Portugal’s fiscal expenditure icnreased to 22773.0 by 21.42% on May 2021 from 18756.0 in the previous month. On a year on year basis Portugal’s fiscal expenditure increased by 2.78%. Portugal’s fiscal expenditure trend is down since the current value of 22773.0 is lower than the 12 month moving average of 30271.6. and the 12 month moving average slope is up. Portugal’s fiscal expenditure 5-year percentile is currently at 61.67%.
Portugal fiscal expenditure Chart
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Portugal fiscal expenditure is the funds spent by tthe government to affect the country’s economic activity. Portugal fiscal expenditure is part of the Portugal’s government fiscal policy. Fiscal policy refers to the use of government revenues in the form of tax collectiona and government expenditure (fiscal expenditure) to influence the economy. Explore MacroVar financial knowledge base structured by professional fund managers and economists.
Portugal fiscal expenditure trend
Portugal fiscal expenditure trend is in an uptrend when the last value is higher than its twelve-month moving average and its twelve-month moving average slope is positive (last twelve-month moving average is higher than the previous month twelve-month moving average) and vice-versa. MacroVar calculates the number of months the Portugal fiscal expenditure has recorded new highs or lows. Portugal fiscal expenditure trend change is assumed when the specific indicator has recorded a 3-month high / low or more.
Portugal fiscal expenditure momentum
Portugal fiscal expenditure momentum is monitored by calculating its long-term year over year (Y/Y) return and its short-term month on month (M/M) return.
The fixed income market is one of the main pillars for managing an investment portfolio and understanding the functioning of global markets and macroeconomics. Bank credit and debt capital markets are the lifeblood of the financial system.
If you are new to Bond Markets / Fixed Income click here for an introduction to bonds.
MacroVar logic for Fixed Income
Government Bonds explained
The bond market determines interest rates based on the demand and supply of bonds traded. An interest rate is the price paid for borrowing funds. The level of interest rates is critical for a country’s economic activity since it affects consumers and businesses decisions.
The government bond market supply is determined by the country’s issuing of government bonds (also known as sovereign debt) to raise money to finance their government budget deficits. Government budget deficit is the gap between the government’s spending and its revenues. When deficits are large, the Treasury sells more bonds, causing the quantity of bonds supplied in the market to increase and government bond prices to fall given the same level of demand for bonds.
The government bond market demand is determined by two types of buyers: the country’s central bank and private investors.
Central Banks & Government
Central banks and the government determine the country’s monetary policy and fiscal policy. There aim is to keep the country’s economy healthy with stable inflation, solid economic growth, and low unemployment. When the country’s economy weakens, the country’s policy makers react to bring back economic growth as follows:
Fiscal policy: the government spends more than it receives and finances it’s fiscal deficit by issuing government bonds/
Monetary policy: the central bank expands it’s balance sheet (prints money) and uses the proceeds to purchase government bonds in order to cause interest rates to fall and a boost in economic activity. Economic stimulation is accomplished in the following ways: 1. wealth effect which is people spending more as the value of their financial and real assets rises, 2. Rising demand of interest rate sensitive goods (real estate, durable goods like cars), 3. Easing of debt service (monthly interest payments are lower).
The country’s central bank and government actions must be very prudent since rising government deficits and monetization of debt by printing money may lead to disastrous economic problems like loss of confidence in the country’s currency and hyperinflation.
Investors
Investors trade government bonds based on their expectations of future economic growth and inflation.
The most important criteria to categorize government bonds are:
Government Bond maturity (Short-term bonds: 1 to 4-year maturity, Long-Term bonds: 10-year to 30-year maturity)
Government Bond Credit risk based on the country’s credit profile
Government Bonds and Credit Risk
The government bonds considered the low-risk investments and used for capital protection during recessions and downturns are the US 10-year Treasury note bond and the German 10-year bond.
The government bonds which considered high risk are the bonds of emerging market countries like Turkey and Hungary, and countries of southern Europe namely Spain, Italy, Portugal, and Greece.
Government Bonds and the factors affecting them
MacroVar monitors government bonds of 2-year, 5-year and 10-year maturities for the 25 biggest economies in the world.
Short-term government bonds (the 2-year government bond is the benchmark for short-term bonds) is driven by the market’s expectation of the central bank future moves. The long-term government bonds (the 10-year government bond is used as the benchmark of long-term bonds) is driven by the market’s expectations of inflation and economic growth.
Factors affecting Government Bonds Inflation ExpectationsInflation is the most critical factor affecting government bonds. A government bond’s coupon rate is fixed for the bond’s life. Hence during inflationary conditions, the price of government bonds tends to drop, because the bond may not be paying enough interest to stay ahead of inflation.
Long-term government bonds offer higher interest rates than short-term government bonds to account for the increased probability of inflation rising at some point during the bond’s life.
Financial health of a Country
The financial health of the country issuing the government bonds affects the coupon rate the bond is issued with. Countries with low credit risk issue bonds with lower interest rates, while those countries with higher credit risk like some emerging market countries will have to offer higher rates to incentivize investors.
Government Bonds and the Economy
Real economic growth expectations and the inflation outlook of the global economy drive all financial assets. There are 4 economic environments based on economic growth and inflationary conditions.
Inflation boom Accelerating Economic growth with Rising inflation
Stagflation Slowing Economic Growth with Rising Inflation
Disinflation boom Accelerating Economic growth with Slowing Inflation
Deflation Bust Slowing Economic Growth with Falling Inflation
Long-term government bonds are the best financial assets during periods of environments of deflation and disinflation. Government bonds are the worst financial assets during periods of inflationary booms with rising inflation and stagflation.
Government Bonds and Market Risk
During global economic expansions when inflation expectations are positive, capital flows out of low-risk assets such as US treasuries and German bunds into higher risk financial assets such as stocks. Inside the bond market, during healthy economic conditions capital flows from safe German bunds to riskier bonds of the Eurozone periphery like Italian government bonds and Spanish government bonds and from low-risk US treasuries to other emerging market bonds in search of additional yield.
During economic slowdowns where the market expectation is disinflation funds flow from risky assets like emerging market bonds and stocks to low-risk financial assets like US treasuries and German bunds.
