Completely Arcane

The G8 confirmed what we knew
The eight of them haven’t a clue
Seems most people think
Their policies stink
And waste time is all that they do

They talked about taxes and trade
But progress was sadly delayed
All details remain
Completely arcane
While photo ops cap the charade

Today is Fed day, with the FOMC’s 6-weekly meeting ending and any policy changes to be announced this afternoon.  We also get a press conference from Chairman Ben at 2:15 pm, although I would be surprised if there is any new information forthcoming.  He must still be licking his wounds from his comments about tapering bond purchases back in May.  After all, since then, 10 year Treasury yields have risen by 25bps, and equities fell more than 5%, although they have since regained about half those losses.  So while all eyes today will be on the Fed, I would be very surprised to see anything even remotely new in the statement or press conference.

Finishing up the G8 meeting, our illustrious leaders spent a small fortune to meet in Northern Ireland, discuss a range of topics and decide nothing.  It was a standard performance I would argue.  In fact, it is not clear to me that the G8, or G20, or G(anything) has shown any value in the last decade.  Perhaps halting these biannual meetings would be an effective way to reduce each government’s expenditures, photo ops be damned!

Looking at the FX markets today, there has not been a great deal of activity overnight with the euro remaining in a 27 pip range, the pound showing a bit more life with a 65 pip range and the yen the most dramatic of the big three with a 83 pip range.  That said, none of them have moved very far from yesterday’s closing levels as they await the Fed comments.  Overnight we saw strong data from Japan, with Department Store Sales surging by 5.1% nationwide and the Trade Deficit expanding by a less than expected 12.6% to ¥993 billion.  While export volumes fell, the yen value of those exports rose by more than 10%.  This was attributed to the weaker yen, and has helped reinforce the idea that Abenomics is doing its job.  The market response to the data was one of immediate yen strength, halting the recent decline in the currency.  But there has been limited follow through as there are several stories this morning of how major hedge funds remain committed to the yen weakening trade.  I am in complete agreement with the hedge funds, and continue to believe current levels remain attractive for yen receivables hedgers.  Once the Upper House election is over, look for the next wave of yen weakness.

The euro story is virtually non-existent today, with no economic data, no comments of note and no expectations of change in the market.  Any movement will be entirely dependent on the Fed.  And the pound, which has rallied steadily over the past month appears to have reached the end of this move.  While it did edge through the levels I thought would cap things, there seems to be no momentum to the trade higher and it feels like it is setting up to head back to the 1.52 level in the next week or two.  The BOE minutes were a non-event, with outgoing Governor King outvoted 6-3 again in his attempt to increase the asset purchase program.  And finally, in the UK, tonight is the Mansion House speech, where Governor King lays out his views of the economy.  It has oftentimes in the past resulted in both market movement and government action, but with King about to step down, my sense is it will have a limited impact.  Incoming Governor Carney is the one that markets will now focus upon.

In emerging markets, a story I have not been discussing directly is Brazil, where protests have been gathering pace over the past two weeks.  It seems that the people of Brazil have become upset with the general level of corruption, the lack of opportunity and the rising inflation that is eating into their living standards.  The catalyst was a rise in the bus fare by 20 cents in Sao Paolo, but it has spread around the country and forced the government to respond, not only to the protestors directly, but to the issues that they have raised.  During this period, BRL has fallen some 5%, and it is down more than 9% in the last month.  Can this continue?  My experience in emerging markets tells me that there is a chance, maybe 20%, that it can extend dramatically.  While the highest likelihood is that the BRL will settle back between 2.00 and 2.10 over the summer, do not rule out a move to 2.50 or beyond.  While this may be unwelcome news, the thing about emerging markets is that the risk comes not so much from the underlying economy, but rather from the lack of market liquidity that is found in developed markets.  And lack of liquidity can produce quite dramatic results.  Pay close attention to this story if you have exposures in country.

Good luck