Author Archives: fxpoet

No Longer Appealing

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Today pound bears seem to be feeling
That shorts are no longer appealing
The polls keep on showing
The Tory lead growing
Look for more complaining and squealing

As well, from the trade front we’ve heard
That progress has not been deterred
Some sources who know
Say Phase One’s a go
With rollbacks the latest watchword

Yesterday was so…yesterday. All of that angst over the trade deal falling apart after President Trump indicated that he was in no hurry to complete phase one has completely disappeared this morning after a story hit the tape citing ‘people familiar with the talks’. It seems that the president was merely riffing in front of the cameras, but the real work has been ongoing between Mnuchin, Lighthizer and Liu He, and that progress is being made. Naturally, the market response was to immediately buy back all the stocks sold yesterday and so this morning we see equity markets in Europe higher across the board (DAX +1.1%, CAC +1.3%) and US futures pointing higher as well (DJIA +0.5%, SPY +0.45%). Alas, that story hit the tape too late for Asia, which was still reeling from yesterday’s negative sentiment. Thus, the Nikkei (-1.1%), Hang Seng (-1.25%) and Shanghai (-0.25%) all suffered overnight.

At the same time, this morning has seen pound Sterling trade to its highest level since May as the latest polls continue to show the Tory lead running around twelve percentage points. Even with the UK’s first-past-the-poll electoral system, this is seen as sufficient to result in a solid majority in Parliament, and recall, every Tory candidate pledged to support the withdrawal agreement renegotiated by Boris. With this in mind, we are witnessing a steady short squeeze in the currency, where the CFTC statistics have shown the size of the short Sterling position has fallen by half in the past month. As a comparison, the last time short positions were reduced this much, the pound was trading at 1.32 which seems like a pretty fair target for the top. Quite frankly, this has all the earmarks of a buy the rumor (Tory victory next week) sell the news (when it actually happens) situation. In fact, I think the risk reward above 1.30 is decidedly in favor of a sharper decline rather than a much stronger rally. Again, for Sterling receivables hedgers, I think adding to positions during the next week will be seen as an excellent result.

Away from the pound, however, the dollar is probably stronger rather than weaker this morning. One of the reasons is that after the euro’s strong performance on Monday, there has been absolutely no follow-through in the market. Remember, that euro strength was built on the back of the dichotomy of slightly stronger than expected Eurozone PMI data, indicating stabilization on the Continent, as well as much weaker than expected US ISM data, indicating things here were not so great after all. Well, this morning we saw the other part of the PMI data, the Services indices, and across all of the Eurozone, the data was weaker than expected. This is a problem for the ECB because they are building their case for any chance of an eventual normalization of policy on the idea that the European consumer is going to support the economy even though manufacturing is in recession. If the consumer starts backing away, you can expect to see much less appealing data from the Eurozone, and the euro will be hard-pressed to rally any further. As I have maintained for quite a while, the big picture continues to favor the dollar vs. the rest of the G10 as the US remains the most robust economy in the world.

Elsewhere in the G10, Australia is today’s major underperformer as the day after the RBA left rates on hold and expressed less concern about global economic issues, they released weak PMI data, 49.7, and saw Q3 GDP print at a lower than expected 0.4%. The point here is that the RBA may be trying to delay the timing of their next rate cut, but unless China manages to turn itself around, you can be certain that the RBA will be cutting again early next year.

In the EMG bloc, the biggest loser was KRW overnight, falling 0.6% on yesterday’s trade worries. Remember, the positive story didn’t come out until after the Asian session ended. In fact, the won has been falling pretty sharply lately, down 3.5% in the past month and tracking quickly toward 1200. However, away from Korea, the EMG space is looking somewhat better in this morning’s risk-on environment with ZAR the big gainer, up 0.5%. What is interesting about this result is the South African PMI data printed at 48.6, nearly a point worse than expected. But hey, when risk is on, traders head for the highest yielders they can find.

Looking to this morning’s US session, we get two pieces of data starting with ADP Employment (exp 135K) at 8:15 and then ISM Non-Manufacturing at 10:00 (54.5). Quite frankly, both of these are important pieces of data in my mind as the former will be seen as a precursor to Friday’s NFP report and the latter will be scrutinized to determine if Monday’s ISM data was a fluke, or something for more concern. The ISM data will also offer a direct contrast to the weak Eurozone PMI data this morning, so a strong print is likely to see the euro head back toward 1.10.

And that’s really it today. Risk is back on, the pound is rolling and whatever you thought you knew from yesterday is ancient history.

Good luck
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Started To Fade

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On Monday, the data released
Showed growth in the US decreased
As well, hope ‘bout trade
Has started to fade
And snow overwhelmed the Northeast

In a word, yesterday sucked. At least that’s the case if you were bullish on essentially any US asset when the session started. Early equity market gains were quickly reversed when the ISM data printed at substantially worse than expected levels. Not only did the headline release (48.1) miss expectations, which was biased toward a modest improvement over the October readings, but all of the sub-indices along with the headline number actually fell further from October. Arguably the biggest concern came from the New Orders Index which printed its lowest level (47.2) since the financial crisis. Granted, this was the manufacturing sector and manufacturing represents only about 12% of the US economy, but still, it was a rout. The juxtaposition with the green shoots from Europe was not lost on the FX market either as the dollar fell sharply across the board. In fact, the euro had its best day since early September, rallying 0.6%.

This morning, the situation hasn’t improved either, as one of the other key bullish stories for equity sentiment, completion of the phase one trade deal with China, was dealt a blow when President Trump explained that he was in no hurry to complete the deal and would only do so when he was ready. In fact, he mused that it might be better to wait until after the 2020 elections before agreeing a deal with China, something that is clearly not priced into the market. When those comments hit the tape, US equity futures turned around from small gains to losses on the order of 0.3%. Bullishness is no fun yet.