Government long-term bonds perform well during a weak economic environment with low inflation expectations and no economic growth expectations. Moreover, a global bond rally may indicate a rotation from risky assets like stocks to low risk assets like bonds.
Low economic growth can arise from a global slowdown affecting a specific economy, low commodity prices affecting commodity export oriented economies like Canada / Russia, geopolitical events affecting adversely economies like Brexit, a domestic economic slowdown, falling exports for export oriented economies like that of Germany, QE intervention or market front running of QE intervention.
Fiscal interventions like government infrastructure spending projects adversely affect government bonds (both short-term government bonds and long-term government bonds) since they sense increased projected inflation expectations.
Emerging countries are often vulnerable to capital outflows for various reasons. Capital outflows cause heavy losses in emerging countries government bonds. If you want to learn about emerging countries risks and opportunities click our guide on emerging economies.
Factors affecting Government Bonds
Government bonds are highly correlated with the factors presented below. However, during extreme economic downturns, central banks use extraordinary measures to combat recessions like extensive quantitative easing programs (money printing) with which they purchase government bonds of all maturities hence distorting price discovery.
The factors affecting government bonds are summarized with the case studies below:
Low-Risk Government bonds like the US and Germany 10-year bonds rally on global slowdown conditions.
Government bonds are closely correlated with the country’s economy expectations. When leading economic indicators show economic slowdown government bonds rise. Leading indicators used to gauge the country’s economic expectations are the following:
All economies: Manufacturing PMI, Housing activity, Domestic Banks exposure
Commodity dependent economies: Commodity trends and momentum
Export oriented economies: e.g. Germany exports to China, Australian exports to China
Geopolitical Events: Brexit, Political Crisis (Italy), Trade wars, Tariffs
Central Bank Expected Interventions: e.g. Front-running ECB Quantitative Easing programs for Italian Bonds
Emerging market Bonds: During rising global risk conditions, capital moves out of emerging market bonds into low-risk assets like US 10-year treasuries and German Bunds
Government infrastructure programs: New debt issuance to finance new projects lead to a fall in both short-term and long-term bonds.
MacroVar financial models monitor government bonds for the largest 30 economies in the world based on the following factors:
Manufacturing PMI Momentum (Y/Y) vs 10Y government bond rate Momentum (Y/Y)
Economic Sentiment Indicator (Y/Y) vs 10Y government bond rate momentum (Y/Y)
Consumer Price Index levels vs 10Y government bond rate levels
Economic Sentiment Retail Prices levels vs Country 10-year government bond rates levels
Exchange Rate levels vs 10-year government bond rates levels
Stock Market Index momentum (Y/Y) vs 10-year government bond rates momentum (Y/Y)
Other factors specifically used for the US 10-year government bond are:
Global Manufacturing PMI Momentum (Y/Y) vs US 10-year treasury bond
US ISM Manufacturing PMI Momentum (Y/Y) vs US 10-year treasury bond
US ISM prices Momentum (Y/Y) vs US 10-year treasury bond
US 5-year forward inflation expectation rate vs US 10-year treasury bond
Since CPI is a coincident indicator, MacroVar uses US ISM Manufacturing prices and ESI retail prices for all European countries as leading indicators to predict government bond trends early.
Click on a government bond’s link to explore up to date analysis of the factors affecting it. Moreover, government bonds are closely correlated with sovereign credit default swaps. The credit default swaps market reacts faster than the bond market it is advisable to monitor it closely.
To gain a closer view of government bonds you, check our yield curve monitor.
Risk On: EM Bonds, Club Med vs DE, Risk Off: US / DE (vs Club Med)
Global disinflation (inflation down) = Global low growth expectations = Global CB dovish = Global rates down = 10Y Bonds soar
Bond rally Causes: Global slowdown, CA: US, Oil, Housing, GB: PMI down, hard Brexit, AU: China, Housing, DE: Export, Brexit, IT: front running for ECB QE, ES: PMI plunge, Domestic Banks, EM Bonds: Risk On, Safe haven – US treasuries, Bunds (vs BTPs), HYG: Risk On
Bond selloff: When markets think economic boost like in trade deal hope. Government infrastructure spending (more new debt) fall in both short- and long-term bonds
Introduction to Bonds and Fixed Income Markets
What is a bond
A bond is a debt security that promises to make interest payments (also called coupon payment) periodically for a specific period and pay back the initial capital borrowed (also called maturity value, face value) when the bond matures.
Government Bond Prices and yields
Government bonds are issued and backed by national governments. Government bonds are considered low-risk investments, but they often entail hidden risks and benefits. MacroVar analyzes government bonds of the 25 largest economies in the world. Government bonds are dependent and intricately linked with the rest of world markets, the global economy, individual country economies, central banks, and governments actions.
Government bond prices are intricately linked to current interest rates. Higher interest rates lead to lower government bond prices. The reason is that if current interest rates are higher than the level of interest rates when the existing government bonds were issued, the prices of those government bonds will fall because new government bonds will be issued with higher coupon rates making the old outstanding government bonds with lower coupon rates, less attractive unless they can be purchased at a lower price. Conversely, lower interest rates mean higher government bond prices.
Government Bonds Example
We buy a government bond with a coupon rate of 2%, price of the bond is $1,000 and the government bond matures in 10 years. The bond price fluctuation is determined by the maturity date of the bond and yields.
One year later, interest rates fall to 1.5%. Buyers can only get 1.5% on new bonds issued so they are willing to pay more for our bond yielding 2% which pays higher interest. In this case, the price rises to $1,080. At a price of $1.080, the yield to maturity of this bond now matches the prevailing interest rate of 1.5%.
Three years later, interest rates rise to 3%. Buyers now get 3% on new bonds issued so they are willing to buy our bond yielding 2% paying lower interest at a discount. The price falls to $900. At a price of $900, the yield to maturity of this bond now matches the prevailing interest of 3%.
Money markets
Money markets allow the flow of short-term capital between lenders and borrowers. Money market instruments are the safest assets in the fixed income arena since they are short-term however during periods of high financial risk like 2008 credit risk exists.
