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  • Hello, and welcome to FT Markets.

  • Aside from the day to day movements in interest rates, stocks, bonds,

  • and the things which investors are having to pay attention to everyday,

  • What about the big trends which are driving this world?

  • What are the most important things that we should be paying attention to?

  • To help us think about that, we are joined today by Jon Jonsson, a very experienced fixed income investor for Neuberger Berman.

  • Hello, Jon. Thanks for joining us.

  • Thank you for having me.

  • So in terms of what's important,

  • I think we've got a chart with a lot of people would recognise here, the US dollar over the last 16 years.

  • So, tell us. Why is this so important?

  • Well, this is very important as you know.

  • The dollar has been behind a lot of the stress where you have seen in the markets today.

  • We have seen massive appreciation of the dollar over the last 18 months, and that has affected the commodity prices.

  • It has affected different economies like China, that is struggling with an old value currency that has been packed to the dollar.

  • So we can trace a lot of things that have happened as we go through this chart if you look back.

  • You know, since 2001.

  • China joined the World Trade Organisation, China is growing faster than US. US is slowing, easing, and the dollar sails off.

  • We go into the financial crisis and then towards the end of quarter QE, and when at the end of tapering the dollar has appreciated a lot

  • and that has caused a significant dislocation, it benefits home countries and can have very disruptive impact on other countries in asset markets

  • I think you've got a chart here as well as sort of some of the winners and losers, everybody has been losing against the dollar,

  • but that benefits some more than others.

  • Yeah, you can see on this chart how dramatically the world has changed.

  • If you go from the top you see the Chinese Renmibi.

  • China is obviously struggling with slowing economy. The currency plays a big role in that.

  • And if you go down the chart, you can see here at the top sort of economies that have been not as successful

  • as in managing or engineering a weaker currency to remain competitive.

  • Then, in sort of the middle you have the Euro. The ACB has been very successful in managing down the currency,

  • and that is the economy you would expect it to benefit from this

  • and then at the bottom you may have some economies that have gotten a little bit too much

  • a little bit too far

  • A little too much of a good thing, where you actually have risks.

  • You know, having capital outflows, CPI spikes, and more disruptive devaluation of the currency.

  • So what's the big conclusion you draw away from this?

  • This is one trend, that's why I mean a significant change in competitiveness and ability for economies to generate growth and inflation.

  • There is a second trend that is very important to understand. On what side, you are on that trend.

  • And that is the movement of commodity prices and more specifically energy prices.

  • And I think you have done something similar here for oil as well. Yes

  • If we just explain this. I think this is sort of you took 2014 sort of imports and exports of oil,

  • and imagined the difference between a hundred dollar oil price and a 45 dollar oil price.

  • And this is who gains and who loses.

  • Yeah, and that's very important. Obviously, we've seen oil prices come down much more.

  • But we are expecting lower for longer if you assume that's the fair representation of going from 100 to 45 as a long term,

  • then this would be the annual impact.

  • And that is a significant wealth transfer.

  • We are talking between the different economies over one trillion dollars that is transferred annually.

  • So that's a lot of money.

  • And if you took it just at the consumer level, that will be around three trillion dollars annually that are transferred from producers of commodities to consumers.

  • So that's a big wealth transfer (that) would really dramatically affect the fortunes of different economies over time.

  • And I have just highlighted some of these economies like India has benefits dramatically from this.

  • So if you are on the right side of the commodity trade, you know, you are gaining from lower import prices and your currency has sold off,

  • then you have one on both of those turns.

  • And that is important to find economies that are on the winning side of both those trends, and as you go through this

  • you can see Europe certainly benefits. And this is only looking at the oil.

  • Europe is benefiting from the oil and the currency, so that sounds pretty constructive for that sort of account.

  • Thank you. So it seems like oil and the dollar, the big trends which are driving our world and which are set to continue doing so.

Hello, and welcome to FT Markets.

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Global fixed income winners and losers | FT Markets

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