Tag Archives: #MXN

A Trump Trope

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For one day the markets expected
That tariffs were roundly rejected
But late yesterday
Trump said the delay
Was short with two nations affected
 
The upshot is all of that hope
That saw the buck slide down a slope
Has largely reversed
As dollar shorts cursed
That tariffs are not a Trump trope

 

This poet feels vindicated in not trying to anticipate what President Trump is going to do that might impact markets after yesterday’s events.  Early in the day there was a story that tariffs would be delayed and were seen as negotiating tools, not punishment.  FX traders (mis)read the room and sold the dollar aggressively, with the greenback suffering declines of more than 1% against some currencies, notably MXN.  Then, Mr Trump was inaugurated, made a speech, where he promised to make many changes within the operating system of the US, signed a load of Executive Orders and mentioned in a press conference much later in the evening that 25% tariffs on Mexico and Canada would be coming on February 1st.  The chart of USDMXN below shows the price action with the peso having given back the bulk of yesterday’s gains.

Source: tradingeconomics.com

Once again, if we learned nothing from Trump’s first term, it is that anticipation of his moves is a very fraught and dangerous way to manage market risk.  Now, will those tariffs actually be implemented?  Will they be universal if they are?  Or does he anticipate changes from behavior by both nations in the next 10 days?  The answer is, nobody knows, probably not even Trump.  The upshot is if you have financial market risk, hedging is critical to maintaining acceptable outcomes.  And, oh by the way, look for implied volatility of all financial products to rise as market makers also have no idea what is going to happen so will require hedgers to pay up for protection.

In Davos, the world’s glitterati
Are meeting, and though they are haughty
They’re losing their splendor
And edicts they render
Are sinking in value like zloty

While there is a great deal more that President Trump has promised to do immediately, the bulk of it seems likely to only have potential longer-term impacts on financial markets.  Meanwhile, in Davos, the World Economic Forum is under way and the main message that I can discern from what I’ve read is that, the members really liked it when everybody listened to what they said and are now really unhappy that President Trump is essentially raining on their parade and devaluing their views and comments.  With Trump withdrawing from the Paris Climate Accords and the WHO, key global initiatives are severely hamstrung, which means the WEF is less important.  And all their pronouncements regarding the need free trade and global cooperation has far less impact if the US has decided to focus on itself rather than the world at large.  My forecast is that by the end of Mr Trump’s term, the WEF will be a sideshow, not a headline event.

And really, at this point, that is pretty much what is happening.  Yes, UK Unemployment rose to 4.4% while wages rose 5.6%, but this has simply put the BOE in a tougher spot.  The Old Lady has only an inflation mandate, but if Unemployment is rising, they cannot ignore that, and the market is now far more convinced (82% probability) that they will be cutting the base rate by 25bps at their meeting the first week of February.  While the pound (-0.8%) is lower this morning, that seems much more about the dollar’s overall strength than this weaker than expected data point as since the release, the pound has fallen only another 0.2%.

So, let’s look around the world and see how markets responded to Trump 2.0.  Equity markets in Asia were largely in the green as neither Japan nor China were mentioned on the immediate tariff list, although the late-night proclamation regarding Canada and Mexico implies that this story has not yet been completed.  Nonetheless, gains in Japan (+0.3%), Hong Kong (+0.9%) and China (+0.1%) showed the way for most of the region with only India (-1.6%) really suffering during the session on a variety of fears regarding tariffs and interest rates despite no mentions by Trump.  In Europe, only Spain’s IBEX (-0.5%) is showing any movement of note and that appears to be specific to some slightly softer than expected corporate earnings results.  Surprisingly, Germany and the rest of the continent are little changed, as is the UK.  As to US futures, at this hour (7:10) they are pointing higher by about 0.4% in anticipation of more earnings reports today and a generally positive attitude from the new president.

In the bond market, Treasury yields have fallen 5bps overnight, seemingly on the idea that because Trump announced the government would do all it can to reduce prices, and therefore inflation, it would magically work.  While I am optimistic things will get better, that is a heavy lift in my opinion and the Fed will need to be far more emphatic on its inflation fighting actions to see this through.  In Europe, yields are basically unchanged across the board and similarly, there was no movement in Asia overnight.  Once again, the world is looking toward the US for directional cues.

In the commodity markets, oil (-1.3%) is sliding back as Trump’s promise to open up more drilling spaces on federal land as well as his overall encouragement of ‘drill, baby, drill’ has traders concerned that supply is going to come around more quickly than demand.  Last January I wrote about my view that there is plenty of oil and it is merely political will that prevents it from being accessed.  I have a feeling that is what we are going to begin to see, a change in that political will which means potentially lower prices and increased demand accordingly.  In the metals markets, gold (+0.5%) is continuing to climb as we approach month end.  There are many in this market who believe the technical picture (see chart below) is pointing to a break to new all-time highs soon.  However another, and perhaps more accurate narrative, is that there is an arbitrage between the NY, London and Shanghai exchanges for physical metal and metal is flowing into NY for delivery which begins next Friday. (H/T Alyosha)

Source: tradingeconomics.com

As to the other metals, they are little changed this morning.

Finally, as mentioned at the top, the dollar is much firmer across the board this morning with the peso and NOK (-1.0%) leading the way lower although most currencies seem to be down by at least -0.5%.  (Yes, PLN is weaker by -0.6%).  This is all dollar-driven with no other idiosyncrasies of note right now.  We shall see how this evolves over time.

On the data front, the rest of the week looks like the following:

WednesdayLeading Indicators0.0%
ThursdayInitial Claims218K
 Continuing Claims1860K
FridayFlash Manufacturing PMI49.6
 Flash Services PMI56.6
 Existing Home Sales4.16M
 Michigan Sentiment73.2

Source: tradingeconomics.com

The Fed is in its quiet period so with the lack of data, I suspect that markets will have heightened awareness to every Trump pronouncement with volatility the new normal.  Remember, consistency is not his strong suit, at least when it comes to commentary about how he may respond to things.

From the market’s perspective, as long as tariffs are still seen as the likely outcome, look for the dollar to remain well bid while equities will see a mixed performance depending on the nature of the company/industry with importers likely suffering.  

Good luck

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A Modest Decrease

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On Friday, the latest release
For some, showed a modest decrease
In pace of inflation
Although observation
By others was not of that piece

 

As an indication of just how confusing everything is in the macroeconomic world, and how earnestly different pundits try to make their individual cases, the following two headlines were in the same email roundup of market and economic articles that I receive daily.

The Fed’s Favored Inflation Gauge Reinforces The Disinflationary Trend

Federal Reserve Watch: Inflation Not Dropping

Parsing a specific data point that is subject to so much revision is always a fraught activity, and this time is no different.  Did the PCE data Friday indicate the inflation trend is starting to head back down or not?  Beats me. Below are the forecasts and actual results as released Friday morning by the Bureau of Economic Analysis (BEA).  While the M/M Core PCE print was a tick lower than the consensus forecast, everything else was right there.  If anything, the fact that Personal Spending fell ought to be a bigger concern.

Source: tradingeconomics.com

So, ask yourself this question, based on the information above, is the disinflationary trend being reinforced?  Or is inflation still sticky and rising?  Personally, I don’t think we have enough information to have changed our views from whatever they were ahead of the release, but that’s just me.  If nothing else, perhaps this will help you understand just how little anybody really knows about the situation.  One other seeming anomaly is that the M/M Core PCE number was lower than expected, yet the Y/Y number was right on target.  Whatever your null hypothesis, it doesn’t seem as though there is enough new information in this report to reject it.  Of course, that didn’t stop the punditry!

