysts thought they had a good estimate o Economists estimated that there would be a 2.2% growth, and slashed it at the referendum moment by - 0,5%. o In spite of the vote, consumer spending was strong and analysts were forced to lift their estimates - Using a mosaic to spot turning points o ECSU = Economic surprise indicators: 40 meaningful leading indicators for the US economy in the left column. The second column is the most recent release of each indicator. The third column is the actual value of each indicator upon release.
Currencies
- Way the world keeps count - Explicit or implicit assumptions made Currency market mechanics - Bloomberg ➔ Trade flow ECTR (trade flow between major countries) o Total import by country (blocs extrieurs), total exports (les blocs interieurs) o Liens: $ Total of import/export between a country and another - Main source of import of the US: China - increase in the number of currencies transacted Currencies used to have predetermined (locked) values. operates 24h/day during business weeks. Bloomberg: FX 24 ➔ Blue: Exchange rate Tokyo trading, green : ….. London, orange: ….. NY. Tokyo stops, London trades, London stops, NY trades, NY stops, Tokyo trades. 3weeks worth of transactions it equal to the world’s GDP. Who trades currencies? - 3 entities that trade currencies: (In descending order of volume)
o Financial investors buying/selling in foreign currencies 45%: Largest. Driven by banks, institutions, and security firms “Hot Money” o Corporations conducting global business o Travelers on trips that change currencies for personal use Locking exchange rate: impression of certainty to businesses and consumers Bloomberg Pegged currencies (PEG function) gives the currencies that are linked/pegged to other currencies values (1 anchor = rate ISO) How to promise a fixed rate:
- FX reserves: Manipulates supply and demand of currencies and therefore its value. - USD most current to build reserve. - If PEG is artificially strong, strong reserves are needed to drive the currency at the peg level. - With peg currency, governments fail to convince the market that the currency must be as strong as the PEG. Government default ➔ Currency value will decline Government also lift interest rates to defend pegs. - EURO Formation 1999: Agreement to keep currency values at a certain band - Interest rates up ➔ Local Bonds more attractive, demand for local currency to buy some. - Mortgage interest rate varies with government interest rate: increase interest rate decrease spending - 1997: HK sold USD reserves, bought HK dollars and invested in HK exchange, won. Unusual spike in HK currency reserve. Floating currencies: - Value of currencies that are not pegged fluctuate in the world currency market. - Bloomberg: Currency codes FX Ticker finder (FXTF) to get a list of currencies. - Need to be careful of units when referring the value of a currency pair. With a star: USD/Currency Ex: JMD 129.215 129 JD per 1 USD *Eur 1.0978 1.0978 USD per Eur FXC Currency rate matrix
- Bloomberg: Tradeweighted and then view the trade-weighted index. Chart reveals if a currency is strong or weak historically. Increases: Strenghted currency Decrease: Weakened currency Long run: law of one price ➔ One good must have the same value everywhere on the long run. Big mac index: Uses price of big macs in the world to demonstrate currency under and over valuation. Here, overvalued by ~26% Factors that drives main currency: - Surprise changes in interest rates Surprise raise in interest in one country relative to another will cause the first currency to strengthen. FXC: add set for European interest rate Surprise Rises in European interest rates: Strengthening of the Euro relative to the Dollar (yellow line). - ……. in inflation
Scarcity drives value. Excess money supply inflation, depreciation, weakening of a currency White line: Value of the rupee If we add data on inflation: cpi CPI rises Monetary value decreases
- …… in trade GDP: X-M X-M > 0: buy home currency Demand up Strengthening X-M < 0: Sell home currency Demand down Weakening Because demand for oil collapsed, value of Russian rupble diminished. Central banks and currencies inflation monitor IFMO Bloomberg: - Goal of central banks: prevent inflation - Goal ~2% infl - Low positive infl: Protects purchasing power, keeps borrowing costs low + backdrop for investing decisions. - Infl in psychological - Expect price to increase pay increase wage increase Prices of goods go up pay increase wage increase…… o break the cycle: Central bank actions - Bloomberg: FDTR index: federal fund interest rate PCE CYOY Index Compare with CPI, negatively related
- Analysis of forecasts of currency pairs FXFC Function Forecast rates for quarters and years Forecasts come from average estimates from banks. Many factors: Inflation, interest rates, trade to derivatives estimates on the value of the currency in the coming quarters or years. Avg of the forecast is used to calculate the mean at the top. More yen for a euro Weakening of the yen Ex: You get 1 euro every 1,365 dollars (mean). Cost 71500 euro revenue 1M usd = 73k euro ➔ profit is the difference If dollar weakens to 1.4$ ➔ Loss Here, 72,2% chance that the rate will be between the blue range. (1-72,2%)/2 = 14% per trail that you will lose money
- Hedging currency risks o FWD Markets FRD: Fwd exchange rate to lock T: time Fwd bid: forward exchange rate for bid (sell) Fwd ask: Forward exchange rate for ask (buy) Used to reduce (hedge) risk. Here, you can buy 1,52$ per euro in 10 yrs. Spot is 1,56 so the market expects a weakening.
