Singing Off-Tune

The Jobless report showed that June
Saw Payroll growth really balloon
But stubbornly, Claims
Are fanning the flames
Of bears, who keep singing off-tune

Markets are quiet this morning as not only is it a summer Friday, but US equity and commodity markets are closed to celebrate the July 4th holiday. In fact, it is curious that it is not a Fed holiday. But with a limited and illiquid session on the horizon, let’s take a quick peak at yesterday’s data and some thoughts about its impact.

The Jobless report was clearly better than expected on virtually every statistic. Payrolls rose more than expected (4.8M vs. exp 3.06M) while the Unemployment Rate fell substantially (11.1% from 13.3%). Happily, the Participation Rate also rose which means that the country is getting back to work. It should be no surprise that this was touted as a great outcome by one and all.

Of course, there was some less positive news, at least for those who were seeking it out. The Initial and Continuing Claims data, both of which are much more current, declined far less than expected. The problem here is that while tremendous progress was made in June from where things were before, it seems that progress may be leveling off at much worse than desired numbers.

It seems there are two things at work here. First, the second wave of Covid is forcing a change in the timeline of the reopening of the economy. Several states, notably Texas and California, are reimposing lockdowns and closing businesses, like bars and restaurants, that had reopened. This is also slowing the reopening of other states’ economies. Second is the pending end of some of the CARES act programs, notably PPP, which has seen the money run out and layoffs occur now, rather than in April. It is entirely realistic that the Initial and Continuing Claims data run at these much higher levels going forward for a while as different businesses wrestle with the right size for their workforce in the new economy.

Odds are we will see a second stimulus bill at some point this summer, but it is not yet a certainty, nor is it clear how large it will be or what it will target. But it would be a mistake to assume that the road ahead will be smooth.

The other potential market impacting news was this morning’s European Services PMI data, which was generally slightly better than expected, but still pointing to slowing growth. For instance, Germany’s Services number was at 47.3, obviously well above the April print of 16.2, but still pointing to a slowing economy. And that was largely the case everywhere.

The point is that nothing we have seen either yesterday or today indicates that the global economy is actually growing relative to 2019. It is simply not shrinking as quickly as before. The implication here is that central banks will continue to add liquidity to their respective economies through additional asset purchases and, for those with positive interest rates still, further rate cuts. Governments will be loath to stop their fiscal stimulus as well, especially those who face elections in the near-term. But in the end, 2020 is going to be a decidedly lost year when it comes to the world’s economy!

On the market side, risk generally remained in demand overnight as Asian equity markets continued to rally (Nikkei +0.7%, Hang Seng +1.0%, Shanghai +2.0%). Will someone please explain to me how Hong Kong’s stock market continues to rally in the face of the draconian new laws imposed by Beijing on the freedom’s formerly available to its citizens? While I certainly don’t have proof, this must be coordinated buying by Chinese government institutions trying to demonstrate that everything there is great.

However, despite the positive cast of APAC markets, Europe has turned red this morning with the DAX (-0.2%), CAC (-0.7%) and FTSE 100 (-0.9%) all under pressure. Each nation has a story today starting with Germany’s Angela Merkel trying to expand fiscal stimulus, not only in Germany, but fighting for the EU program as well. Meanwhile, in France, President Macron has shaken up his entire government and replace most of the top positions including PM and FinMin. Finally, the UK is getting set to reopen tomorrow, and citizens are expected to be ready to head back to a more normal life.

In the bond markets, while US markets are closed, we are seeing a very modest bid for European government bonds, but yields are only about 1 basis point lower on the day. Commodity markets show that oil is once again under pressure, down a bit more than 1% but still hanging onto the $40/bbl level.

Turning to currencies, in the G10, only NOK (+0.4%) is showing any real life today as its Unemployment Rate printed at a lower than expected 4.8% encouraging some to believe it is leading the way back in Europe. Otherwise, this bloc is doing nothing, with some gainers and some losers and no direction.

In emerging markets, the story is of two weak links, IDR (-1.0%) and RUB (-0.9%). The former, which has been falling for more than a week, is suffering from concerns over debt monetization by the central bank there, something that I’m sure will afflict many currencies going forward. As to the ruble, the only explanation can be the oil price decline as their PMI data was better than expected, although still below 50.0. But there are issues there regarding the spread of the infection as well, and concerns over the potential imposition of new sanctions by the US.

And that is really it for the day. With no data or speakers here, look for markets to close by lunchtime, so if you have something to do, get it done sooner rather than later.

Have a wonderful holiday weekend and stay safe
Adf

 

It’s Over

“It’s over”, Navarro replied
When asked if the trade deal had died
The stock market’s dump
Forced President Trump
To tweet the deal’s still verified

What we learned last night is that the market is still highly focused on the trade situation between the US and China. Peter Navarro, the Director of Trade and Manufacturing Policy, was interviewed and when asked if, given all the issues that have been ongoing between the two countries, the trade deal was over, he replied, “it’s over, yes.” The market response was swift, with US equity futures plummeting nearly 2% in minutes, with similar price action seen in Tokyo and Sydney, before the president jumped on Twitter to explain that the deal was “fully intact.”

One possible lesson to be gleaned from this story is that the market has clearly moved on from the coronavirus, per se, and instead is now focusing on the ramifications of all the virus has already wrought. The latest forecasts from the OECD show trade volumes are expected to plummet by between 10% and 15% this year, although are expected to rebound sharply in 2021. The key is that infection counts and fatality rates are no longer market drivers. Instead, we are back to economic data points.