In Mexico, voters have spoken
And Claudia Sheinbaum’s awoken
This morning as prez
From Roo to Juarez
Alas, now the peso’s been broken

In a historic, although completely expected outcome, Claudia Sheinbaum has been elected president of Mexico, the first woman to hold the office.  She is current president Lopez Obrador’s protégé as well as the former mayor of Mexico City.  Now, she will be ruling from Quintana Roo in the south to Ciudad Juarez in the north of the country.  However, perhaps the bigger news, at least from the market’s perspective, is that her party, Morena, looks like it will win a supermajority in both the House and Senate there.  This matters because it will allow congress to alter the constitution as they see fit with no checks against it.  Given that Morena is a left-wing party, markets have suddenly become concerned that there could be serious impacts to the nature of business in Mexico which might impact both strategic and operational questions.
 
Consider, part of Mexico’s attractiveness as a manufacturing base was its relatively low wages.  However, with this type of political control, it is not hard to believe that a much higher minimum wage would be imposed, perhaps only on companies that export goods, but one that would substantially reduce the profitability of those operations.  As well, changes in the constitution would now be achievable with no recourse.  Reduction of judicial independence and the removal of the presidential term limit are two key domestic issues that may be addressed and are garnering concern.  After all, the one thing we all know is that when one political party can change the rules without the opposition having a say, those rule changes are generally designed to maintain power in perpetuity.  History has shown that is not typically a great situation.
 
As to the market impact, under the rubric, a picture is worth 1000 words, behold the chart of the peso as of this morning.

Source: tradingeconomics.com

FX traders and investors have determined there is a great deal of risk attached to the overall election outcome, and the peso has suffered accordingly.  This morning it has fallen -2.6% and is showing no sign of slowing down.  Remember, the peso has been a favorite currency in the hedge fund world as the carry trade has been a huge winner since last October.  Not only did traders benefit from Mexico’s higher interest rates, but the currency appreciated nearly 10% as well from October through late May.  But as of this morning, MXN has weakened nearly one full peso from its level just two weeks ago.  I sense that many risk managers are forcing a lot of position unwinding as the broader concerns over the future direction of the country increase as per the above issues.  For those of you with MXN revenues or assets, this will be a tricky time as hedging remains very expensive.  For those with MXN expenses, flexibility will be key with option structures likely to be very effective right now.

However, beyond those stories, the overnight session was relatively muted.  PMI data was largely in line with expectations around the world, confirming that economies are not seeing either significant growth or weakness, but rather muddling through.  So, let’s see how markets behaved overall.

Friday’s late US rally was followed throughout Asia with the Nikkei (+1.1%), Hang Seng (+1.8%) and ASX 200 (+0.8%) all having solid sessions but pretty much all markets rallying overall.  European bourses are also having a good day led by the DAX (+0.85%) and Spain’s IBEX (+0.8%) with green being the dominant color on screens here as well.  US futures at this hour (6:45) are pointing higher, except for the Dow which is down ever so slightly.

In the bond market, yields are continuing their recent slide with Treasuries down 2bps this morning and 15bps from the levels seen just last Wednesday.  European sovereign yields are also lower this morning, but between 4bps and 6bps as it appears traders remain highly confident the ECB, which meets Thursday, will cut rates by 25bps despite last week’s firmer than expected CPI data there.  The fact that the PMI data was lackluster has probably helped this mindset.

In the commodity markets, oil prices have edged higher by 0.1% after OPEC+ laid out that they will maintain production cuts through 2025, but also created a process by which they would eventually grow production again.  Given the fact that there is no indication demand for oil has peaked, I expect that all that production and more will ultimately be needed.  In the metals markets, both precious and industrial metals are continuing their modest rebound after the recent selloff.  Of course, given the strength of the rally since March across the board here, more consolidation seems quite likely for a while.  However, I believe the direction of travel remains higher for all metals going forward.

Finally, in the FX markets, while the peso is the outlier, (now -3.4% just 45 minutes later than the earlier update), the dollar is mixed otherwise.  ZAR (+0.6%) is benefitting from the news that a coalition government is forming, and Cyril Ramaphosa is likely to remain president.   Meanwhile, KRW (+0.5%) rallied on the back of stronger PMI data.  However, the euro (-0.1%) and its CE4 acolytes are all softer this morning as there has been more saber rattling over Ukraine’s use of recently acquired long-range missiles and ammunition from the West to attack deeper into Russia.  Threats are now being made about an escalation of this conflict in terms of the sphere (i.e. Eastern Europe) and the tools (i.e. nukes), so the euro is feeling a little heat.