Storage cost Fixed Income : Roots of bond market
- Sets the price of borrowing and lending - UDG: US Federal budget dashboard: red bars ➔ deficit: gvt spending more - Bloomberg: TREASURY SECURITIES: Total amount of us federal debt o 2000 decline, but then rise o More than 1T$ o To know who own the debt: DEBT Bloomberg: Pie chart of non us owners of bonds: 6T by non-US Entities
Millier dans amount = trillion
- Why a lot of debt? Currencies o Accumulate war chests of fx reserves to defend their pegs. o US: Safest and easy way to place their money, right to tax citizen and business across the world o US Can print the world’s currencies o US Bonds most liquid assets in the world - Investors also use Gvt bonds o VIX volatility Index = fear gauge: High scared investors, low complaced o Fear ➔ buying gvt bonds o Turmoil: Vix spikes, yield plunges - Corporate bonds are another segment o greater diversity of corporate bonds o IBM Cmd line > overview > cast (cap structure): disllays company and subsidiaries ▪ security detail to see that it has several outstanding bonds o Why borrow in corporate bond marke? ▪ Debt repayment reduce pretax profits ➔ pay less taxes ▪ Can borrow longer term bonds - Structure o Regular fixed amount payments and a large payment at the end o Bloomberg: DEBT DISTRIBUTION or Rwanda ➔ we can see the bond payments and the principal and interest payments - APR: annual percentage rate - Bond prices: main input - Fixed income isn’t fixed APR and bond prices fluctuate - APR = YIELD - Remaining pmts are used together to calculate yields. - Lower price ➔ greater yield/apr - Perpetual bond: principal never repaid, price and yield are a perfect mirror image
- debt/gdp increases ➔ bigger repayments and the burden on the economy
- WCDM Bloomberg: we get d/gdp ➔ increase ➔ trouble ▪ DEFICIT/GDP
- WCDM: Size of the funding gap
- Negative: More money spent, rely on the bond market to finance their deficit
- Higher deficit ➔ higher debt rate cuz more risk
- Bond market can refuse to finance it ▪ Repayment schedule
- If the borrower will have the cash available when the repayments come due
- Borrowing ST: lower interest rate cuz less risk.
- Downside for gvts: Lenders can question their ability to repay and demand high yields
- DDIS Bloomberg: schedule
- Borrow ST refinance regularly: take advantage on ST interests
- Borrowing ST is risky
- Greece: the bulk was repayable far in the future o it was reliant on st debt, but the market changed it into a LT one Credit risk indicators:
- Credit ratings by an agency (most developed have higher ratings)
- SOVEREIGN RATINGS ➔ CSDR ➔ list of credit rating changes (green = upgrade, red = downgrade)
- Corporate: Good = investment ratings Not good = non-investment, junk, speculative ratings CRP: Corporation ratings. ENRON WENT FROM BBB TO D.
- CDS: Insurance More timely warning of default. Higher spread, higher risk. Can provide a warning, but not always. Also available on gvt bonds. Bloomberg SOVR: Bad credit worthiness ➔ higher CDS spread CDS give the intrinsic probability of default. White line: chance of default o Macroeconomics ▪ ST Int rate
- If it lowers, price will increase
- Same risks, prefer the one with the highest yield
▪ Inflation
- Corrosive effect on prices of fixed income
- correlation between inflation and gvt bond yields
- high infl, high yield central banks control st int rates and statements. Inflation gauge for federal reserve: core pce The yield curve and why it matters - World bond market WB ➔ Yield curve (GC) o x axis: bond maturity (not the passage of time); y axis: yield o ECFC: inflation forecast for US: estimate are that 2.2 band and 2.7 later - Term premium = lt yield – st yield o BYFC function = bond yield forecast = higher T, higher rates - YC = Cost of borrowing and represents the state of the economy - Corporate Impact: o Projects are financed o LT: more credit risk, higher yield o Spread: How much more businesses pay compared to gvt for bonds o Yield curve GC select a company. Yield curve kellogs is higher than gvt Difference between the points = spread o When it moves: Spread is relatively constant o No major changes in spreads o Cost of borrowing changes with the gdp o Large projects ➔ gdp growth, that’s why regulations and relatively constant spread - Consumer impact: o Mortgages o bond yields and mortgage interest rates spread are the same - Global impact:
