The World of ABC Economics

The ABC Economics Newsletter Ideas shape the course of history http://abceconomics.com/ No. 4 – 03/2016

WHAT’S IN THIS MONTH’S ISSUE:

Understanding Brexit. The impact of immigration on UK wages – Stefano F. Fugazzi (p.1)

US elections. Will it be Trump vs. Clinton? – John Wood (p.2)

VIX Index, Phillips Curve and Misery Index. Understanding macroeconomics with ABC Economipedia – Stefano F. Fugazzi (p. 3)

Is this why the Fed is hiking interest rates? – Stefano F. Fugazzi (p.4)

Could CoCos trigger a new financial crisis in Europe? – Calogero Nicosia (p. 5)

Residential property prices – BIS Monetary and Economic Department (p.6)

How the UK property market will look like in 2030 – John Wood (p. 7)

An assessment of the prospects for UK inflation – Bank of England (p.8)

Elezioni USA, toro seduto e la maledizione dell'ottavo anno – Federico Izzi (p. 9)

Regole di trading basate sui canali – Giorgio Marchi (p. 10)

This Month's Recipe: Broad beans, asparagus and Pecorino soup – Claudia Armani (p.11)

Understanding Brexit. The impact of immigration on UK wages

STEFANO FRANCESCO FUGAZZI (Founder of ABC Economics) reports

The recent rise in UK immigration has been a hotly debated and politically charged topic, particularly now in the run-up to the referendum vote.

At the heart of this heated debate is the widespread belief that immigration has large effects on the labour market in general, and employment and wages in particular.

The stereotype of the Polish plumber — used widely as a symbol of cheap labour — led many to believe that immigration in Britain has pushed down wages.

According to a Bank of England research paper published in December 2015, immigration to the United Kingdom has risen dramatically over the past two decades.

Please continue reading on ABC Economics:

https://abceconomics.com/2016/02/22/ukwages/

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Race/Topic Poll Poll date Results Spread

Michigan Republican Presidential Primary FOX 2 Detroit/Mitchell Friday 4 March Trump 42, Cruz 19, Rubio 15, Kasich 14, Carson Trump +23

Kansas Republican Presidential Caucus Trafalgar Group (R) Friday 4 March Trump 35, Cruz 29, Rubio 17, Kasich 13, Carson Trump +6

Louisiana Democratic Presidential Primary Magellan Strategies (R) Thursday 3 March Clinton 61, Sanders 14 Clinton +47

Louisiana Republican Presidential Primary Trafalgar Group (R) Thursday 3 March Trump 44, Cruz 26, Rubio 15, Kasich 5, Carson 6 Trump +18

Louisiana Republican Presidential Primary Magellan Strategies (R) Thursday 3 March Trump 41, Cruz 21, Rubio 15, Kasich 9, Carson 5 Trump +20

Michigan Democratic Presidential Primary FOX 2 Detroit/Mitchell Thursday 3 March Clinton 61, Sanders 33 Clinton +28

Michigan Republican Presidential Primary FOX 2 Detroit/Mitchell Thursday 3 March Trump 39, Cruz 14, Rubio 19, Kasich 12, Carson 9 Trump +20

Mississippi Republican Presidential Primary Magellan Strategies (R) Wednesday 2 March Trump 41, Cruz 17, Rubio 16, Kasich 8, Carson 5 Trump +24

Mississippi Democratic Presidential Primary Magellan Strategies (R) Wednesday 2 March Clinton 65, Sanders 11 Clinton +54

Michigan Republican Presidential Primary EPIC-MRA Wednesday 2 March Trump 29, Cruz 19, Rubio 18, Kasich 8, Carson 7 Trump +10

General Election: Trump vs. Clinton Rasmussen Reports Wednesday 2 March Clinton 41, Trump 36 Clinton +5

General Election: Trump vs. Clinton CNN/ORC Tuesday 1 March Clinton 52, Trump 44 Clinton +8

General Election: Trump vs. Sanders CNN/ORC Tuesday 1 March Sanders 55, Trump 43 Sanders +12

General Election: Cruz vs. Clinton CNN/ORC Tuesday 1 March Cruz 49, Clinton 48 Cruz +1

General Election: Cruz vs. Sanders CNN/ORC Tuesday 1 March Sanders 57, Cruz 40 Sanders +17

General Election: Rubio vs. Clinton CNN/ORC Tuesday 1 March Rubio 50, Clinton 47 Rubio +3

General Election: Rubio vs. Sanders CNN/ORC Tuesday 1 March Sanders 53, Rubio 45 Sanders +8

ABC Economics based on RealClearPolitics data

US elections. Will it be Trump vs. Clinton?