Arguably, this is a much better scenario for investors as these variables have been studied far more extensively with their impact on economic activity reasonably well understood. It is with this in mind that I would humbly suggest we have moved into a new phase of the Covid impact on the world; from fear, initially, to panicked government response, and now on to economic fallout. Its not that the economic impact was unimportant before, but it came as an afterthought to the human impact. Now, despite the seeming resurgence in infections in many spots around the world, at least from the global market’s perspective, we are back to trade data and economic stories.

This was also made evident by all the talk regarding today’s preliminary PMI data out of Europe, which showed French numbers above 50 and the Eurozone, as a whole, back to a 47.5 reading on the Composite index. However, this strikes me as a significant misunderstanding of what this data describes. Remember, the PMI question is, are things better, worse or the same as last month? Now, while April was the nadir of depression-like economic activity, last month represented the second worst set of numbers recorded amidst global shutdowns across many industries. It is not a great stretch to believe that this month is better than last. But this does not indicate in any manner that the economy is back to any semblance of normal. After all, if we were back to normal, would we all still be working from home and wearing masks everywhere? So yes, things are better than the worst readings from April and May, but as we will learn when the hard data arrives, the economic situation remains dire worldwide.

But while the economic numbers may be awful, that has not stopped investors traders Robinhooders from taking the bull by the horns and pouring more energy into driving stocks higher still. Of course, they are goaded on by the President, but they seem to have plenty of determination on their own. Here’s an interesting tidbit, the market cap of the three largest companies, Apple, Microsoft and Amazon now represents more than 20% of US GDP! To many, that seems a tad excessive, and will be pointed to, after prices correct, as one of the greatest excesses created in this market.

And today is no different, with the risk bit in their teeth, equity markets are once again trading higher across the board. Once the little trade hiccup had passed, buyers came out of the woodwork and we saw Asia (Nikkei +0.5%, Hang Seng +1.6%, Shanghai +0.2%) and Europe (DAX +2.7%, CAC +1.6%, FTSE 100 +1.2%) all steam higher. US futures are also pointing in that direction, currently up between 0.6% and 0.8%. Treasury yields are edging higher as haven assets continue to lose their allure, with 10-year Treasury yields up another basis point and 2bp rises seen throughout European markets. Interestingly, there is one haven that is performing well today, gold, which is up just 0.15% this morning, but has rallied more than 5% in the past two weeks and is back to levels not seen since 2012.

Of course, the gold explanation is likely to reside in the dollar, which in a more typical risk-on environment like we are currently experiencing, is sliding with gusto. Yesterday’s weakness has continued today with most G10 currencies firmer led by NOK (+0.9%) and SEK (+0.75%) on the back of oil’s ongoing rebound and general optimism about future growth. It should be no surprise that the yen has declined again, but its 0.1% fall is hardly earth shattering. Of more interest is the pound (-0.3%) which after an early surge on the back of the UK PMI data (Mfg 50.1), has given it all back and then some as talk of the UK economy faring worse than either the US or Europe is making the rounds.

In the EMG bloc, the dollar’s weakness is broad-based with MXN and KRW (+0.6% each) leading the way but INR an PLN (+0.5% each) close behind. As can be seen, there is no one geographic area either leading or lagging which is simply indicative of the fact that this is a dollar story, not a currency one.

On the data front in the US, while we also get the PMI data, it has never been seen as quite as important as the ISM data due next week. However, expectations are for a 50.0 reading in the Manufacturing and 48.0 in the Services indices. We also see New Home Sales (exp 640K) which follow yesterday’s disastrous Existing Home Sales data (3.91M, exp 4.09M and the worst print since 2010 right after the GFC.) We hear from another Fed speaker today, James Bullard the dove, but I have to admit that Chairman Powell has everybody on the FOMC singing from the same hymnal, so don’t expect any surprises there.

Instead, today is very clearly risk-on implying that the dollar ought to continue to trade a bit lower. My hypothesis about the dollar leading stocks last week has clearly come a cropper, and we are, instead, back to the way things were. Risk on means a weaker dollar and vice versa.

Good luck and stay safe
Adf

Dire Straits

In Europe, that grouping of states
Now find themselves in dire straits
The PMI data
Described a schemata
Of weakness and endless low rates

In the past, economists and analysts would build big econometric models with multiple variables and then, as new data was released, those models would spit out new estimates of economic activity. All of these models were based on calculating the historic relationships between specific variables and broader growth outcomes. Generally speaking, they were pretty lousy. Some would seem to work for a time, but the evolution of the economy was far faster than the changes made in the models, so they would fall out of synch. And that was before Covid-19 pushed the pace of economic change to an entirely new level. So now, higher frequency data does a far better job of giving indications as to the economic situation around the world. This is why the Initial Claims data (due this morning and currently expected at 4.5M) has gained in the eyes of both investors and economists compared to the previous champ, Nonfarm Payrolls. The latter is simply old news by the time it is released.

There is, however, another type of data that is seen as quite timely, the survey data. Specifically, PMI data is seen as an excellent harbinger of future activity, with a much stronger track record of successfully describing inflection points in the economy. And that’s what makes this morning’s report so disheartening. Remember, the PMI question simply asks each respondent whether activity is better, the same or worse than the previous month. They then subtract the percentage of worse from the percentage of better and, voila, PMI. With that in mind, this morning’s PMI results were spectacularly awful.