Perhaps it’s worth a few moments to consider the essence of the bullish US case and determine if it still holds water. Basically, the broad consensus has been that despite its sluggish pace, growth in the US has been more robust than anywhere else in the developed world and that with the FOMC having added additional stimulus via 75 bps of interest rate cuts and, to date, $340 billion in non-QE QE, prospects for continued solid growth seemed strong. In addition, the tantalizing proximity of that phase one trade deal, which many had assumed would be done by now or certainly by year end, and would include a reduction in some tariffs, was seen as a turbocharger to add to the growth story.

Now, there is no doubt that we have seen some very positive data from the US, with Q3 GDP being revised higher, the housing market showing some life and Retail Sales still solid. In fact, last week’s data releases were uniformly positive. At the same time, the story from Europe, the UK, China and most of the rest of the world was of slowing or non-existent growth with central banks having run out of ammunition to help support those economies and a protracted period of subpar growth on the horizon. With this as a backdrop, it is no surprise that US assets performed well, and that the dollar was a key beneficiary.

However, if that narrative is going to change, then there is a lot of price adjustment likely to be seen in the markets, which arguably are priced for perfection on the equity side. The real question in the FX markets is, at what point will a risk-off scenario driven by US weakness convert from selling US assets, and dollars by extension, to buying US dollars in order to buy US Treasuries in a flight to safety? (There is a great irony in the fact that even when the US is the source of risk and uncertainty, investors seek the safety of US Treasury assets.) At this point, there is no way to know the answer to that question, however, what remains clear this morning is that we are still in the sell USD phase of the process.

With that in mind, let’s look at the various currency markets. Starting with the G10, Aussie is one of the winners after the RBA left rates on hold, as widely expected, but sounded less dovish (“global risks have lessened”) than anticipated in their accompanying statement. Aussie responded by rallying as much as 0.65% initially, and is still higher by 0.35% on the day. And that is adding to yesterday’s 0.85% gain taking the currency higher by 1.2% since the beginning of the week. While the longer term trend remains lower, it would not be a surprise to see a push toward 0.70 in the next week or so.

The other major winner this morning is the British pound, currently trading about 0.4% higher after the latest election poll, by Kantar, showed the Tories with a 12 point lead with just nine days left. Adding to the positive vibe was a modestly better than expected Construction PMI (45.3 vs. 44.5 expected) perhaps implying that the worst is over.

Elsewhere in the G10, things have been far less interesting with the euro maintaining, but not adding to yesterday’s gains, and most other currencies +/- a few bps on the day. In the EMG bloc, the noteworthy currency is the South African rand, which has fallen 0.55% after a much worse than expected Q3 GDP release (-0.6% Q/Q; 0.1% Y/Y). The other two losing currencies this morning are KRW and CNY, both of which have suffered on the back of the Trump trade comments. On the plus side, BRL has rallied 0.4% after its Q3 GDP release was better than expected at +0.6% Q/Q. At least these moves all make sense with economic fundamentals seeming to be today’s driver.

And that’s really it for the day. There is no US data this morning, although we get plenty the rest of the week culminating in Friday’s payroll report. Given the lack of economic catalysts, it feels like the dollar will remain under general pressure for the time being. The short term narrative is that things in the US are not as good as previously had been thought which is likely to weigh on the buck. But for receivables hedgers, this is an opportunity to add to your hedges at better levels in quiet markets. Take advantage!

Good luck
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A Future Quite Bright

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The data from China last night
Implied that growth might be all right
The PMI rose
And everyone knows
That points to a future quite bright!

Is it just me? Or does there seem to be something of a dichotomy when discussing the situation in China? This morning has a decidedly risk-on tone as equity markets in Asia (Nikkei +1.0%, Hang Seng +0.4%, Shanghai +0.15%) rallied after stronger than expected Chinese PMI data was released Friday night. For the record, the official Manufacturing PMI rose to 50.2, its first print above 50.0 since April, while the non-Manufacturing version rose to 54.4, its highest print since March. Then, this morning the Caixin PMI data, which focuses on smaller companies, also printed a bit firmer than expected at 51.8. These data releases were sufficient to encourage traders and investors to scoop up stocks while they dumped bonds. After all, everything is just ducky now, right?

And yet…there are still two major issues outstanding that have no obvious short-term solution, both of which can easily deteriorate into a much worse situation overall. The first, of course, is the trade fiasco situation, where despite comments from both sides that progress has been made, there is no evidence that progress has been made. At least, there is no timeline for the completion of phase one and lately there has been no discussion of determining a location to sign said deal. Certainly it appears that the current risk profile in markets is highly dependent on a successful conclusion of these talks, at least as evidenced by the fact that every pronouncement of an impending deal results in a stock market rally.

The second issue is the ongoing uprising in Hong Kong. China has begun to use stronger language to condemn the process, and is extremely unhappy with the US for passing the Hong Kong Human Rights and Democracy Act last week. However, based on China’s response, we know two things: first that completing a trade deal is more important than words about Hong Kong. This was made clear when the “harsh” penalties imposed in the wake of the Act’s passage consisted of sanctions on US-based human rights groups that don’t operate in China and the prevention of US warships from docking in Hong Kong. While the latter may seem harsh, that has already been the case for the past several months. In other words, fears that the Chinese would link this law to the trade talks proved unfounded, which highlights the fact that the Chinese really need these talks to get completed.

The second thing we learned is that China remains highly unlikely to do anything more than complain about what is happening in Hong Kong as they recognize a more aggressive stance would result in much bigger international relationship problems. Of course, the ongoing riots in Hong Kong have really begun to damage the economy there. For example, Retail Sales last night printed at -24.3%! Not only was this worse than expected, but it was the lowest in history, essentially twice as large a decline as during the financial crisis. GDP there is forecast to fall by nearly 3.0% this year, and unless this is solved soon, it seems like 2020 isn’t going to get any better. But clearly, none of the troubles matter because, after all, PMI rose to 50.2!
Turning to Europe, PMI data also printed a hair better than expected, but the manufacturing sector remains in dire straits. Germany saw a rise to 44.1 while France printed at 51.7 and the Eurozone Composite at 46.9. All three were slightly higher than the flash data from last week, but all three still point to a manufacturing recession across the continent. And the biggest problem is that the jobs sub-indices were worse than expected. At the same time, Germany finds itself with a little political concern as the ruling coalition’s junior partner, the Social Democrats, just booted out their leadership and replaced it with a much more left wing team who are seeking changes in the coalition agreement. While there has been no call for a snap election, that probability just increased, and based on the most recent polls, there is no obvious government coalition with both the far left and far right continuing to gain votes at the expense of the current government. While this is not an immediate problem, it cannot bode well if Europe’s largest economy is moving toward internal political upheaval, which means it will pay far less attention to Eurozone wide issues. This news cannot be beneficial for the euro, although this morning’s 0.1% decline is hardly newsworthy.

Finally, with less than two weeks remaining before the British (and Scottish, Welch and Northern Irish) go to the polls, the Conservatives still hold between a 9 and 11 point lead, depending on which poll is considered, but that lead has been shrinking slightly. Pundits are quick to recall how Theresa May called an election in the wake of the initial Brexit vote when the polls showed the Tories with a large lead, but that she squandered that lead and wound up quite weakened as a result. At this point, it doesn’t appear that Boris has done the same thing, but stranger things have happened. At any rate, the FX market appears reasonably confident that the Tories will win, maintaining the pound above 1.29, although unwilling to give it more love until the votes are in. I expect that barring any very clear gaffes, the pound will range trade ahead of the election and in the event of a Tory victory, see a modest rally. If we have a PM Corbyn, though, be prepared for a pretty sharp decline.

Looking ahead to this week, we have a significant amount of US data, culminating in the payroll report on Friday:

Today ISM Manufacturing 49.2
  ISM Prices Paid 47.0
  Construction Spending 0.4%
Wednesday ADP Employment 140K
  ISM Non-Manufacturing 54.5
Thursday Initial Claims 215K
  Trade Balance -$48.6B
  Factory Orders 0.3%
  Durable Goods 0.6%
  -ex Transport 0.6%
Friday Nonfarm Payrolls 190K
  Private Payrolls 180K
  Manufacturing Payrolls 40K
  Unemployment Rate 3.6%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.4
  Michigan Sentiment 97.0

Source: Bloomberg

As we have seen elsewhere around the world, the manufacturing sector in the US remains under pressure, but the services sector remains pretty robust. But overall, if the data prints as expected, it is certainly evidence that the US economy remains in significantly better shape than that of most of the rest of the world. And it has been this big picture story that has underpinned the dollar’s strength overall. Meanwhile, with the Fed meeting next week, they are in their quiet period, so there will be no commentary regarding policy until the next statement and press conference. In fact, next week is set to be quite interesting with the FOMC, the UK election and then US tariffs slated to increase two weeks from yesterday.

And yet, despite what appear to be numerous challenges, risk remains the primary choice of investors. As such, equities are higher and bonds are selling off although the dollar remains stuck in the middle for now. We will need to get more news before determining which way things are likely to break for the buck in the near term.

Good luck
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The Final Throes

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Trump said that he now could disclose
Trade talks have reached “the final throes”
We soon will reveal
A fabulous deal
Designed to increase our trade flows

Imagine, for a moment, that you are the leader of the largest nation (by population) on earth and that you run the place with an iron grip. (Or at least you continue to imply to the outside world that is the case.) Imagine, also, that your only geopolitical rival, with far fewer people but far more money, has completely changed the ground rules regarding how business will be transacted going forward, totally upsetting intricately created supply chains that have been hugely profitable and beneficial to your country over the past two decades. And finally, imagine that for the past eighteen months, a series of unforeseen events (increasingly violent protests in a recalcitrant province, devastating epidemic of a virus decimating your nation’s protein supply, etc.) have combined with the rule changes to significantly slow your economy’s growth rate. (Remember, this growth rate is crucial to maintaining order in your nation.) What’s a despot leader to do?

It can be no real surprise that the US and China are moving closer to completing a phase one trade deal because the importance of completing said deal has grown on both sides of the table. We saw evidence of this earlier in the week when the Chinese changed their tune on IP theft; an issue they had previously maintained did not exist, but are now willing to codify as criminal. And with every lousy piece of Chinese data (last night Industrial Profits fell 9.9%, their largest decline since 2011 and further evidence of the slowing growth trajectory on the mainland) the pressure on President Xi increases to do something to arrest the decline. Meanwhile, though the US economy seems to be ticking along reasonably well (at least according to every Fed speaker and as evidenced by daily record high closings in the US equity markets) the other issues in Washington are pushing on President Trump to make a deal and score a big win politically.

With this as a backdrop, I expect that we will continue to hear positive comments regarding the trade deal from both sides and that prior to the December 15 imposition of new tariffs by the US, we will have something more concrete, including a timetable to sign the deal. And so, there is every reason to believe that risk appetite will continue to be whetted and that equity markets will continue to perform well through the rest of 2019 and arguably into the beginning of 2020.

It is easy to list all the concerns that exist for an investor as they are manifest everywhere. Consider: excess corporate leverage, a global manufacturing recession, anemic global growth, $14 trillion of negative yielding debt globally, and, of course, the still unresolved US-China trade issues and crumbling of seventy years of globalization infrastructure. And that doesn’t even touch on the non-financial, but still economic issues of wealth and income inequality and the growing number of protests around the world by those on the bottom rungs of the economic ladder (Chile, Colombia, Iraq, Iran, Sudan, Lebanon, and even Hong Kong and France’s gilets jaunes). And yet, risk appetite remains strong.

The point I am trying to make is that there is quite a dichotomy between financial market, specifically equity market, behavior and the economic and political situation around the world. The question I would ask is; how long can this dichotomy be maintained? Every bear’s fear is that there will be some minor catalyst that has an extremely outsized impact on risk pricing causing a significant decline. Bears constantly point to all those things mentioned above, and more, and are firm in their collective belief that the central bank community, which may be the only thing holding risk asset prices higher, is running out of ammunition. Certainly I agree with the latter point, they are running out of ammunition, but as Lord John Maynard Keynes was reputed to have said, “Markets can remain irrational far longer than you can remain solvent.”

As of right now, there is no evidence that any of the above mentioned issues are relevant to market pricing decisions. So what is relevant? Based on the almost complete lack of price movement in the FX market for the past several sessions, I would say nothing is relevant. Every day we walk in and the euro or the yen or the pound or the renminbi is within a few basis points of the previous day’s levels. Trading appetite has diminished and implied volatility continues to track to new lows almost daily. In fact, especially for those hedgers who are paying significantly to manage balance sheet risks, it almost seems like it is not worth the money to continue doing so. But I assure you that it is worth the cost. This is not the first time we have seen an extended period of market malaise in FX (2007-8 and 2014 come to mind) and in both those cases we saw a significant rebound in activity in the wake of a surprising catalyst (financial crisis, oil market crash). Do not be caught out when the current market attitude changes.

With that, rather long-winded, opening, a look at markets today shows that every G10 currency is within 15bps of yesterday’s closing levels. And those levels were similarly close to the previous day’s levels. There has been a distinct lack of data, and really very little commentary by central bank officials. Even in the emerging markets, activity generally remains muted. I will grant that the Chilean peso (-0.6%) has been a dog lately, but that is entirely related to the ongoing protests in that country and the fact that investors are exiting rapidly. But elsewhere, movement remains less than 0.3% except for in South Africa, where the rand has actually gained 0.5% as demand increases for their bond issuance today. In a world where a third of sovereign debt carries negative interest rates, 8% and 9% coupons are incredibly attractive!

On the data front, with Thanksgiving tomorrow, we see a ton of stuff today:

Initial Claims 221K
Q2 GDP 1.9%
Durable Goods -0.9%
-ex Transport 0.1%
Chicago PMI 47.0
Personal Income 0.3%
Personal Spending 0.3%
Core PCE 0.1% (1.7% Y/Y)
Fed’s Beige Book  

We should certainly learn if the growth trajectory in the US remains solid before the morning is over, and I expect that the dollar may respond accordingly, with strong data supporting the greenback and vice versa. But the thing is, given the holiday tomorrow, liquidity will be somewhat impaired, especially this afternoon. So if you still have things that you need to get done in November, I cannot stress strongly enough that executing early today is in your best interest.

Overall, the dollar continues to hold its own despite the risk-on attitude, but I have a feeling that is because we are seeing international investors buy dollars to buy US equities. At this point, there is no reason to believe that process will change, so I like the dollar to continue to edge higher over time.

Good luck and have a wonderful Thanksgiving holiday
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Things Are Just Grand

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Said Chairman Jerome yesterday
The message I’d like to convey
Is things are just grand
And we’re in command
While keeping recession at bay

As New York walks in this morning, markets look quite similar to where traders left them yesterday. After more record highs in the US equity markets, futures are essentially flat. European equity markets are +/- 0.1% and even Asian markets only moved +/-0.3% overnight. Bond markets are also little changed, with 10-year Treasury yields less than 1bp lower than yesterday’s close, while Germany’s bund is a full 1bp lower. In other words, we’ve seen very little movement there either. Finally, FX markets are entirely within a 0.3% range of yesterday’s closing levels, in both the G10 and EMG blocs, with a pretty even mix of gainers and losers.

The three headlines that have garnered the most commentary are regarding our three favorite topics of late; the Fed, trade and Brexit. In order this is what we learned. Chairman Powell spoke yesterday evening and told us the economy’s glass was not merely half full, but much more than that due to the Fed’s policy decisions. He reiterated that policy rates are appropriate for now and as a group, the FOMC sees no reason to change them unless something untoward appears suddenly on the horizon. And, in fairness, the horizon looks pretty clear. We continue to see mixed, but decent, data overall in the US, which has shown that ongoing weakness in the manufacturing sector has not spilled over into the consumer sector…yet. And perhaps it never will. Without a shock event of some sort (collapse of the trade talks, Chinese intervention in Hong Kong, or something equally serious) it is hard to argue with Jay’s conclusion that US interest rates are on hold for the foreseeable future. With that news, I wouldn’t have changed my position views either.

Moving on to the trade situation, things appear to be moving in the right direction as some comments from the Chinese side pointed to modest further progress on tariffs and what levels are appropriate at this point in time. I find it interesting that the US has been far less forthcoming on the issue of late, which is certainly out of character for the President. While I may be reading too much into this subtle shift in communication strategy, it appears that the Chinese are truly keen to get this deal done which implies that they are feeling a lot of pain. Arguably, the ongoing crisis in Chinese pork production is one area where the US has a significantly stronger hand to play, and one where China is relatively vulnerable. At any rate, despite more positive comments, it has not yet been enough to move markets.

Finally, the only market which has responded to news has been the British pound, which has ‘tumbled’ 0.25% after two polls released in the US showed that the Tory lead over Labour has fallen to 42%-33% from what had appeared to be a double digit lead last week. With both major parties having issued their election manifestos, at this point the outcome seems to be completely reliant on electioneering, something at which Boris seems to have the edge. In the end, I continue to expect that the Tories win a comfortable majority and that Brexit goes ahead on January 31. However, two things to remember are that polls, especially lately, have been notoriously poor predictors of electoral outcomes, and Boris clearly has the capability of saying something incredibly stupid to submarine his chances.

Looking at a range of potential outcomes here, I think the pound benefits most from a strong Tory victory, as it would remove uncertainty. In the event of a hung Parliament, where the Tories maintain the largest contingent but not a majority, that seems like a recipe for a much weaker pound as concerns over a hard Brexit would reignite. Finally, any situation where Jeremy Corbyn is set to lead the UK is likely to see the pound sell off sharply on the back of swiftly exiting capital. Corbyn’s platform of renationalization of private assets will not sit well with investors and the move lower in the pound will be swift and sharp. However, I think this is an extremely low probability event, less than 5% probability, so would not be focusing too much on that outcome.