The World of ABC Economics. An ABC Economics creation. http://abceconomics.com/ Created, edited and directed by Stefano Francesco Fugazzi (abc.economics@yahoo.com). Acknowledgements: Paola De Pascali (co-editor of The World of ABC Economics and freelance jounalist), Italoeuropeo, London One Radio, Luadan Future Trade and this month’s contributors.

ABC Economics has been cited on several occasions by the media, making a splash on the front pages of Il Sole 24 Ore and Il Giornale, mentioned by Otto e Mezzo (a TV programme) and by a handful of Italian blogs, in addition to Wikipedia and a number of US news portals e.g. Zero Hedge, TV channels and UK radio stations. Additionally, some of our ABC Economics work was translated into and reported by French and Russian news portals.

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VIX Index, Phillips Curve and Misery Index. Understanding macroeconomics with ABC Economipedia

Stefano Francesco Fugazzi, founder of ABC Economics, is pleased to announce the release of the second edition of 'ABC Economipedia'. Now available both in eBook and paperback formats.

Synopsis of ABC Economipedia

The author has interpreted the current economic situation from two points of view, focusing, on the analysis of the key economic indicators of the eurozone since the introduction of the single currency (please refer to the Phillips curve and the various iterations of the Misery Index introduced here) and on the reactions of financial markets – including forex, equity and bond markets – to the monetary policies announced by Central Banks since the bursting of the 2007 subprime mortgage bubble.

The new edition features new chapters including a revised Misery Index framework and Fugazzi's internationally acclaimed VIX Index analysis ('What financial markets know about terrorism?').

Available in Paperback (distributed by Amazon and Lulu) e eBook.

About the Author

Graduated in 2003 with a BA in Business Studies. After successfully completing a Master in Strategic Management at the Michael Smurfit Graduate School of Business (University College Dublin) the following year, in 2005 he joined Merrill Lynch. Between 2007 and 2015 he worked at Schroders. Currently working for a boutique bank in Central London as a stress testing and risk management analyst.

In 2011 he completed a course in News Journalism at the London School of Journalism. In 2013 he founded the business news portal ABC Economics. He is the author of “Idee per l’Italia” (2013), “A.B.C. Italia – Abbiamo Bisogno di Crescita” (2014), “ABC Economipedia” (2015) and “Brexit?” (2015).

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Is the above notion supported by empirical evidence?

The two FED economists argue that there is no empirical evidence to support this notion as a number of studies suggest that in practice exchange rates are (almost) unpredictable in the short run and that there “is weak evidence that a high-interest-rate currency actually has a tendency to appreciate.”

* Carry trade investors have to move funds from one country to another, exposing their investment to exchange rate risk.

A recent research by two Federal Reserve Bank of St. Louis economists put into perspective last December’s decision by the Federal Open Market Committee (FOMC) to increase rates for the first time in nearly a decade.

The researchers noted that “starting in the middle of 2014, the U.S. dollar experienced a rapid appreciation. The dollar's value increased by more than 20 percent within nine months, a quick change relative to its history.”

Are the two events – the appreciation of the US dollar and the subsequent rate hike – somehow connected?

The common belief is that a high-interest-rate currency should appreciate relative to a low-interest-rate currency.

For instance, if the central bank of Country A increases interest rates whilst Country B lowers their base rates, then Country A would provide more attractive returns on savings than in the Country B. On that basis, Country A would attract higher inflows of international capital and consequently appreciate his home currency.

Interestingly, the authors of the research observed that a standard textbook theory called uncovered interest rate parity seems to suggest exactly the opposite: high-interest-rate currencies should depreciate.

Suppose that Country A’s three-month rate is higher than Country B's. An investor can borrow the money in Country B, buy Country A’s currency and invest the money in a Country A bond, which yields a higher interest rate than Country B's.

After three months, the investor has to exchange the money denominated in Country A’s currency back to Country B’s and repay the loan.