Country Manufacturing Services Composite
France 31.5 10.4 11.2
Germany 34.4 15.9 17.1
UK 32.9 12.3 12.9
Eurozone 33.6 11.7 13.5

Source: Bloomberg

In each case, the data set new historic lows, and given the service-oriented nature of developed economies, it cannot be that surprising that the Services number fell to levels far lower than manufacturing. After all, social distancing is essentially about stopping the provision of individual services. But still, if you do the math, in France 94.8% of Service businesses said that things were worse in April than in March. That’s a staggering number, and across the entire continent, even worse than the dire predictions that had been made ahead of the release.

With this in mind, two things make more sense. First, the euro is under pressure this morning, falling 0.6% as I type and heading back toward the lows seen last month. Despite all the discussion of how the Fed’s much more significant policy ease will ultimately undermine the dollar, the short-term reality continues to be, the euro has much bigger fundamental problems and so is far less attractive. The other thing is the ECB’s announcement last evening that they were following the Fed’s example and would now be accepting junk bonds as collateral, as long as those bonds were investment grade as of April 7. This is an attempt to prevent Italian debt, currently rated BBB with a negative outlook, from being removed from the acceptable collateral list when if Standard & Poor’s downgrades them to junk tomorrow. Italian yields currently trade at a 242bp premium to German yields in the 10-year bucket, and if they rise much further, it will simply call into question the best efforts of PM Conte to try to support the Italian economy. After all, unlike the US, Italy cannot print unlimited euros to fund themselves.

Keeping all that happy news in mind, market performance this morning is actually a lot better than you might expect. Equities in Asian markets were mixed with the Nikkei up nicely, +1.5%, but Shanghai slipping a bit, -0.2%. Another problem in Asia is Singapore, where early accolades about preventing the spread of Covid-19 have fallen by the wayside as the infection rate there spikes and previous efforts to reopen the economy are halted or reversed. Interestingly, the Asian PMI data was relatively much better than Europe, with Japanese Services data at 22.8. Turning to Europe, the picture remains mixed with the DAX (-0.3%) and FTSE 100 (-0.3%) slipping while the CAC (+0.1%) has managed to keep its head above water. The best performer on the Continent is Italy (+1.0%) as the ECB decision is seen as a win for all Italian markets. US futures markets are modestly negative at this time, but just 0.2% or so, thus it is hard to get a sense of the opening.

Bond markets are also having a mixed day, with the weakest links in Europe, the PIGS, all rallying smartly with yields lower by between 5bps (Italy) and 19bps (Greece). Treasury yields, however, have actually edged higher by a basis point, though still yield just 0.63%. And finally, the dollar, too, is having a mixed session. In the G10 bloc, the euro and Swiss franc are at the bottom of the list today, with Switzerland inextricably tied to the Eurozone and its foibles. On the plus side, NOK has jumped 1.0% as oil prices, after their early week collapse, are actually rebounding nicely this morning with WTI higher by 12.4% ($1.70/bbl), although still at just $15.50/bbl. Aussie (+0.6%) and Kiwi (+0.75%) are also in the green, as both have seen sharp recent declines moderate.

EMG currencies also present a mixed picture, with the ruble on top of the charts, +1.4%, on the strength of the oil market rebound. India’s rupee has also performed well overnight, rising 0.8%, as the market anticipates further monetary support from the Reserve bank there. While there are other gainers, none of the movement is significant. On the other side of the ledger, the CE4 are all under pressure, tracking the euro’s decline with the lot of them down between 0.3% and 0.5%. I must mention BRL as well, which while it hasn’t opened yet today, fell 2.6% yesterday as the market responded to BCB President Campos Neto indicating that further rate cuts were coming and that QE in the future is entirely realistic. The BRL carry trade has been devastated with the short-term Selic rate now sitting at 3.75%, and clearly with room to fall.

Aside from this morning’s Initial Claims data, we see Continuing Claims (exp 16.74M), which run at a one week lag, and then we get US PMI data (Mfg 35.0, Services 30.0) at 9:45. Finally at 10:00 comes New Home Sales, which are forecast to have declined by 16% in March to 644K.

The big picture remains that economic activity is still slowing down around the world with the reopening of economies still highly uncertain in terms of timing. Equity markets have been remarkable in their ability to ignore what have been historically awful economic outcomes, but at some point, I fear that the next leg lower will be coming. As to the dollar, it remains the haven of choice, and so is likely to remain well bid overall for the foreseeable future.

Good luck and stay safe
Adf

 

Significant Woe

The data continue to show
A tale of significant woe
Last night’s PMIs
Define the demise
Of growth; from Spain to Mexico

Another day, another set of data requiring negative superlatives. For instance, the final March PMI data was released early this morning and Italy’s Services number printed at 17.4! That is not merely the lowest number in Italy’s series since the data was first collected in 1998, it is the lowest number in any series, ever. A quick primer on the PMI construction will actually help show just how bad things are there.

As I’ve written in the past, the PMI data comes from a single, simple question; ‘are things better, the same or worse than last month?’ Each answer received is graded in the following manner:

Better =      1.0
Same =        0.5
Worse =      0.0

Then they simply multiply the number of respondents by each answer, normalize it and voila! Essentially, Italy’s result shows that 65.2% of the country’s services providers indicated that March was worse than February, with 34.8% indicating things were the same. We can probably assume that there was no company indicating things were better. This, my friends, is not the description of a recession; this is the description of a full-blown depression. IHS Markit, the company that performs the surveys and calculations, explained that according to their econometric models, GDP is declining at a greater than 10% annual rate right now across all of Europe (where the Eurozone Composite reading was 26.4). In Italy (Composite reading of 20.2) the damage is that much worse. And in truth, given that the spread of the virus continues almost unabated there, it is hard to forecast a time when things might improve.