And that’s really all that has moved markets today and not that much quite frankly. On the data front, we see the Advanced Goods Trade balance (exp -$71.0B), Case Shiller Home Prices (3.25%), New Home Sales (705K) and Consumer Confidence (127.0). Quite frankly, none of these are likely to be market movers.

Today’s story is far more likely to be about liquidity evaporating as the day progresses ahead of Thursday’s Thanksgiving holiday in the US. Trading desks will be at skeleton staff tomorrow and Friday, so given it is effectively month-end today, make sure to take advantage of the liquidity available. The benefit is the quiet market price action should allow excellent execution.

Good luck
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Quite a Breakthrough

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Is stealing IP now taboo?
If so that is quite a breakthrough
Now maybe Phase One
Can finally be done
Or is this just more déjà vu?

Tell me if you’ve heard this one before; a phase one trade deal is really close! For the umpteenth time in the past six months, this is the story driving markets this morning, although, in fairness, today’s version may have a bit more substance to it. That substance comes from an announcement by China that they are going to institute penalties on IP theft and potentially lower the threshold for considering criminal punishments for those convicted of the crime. This, of course, has been one of the key US demands in the negotiations thus far and the fact that the Chinese have conceded the argument is actually quite a big deal. Recall, if you will, that when this entire process started, the Chinese wouldn’t even admit that the practice was ongoing. Now they are considering enshrining the criminality of these actions into law. That is a huge change. Perhaps the current US stance in the negotiations is beginning to bear fruit.

Given this positive turn in the discussions, it should be no surprise that risk assets are in demand today and we are seeing equity markets rally around the world. Overnight in Asia, we saw strength across the board (Nikkei +0.8%, Hang Seng +1.5%, Shanghai +0.7%) and we are seeing solid gains in Europe as well (DAX +0.4%, CAC +0.3%, FTSE 100 +0.8%). The two outliers, Hong Kong and London have additional positive stories to boot. In Hong Kong the weekend’s local council elections resulted in the highest turnout in years and not surprisingly, given the ongoing protests for democracy, the pro-democracy candidates won 85% of the seats. HK Chief Executive Carrie Lam was quick to respond by explaining the government will listen carefully to the public on this issue. One other aspect of the elections was that they were completely peaceful, with no violence anywhere in the city this weekend, a significant difference to recent activity there, and that was also seen as a risk positive outcome.

Meanwhile, in the UK, PM Boris Johnson released his election manifesto and it was far more sensible than his predecessor’s attempt three years ago. While it included spending promises on infrastructure and increased hiring of nurses for the National Health Service, there were few other spending categories. Of course, he did remind everyone that a Tory majority will allow him to deliver Brexit by January 31 and he assured that the trade deal would be complete by the end of 2020. The latest polls show that the Tories lead 42% to 30% for Labour with the rest still split amongst minor players. Also, a Datapraxis study shows that on current form, the Tories will win 349 of the 650 seats in Parliament, a solid majority that will allow Boris to implement his policies handily. Given this news less than three weeks from the election, investors and traders are becoming increasingly bullish on the outcome and the pound has benefitted accordingly this morning, rising 0.3%. Now, it is still well below the levels seen last month, when it briefly peeked over 1.30 in the euphoria that Boris was going to get Brexit done by October 31. But, it is today’s clear winner in the G10 space.

Away from the pound, the rest of the G10 space has been quite dull, with the euro slipping a scant 0.1% after German IFO data showed that while the economy may not be getting worse, it is not yet getting much better. In keeping with the equity driven risk-on theme, the yen is softer this morning as well, -0.2%, but that is entirely risk related.

Turning to the EMG space, there has been a touch more activity but still nothing remarkable. On the positive side we see CLP rising 0.7% which has all the earmarks of a position consolidation after a very troubled couple of weeks. There has been no specific news although a background story has been focused on shifts in the local pension scheme. It seems there are five funds, labeled A through E with A the most aggressive, invested 60% in international equities, while E is the most conservative, investing 92% in local fixed income assets. It seems that in the wake of the protests, there was a substantial shift into the A fund, which has outperformed given the peso’s weakness. However, it now appears that local investment advisors are highlighting the benefits of the E fund which will result in CLP purchases and corresponding CLP strength. This is certainly consistent with the idea that risk is back in vogue so perhaps we have seen the worst in CLP. But otherwise, nothing much of interest here either.

During this holiday shortened week, we actually get a decent amount of data with most of it released Wednesday morning.

Tuesday Case Shiller Home Prices 3.30%
  New Home Sales 707K
  Consumer Confidence 127.0
Wednesday Initial Claims 221K
  Q3 GDP 1.9%
  Durable Goods -0.8%
  -ex Transport 0.1%
  Chicago PMI 46.9
  Personal Income 0.3%
  Personal Spending 0.3%
  Core PCE 0.1% (1.7% Y/Y)
  Fed’s Beige Book  

Source: Bloomberg

In addition to this, where my sense is the market will be most focused on the Personal Income and Spending data, we hear from Chairman Powell later this evening. While it is always an event when a Fed chair speaks, it seems pretty unlikely that we are going to learn anything new here. At this stage, it has been made quite clear that the Fed is on hold for the foreseeable future. If that is not the message, then you can look for market fireworks.

So the session today is shaping up to be risk focused which means that away from the yen and maybe Swiss franc, I expect the dollar to be softer rather than firmer.

Good luck
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Both Sides Connive

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The trade war continues to drive
Discussion as both sides connive
To show they are right
And it’s their birthright
The other, access to deprive

Once again, discussion about the trade situation seems to be the dominant theme in market activity. Not only did we get comments from Chinese President Xi (“We didn’t initiate this trade war and this isn’t something we want. When necessary, we will fight back, but we have been working actively to try not to have a trade war,”) but we also got a raft of weak PMI data from around the world where, to an analyst, the blame was attributed to… the impact of the trade war.