The investor would record a profit from the difference in interest rates, plus the positive (or negative) variation in exchange rate over the time-period.

According to the uncovered interest rate parity theory, such strategy – typically called a carry trade* – yields a nil return as interest rate gains are generally offset by FX losses due to Country A’s currency depreciating against Country B’s.

STEFANO FRANCESCO FUGAZZI reports.

Is this why the Fed is hiking interest rates?

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Could CoCos trigger a new financial crisis in Europe?

Since the introduction of Contingent Convertible bonds (CoCos), a form of hybrid assets, many financial practitioners around the world, particularly in the US and in Britain, have publicly criticised a product which is believed to be too opaque in valuation and largely untested.

As many believe CoCos could trigger the next European financial market crisis, time has come for us to shed some light on the salient characteristics of this instrument.

What is a CoCo bond?

A CoCo bond is a debt instrument that converts into equity or writes down as soon as the banks gets into a high threating situation. The Conversion or the write down happens via a trigger mechanism which is defined in the contract. Typically the trigger starts when the common equity TIER-1 or 2 fall below certain limits.

Investors holding CoCos enjoy a really high coupon, far above a standard bond coupon; however, should the CoCo issuer, typically a financial institution, face a stress situation and should its balance sheet shrink and the trigger level be reached, the investor could experience a write down on the bond, or see the bond being converted into equity. In the latter case, the CoCos holder will become a shareholder; however, should this occur, there is a high probability that the share value will be very low with the investor recording unexpected losses.

CALOGERO NICOSIA reports.

Beauty and the Beast

Although Bloomberg labelled CoCos ‘a high-yield investment with a hand grenade attached’, it is worth noting that their original intent was to reinforce the European banking system.

Beyond the divergence in the opinion around CoCos’ ability to strengthen the resilience of the banking system, it remains the fact the CoCo market is fast- growing.

The demand for CoCos is largely due to (i) European banks rushing into new issuance of capital in order to meet regulatory requirement under Basel 3 and (ii) the quest for high yield returns in the current context of ultra-low interest rates.

Who is investing in CoCos?

CoCos are proving popular amongst the financial sector, and in particular within the banking sector. However, the widespread use of this instrument could pose systemic risks to the financial community as investors willing to hedge their investments would have to short the equity share of CoCos issuers.

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BIS statistics on residential property prices

Excerpt from the Bank for International Settlements (BIS) quarterly bulletin by the BIS Monetary and Economic Department.

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How the UK property market will look like in 2030

JOHN WOOD reports.

The number of UK homes worth £1m or more is set to triple over the next 15 years, according to Santander Mortgages. Today, fewer than half a million properties in Britain are worth £1m or more, of which 62 per cent are based in London.

It is envisioned that more than 25 per cent of London properties will break the £1m-mark by 2030 compared to nearly one in 10 properties today. In London the average price will rise from £0.53m to £1.27m whilst the national average will increase from £0.28m to £0.56m by 2030. In the UK the average property price is 7.9 times the average income. This is expected to hit a multiple of 9.7 by 2030.

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An assessment of the prospects for UK inflation

Extract from Bank of England's quarterly Inflation Report as at February 2016. The Report sets out the detailed economic analysis and inflation projections on which the Bank's Monetary Policy Committee bases its interest rate decisions, and presents an assessment of the prospects for UK inflation.

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Elezioni USA, toro seduto e la maledizione dell'ottavo anno

A cura di FEDERICO IZZI

Dopo aver assistito ad un disastroso inizio anno, il peggiore dal dopoguerra, l’orso concede una tregua a un toro che mostra una pelle segnata da profonde ferite.

La volatilità che sta caratterizzando questa prima fase dell’anno descrive un certo nervosismo tra gli operatori finanziari che si trovano a dover mutare velocemente le aspettative per le prossime settimane e mesi.

Analizzando nel dettaglio questi primi 42 giorni di contrattazione (chiusura di venerdì 4 marzo) possiamo notare come per ben 24 volte l’indice statunitense S&P500 abbia chiuso con rialzi e/o ribassi superiori all’1% e 6 volte oltre il 2%.