It does not seem like a stretch to describe the situation across the Eurozone as existential. What we learned in 2012, during the Eurozone debt crisis, was that the project, and the single currency, are a purely political construct. That crisis highlighted the inherent design failure of creating a single monetary policy alongside 19 fiscal policies. But it also highlighted that the desire to keep the experiment going was enormous, hence Signor Draghi’s famous comment about “whatever it takes”. However, the continuing truth is that the split between northern and southern European nations has never even been addressed, let alone mended. Germany, the Netherlands and Austria continue to keep fiscal prudence as a cornerstone of their government policies, and the populations in those nations are completely in tune with that, broadly living relatively frugal lives. Meanwhile, the much more relaxed atmosphere further south continues to encourage both government and individual profligacy, leading to significant debt loads across both sectors.

The interesting twist today is that while Italy and Spain are the two hardest hit nations in Europe regarding Covid-19, Germany is in third place and climbing fast. In other words, fiscal prudence is no protection against the spread of the disease. And that has led to, perhaps, the most important casualty of Covid-19, German intransigence on debt and deficits. While all the focus this morning is on the proposed 10 million barrel/day cut in oil production, and there is a modest amount of focus on the Chinese reduction in the RRR for small banks and talk of an interest rate cut there, I have been most amazed at comments from Germany;s Heiko Maas, granted the Foreign Minister, but still a key member of the ruling coalition, when he said, regarding Italy’s situation, “We will help, we must help, [it is] also in our own interest. These days will remind us how important it is that we have the European Union and that we cannot solve the crisis acting unilaterally. I am absolutely certain that in coming days we’ll find a solution that everyone can support.” (my emphasis). The point is that it is starting to look like we are going to see some significant changes in Europe, namely the beginnings of a European fiscal policy and borrowing authority. Since the EU’s inception, this has been prevented by the Germans and their hard money allies in the north. But this may well be the catalyst to change that view. If this is the case, it is a strong vote of confidence for the euro and would have a very significant long-term impact on the single currency in a positive manner. However, if this does not come about, we could well see the true demise of the euro. As I said, I believe this is an existential moment in time.

With that in mind, it is interesting that the market has continued to drive the euro lower, with the single currency down 0.5% on the day and falling below 1.08 as I type. That makes 3.3% this week and has taken us back within sight of the lows reached two weeks ago. In the short term, it is awfully hard to be positive on the euro. We shall see how the long term plays out.

But the euro is hardly the only currency falling today. In fact, the dollar is firmer vs. all its G10 counterparts, with Aussie and Kiwi the biggest laggards, down 1.2% each. The pound, too, is under pressure (finally) this morning, down 1.0% as there seems to be some concern that the UK’s response to Covid-19 is falling short. But in the end, the dollar continues to perform its role of haven of last resort, even vs. both the Swiss franc (-0.35%) and Japanese yen (-0.6%).

EMG currencies are similarly under pressure with MXN once again the worst performer of the day, down 2.1%, although ZAR (-2.0%) is giving it a run for its money. The situation in Mexico is truly dire, as despite its link to oil prices, and the fact that oil prices have rallied more than 35% since Wednesday, it has continued to fall further. AMLO is demonstrating a distinct lack of ability when it comes to running the country, with virtually all his decisions being called into question. I have to say that the peso looks like it has much further to fall with a move to 30.00 or even further quite possible. Hedgers beware.

Risk overall is clearly under pressure this morning with equity markets throughout Europe falling and US futures pointing in the same direction. Treasury prices are slightly firmer, but the market has the feeling of being ready for the weekend to arrive so it can recharge. I know I have been exhausted working to keep up with the constant flow of information as well as price volatility and I am sure I’m not the only one in that situation.

With that in mind, we do get the payroll report shortly with the following expectations:

Nonfarm Payrolls -100K
Private Payrolls -132K
Manufacturing Payrolls -10K
Unemployment Rate 3.8%
Average Hourly Earnings 0.2% (3.0% Y/Y)
Average Weekly Hours 34.1
Participation Rate 63.3%
ISM Non- Manufacturing 43.0

Source: Bloomberg

But the question remains, given the backward-looking nature of the payroll report, does it matter? I would argue it doesn’t. Of far more importance is the ISM data at 10:00, which will allow us to compare the situation in the US with that in Europe and the rest of the world on a more real-time basis. But in the end, I don’t think it is going to matter too much regarding the value of the dollar. The buck is still the place to be, and I expect that it will continue to gradually strengthen vs. all comers for a while yet.

Good luck, good weekend and stay safe
Adf

Set For a Rout

In case you still had any doubt
That growth has encountered a drought
The readings this morning
Gave adequate warning
That markets are set for a rout

You may all remember the Chinese PMI data from last month (although granted, that seems like a year ago) when the official statistic printed at 35.7, the lowest in the history of the series. Well, it was the rest of the world’s turn this month to see those shockingly low numbers as IHS Markit released the results of their surveys for March. Remember, they ask a simple question; ‘are things better, the same or worse than last month?’ Given the increasing spread of Covid-19 and the rolling shut-downs across most of Europe and the US in March, it can be no surprise that this morning’s data was awful, albeit not as awful as China’s was in February. In fact, the range of outcomes in the Eurozone was from Italy’s record low of 40.3 to the Netherlands actually printing at 50.5, still technically in expansion phase. The Eurozone overall index was at 44.5, just a touch above the lows reached during the European bond crisis in 2012. You remember that, when Signor Draghi promised to do “whatever it takes” to save the euro. The difference this time is that was a self-inflicted wound, this problem is beyond the ECB’s control.

The current situation highlights one of the fundamental problems with the construction of the Eurozone, a lack of common fiscal policy. While this has been mentioned many times before, it is truly coming home to roost now. In essence, with no common fiscal policy, each of the 19 countries share a currency, but make up their own budgets. Now there are rules about the allowed levels of budget deficits as well as debt/GDP ratios, but the reality is that no country has really changed their ways since the Union’s inception. And that means that Germany, Austria and the Netherlands remain far more frugal than Italy, Spain, Portugal and Greece. And the people of Germany are just not interested in paying for the excesses of Italian or Spanish activities, as long as they have a choice.

This is where the ECB can make a big difference, and perhaps why Madame Lagarde, as a politician not banker, turns out to have been an inspired choice for the President’s role. Prior to the current crisis, the ECB made every effort to emulate the Bundesbank, and was adamant about preventing the monetization of national debt. But in the current situation, with Covid-19 not seeming to respect the German’s inherent frugality, every nation is rolling out massive spending packages. And the ECB has pledged to buy up as much of the issued debt as they deem necessary, regardless of previous rules about capital keys and funding. Thus, ironically, this may be what ultimately completes the integration of Europe. Either that or initiates the disintegration of the euro. Right now, it’s not clear, although the euro’s inability to rally, despite a clear reduction in USD funding pressures, perhaps indicates a modestly greater likelihood of the latter rather than the former. In the end, national responses to Covid-19 continue to truly hinder economic activity and there seems to be no immediate end in sight.

With that as our preamble, a look at markets as the new quarter dawns shows that things have not gotten any better than Q1, at least not in the equity markets. After a quarter where the S&P 500 fell 20.0%, and European indices all fell between 25% and 30%, this morning sees equity markets under continued pressure. Asia mostly suffered (Nikkei -4.5%, Hang Seng -2.2%) although Australian stocks had a powerful rally (+3.6%) on the strength of an RBA announcement of A$3 billion of QE (it’s first foray there). Europe, meanwhile, has seen no benefits with every market down at least 1.75% (Italy) with the CAC (-4.0%) and DAX (-3.6%) the worst performers on the Continent. Not to be left out, the FTSE 100 has fallen 3.8% despite UK PMI data printing at a better than expected 47.8. But this is a risk-off session, so a modestly better than expected data print is not enough to turn the tide.

Bond markets are true to form this morning with Treasury yields down nearly 7bps, Bund yields down 3bps and Gilt yields lower by 6bps, while both Italian (+5bps) and Greek (+9bps) yields are rising. Bond investors have clearly taken to pricing the latter two akin to equities rather than the more traditional haven idea behind government bonds. And a quick spin through the two most followed commodities shows gold rising 0.8% while oil is split between a 3.5% decline in Brent despite a 0.5% rally in WTI.

And finally, in the FX world, the dollar continues to be the biggest winner, although we have an outlier in Norway, where the krone is up by 0.8% this morning, despite the weakness in Brent crude and the very weak PMI data. Quite frankly, looking at the chart, it appears that the Norgesbank has been in once again supporting the currency, which despite today’s gains, has fallen by nearly 9% in the past month. Otherwise, in the G10 space, CAD is the worst performer, down 1.4%, followed closely by AUD (-1.0%) as commodity prices generally remain under pressure. In fact, despite its 0.25% decline vs. the dollar, the pound is actually having a pretty good session.

In EMG markets, it is HUF (-2.5%) and MXN (-2.1%) which are the leading decliners with the former suffering on projected additional stimulus reducing the rate structure there, while the peso continues to suffer from weak oil prices and the US slowdown. But really, the entire space is lower as well, with APAC and EMEA currencies all down on the day and LATAM set to slide on the opening.

On the data front this morning, we see ADP Employment (exp -150K), which will be a very interesting harbinger of Friday’s payroll data, as well as ISM Manufacturing (48.0) and Prices Paid (44.5). We already saw the big hit in Initial Claims last week, and tomorrow’s is set to grow more, so today is where we start to see just how big the impact on the US economy Covid-19 is going to have. I fear, things will get much worse before they turn, and an annualized decline of as much as 10% in Q1 GDP is possible in my view. But despite that, there is no indication that the dollar is going to be sold in any substantial fashion in the near term. Too many people and institutions need dollars, and even with all the Fed’s largesse, the demand has not been sated.

Volatility will remain with us for a while yet, so keep that in mind as you look for hedging opportunities. Remember, volatility can work in your favor as well, especially if you leave orders.

Good luck and stay safe
Adf

This Terrible Blight

The data from China last night
Showed PMI looking alright
But what does this mean?
Has China now seen
The end of this terrible blight?