The money market includes short-term credit market instruments.
Treasury securities
Countries raise capital using long and short-term debt. The treasury raises funds in the money market by selling US Treasury bills typically expiring from 1 to 12 months.
Commercial paper
Commercial paper is an unsecured, short-term debt obligation of corporations and banks. They usually have a maturity of 90 to 270 days. Commercial paper is used for short-term financing needs. The advantage of commercial paper relative to short-term borrowing from banks is the lower rates paid.
Treasury Inflation-protected securities (TIPS)
TIPS is a form of US government debt linked to US inflation index. As a result, investors don’t suffer from the negative effects of inflation. They are issued on a quarterly basis with 5-year, 10-year and 30-year maturities.
Breakevens
Breakeven inflation rate is an instrument giving exposure to the inflation rate based on the implied inflation from TIPS.
Nominal Rates (based on US Treasuries) – Inflation (Breakevens) = Real Rates
Time deposits
Time deposits also referred to as certificate of deposits or CDs, are bank deposits which cannot be withdrawn without a penalty for a specified maturity date. Typically the maturity of time deposits ranges from 30 days to 5 years.
Interbank Loans
Interbank loans refers to a market where banks loan capital to each other. Most interbank loans are done overnight for maturity of 1 week or less.
Repurchase agreements
Banks raise funds through repurchase agreement or “repos”. A repo is a sale of securities with an agreement by the seller to repurchase them at a later date.
LIBOR (London Interbank Offered Rate)
LIBOR is the most important rate in global financial markets. It is the rate at which banks borrow from each other. The 3-month LIBOR is the dominant gauge. During periods of financial stress, LIBOR rises due to the high counterparty risk between banks.
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Eurodollar Futures
Eurodollar deposits are time deposits at banks in US dollars outside of the Fed’s jurisdiction. A Eurodollar futures contract is a contract on 3-month LIBOR spanning 3 months from the initial date.
Interest Rate Swaps
Interest rate swaps are derivatives allowing an investor to exchange one set of interest payments for another. the most common interest rate swaps are fixed-for-floating where investor or hedger receives a fixed rate to pay for a floating rate and vice-versa. If someone is a receiver of rates, he believes the floating portion will drop and vice-versa.
Federal Funds
Fed funds are unsecured loans of reserve balances banks and other institutions make to one another. The rate at which these transactions occur are called Fed Fund rates set by the Federal Reserve. The most common duration or term for fed funds is overnight.
The FOMC sets a target level for the fed funds rate, the most important tool for monetary policy. However, the availability of banks between institutions determines the final rate. Any reserves of banks kept at the Fed in excess of reserve requirement are considered excess reserves.
The Fed during financial crisis, provides excessive funds to banks causing them to hold reserves in excess of the requirement. The fed pays interest on excess reserves (IOER). Since there is a large amount of excessive reserves, the effective Fed funds rate and IOER are below the Fed funds target rate.
Investors can trade Fed funds using the Fed Funds futures contract trading in the CME.
Overnight Indexed Swaps (OIS)
Overnight index swap (OIS) is fixed-for-floating interest swap indexed against the overnight rate, in the case of US the Fed effective rate. They have a maturity of less than two years and are used to speculate in central bank action.
LIBOR-OIS spread
LIBOR-OIS is one the indicators MacroVar uses to gauge financial stress. LIBOR is an unsecured lending rate among banks, while OIS is based on Fed effective rate. This spread widens during periods of elevated financial risk when counterparty risk between banks is rising.
Macroeconomics
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Commodities
Currencies
Credit markets
Stocks
Price dynamics
Multi-factor
Portfolio management
Risk management
MacroVar Quantitative Models
MacroVar index (MV)
The MacroVar index is a synthetic variable derived by a combination of the Momentum, Trend and Bubble models described below. It ranges between -150 and +150. MacroVar displays signals schematically as follows:
Value currently 0 meaning that trend is flat.
Value is -25 meaning a strong -ve momentum is currently present.
Value is -50 meaning a strong -ve momentum is currently present.
Value is -75 meaning a strong -ve momentum and long-term is currently present.
Value is -100 meaning a strong -ve momentum and long-term is currently present.
Value is +25 meaning a strong +ve momentum is currently present.
Value is +50 meaning a strong +ve momentum is currently present.
Value is +75 meaning a strong +ve momentum and long-term is currently present.
Value is +100 meaning a strong +ve momentum and long-term is currently present.
Value is either +125 (when Momentum and Trend is +100) or -125 (when Momentum and Trend is -100) meaning that there is a moderate possibility of price reversal from the current trend.
Value is either +150 (when Momentum and Trend is +100) or -150 (when Momentum and Trend is -100) meaning that there is a very high probability of price reversal from the current trend.
MacroVar Momentum Model (M)
Momentum trading is used to capture moves in shorter timeframes than trends. Momentum is the relative change occurring in markets. Relative change is different to a trend. A long-term trend can be up but the short-term momentum of a specific market can be 0.
If a market moves down and then moves up and then moves back down the net relative change in price is 0. That means momentum is 0. A short-term positive momentum, with a long-term downtrend results in markets with no momentum.
MacroVar momentum signal ranges from -100 to +100. The market trend signal is derived as the mean value from 4 calculations for each asset. The timeframes monitored are the following:
1 Day (1 trading day)
1 Week (5 trading days)
1 Month (20 trading days)
3 Months (60 trading days)
For each timeframe, the following calculations are performed:
Calculations of the return for the specific timeframe
If return calculated is higher than 0, signal value 1 else signal value -1
Finally, the 4 values are aggregated daily.
A technical rollover is identified when MacroVar momentum strength indicator moves from positive to negative value or vice-versa.
Value currently 0 meaning that momentum is flat.
Value is -25 meaning a weak -ve momentum is currently present.
Value is -50 meaning a strong -ve momentum is currently present.
Value is -75 meaning a strong -ve momentum is currently present.
Value is -100 meaning a strong -ve momentum is currently present.
Value is +25 meaning a strong +ve momentum is currently present.
Value is +50 meaning a strong +ve momentum is currently present.