For instance, Australia started off the data slump with Composite PMI falling to 49.5, below that magic 50.0 boom-bust level and endangering the ‘Lucky Country’s’ 27 year streak of growth with no recession. This outcome increased the talk that the RBA would soon be forced to cut rates again, or perhaps even consider QE, a road down which they have not yet traveled. Aussie, however, is little changed on the day although it has been trending steadily lower for the entire month of November.

Next we saw PMI data from the Eurozone and the UK, all of which was pretty awful. On the EZ side, the interesting thing was that the manufacturing readings were all slightly higher than expected (Germany 43.8, France 51.6, EZ 46.6) but the services data were all much worse driving the composite figures lower (Germany 49.2, France 52.7, and EZ 50.3). The point is that one of the key fears expressed lately has been that the global manufacturing slump would eventually bleed into the rest of the economy. This data is some powerful evidence that is exactly what is occurring. The euro, however, is little changed on the day having rallied on earlier confirmation that Germany did not enter a technical recession, but falling back after the PMI release.

In the UK, however, things were even worse, with all three PMI data points printing much lower than expected and all three with a 48 handle. These are the weakest readings since the immediate aftermath of the Brexit vote in June 2016, and speak to the increased uncertainty that led to the recently called election. In this case, the pound did suffer, falling 0.3% and earning the crown for worst performer of the day. There are just less than three weeks left before the election and thus far, it still appears that Boris is well placed to win. But stranger things have happened with regard to elections lately. Next week we will get to see the Tory manifesto, which you can be sure will be very different than Labour’s version. Once again, I look at that document and wonder why any politician would believe that promising higher taxes, on what appeared to be everyone, is seen as a winning position. I’m confident that Boris will not be proposing a tax program of that nature, although I’m sure there will be plenty of spending promises. However, all of these political machinations are only likely to have modest impacts on the value of the pound at this point. We will need to see the outcome of the election for the next move to be defined. I still believe that a Tory majority in Parliament will see the pound rally a few cents more, but that trading above 1.35 will be very difficult in the near term.

Inflation remains
Elusive in the distance
A crow at midnight

Japan released their latest inflation data overnight and it showed that, despite the 2% rise in the GST, to 10%, the general price level did virtually nothing. The headline number was unchanged at 0.2% while the core number did manage to tick up to…0.7%. Wow. If one were to evaluate the BOJ’s performance on an objective basis, something like how they have done achieving their inflation target, it strikes me that Kuroda-san would be deemed a colossal failure. This is not to imply that the job is easy, but he has been in the chair for more than six years at this point, and despite an extraordinary amount of monetary stimulus (growing the balance sheet from 32.3% of GDP to 104.2% of GDP) core CPI has risen only from -0.7% to +0.7%. Granted, that is not actual deflation, but there is certainly no reason to believe that the 2.0% target is ever going to be attainable. To his credit, I guess, he has been able to drive the yen lower by some 16% since he started (95.00 to 108.50) which has clearly helped Japanese corporate profitability but arguably not much else. I know I’m a bit of a heretic here, but perhaps the Japanese might consider another measure of what they want to achieve. Again I ask; do policy makers around the world really believe that their populations are keen to pay more for anything? I fear that a slavish pursuit of some macroeconomic model’s mooted outcome has resulted in creating more problems than it has fixed. Just sayin’.

A quick peek at the EMG bloc shows that no currency has moved even 0.2% today, which implies that there is nothing, at all, to discuss here. On the data front, yesterday’s Initial Claims data was higher than expected at 227K with a revision higher to the previous week’s print. This is a data point that is going to get increasing scrutiny going forward, because if it starts to trend higher, it could well signal the US economy is starting to suffer more than currently believed (or at least expressed) by the Fed and its members. And that means more rate cuts and the potential for a lower dollar. This morning’s only data point is Michigan Sentiment (exp 95.7) and mercifully we don’t hear from any more Fed speakers.

It is difficult to broadly characterize this morning’s market activity, with the dollar mixed, bond yields slightly lower but equity markets slightly higher. My take is that after a week of modest overall movements, and with the Thanksgiving holiday approaching next week, there is little reason to believe we will see any currency move more than a few ticks in either direction before we head home for the weekend.

Good luck and good weekend
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Well Calibrated

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Our policy’s “well calibrated”
Though some of us are still frustrated
It’s time to resort
To fiscal support
Since our balance sheet’s so inflated

While market activity has been relatively benign this morning, there are two stories that have consistently been part of the conversation; the FOMC Minutes and the latest trade information. Regarding the former, it seems there was a bit more dissent than expected regarding the Fed’s last rate cut, as while there were only two actual dissenters, others were reluctant rate cutters. With that said, the term “well calibrated” has been bandied about by more than one Fed member as a description of where they see policy right now. And this aligns perfectly with the idea that the Fed is done for a while which is what Powell signaled at the press conference and what essentially every Fed speaker since has confirmed. Regarding the balance of risks, despite what has been a clear uptick in investor sentiment over the past month, the Fed continues to point to asymmetry with the downside risks being of more concern. Recall, the futures markets are not looking for any policy adjustments at the December meeting, and in fact, are pricing just a 50% chance of a cut by next June. One final thing, the feeling was unanimous on the committee that there was no place for negative interest rates in the US. If (when) the economic situation deteriorates that much, they were far more likely to utilize policies like yield curve control (we know how well that worked for Japan) and forward guidance rather than taking the leap to negative rates.

Ultimately, the market read the Minutes and decided that while the Fed is on hold, the next move is far likelier to be a rate cut than a rate hike and thus yesterday’s early risk-off attitude was largely moderated by the end of the day. In fact, this morning, we are seeing a nascent risk-on view, although given how modest movement has been in any market; I am hesitant to describe it in that manner.

The other story that reinserted itself was the US-China trade negotiations, where Chinese vice –premier Liu He, the chief negotiator, explained that he was “cautiously optimistic” about progress and that he invited Messr’s Mnuchin and Lighthizer to Beijing next week to continue the dialog. While he admitted that he was confused about US demands, it does appear that the Chinese are pretty keen to get a deal done.