Many pundits were both shocked and amazed when China’s PMI data was released last night and printed back above 50 (Manufacturing 52.0 and Composite 53.0), given the ongoing global economic shutdown. But if you simply consider the question asked to create the statistic; are things worse, the same or better than last month, it seems pretty plausible that things were at least the same as the previous month when commerce on the mainland shut down. And arguably, given the word that some proportion of the Chinese economy is starting to get back to work, the idea that a small proportion of respondents indicated improvement is hardly shocking. Instead, what I think we need to do is reconsider exactly what the PMI data describes.

Historically, when the global economy was functioning on, what we used to consider, a normal basis, the difference of a few tenths of a percent were seen as important. They seemed to tell a story of marginal improvement or decline on an early basis. Perhaps this was a false precision, but it was clearly the accepted narrative. The PMI data remains a key input into many econometric models, and those tenths were enough to alter forecasts. But that was then. As we all are abundantly aware, today’s economy and working conditions are dramatically different than they were, even in January. And so, the key question is; does the data we used to focus on still tell us the same story it did? Forward looking survey data is going to be far more volatile than in the past given the extraordinary actions taken by governments around the world. Quarantine, shelter-in-place and working from home will require a different set of measurements than the pre-Covid commuting world with which most of us are familiar.

Certainly, measurements of employment and consumption will remain key, but things like ISM, Fed surveys and productivity measurements are going to be far more suspect in the information they provide. After all, when the lockdowns end, and the surveys shoot higher, while the relative gains will be large, we are still likely to be in a much slower and different economic situation than we were back in January. A major investment bank is now forecasting Q2 GDP to decline by 34% annually, while Q3 is forecast to rebound 19%. The total story is one of overall decline, but the Q3 story will certainly be played up for all it is worth as the fastest growth in US history. My point is, be a little careful with what the current data is describing because it is not likely the same things we are used to from the past. The new narrative has yet to form, as the new economy has yet to emerge. While we can be pretty sure things will be different, we just don’t yet know exactly in which sectors and by how much. In other words, data will continue to be uncertain for a while, and its impact on markets will be confusing.

With that in mind, let’s take a look at where things stand this morning. After a very strong start to the week yesterday, at least on the equity front, things are a bit more mixed today. Asian markets saw both strength (Hang Seng + 1.8%) and weakness (Nikkei -0.9%), although arguably there were a few more winners than losers. Interestingly, despite the blowout Chinese PMI data, Shanghai only rose 0.1%. It seems the equity market there had a reasonable interpretation of the data. In Europe, meanwhile, things are generally positive, but not hugely so, with the DAX and FTSE 100 both higher by 0.8%, although the CAC has edged lower by 0.1%. at this time, US futures are pointing modestly higher and well off the earlier session highs.

Bond markets suffered yesterday on the back of the equity rally, as risk assets had some short-term appeal, but this morning the picture is more mixed. Treasury yields have fallen by 4bps, but Bund yields are little changed on the day. And in the European peripheral markets, Italian BTP’s are seeing yields edge higher by 1bp while Greek yields have softened by 4bps. I think today’s price action has much more to do with the fact it is month and quarter end, and there is a lot of rebalancing of portfolios ongoing, rather than as a signal of future economic/intervention activity.

In the FX market, though, the dollar continues to reign supreme with only NOK able to rally this morning in the G10 space as oil prices have rebounded sharply. A quick peek there shows WTI +7.5% and Brent +3.9%, although the price of oil remains near its lowest levels since 2001’s recession. But away from NOK, the dollar is quite firm with AUD under the most pressure, down 1.4% after some awful Australian confidence data. Clearly, the surprisingly positive Chinese data had little impact. But the euro has fallen 1.0% as concerns grow over Italy’s ability to repay its debt and what that will mean for the rest of the continent with respect to picking up the tab. Even the yen is under pressure today, perhaps on the news that the government is preparing a ¥60 trillion support package, something that will simply expand their already remarkable 235% debt/GDP ratio.

In the emerging markets, it should be no surprise that Russia’s ruble is top dog today, +1.3% on the oil rebound. Meanwhile, ZAR and KRW have also moved higher by 0.5% each with the rand benefitting from a massive influx of yield seekers as they auctioned a series of debt with yields ranging from 7.17% for 3-year to 11.37% for the 10-year variety. Meanwhile, in Seoul, the results of the USD swap auctions showed that liquidity there is improving, meaning there is less pressure on the currency. On the downside, CE4 currencies are under the gun as they track the euro lower, with the entire group down by between 0.8% and 1.3%. Perhaps the biggest disappointment today is MXN, which despite the big rebound in oil is essentially unchanged today after a 2% decline yesterday. The peso just cannot seem to get out of its own way, and as long as AMLO continues to be seen as ineffective, it is likely to stay that way.

There is some data due this morning, with Case Shiller Home Prices (exp 3.23%) and the Conference Board’s Consumer Confidence Index (110.0 down from 130.7), but it is not clear it will have much impact. Yesterday’s Dallas Fed Manufacturing Index was released at -70, the worst print in its 16-year history, but one that cannot be surprising given the nationwide shutdowns and problems in the oil patch. I don’t see today’s data having an impact, and instead, expect that the focus will be on the next bailout package, the implementation of this one, and month-end rebalancing. It is hard to make the case that the dollar will decline in this environment, but that remains a short-term view.