Value is +75 meaning a strong -ve momentum is currently present.
Value is +100 meaning a strong -ve momentum is currently present.
MacroVar Trend model (T)
MacroVar Trend signal ranges from -100 to +100. The market trend signal is derived as the mean value from 8 calculations for each asset. The timeframes monitored are the following:
1-month (20 trading days)
3-months (60 trading days)
6-months (125 trading days)
1-year (250 trading days)
For each timeframe, the following calculations are performed:
Closing price vs moving average (MA): if price greater than MA value is +1, else -1
Moving average slope: if current MA is higher than previous MA, upward slope +1, else -1
MacroVar trend model can be used as a trend strength indicator. MacroVar trend strength values ranging between +75 and +100 or -75 and -100 show strong trend strength.
A technical rollover is identified when MacroVar trend strength indicator moves from positive to negative value or vice-versa.
Value currently 0 meaning that trend is flat.
Value is -25 meaning a weak -ve trend is currently present.
Value is -50 meaning a strong -ve trend is currently present.
Value is -75 meaning a strong -ve trend is currently present.
Value is -100 meaning a strong -ve trend is currently present.
Value is +25 meaning a strong +ve trend is currently present.
Value is +50 meaning a strong +ve trend is currently present.
Value is +75 meaning a strong -ve trend is currently present.
Value is +100 meaning a strong -ve trend is currently present.
MacroVar Bubble model (B)
MacroVar bubble model monitors a financial asset’s price relative to its 252-day moving average to identify possible inflection point. Extreme moves often followed by price reversals have a high probability of occuring when MacroVar bubble indicator is greater than 2.5 or less than -2.5.
The MacroVar bubble model is calculated using the formula: Latest Price – (252-day Moving Average) / (252-day Standard Deviation). It represents a z-score and extreme values are greater than 2.5 and less than -2.5. Other thresholds include -3, +3.
Value is higher than +2.5 or lower than -2.5 meaning that there is a moderate possibility of price reversal from the current trend.
Value is higher than +3 (when Momentum and Trend is +100) or -3 (when Momentum and Trend is -100) meaning that there is a very high probability of price reversal from the current trend.
Momentum vs Trend
A trend can last for day(s), weeks and even months and doesn’t necessarily need momentum to continue moving. Trend is a sustained directional movement over a time. Momentum typically refers to the building of energy in a particular direction. For example, as part of an overall trend up, the market might be experiencing a lot of momentum to the upside, whereas the market may be in an overall trend up, but lacking any current momentum to push prices up and thus moving sideways but still in an uptrend. You can have a trend without momentum, and have momentum without a trend.
Every financial market is linked (correlated) with economic growth expectations and other related markets.
Hence, analyzing a financial market requires monitoring the asset’s price dynamics (trend & momentum) and how the financial market reacts against economic indicators affecting it and other related markets.
For example, a specific stock is affected by the company’s fundamentals, it’s sector performance which in turn depends on the country and world economic growth. Moreover, the stock price must be analyzed in combination with the company’s bond price since both markets are closely linked and often a divergence between them may signal an trading opportunity.
MacroVar monitors various macroeconomic and financial factors affecting each financial market. A brief list is provided below. From click on a specific financial market in the World Markets or Sectors sections of MacroVar to examine the related factors.
Global Manufacturing PMI vs Global Stock Market, US Dollar, Emerging Markets, US 10 year treasury
Emerging Markets vs US 10 year treasury, US Dollar
Global Manufacturing PMI vs Cyclical Commodities (Metals, Energy, Shipping)
Country Stock Market vs Yield Curve, Manufacturing PMI, 10-year Bond, ZEW
Country Bonds vs Manufacturing PMI, ESI, Inflation, ZEW, Inflation Expectations (ISM, ESI)
Country Currency vs 10-year Bond, Stock Market, Central Bank B/S, 10-Year bond yield differential, 2-year bond yield differential, Manufacturing PMI, ZEW
Country ETF vs Manufacturing PMI, ESI, Country Currency, 10-year Bond, CDS, ESI
US & EU Stock Market vs Credit Index (YoY) – Index and Sector Analysis
Commodity related currencies vs Metals, Energy
Gold vs Bonds
Construction ETF vs Building Permits
Commodities ETF vs Commodity Futures
Bank Sector ETF vs Yield Curve
Equity vs Credit Volatility Indices
Every financial market is linked (correlated) with economic growth expectations and other related markets.
Hence, analyzing a financial market requires monitoring the asset’s price dynamics (trend & momentum) and how the financial market reacts against economic indicators affecting it and other related markets.
For example, a specific stock is affected by the company’s fundamentals, it’s sector performance which in turn depends on the country and world economic growth. Moreover, the stock price must be analyzed in combination with the company’s bond price since both markets are closely linked and often a divergence between them may signal an trading opportunity.
MacroVar monitors various macroeconomic and financial factors affecting each financial market. A brief list is provided below. From click on a specific financial market in the World Markets or Sectors sections of MacroVar to examine the related factors.
Global Manufacturing PMI vs Global Stock Market, US Dollar, Emerging Markets, US 10 year treasury
Emerging Markets vs US 10 year treasury, US Dollar
Global Manufacturing PMI vs Cyclical Commodities (Metals, Energy, Shipping)
Country Stock Market vs Yield Curve, Manufacturing PMI, 10-year Bond, ZEW
Country Bonds vs Manufacturing PMI, ESI, Inflation, ZEW, Inflation Expectations (ISM, ESI)
Country Currency vs 10-year Bond, Stock Market, Central Bank B/S, 10-Year bond yield differential, 2-year bond yield differential, Manufacturing PMI, ZEW
Country ETF vs Manufacturing PMI, ESI, Country Currency, 10-year Bond, CDS, ESI
US & EU Stock Market vs Credit Index (YoY) – Index and Sector Analysis
Commodity related currencies vs Metals, Energy
Gold vs Bonds
Construction ETF vs Building Permits
Commodities ETF vs Commodity Futures
Bank Sector ETF vs Yield Curve
Equity vs Credit Volatility Indices
Every financial market is linked (correlated) with economic growth expectations and other related markets.