One other wrinkle is the fact that the Hong Kong support bill in Congress has been approved virtually unanimously, and all indications are that President Trump is going to sign it. While it is clear the Chinese are not happy about that, it seems a bit of an overreaction. After all, the bill simply says that Hong Kong’s special economic status will be reviewed annually, and that any direct military intervention would be met with sanctions. I have to believe that if the PLA did intervene directly to quell the unrest, even without this law in place, the US would respond in some manner that would make the Chinese unhappy. As to an annual review, the onus is actually on the US, although it could certainly add a new pressure point on China in the event they decide to convert from ‘one country, two systems’, to ‘one country, one system’. My take on the entire process is the Chinese are feeling more and more pressure on the economy because of the current tariff situation, and realize that they need to change that situation, hence the new invitation to continue the talks.

With that as our backdrop, a look at markets this morning shows the dollar is very modestly softer pretty much across the board. The largest gainer overnight has been the South African rand, which has rallied 0.5% ahead of the SARB meeting. While markets are generally expecting no policy changes, yesterday’s surprisingly low CPI data (3.7%, exp 3.9%) has some thinking the SARB may cut rates from their current 6.5% level and help foster further investment. On the flip side, South Korea’s won has been the big loser, falling 0.7% overnight after export data showed a twelfth consecutive month of declines and implied prospects for a pickup are limited. Arguably South Korea has been the nation most impacted by the US-China trade war. And one last thing, the Chilean peso, which has been under significant pressure for the past two weeks, is once again opening weaker, down 0.4% to start the day. In the past two weeks the peso has tumbled nearly 7%, and this despite the fact that the Chilean government has been extremely responsive to the protest movement, agreeing to rewrite the constitution to address many of the concerns that have come to light.

As to the G10, there is nothing to discuss. Movement has been extremely modest and data has been limited. Perhaps the one interesting item is that Jeremy Corbyn has released the Labour manifesto for the election and it focuses on raising taxes in numerous different ways and on numerous different parties. Certainly in the US that is typically not the path that wins elections, but perhaps in the UK it is different. At any rate, the market seems to think that this will hurt Corbyn’s chances, something it really likes, and the pound has edged up 0.25% this morning.

On the data front, this morning brings Initial Claims (exp 218K), Philly Fed (6.0), Leading Indicators (-0.1%) and finally Existing Home Sales (5.49M). Of this group, I expect that Philly Fed is the most likely to have an impact, but keep an eye on the claims data. Remember, last week it jumped to 225K, its highest since June, and another high print may start to indicate that the labor market, one of the key pillars of economic support, is starting to strain a little. We also hear from two Fed speakers, the hawkish Loretta Mester and the dovish Neal Kashkari, but again, it feels like the Fed is pretty comfortably on hold at this point.

Lacking a catalyst, it seems to me that the dollar is likely to have a rather dull session. Equity futures are pointing ever so slightly lower, but are arguably unchanged at this point. My sense is that this afternoon, markets will be almost exactly where they are now…unchanged.

Good luck
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The Senate’s Blackball

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Near China, an island quite small
Has led to the latest downfall
In equity prices
Because of their crisis
As well as the Senate’s blackball

Risk is decidedly off this morning as equity markets around the world are under pressure and bond markets rally strongly. Adding to the mix is a stronger dollar and Japanese yen as well as an uptick in gold prices. The proximate cause of this angst was the unanimous voice vote in the Senate last night to pass legislation requiring an annual review of Hong Kong’s special trade status with the US, something that was heretofore permanently granted in 1992. The new legislation requires Hong Kong to remain “sufficiently autonomous” in order to maintain that status, which is arguably quite a nebulous phrase. Nonetheless, the Chinese response was immediate, threatening unspecified retaliation if the bill becomes law and calling it illegal and an intrusion in domestic Chinese affairs. While the bill must still be reconciled with a similar House version, that seems likely to be fairly easy. The real question is how the president will manage the situation given the fragility of the ongoing trade talks. Thus far, he has not made his views known, but they would appear to be in sympathy with the legislation. And given the unanimity of voting in both chambers, even a presidential veto would likely be overturned.

Given this turn of events, it should be no surprise that risk is under pressure this morning. After all, the promise of a trade deal has been supporting equity and other risk markets for the past six weeks. This is the first thing that could clearly be seen to cause a complete breakdown in the discussions. And if the trade negotiations go into hibernation, you can be sure that risk assets have much further to fall. You can also be sure that the developing narrative that European weakness is bottoming will also disappear, as any increase in US tariffs, something that is still scheduled for the middle of next month, would deal a devastating blow to any nascent recovery in Europe, especially Germany. The point is, until yesterday, the trade story was seen as a positive catalyst for risk assets. Its potential unwinding will be seen as a clear negative with all the risk-off consequences that one would expect.

Beyond the newly fraught trade situation, other market movers include, as usual, Brexit and the Fed. In the case of the former, last night saw a debate between PM Johnson and Labour’s Jeremy Corbyn where Boris focused on reelection and conclusion of the Brexit deal he renegotiated. Meanwhile, Jeremy asked for support so that he could renegotiate, yet again, the deal and then put the results to a referendum in six months’ time. The snap polls after the debate called it a draw, but the overall polls continue to favor Boris and the Tories. However, the outcome was enough to unnerve Sterling traders who pushed the pound lower all day yesterday and have continued the process today such that we are currently 0.6% below yesterday’s highs at 1.2970. It seems pretty clear that in the event of an upset victory by Corbyn, the pound would take a tumble, at least initially. Investors will definitely run from a country with a government promising a wave of nationalization of private assets. Remember what happened in Brazil when Lula was elected, Mexico with AMLO and Argentina with Fernandez a few months ago. This would be no different, although perhaps not quite as dramatic.

