Not Been Sated

As markets, a trade deal, awaited
Risk appetite has not been sated
The headlines insist
That barring a twist
Phase one will soon be activated

Hooray!! Phase One of the trade deal is almost complete and apparently President’s Trump and Xi are planning a meeting to sign this historic document. At least that’s today’s story to pump up global equity markets. Actually, I assume that will be tomorrow’s as well, just as it has been the story for the past two weeks. But whether or not this comes to pass, the current view is quite positive and risk assets are back in demand. Equity markets are generally higher worldwide, with Asia showing significant strength (Nikkei +1.75%, Shanghai +0.55%, KOSPI +0.6%), although Europe is having a more muted session (DAX 0.0%, CAC +0.15%, FTSE +0.25%). Meanwhile, US futures are currently pointing to a 0.25% rise at the open.

Other evidence of increased risk appetite has been the decline in both Treasury and Bund prices, with the former seeing yields rise a further 4bps this morning and the latter 2bps. A quick look at the recent price history of the 10-year shows that one week ago they were trading at 1.84% and in the interim they fell to 1.69% before rebounding to this morning’s 1.82% level. A slightly longer term view shows a picture of a market that looks like it bottomed in early September, when the 10-year traded to 1.457% amidst escalating fears of everything, and is now slowly trying to head a bit higher. If the Fed has truly stopped cutting rates, and if they maintain their current ‘not-QE’ version of QE, purchasing $60 billion/month of T-bills, I expect we are looking at a much steeper yield curve and the chance for the dollar to resume its rally. (Historically, the dollar performs better in a steepening yield curve environment.)

However, that dollar movement is much more of a long-term trend than a day to day prescription, and in fact, this morning’s risk-on movement has seen the dollar soften further, except against the other two haven currencies, the Swiss franc (-0.35%) and the Japanese yen (-0.25%). The most notable mover has arguably been the Chinese reniminbi, which has rallied 0.5% and is back below 7.00 for the first time since early August. You may recall that time as a severe escalation of the trade conflict and fears were rampant that the PBOC was going to allow the renminbi to weaken substantially to offset tariffs. Of course, that never happened, and ostensibly, part of the trade deal is a Chinese promise to prevent significant currency weakness. (You know, manipulation of a currency is fine when it works in your favor, just not when it works against you.) At any rate, CNY has been strengthening steadily for the past month and has recouped 2.3% in that time. Quite frankly, despite the fact that the slowdown in the Chinese economy would argue for a weaker currency, I expect that we will continue to see modest strength in the renminbi; at least until the trade deal is signed.

In the G10 space, today’s big winner is the Aussie dollar, which is higher by 0.45% this morning and has rallied 3.65% since its recent trough in the beginning of October. Given the country’s close ties to China, it should be no surprise that positive news regarding China helps the AUD. In addition, last night the RBA met and left rates on hold, which while widely expected was a bit of a relief given they cut rates in the past three meetings. While they maintained their easing bias, the market is gaining optimism that the global trade situation will improve shortly and that Aussie will benefit. While the move in Aussie did help drag kiwi higher (+0.25%), the rest of the space is entirely uninteresting.

In the EMG bloc, South Africa’s rand is the leader, gaining 0.65% as the market continues to absorb the fact that Moody’s left them with an investment grade rating. While things are still precarious there, perhaps a relaxation of trade tensions globally will allow the country to stabilize their finances and the currency to stabilize as well. On the flip side, Chile’s peso has opened under pressure, falling 0.65% after Retail Sales there were released at a much worse than expected -0.9% (expected +1.8%). Clearly the ongoing protests are having an impact and as in most places around the world, there doesn’t appear to be any end in sight.

On the calendar this morning we see the Trade balance (exp -$52.4B) as well as the JOLTS Jobs report (7.063M) and finally, at 10:00 ISM Non-Manufacturing (51.0). You may recall the ISM data on Friday was soft at 48.3, and this morning we saw UK Services PMI print at a better than expected 50.0. The best explanation I can give is that we are at an inflection point in the global economy, where what has clearly been a slowing trend may finally be responding to the massive stimulus efforts by the world’s central banks. (FYI, the PBOC reduced its 1-year lending rate by 5bps last night, the first cut since 2016). But inflection points are probably more accurately referred to as inflection curves, since things are not going to turn around quickly. I anticipate we are going to see mixed data for some time into the future. This will allow both bulls and bears to use data to make their respective cases.

In the end, unless today’s data is horrendous, I expect that the risk-on scenario will continue to drive markets and the dollar will likely soften a bit further before it is all over.

Good luck
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