Hence, analyzing a financial market requires monitoring the asset’s price dynamics (trend & momentum) and how the financial market reacts against economic indicators affecting it and other related markets.
For example, a specific stock is affected by the company’s fundamentals, it’s sector performance which in turn depends on the country and world economic growth. Moreover, the stock price must be analyzed in combination with the company’s bond price since both markets are closely linked and often a divergence between them may signal an trading opportunity.
MacroVar monitors various macroeconomic and financial factors affecting each financial market. A brief list is provided below. From click on a specific financial market in the World Markets or Sectors sections of MacroVar to examine the related factors.
Global Manufacturing PMI vs Global Stock Market, US Dollar, Emerging Markets, US 10 year treasury
Emerging Markets vs US 10 year treasury, US Dollar
Global Manufacturing PMI vs Cyclical Commodities (Metals, Energy, Shipping)
Country Stock Market vs Yield Curve, Manufacturing PMI, 10-year Bond, ZEW
Country Bonds vs Manufacturing PMI, ESI, Inflation, ZEW, Inflation Expectations (ISM, ESI)
Country Currency vs 10-year Bond, Stock Market, Central Bank B/S, 10-Year bond yield differential, 2-year bond yield differential, Manufacturing PMI, ZEW
Country ETF vs Manufacturing PMI, ESI, Country Currency, 10-year Bond, CDS, ESI
US & EU Stock Market vs Credit Index (YoY) – Index and Sector Analysis
Commodity related currencies vs Metals, Energy
Gold vs Bonds
Construction ETF vs Building Permits
Commodities ETF vs Commodity Futures
Bank Sector ETF vs Yield Curve
Equity vs Credit Volatility Indices
MacroVar analyzes financial markets and economies using a top down approach. MacroVar’s aim is to monitor markets and economies in order to predict the performance of every sector under investigation in the next 6-12 months.
The most important factors which affect economic conditions and financial markets are:
Global economic growth expectations
Global Inflation outlook
Global Liquidity conditions
Global Risk environment
Financial Markets
Global Economic Growth Expectations
Global economic growth is the most important factor affecting individual economies, sectors, industries, and all financial assets (stocks, bonds, currencies, and commodities).
The most important indicator to monitor Global growth is MacroVarGlobal PMI which is a weighted average of Manufacturing PMI of the 35 largest economies.
PMI is a leading economic indicator published for each country monthly derived from surveys of private sector companies. The PMI summarizes whether market conditions are expanding, staying the same, or contracting as viewed by managers of the companies surveyed. PMI provides information about current and future business conditions.
Special attention is given to the top four largest economies (United States, Eurozone, China, Japan) comprising more than 50% of global GDP.
Interpreting Global PMI: Readings above 50 indicator economic expansion, while readings below 50 indicate economic contraction.
Global Liquidity
Global liquidity is the availability of credit in global financial markets. Global liquidity is controlled by central banks using various instruments to inject or remove money from the system. An expansion of global liquidity leads to debt growth which is favorable for financial assets and economic growth and vice versa.
Global Liquidity Snapshot: Global Liquidity is gauged by monitoring the 1. Level of interest rates, 2. balance sheet and 3. Money Supply M2 of the four major central banks of the world namely Federal Reserve (US), ECB (Eurozone), PBoC (China) and BOJ (China).
Country View
Country Economic, Financial & Risk Snapshot
To get a snapshot of your country’s economic health, the most important macroeconomic and financial indicators are the country’s 1. Manufacturing and Services PMI and 2. The performance of the stock market, bonds and currency.
A country’s full macroeconomic analysis involved the indicators below.
Get a snapshot of a country’s economy using:
Economic Growth variables
United States: use ISM Manufacturing New Orders
Europe: use ESI Manufacturing New Orders
Other Countries: use Manufacturing, Services and Composite PMI
Inflation variables
United States: use ISM Manufacturing prices
Europe: use ESI Manufacturing Prices
Other Countries: CPI & PPI
To further analyze a country’s macroeconomy, the following parameters must be closely monitored:
Business Confidence: UMSCI, Manufacturing PMI, Services PMI, Construction PMI, Permits, Employment (ESR), ESI, Consumer Confidence, Real Estate Index
Inflation Conditions: Leading: ISM Prices, ESI Prices – Coincident: CPI, CPI Core, PPI, PPI
Trade: CA (BOP): Trade surplus = exports > imports, FX demand
Fiscal Policy:
Current Surplus/Deficit: rising deficit, injection > inflationary > debt rising
Debt/GDP: growth dependent on public spending, rising Debt/GDP (more spending injections) > must keep rates low / raise MS (interest bill kept low), else default or deflate (not desirable)
Interest bill: interest bill % GDP
Liquidity Cover: government ability to pay its interest bill (tax revenues # Interest bill)
Monetary Policy:
MP1: M2, Interest rates, Reserve Requirement
MP2: Central Bank Balance sheet
News flow: Politics
Four Macroeconomic Environments versus financial markets
There are four macroeconomic environments based on economic growth and inflationary conditions. MacroVar uses this model to monitor macroeconomic conditions for the largest 35 countries in the world.
Inflation boom: Accelerating Economic growth with rising inflation
During these macroeconomic conditions economic growth is strong, capacity utilization is high and hence rising inflation is experienced. Policy makers use monetary policy and fiscal policy tools to slowdown the economy and bring inflation down.
High global growth with rising inflation expectations lifts commodities. Many emerging economies growth is linked to commodities. When commodities rise emerging market stocks, currencies and real estate rise as well.
During this environment, global growth is strong and global risk is low. Capital flows out of safe developed low growth countries like the US into emerging markets.
The best performing financial assets are emerging market stocks, international real estate, emerging countries’ currencies, commodities, and IL bonds (inflation linked bonds).
The worst performing financial assets are US treasury bonds and cash since they are adversely affected by rising inflation.
Stagflation: Slowing Economic Growth with Rising Inflation
Click to check the Best & Worst Assets during Stagflation
The best asset performers protecting investors from inflation are Gold, Cash, Treasury Inflation Protected Securities, and the US Dollar.