As to the Fed, all eyes today are on the release of the FOMC Minutes from the November meeting where they cut rates by 25bps and essentially told us that was the end of the ‘mid-cycle adjustment’. And, since then, we have heard from a plethora of Fed speakers, all explaining that they were comfortable with the current rate situation relative to the economy’s status, and that while they will respond if necessary to any weakening, they don’t believe that is a concern in the near or medium term. In fact, given how much we have heard from Fed speakers recently, it is hard to believe that the Minutes will matter at all.

So reviewing market activity, G10 currencies are all lower, save the yen, which is basically unchanged. The weakest link is NOK, which is suffering on the combination of risk aversion and weak oil prices (+0.4% today but -4.0% this week). But the weakness is solid elsewhere, between 0.2% and 0.5%. In the EMG bloc, CLP is once again leading the way lower, down 1.0% this morning after a 2.0% decline yesterday, with spot pushing back toward that psychological 800 level (currently 795). But pretty much every other currency in the bloc is lower as well, somewhere between 0.2% and 0.4%, with just a few scattered currencies essentially unchanged on the day.

And that really describes what we have seen thus far today. With only the FOMC Minutes on the docket, and no other Fed speakers, my take is the FX market will take its cues from the broader risk sentiment, and the dollar is in a position to reverse its losses of the past week. Barring a shocking change of view by Congress, look for a test of 1.10 in the euro by the end of the week.

Good luck
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Further Debates

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Mnuchin and Powell and Trump
Sat down to discuss how to pump
The ‘conomy higher
To meet Trump’s desire
The Democrats fall with a thump

While Trump later carped about rates
Chair Jay explained recent updates,
To Congress, he made
Cannot be portrayed
As leading to further debates

Arguably the biggest story yesterday was news of a meeting at the White House between President Trump, Treasury Secretary Mnuchin and Fed Chair Powell. While this is hardly unprecedented, given the President’s penchant for complaining about everything Powell has done; notably not cutting interest rates fast enough, when the news was released the conspiracy theorists immediately expected a change of tune from the Fed. But thus far, at least, nothing has changed. The Fed released a statement that explained the Chairman essentially repeated the talking points he made to Congress last week, and that the Fed’s actions are entirely predicated on their economic views and expectations, and not on politics.

The first thing to take away from that Fed statement is; it is a blatant admission that the Fed simply follows the markets/economy rather than leads it. If you listen to Fed speakers or read the Minutes or FOMC statement, they try to imply they are ahead of the curve. They are never ahead of the curve, but instead are always reacting to things that have already occurred. After all, isn’t that what data dependence means? Data isn’t released before it is gathered; it is a backward looking indicator.

The other thing, which is a modest digression, is an important question for those of us who are active in financial markets on a daily basis: Does anybody really think that any of the G10 central banks are actually independent? Consider that in macroeconomic theory, coordinated monetary and fiscal policy is seen as the Holy Grail. And, by definition, if the central bank and administration of a nation are working together, where is the independence? Or why is it considered business as usual when Mario Draghi and Christine Lagarde exhort nations to increase their fiscal spending, when their stated role is monetary policy? My point is central banks long ago lost their independence, if they ever had it at all, and are simply another arm of the government. Their biggest problem is that they are in danger of the illusion that they are independent disintegrating, at which point their powers of verbal suasion may disintegrate as well.

But in the end, despite the wagging of tongues over this meeting, nothing happened and the market returned its focus to…the trade deal. Once again, hopes and fears regarding the elusive phase one deal are driving equity markets, and by extension most others. The latest information I’ve seen is that the Chinese categorically will not sign a deal that leaves tariffs in place, and have even come to believe that the ongoing politics in Washington may leave the President in a weakened state which will allow them to get a better deal. Meanwhile, the President has not agreed to remove tariffs yet, although apparently has considered the idea. Underlying the broad risk-on theme is the idea that both Presidents really need the deal for their own domestic reasons, and so a deal will be agreed. But as yet, nothing is done.

Adding to the trade discussion is the constant commentary by the economic punditry as well as supranational organizations like the IMF who unanimously agree that Trump is a problem settling the US-China trade dispute would immediately lead to faster economic growth everywhere in the world. This morning we heard from new IMF Managing Director, Kristalina Georgieva, who said just that. Remember, the IMF has been reducing its estimates of global growth consistently for the past twelve months, and arguably they are still too high. But the one thing on which we can count is that the President is not going to be swayed by comments from the IMF.

So with that as our backdrop, a quick look at markets shows us that most equity markets continue to move higher (Hang Seng +1.5%, Shanghai +0.85%, DAX +0.95%, FTSE +1.1%) but not all (Nikkei -0.5%). This movement seems predicated on hope that the trade situation will improve, but boy, markets have been rallying on that same story for a few months now, and as yet, there has been no change. In fairness, in the UK, the Tory lead in the polls is growing which has started to filter into an idea that Brexit will happen and then businesses will be able to plan with more certainty going forward.

Interestingly, the bond market does not share the equity market’s collective belief that a trade deal will be done soon. This is evident by the fact that yields have actually been edging down rather than rising as would be expected in a full-scale risk-on environment. Finally, turning to the FX market, in the G10 space today, the biggest move is less than 0.2% with five currencies stronger and five weaker on the day. In other words, there is nothing of note there.

In the EMG space, there are some movers of note with CLP leading the way lower, -0.85%, as ongoing concerns over the fraught political situation make themselves felt in the FX market with investment flows softening. But away from that story, most of the bloc seems to be feeling the effects of the trade tensions, with far more losers, albeit small losers, than winners. On the positive front, ZAR has rallied 0.4% after Eskom, the troubled utility in South Africa, named a new CEO to try to turn things around.

On the data front this morning we see Housing Starts (exp 1320K) and Building Permits (1385K) and NY Fed President Williams speaks at 9:00. As to the data, housing has rarely been a big market driver in FX. And regarding Williams, we already know his views, as well as those of everybody else on the Fed. Nothing is going to change there. With all this in mind, as long as equity markets continue to embrace risk, the dollar (and yen and Swiss franc) are likely to continue to feel modest pressure. But I see no reason for a large move in the near term.

Good luck
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