Good luck
Adf

At Loggerheads

While yesterday there was no hope
The global economy’d cope
With Covid-19
Today what we’ve seen
Is those fears were just a mere trope

Meanwhile as the virus still spreads
Investors are at loggerheads
Should bulls buy the dip?
Can bears get a grip?
I guess it’s all up to the Fed(s)

This morning there is a tentative truce in markets between those terrified of a global pandemic and those who have been trained to BTFD (Buy the f***ing dip). Of course, the dip buyers have been the big winners over the past decade, which drives the real question, is this time different? The difficulty in answering this question is due to the fact that the last time there was truly a global pandemic, the Spanish flu of 1918; central banks did not control the economy. In fact, the Fed was just 5 years old at the time, and still coming to terms with its role in the US economy. Ultimately, the problem is that despite the extraordinary information dissemination capabilities that exist in the modern world, where every type of news is available in multiple formats almost instantly, nobody really has any idea what is actually happening in China. Do the infection and fatality numbers they release each day have any resemblance to reality? Can’t really tell. What we do know is that large portions of China remain essentially under lockdown, with Hubei province at a virtual standstill. The tension between preventing the spread of the disease and preventing a collapsing economy is extreme in Beijing. Alas, it is not hard to believe that in the end, President Xi will choose growth over health.

Nonetheless, yesterday’s proximate cause of the market rout seemed to be the sudden uptick in cases in Italy, which was a clear demonstration that the situation was not nearly under control. Although all markets remain tentative this morning, there have been no major dislocations…yet. Even so, for the time being, Covid-19 is going to be the primary story driving daily market activity.

One thing we learned yesterday was that there is growing dissention at the Fed as the hawks, led by Loretta Mester, are nowhere near convinced that cutting interest rates will do anything to solve a medical problem, while the doves, led by Neel Kashkari, think a 25bp cut, at least, is appropriate right now. With the next FOMC meeting slated for March 18, we still have nearly 3 weeks for this conversation to play out. And of course, so much will depend on just what happens with Covid-19. Wider disruption of economic activity due to further quarantines and lock-downs will almost certainly see further monetary policy easing, whether it is useful or not, as central bankers will not want to be seen doing ‘nothing’.

Another interesting thing to watch for is this week’s February Chinese PMI data, due to be released on Thursday night. It is quite interesting that Manufacturing PMI is currently forecast to fall only to 45.1 given the near total shutdown of Chinese activity since the Lunar New Year. Consider that the PMI questions ask if activity levels were “higher, the same or lower than in the prior month.”1 Can anyone asked those questions in China claim that activity was higher than the previous month? It beggars belief that the index can be anywhere near 45. Rather one would expect it to approach zero! My point is that depending on what gets released, it will help us further understand the reliability of the Chinese economic data.

Keeping this in mind, it is extremely difficult to have a strong view on anything right now. Generally speaking, haven assets remain better bid, although this morning’s price action is nowhere near as impressive as yesterday’s. For example, Treasury yields are little changed, still just below 1.37% (and just above the record low of 1.34% set in 2016), although German bund yields have fallen a further 3bps this morning and are sitting at -0.51%. We have also seen a bit of discrimination in the European government bond markets as the PIGS see their bond yields rise this morning, clearly not feeling the haven love of bunds or Treasuries. Also on the haven front, gold prices, which rallied sharply yesterday, trading up nearly 3% at one point, have given back about 0.75% this morning.

In equity land, the Nikkei, which had been closed Monday, fell 3.3% in a catchup move, but the rest of APAC markets had a more mixed performance. Australia’s ASX 200 fell 1.6%, but the Kospi in Korea rallied 1.2%. Even China had mixed results with Shanghai falling 0.6% while Shenzhen rose 0.5%. All told, fear was not quite as rampant overnight. But this morning, European shares, which had started the session in the green, have since turned lower led by Spain’s IBEX (-1.15%), but closely followed by the FTSE 100 (-0.85%), CAC (-0.7% and DAX (-0.6%). In other words, fear is once again creeping into investor’s minds. At this point in the session, US futures are pointing slightly higher, but only about 0.2%. Obviously we will be watching US markets closely when they open.

In the FX world, it has also been a bit of a mixed picture, with the pound actually today’s big winner, +0.3%, as it appears cable options traders are driving the move higher after getting paid out of substantial amounts of short-dated volatility by the leveraged community. The yen has also gained today after a very impressive move yesterday. When I wrote, the yen had just edged higher by 0.25%, but it was in great demand during the NY session and closed nearly a full percent stronger. On the down side, NZD and SEK are the leading decliners, down 0.3% and 0.2% respectively with the former reacting to a story about the RBNZ easing policy further while the latter suffers as a cross play SEKJPY with punters viewing the krone as the most vulnerable currency to the virus.

In the EMG space, KRW (+0.85%) is today’s big winner, following the Kospi higher on hopes that the worst aspects of the virus have passed. On the flipside, RUB is down by 2.0% in a catch up move after being closed yesterday for a bank holiday. Otherwise, the rest of the bloc is +/- 0.2%.

On the data front this morning we see Case-Shiller Home prices (exp 2.8%) and Consumer Confidence (132.1), neither of which seems likely to impact FX. Arguably, this is still a virus and equity driven market, and that is where to look to get the fear barometer and consider where the dollar may move for the rest of the day.

Good luck
Adf

1. https://cdn.ihs.com/www/pdf/1218/IHS-Markit-PMI-Introduction.pdf

 

Despite Cash

In China the stock market sank
Despite cash from its central bank
But elsewhere it seems
The narrative deems
Investors, the Kool-Aid, have drank

So, it can be no surprise that after a one and a half week hiatus, the Chinese equity markets sold off dramatically (Shanghai -7.8%) when they reopened last night. After all, equity markets elsewhere in the world had all been under pressure for the entire time as the novel coronavirus spread seemed to accelerate. Of course, since Chinese markets closed for the Lunar New Year holiday, major global markets in the west had fallen only between 3.5% and 4.0%. But given China is the country whose economy will be most impacted, the ratio doesn’t seem wrong.