On the data calendar this week, there is a decent amount of new information culminating in the payroll report on Friday.  As well, we hear from both the Bank of Canada and the ECB this week.

TodayISM Manufacturing49.6
 ISM Prices Paid60.0
TuesdayJOLTS Job Openings8.34M
 Factory Orders0.6%
WednesdayADP Employment173K
 BOC Rate Decision4.75% (5.00% current)
 ISM Services50.5
ThursdayECB Rate Decision4.25% (4.50% current)
 Initial Claims220K
 Continuing Claims1798K
 Trade Balance-$76.0B
 Nonfarm Productivity0.3%
 Unit Labor Costs4.7%
FridayNonfarm Payrolls190K
 Private Payrolls170K
 Manufacturing Payrolls5K
 Unemployment Rate3.9%
 Average Hourly Earnings03% (3.9% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.7%
 Consumer Credit$10.5B
Source: tradingeconomics.com

So, lots to look forward to all week with two key central bank rate decisions and rate cuts seen as the most likely outcome.  As well, the payrolls will be a critical piece of the Fed discussion.  But mercifully, the Fed is in its quiet period so there will be no actual Fed discussion.

Last week, investors and traders got excited over the prospect that inflation was heading back toward target which would allow the Fed to finally cut rates.  However, that interpretation seems tenuous to me, as I do not see the data as pointing strongly in that direction.  Given it seems likely that both the BOC and ECB will be cutting rates, Friday’s data will be extremely important in helping us determine the tone of the FOMC meeting.  I believe we are seeing a growing split between the Fed governors and regional presidents with the former anxious to start easing policy while the latter see that as quite risky.  My take is that split will prevent any actions for quite a while as both sides argue their case and so any rate cuts will not be coming until next year at the earliest.  That is, of course, unless we see a significant economic downturn, which seems highly unlikely right now.  In the end, I think the dollar will maintain its value overall as the Fed remains the most hawkish central bank around.

Good luck

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Value, Nought

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In college Econ 101
Professors described the long run
As when we all died
Like Keynes had replied
Debating a colleague for fun

However, the rest that they taught
Has turned out to have, value, nought
Their models have failed
While many have railed
That people won’t do what they ought

Observing market activity these days and trying to reconcile price action with the theories so many of us learned in college has become remarkably difficult. While supply and demand still seem to have meaning, pretty much every construct more complex than that turns out to have been a description of a special case and not a general model of behavior. At least, that’s one conclusion to be drawn from the fact that essentially every forecast made these days turns out wrong while major pronouncements, regarding the long-term effect of a given policy, by esteemed economists seem designed to advance a political view rather than enhance our knowledge and allow us to act in the most effective way going forward. Certainly, as merely an armchair economist, my track record is not any better. Of course, the difference is that I mostly try to highlight what is driving markets in the very short term rather than paint a picture of the future and influence policy.

I bring this up as I read yet another article this morning, this by Stephen Roach, a former Chairman of Morgan Stanley Asia and current professor at Yale, about the imminent collapse of the dollar and the end of its status as the world’s reserve currency. He is not the first to call for this, nor the first to call on the roster of models that describe economic activity and determine that because one variable has moved beyond previous boundaries, doom was to follow. In this case growth of the US current account deficit will lead to the end of the dollar’s previous role as reserve currency. Nor will he be the last to do so, but the consistent feature is that every apocalyptic forecast has been wrong over time.

This has been true in Japan, where massive debt issuance by the government and massive debt purchases by the BOJ were destined to drive inflation much higher and weaken the yen substantially. Of course, we all know that the exact opposite has occurred. This has been true around the world where negative interest rates were designed to encourage borrowing and spending, thus driving economic growth higher, when it only got half the equation right, the borrowing increase, but it turns out spending on shares was deemed a better use of funds than spending on investment, despite all the theories that said otherwise.