The worst performers are long-duration treasury bonds adversely affected by rising inflation.
Disinflation boom: Accelerating Economic growth with Slowing Inflation
The best performers are developed markets stocks, developed Real estate and US Treasury bonds.
Low inflation with moderate growth is a good environment for bonds and stocks and bad for the worst performs which are commodities and commodity related sectors.
Deflation Bust: Slowing Economic Growth with Falling Inflation
During this environment the best asset performers are Long-Duration Treasuries and Cash. Everything else experiences big volatility and often large losses.
MacroVar risk management model overview
Successful investing requires managing a portfolio of assets to protect the capital of investors and generate steady returns in both rising and falling markets. This requires investing in growth assets (stocks, commodities, currencies) when global financial risk is low while shifting the portfolio to safe investments (bonds, cash) or neutralizing a portfolio’s market risk when financial risk exceeds certain levels.
Risk management analysis
Financial markets and the real economy have historically experienced a series of severe crises. During these financial crisis, catastrophic investment and economic losses where experienced. It is critical for any investment or business strategy to understand financial risk conditions and adapt strategies based on these conditions.
Analyzing the Global Economy and Financial risk
The global economy and financial markets experience long-term growth. When financial risk is low, financial markets operate smoothly providing ample liquidity to financial markets and the economy. During these periods high growth assets like stocks experience high returns and are priced efficiently based on their fundamental drivers. On the contrary, when financial risk is rising, market liquidity deteriorates because of a loss of confidence in banks, funding institutions or governments which causes a feedback loop of surging funding costs, increased price volatility and asset fire sales.
MacroVar risk management model overview
MacroVar risk management is a quantitative model which monitors critical financial markets and warns investors when financial risk is rising quickly. The risk management model monitors stocks, bonds, credit markets, currencies and global liquidity daily. MacroVar risk management model is comprised of the following segments:
Stock Risk monitor: Stock risk is monitored by analyzing the implied volatility and shape of the term sturcture of the S&P 500 and Eurostoxx 50 stock markets.
Credit Risk monitor: Credit risk is monitored by analyzing the credit default swaps indices of the United States and European markets.
Bond Risk: Bond risk is monitored by analyzing the implied volatility of the US treasury market.
Emerging markets risk: Emerging markets risk is monitored by analyzing the credit default swaps of government bonds for major emerging countries.
Liquidity risk: Liquidity risk is monitored by analyzing the LIBOR-OIS spread.
Currency risk: Currency risk is monitored by analyzing the implied volatility of low-risk currencies and gold.
Banking risk: US, European and UK banks credibility plays an important role in monitoring global liquidity risk. When Banks risk is rising, global market liquidity risk is rising and therefore global financial risk is rising. MacroVar monitors Global Bank risk by monitoring credit default swaps levels of the following major global systemic banks.
Sovereign risk: Sovereign credit risk plays an important in gauging global financial risk. MacroVar monitors Sovereign Risk by monitoring Credit Default Swaps Levels for the following developed countries
Learn more in the respective section of MacroVar Risk Management model section.
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MacroVar Investing & Trading Guide
This guide was created by MacroVar’s team of professional fund managers and economists to enable you understand the principles of trading and investing.
Macrovar uses a top down framework to analyse markets and economies and multi-factor models to identify trading opportunities across 1,400 financial assets.
Top-Down Analysis of Markets & Economies
Fund managers use a top down framework to analyze the major components driving the global economy which in turn drive all financial markets.
The major factors monitored and analysed are:
Global Economic Growth Expectations
The most important factor to predict from a fundamental point is view is global economic growth trend for the next one to three months. This is accomplished by monitoring leading macroeconomic indicators for each country like manufacturing, services PMI and other business and consumer confidence indicators. Global economic growth is monitored by calculating MacroVar Global PMI based on each country’s manufacturing PMI and it’s relative weight to Global GDP of the 35 largest economies. Special attention is given to the top four largest economies (United States, Eurozone, China, Japan) comprising more than 50% of global GDP. Global macroeconomic growth breadth is monitored. The trend and momentum for each macroeconomic indicator is calculated using the following metrics.
Check the major macroeconomic indicators of the largest 35 economies in the world in MacroVar’s Global Economy section.
Global Liquidity conditions
Global liquidity is a major factor affecting all financial markets. The most important liquidity factors are related to the four largest central banks in the world namely the Federal Reserve (US), ECB (Eurozone), PBoC (China) and BOJ (China). MacroVar monitors each central bank’s interest rates, Money Supply (M2) and Balance Sheet dynamics on a year to year basis.
Global Financial Risk levels
Global financial risk conditions are especially important since they affect all financial assets. MacroVar risk index is composed of various financial risk factors to provide an overview of global market risk conditions. The risk index is used for adjusting portfolio risk. MacroVar risk management provides free current risk analysis.
Global Financial Markets Overview
MacroVar uses a top down framework to analyse financial markets as well. The major financial markets which affect the rest of the other financial assets are: Stocks
Global Stocks: MSCI All Country World Index
US Stocks: S&P 500 Index
European Stocks: Eurostoxx 600 Index
Bonds
US 10-year Treasury
German 10-year Bund
US Short-Term Yield Curve (2s5s)
US Long-Term Yield Curve (2s10s)
Currencies
US Dollar: DXY Index
Risk Off Currencies: USDJPY, USDCHF
Emerging Market Currencies: CEW Index
Commodities
Crude Oil
Copper
Gold
Equity Risk
US Stock implied volatility: VIX Index, VIX term structure
EU Stock implied volatility: VSTOXX Index, VSTOXX term structure
Emerging Markets Stock implied volatility: VXEEM Index
Credit Risk
US Corporate risk: CDX IG, CDX HY
EU Corporate risk: ITRAXX EU
Emerging Corporate risk: CDX EEM
Global Macroeconomic Overview
Global Manufacturing PMI
Global Services PMI
Developed Economies Manufacturing PMI
Emerging Economies Manufacturing PMI
How Financial Markets Work
The basic logic on how financial assets behaves during different economic conditions is provided below. There are periods where correlations between financial assets breakdown and where economic data are disconnected from financial markets but the core market logic is described below.