L’ S&P500 ha chiuso il mese di gennaio con un ribasso superiore al 5% facendo temere per il resto dell’anno. Il Barometro di Gennaio (vedi a lato la descrizione) diventa meno preoccupante se consideriamo che dai minimi di metà febbraio i prezzi sono tornati nuovamente a rivedere i livelli di inizio gennaio, recuperando così l’80% del terreno perso in questi ultimi mesi.

Considerando che marzo e aprile sono solitamente i mesi più positivi dell’anno, preoccupa la correlazione presente con la statistica dell’ultimo anno presidenziale. In base alle serie storiche, il mese di giugno potrebbe riservare qualche cattiva sorpresa, con i mercati che mediamente tendono a stornare.

La tendenza al ribasso è inoltre più marcata nel corso dell’ultimo anno di un doppio mandato presidenziale (cfr. la linea nera all’interno del grafico).

Considerando che l’attuale andamento dell’indice statunitense (linea rossa) rispecchia quasi fedelmente la media del ciclo presidenziale ad 8 anni, nel corso

delle prossime settimane sarà opportuno non farsi contagiare dall’euforia. Il primo sole primaverile potrebbe, infatti, iniziare a bruciare le ferite del toro oramai seduto.

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A cura di GIORGIO MARCHI (jobtrading.it)

Nel mondo dell’analisi tecnica i canali possono essere metaforicamente rappresentati da fiumi. Quando, scendendo a valle, questo tocca il bordo sinistro, rimbalza verso destra, e quando tocca il destro, ruota a sinistra.

Il medesimo concetto può essere applicato ai canali: quando il prezzo di uno strumento finanziario tocca il tetto del canale, inverte il trend e scende giù, fino a pavimento. Quando anche questo è raggiunto, si assiste ad una nuova inversione fino al soffitto.

A questo punto l’investitore aprirà posizioni short (ad una inversione ribassista dopo che il prezzo non ha infranto il tetto del canale con funzione di resistenza) oppure posizioni long (ad una inversione rialzista dopo che il prezzo non ha infranto il pavimento del canale con funzione di supporto).

In analisi tecnica esistono differenti tipi di canali che possono essere utilizzati seguendo sempre questo principio. Andiamo ad analizzarli nel dettaglio.

A riguardo si cita il caso delle famose Bande di Bollinger, indicatore sovrapposto che vuole prima la creazione di una media mobile a 20 periodi e poi di altre due linee una superiore (tetto del canale) e l’altra inferiore (pavimento) calcolate come la media mobile +/- 2 standard deviations.

Una quarta metodologia si sostanzia nel plottaggio sul grafico di due linee rappresentati appunto i bordi del canale e calcolate una come media mobile dei massimi raggiunti dal prezzo nelle X sedute precedenti e l’altra come media mobile dei minimi.

Regole di trading basate sui canali

Il primo modo per rappresentare un canale è banalmente quello di disegnare sul grafico una retta parallela ad una trendline già esistente da distanziare in base alle passate oscillazioni del prezzo.

Un secondo modo consiste nel plottare sul grafico due linee parallele ad una media mobile (l’ideale sarebbe una media mobile esponenziale a 13 periodi). Ciò si può fare utilizzando la seguente formula:

Linea Superiore del Canale = EMA + Coefficiente * EMA

Linea Superiore del Canale = EMA - Coefficiente * EMA

dove la larghezza del canale è data appunto dal Coefficiente che deve essere regolato in modo da contenere tra il 90% ed il 95% della price action. Una stessa considerazione vale per il terzo caso, dove però la distanza non è soggettivamente scelta (ed adattata nel tempo) dall’operatore, ma è automaticamente calcolata dalla piattaforma utilizzata sulla base della volatilità dello strumento finanziario (misurata banalmente dalla standard deviation).

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This Month's Recipe: Broad beans, asparagus and Pecorino soup

CLAUDIA ARMANI reports. A green goodness soup, perfect for the spring. Easy to make, filling, rich in folates and vegetable proteins. It works really well even without the cheese, making it a perfect choice for vegans.

Ingredients A bunch of asparagus 100 grams broad beans 1 big leek 1 small potato 1 organic stock cube ( Kalo) Pecorino romano to serve

Method Wash and prepare the vegetables Chop them and place them in a pot. Add some water and stock, let it

simmer for at least 30 min. Simply put it in the blender add some

Pecorino shavings and serve.