Ultimately, the point is that despite the economics community having built a long list of very impressive looking and sounding models that are supposed to describe the workings of the economy, those models were built based on observed data rather than on empirical truths. Now that the data has changed, those models are just no longer up for the task. In other words, when it comes to forecasting models, caveat emptor.

Turning to the markets this morning, equity markets seem to have stopped to catch their collective breath after having recouped all of their March losses. In fact, the NASDAQ actually set a new all-time high yesterday, amid an economy that is about to print a GDP number somewhere between -20% and -50% annualized in Q2.

I get the idea of looking past the short-run problems, but it still appears to me that equity traders are ignoring long-run problems that are growing on the horizon. These issues, like the wave of bankruptcies that will significantly reduce the number of available jobs, as well as the potential for behavioral changes that will dramatically reduce the value of entire industries like sports and entertainment, don’t appear to be part of the current investment thesis, or at least have been devalued greatly. And while in the long-run, new companies and activities will replace all these losses, it seems highly unlikely they will replace them by 2021. Yet, yesterday saw US equity indices rally for the 7th day in the past eight. While this morning, futures are pointing a bit lower (SPU’s and Dow both lower by 1.2%, NASDAQ down by 0.7%), that is but a minor hiccup in the recent activity.

European markets are softer this morning as well, with virtually every major index lower by nearly 2% though Asian markets had a bit better showing with the Hang Seng (+1.1%) and Shanghai (+0.6%) both managing gains although the Nikkei (-0.4%) edged lower.

Bond markets are clearly taking a closer look at the current risk euphoria and starting to register concern as Treasury yields have tumbled 5bps this morning after a 4bp decline yesterday. We are seeing similar price action in European markets, albeit to a much lesser extent with bunds seeing yields fall only 2bps since yesterday. But, in true risk-off fashion, bonds from the PIGS have all seen yields rise as they are clearly risk assets, not havens.

And finally, the dollar is broadly stronger this morning with only the other havens; CHF (+0.3%) and JPY (+0.4%) gaining vs. the buck. On the downside, AUD is the laggard, falling 1.4% as a combination of profit taking after a humongous rally, more than 27% from the lows in March, and a warning by China’s education ministry regarding the potential risks for Chinese students returning to university in Australia have weighed on the currency. Not surprisingly, NZD is lower as well, by 1.1%, and on this risk-off day, with oil prices falling 2.5%, NOK has fallen 1.0%. But these currencies’ weakness has an awful lot to do with the dollar’s broad strength.

In the emerging markets, the Mexican peso, which had been the market’s darling for the past month, rallying from 25.00 to below 21.50 (13.5%) has reversed course this morning and is down by 1.4%. But, here too, weakness is broad based with RUB (-0.95%), PLN (-0.7%) and ZAR (-0.6%) all leading the bloc lower. The one exception in this space was KRW (+0.6%) after the announcement of some significant shipbuilding orders for Daewoo and Samsung Heavy Industries improved opinions of the nation’s near-term trade situation.

Turning to the data, although it’s not clear to me it matters much yet, we did see some horrific trade data from Germany, where their surplus fell to €3.5 billion, its smallest surplus in twenty years, and a much worse reading than anticipated as exports collapsed. Meanwhile, Eurozone Q1 GDP data was revised ever so slightly higher, to -3.6% Q/Q, but really, everyone wants to see what is happening in Q2. At home, the NFIB Small Biz Index was just released at a modestly better than expected 94.4 but has been ignored. Later this morning we see the JOLT’s Jobs data (exp 5.75M), but that is for April so seems too backward-looking to matter.

Risk is on its heels today and while hopes are growing that the Fed may do something new tomorrow, for now, given how far risk assets have rallied over the past two weeks, a little more consolidation seems a pretty good bet.

Good luck and stay safe
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