There are two market environments: Risk On periods during which funds flow from safe assets to risky assets and Risk Off periods where funds flow from risky assets to low-risk assets. Risk Assets (Risk-On): Stocks, Cyclical Commodities, Cyclical Sectors / Industries, High Yield Bonds, Cyclical Currencies, Emerging Markets (Capital flows to emerging markets in search for higher yields, higher growth rates and hence profits) Safe Assets (Risk-Off): US Treasuries, German Bunds, Defensive Sectors / Industries, US Dollar DXY, Swiss Franc, Japanese Yen, Gold
The most important asset correlation is between the US stocks and US Bonds. During risk on periods US stocks rise while US bonds are sold and vice-versa. Since equities are closely linked with credit, MacroVar monitors closely the performance of corporate bonds for each sector in US and EU markets.
During Risk on Periods the markets behave as follows: Global Risk
Equity Risk: US VIX & Europe VSTOXX falling
Credit Risk: US CDX IG, Europe ITRAXX IG, US BofA High Yield credit spreads falling
Volatility Term Structures: US VIX & Europe VSTOXX term structures in steep Contango
MacroVar Risk index: falling
Stocks
Global Stocks: rising (ideally this should occur with global bond market weakness)
US Stocks Breadth: rising
Global Stock Breadth: rising
Emerging Market Stocks: rising (often outperforming developed markets like US & EU)
Stock Sectors
Cyclical vs Defensive sectors: Cyclical sectors outperform Defensive sectors
Sector Breadth rising
Bonds (MacroVar monitors 2-year, 5-year and 10-year bonds)
Low Risk Bonds: US Treasuries & German Bunds falling (yields rising)
High Risk Bonds: US High Yield Bonds, Europe Club Med Bonds, Emerging Market bonds rising (yields falling)
Bond interest rates breadth: Rising – Funds move out of bonds into stocks hence yield rates rise
Yield Curve dynamics
Yield Curve: Bear steepening (on the contrary a Yield Curve bull re-steepening signifies Risk Off environment)
Global Yield Curve Steepening breadth: rising
Fed Funds futures: steep Contango
Eurodollar futures: Rising
Currencies
US Dollar (DXY): Rising
Low Risk Currencies (JPY, CHF): Falling
High Risk Currencies (AUD, NZD, CAD): Rising
Currencies Breadth (vs the US Dollar): Rising
Commodities
Energy (Crude Oil): Rising
Metals (Copper): Rising
Low Risk Commodities (Gold): Falling
Cyclical Commodities : Rising
Macroeconomic Conditions
Global Manufacturing & Services trend and momentum: Rising
Global Manufacturing & Services breadth trend and momentum: Rising
Factors of a specific financial asset
Financial assets like stocks, bonds, currencies and commodities are linked with other
related financial markets. MacroVar monitors a broad list of macroeconomic and financial factors affecting every financial market. Check a representative list of factors monitored below:
Global Manufacturing PMI vs Global Stock Index, US Dollar, Emerging Markets, US 10-year treasury
Stocks markets, sectors and industries versus their respective credit indices
A specific country’s stock market vs its yield curve, Manufacturing & Services PMI, 10-year bond, Yield Curve
Commodity Futures vs Commodities ETF
Country Macroeconomic Overview
MacroVar analyses the economic and financial conditions of the largest 35 economies in the world by monitoring 40 economic and financial indicators for each country. Economic Aim
A nation’s economy is healthy when it experiences stable economic growth with low inflation and low unemployment. Economic growth is measured by Real GDP and inflation by CPI, PPI. An economy is affected by its individual performance and its economic performance relative to the rest of the World (RoW).
Policymakers (government & central bank) use fiscal and monetary policy to inject liquidity (print & spend money) during slowdowns (to solve weak economic growth) and withdraw liquidity (buy back money & stop spending money) from an overheating economy (to solve high inflation).
Excessive intervention in the economy may lead to loss of confidence in the country and a financial crisis. The degree of intervention depends on the country’s fundamentals. Read how to analyze a country’s economic in depth. The four economic environments
Financial markets are affected by economic growth and inflation expectations. The performance of each financial asset for each economic environment is explained below.
The four economic environments:
Inflation boom: Accelerating Economic growth with Rising inflation
Stagflation: Slowing Economic Growth with Rising Inflation
Disinflation boom: Accelerating Economic growth with Slowing Inflation
Deflation Bust: Slowing Economic Growth with Falling Inflation
MacroVar uses leading economic indicators for each country to predict economic and inflation expectations. More specifically for each country the Price Expectations and New Orders expectations components of the PMI, ISM and ESI indicators are used for structuring the models.
Country Macroeconomic Analysis
This analysis is based on the work of Ray Dalio and more specifically how the economic machine works.
Introduction: An economy is the sum of the transactions that make it up. A country’s economy is comprised of the public and private sector. The private sector is comprised of businesses and consumers.
Economic activity is driven by 1. Productivity growth (GDP growth 2% per year due knowledge increase), 2. the Long-term debt cycle (50-75 years), 3. the business cycle (5-8 years). Credit (promise to pay) is driven by the debt cycle. If credit is used to purchase productive resources, it helps economic growth and income. If credit is used for consumption it has no added value
Money and Credit: Economic transactions are filled with either money or credit (promise to pay). The availability of credit is determined by the country’s central bank. Credit used to purchase productive resources generating sufficient income to service the debt, helps economic growth and income.
Country versus Rest of the World: A country’s finances consist of a simple income statement (revenue–expenses) and a balance sheet (assets–liabilities). Exports are imports are the main revenue and expense for countries. Uncompetitive economies have negative net income (imports higher than exports), which is financed by either savings (FX & Gold reserves) or rising debt (owed to exporters).
Debt: A nation’s debt is categorized as local currency debt and FX debt. Local debt is manageable since a country’s central bank can print money and repay it. FX debt is controlled by foreign central banks hence it is difficult to be repaid. For example. Turkey has US dollar denominated debt. Only the US central bank (the Federal Reserve), can print US dollars hence FX debt is out of Turkey’s control.
A country can control its debt by either: 1. Inflate it away, 2. Restructure, 3. Default. The US aims to keep nominal GDP growth above interest rates (kept low) to gradually reduce its debt.
Injections & Withdrawals
The government and central bank use fiscal and monetary policies to inject liquidity during slowdowns to boost growth and withdraw liquidity from an overheating economy to control rising inflation. The available policies and tools used during recessions are the following:
Monetary Policies (MP)
Reduce short-term interest rates > Boost Economic growth by 1. Raising Credit, Easing Debt service
Print money > purchase financial assets > force investors to take more risk & create wealth effect
Print Money > purchase new debt issued to finance Gov. deficits when no local or foreign investors
Fiscal Policies (FP)
Expansionary FP is when government spends more than tax received to boost economic growth. This is financed by issuing new debt financed by 1. domestic or foreign investors or 2. CB money printing
Currency vs Injections & Withdrawals and inflation
The degree of economic intervention depends on the country’s economic fundamentals, its currency status and credibility. Countries with reserve currencies or strong fundamentals are allowed by markets to intervene. However, when nations with weak economic fundamentals intervene heavily, confidence is lost, causing a capital flight out of the country, spiking inflation and interest rates which lead to a severe recession, political and social crisis.
Reserve vs Non-reserve currencies: Reserve currencies are used by countries and corporations to borrow funds, store wealth and for international transactions (buy commodities). They are considered low risk. The US dollar is the world’s largest reserve currency. The main advantage of reserve currency nations is their ability to borrow (issue debt) on their own currency. These countries have increased power to conduct monetary and fiscal policies to boost their economies. However, prolonged expansionary fiscal and monetary policies eventually lead to loss of confidence in these currencies as a store of value and potential inflationary crisis.
Non-reserve currency countries: Conversely, developing nations are not considered low risk hence their ability to borrow in their own currencies is limited. Their economic growth is dependent on foreign capital inflows denominated in foreign currencies like the US dollar. During periods of global economic growth, capital flows from developed markets into developing nations looking for higher returns. These economies and their corporations’ issue foreign debt to grow. However, during periods of weak global economic growth or financial stress, foreign capital flows (also called capital flight) back to developed countries causing an inability of countries and companies to repay their debt. Central banks gather foreign exchange reserves during growth periods to create a cushion against capital outflows.
A nation’s economy is vulnerable to economic weakness or financial stress when it experiences:
Current account deficit: a current account deficit indicates an uncompetitive economy which relies on foreign capital to sustain its spending. Hence, is vulnerable to capital outflows
Government deficit: a big government deficit indicates an economy relying or rising debt to finance its operations
Debt/GDP: a high Debt/GDP pushes a nation to borrow large amounts to finance its debt, print money or default. Historically, Debt/GDP higher than 100% is a red warning for economies.
Low or no foreign exchange reserves: Developing economies are vulnerable to capital flight since foreign exchange reserves provide a cushion against capital outflows
High external debt: Nations are vulnerable to high external debts which may be caused by a sudden depreciation of their currency or rising foreign interest rates (due to foreign growth)
Negative real interest rates: Lower interest rates than inflation, are not compensating lenders for holding a nation’s debt hence making nation’s currency vulnerable to capital outflows.
A history of high inflation and negative total returns:: Nations with bad history have lack of trust in value of their currency and debt
Trend & Momentum indicators
Momentum trading is used to capture moves in shorter timeframes than trends. Momentum is the relative change occurring in markets. Relative change is different to a trend. A long-term trend can be up but the short-term momentum of a specific market can be 0.
If a market moves down and then moves up and then moves back down the net relative change in price is 0. That means momentum is 0.
A short-term positive momentum, with a long-term downtrend results in markets with no momentum. MacroVar Momentum model for Financial Markets
MacroVar Trend signal ranges from -100 to +100. The market trend signal is derived as the mean value from 4 calculations for each asset. The timeframes monitored are the following: 1 Day (1 trading day), 1 Week (5 trading days), 1 Month (20 trading days), 3 Months (60 trading days)
For each timeframe, the following calculations are performed: 1. Calculations of the return for the specific timeframe, 2. If return calculated is higher than 0, signal value 1 else signal value -1. Finally, the 4 values are aggregated daily.
MacroVar Trend model for Financial Markets The most important trend indicator
The 52-week simple moving average and its slope are the most important indicators defining a market’s trend. An uptrend is characterized by price above the 52-week moving average followed by an upward slope. If fundamentals of the market have not changed and the moving average slope is still in uptrend, a price drop signifies a market correction and not a change of trend. Traders should watch oscillators like MacroVar oscillator and RSI to buy the dip and still follow the trend. The moving average slope turn signifies a change of trend. MacroVar Trend model for financial markets
MacroVar Trend signal ranges from -100 to +100. The market trend signal is derived as the mean value from 8 calculations for each asset. The timeframes monitored are the following: 1-month (20 trading days), 3-months (60 trading days), 6-months (125 trading days), 1-year (250 trading days)
For each timeframe, the following calculations are performed: 1. Closing price vs moving average (MA): if price greater than MA value is +1, else -1, 2. Moving average slope: if current MA is higher than previous MA, upward slope +1, else -1
MacroVar trend model can be used as a trend strength indicator. MacroVar trend strength values ranging between +75 and +100 or -75 and -100 show strong trend strength.
A technical rollover is identified when MacroVar trend strength indicator moves from positive to negative value or vice-versa.
MacroVar Trend model for Macroeconomic Indicators
A macroeconomic indicator is in an uptrend when last value is higher than its twelve month moving average and its twelve month moving average slope is positive (last twelve month moving average is higher than the previous month’s twelve month moving average)
Lastly, MacroVar calculates the number of months the current value has recorded highs or lows. Trend change is assumed when a specific indicator has recorded a 3-month high / low or more. MacroVar Momentum model for Macroeconomic Indicators
A macroeconomic indicator’s momentum is monitored by calculating its long-term year over year (Y/Y) return and its short-term month on month (M/M) return.
MacroVar is a free financial and economic analysis platform designed to help you make the right trading, investment and business decisions based on data analysis of global financial and economic conditions.
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