What we learned over the weekend, though, is that the acceleration has not yet begun to slow down. The latest data shows over 17,000 infected and over 300 deaths are now attributable to this illness. Most epidemiological models indicate that we have not reached the peak, and that it would not be surprising to see upwards of a quarter of a million cases within the next month or two. Remember too, this assumes that the information coming from China is accurate, which given the global reaction to the situation, may be a big ask. After all, I’m pretty sure President Xi Jinping does not want to be remembered as the leader of China when it unleashed a global pandemic. You can be sure that there will be a lot of finger-pointing in China for the rest of 2020, as some heads will need to roll in order to placate the masses, or at least to placate Xi.

But in what has been a classic case of ‘sell the rumor, buy the news’, equity markets in the rest of the world seem to have gotten over their collective fears as we see modest strength throughout Europe (DAX +0.2%, CAC +0.2% FTSE +0.4%) and US futures are all pointing higher as well. So at this point in time, it appears that the market’s modest correction last week is seen as sufficient to adjust for what will certainly be weaker growth globally, at least in Q1 2020. Something tells me that there is further repricing to be seen, but for now, the default belief is that the Fed and other central banks will do “whatever it takes” as Signor Draghi once said, to prevent an equity market collapse. And that means that selling risk would be a mistake.

With that as prelude, let’s turn our attention to what is happening away from the virus. The biggest FX mover overnight has been the pound, which has fallen 1.1% after tough talk from both PM Boris Johnson and EU Brexit negotiator Michel Barnier. The market’s concern seems to be that there will be no agreement reached and thus come December, we will have a Brexit redux. I am strongly in the camp that this is just posturing and that come June, when the decision for an extension must be made, it will be done under the guise of technical aspects, and that a deal will be reached. Neither side can afford to not reach a deal. In fact, one of the key discussion points in Europe this morning is the fact that the EU now has a €6 billion hole in its budget and there is nobody able to fill the gap.

On the data front, Eurozone Manufacturing PMI data was modestly better than forecast, with the bloc-wide number at 47.9, still contractionary, but Italy, France and Germany all edging higher by a tenth or two. However, despite the modestly better data and the modest uptick in equity markets, the single currency is under some pressure this morning, down 0.25%, as the market adjusts its outlook for Fed activity. It remains pretty clear that the ECB is already doing everything it can, so the question becomes will the Fed ease more aggressively as we go forward, especially if we start to see weaker data on the back of the coronavirus situation. Friday’s market activity saw futures traders reprice their expectations for Fed rate cuts, with the first cut now priced for July and a second for December. And that rate change was what undermined the dollar during Friday’s session, as it suddenly appeared that the US would be stepping on the monetary accelerator. In fairness, if the quarantine in China continues through the end of Q1, a quick Fed rate cut seems pretty likely. We shall see how things evolve. However, this morning sees a bit less fear all over, and so less need for Fed action.

The other main mover in the G10 was NOK (-0.7%), which given how much oil prices have suffered, seems quite reasonable. There is a story that Chinese oil demand has fallen 20% since the outbreak, as the combination of factory closures and quarantines reducing vehicle traffic has taken its toll. In fact, OPEC is openly discussing a significant production cut to try to rebalance markets, although other than the Saudis, it seems unlikely other producers will join in. But away from those currencies, the G10 space is in observation mode.

In the emerging markets, it should be no surprise that CNY is much weaker, falling 1.1% on-shore (catching up to the offshore CNH) and trading below (dollar above) 7.00. Again, that seems pretty appropriate given the situation, and its future will depend on just how big a hit the economy there takes. Surprisingly, the big winner today is ZAR, which has rebounded 1.0% after Friday’s sharp decline which took the currency through the 15.0 level for the first time since October. In truth, this feels more like a simple reaction to Friday’s movement than to something new. If anything, this morning’s PMI data from South Africa was much worse than expected at 45.2, which would have seemingly undermined the currency, not bolstered it.

On the data front, this week will be quite active as we see the latest payroll data on Friday, and a significant amount of new data between now and then.

Today ISM Manufacturing 48.5
  ISM Prices Paid 51.5
  Construction Spending 0.5%
Tuesday Factory Orders 1.2%
Wednesday ADP Employment 158K
  Trade Balance -$48.2B
  ISM Non-Manufacturing 55.1
Thursday Initial Claims 215K
  Unit Labor Costs 1.2%
  Nonfarm Productivity 1.6%
Friday Nonfarm Payrolls 160K
  Private Payrolls 150K
  Manufacturing Payrolls -4K
  Unemployment Rate 3.5%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.3
  Participation Rate 63.2%
  Consumer Credit $15.0B

Source: Bloomberg

Obviously, all eyes will be on the payrolls on Friday, although the ISM data will garner a great deal of attention as well. Last Friday’s core PCE data was right on the screws, so the Friday rate movement was all about coronavirus. With the FOMC meeting behind us, we get back to a number of Fed speakers, although this week only brings four. Something tells me there will be a lot of discussion regarding how they will respond to scenarios regarding China and the virus.

In the end, short term price action is going to be all about the virus and its perceived impact on the global economy. Any indication that the outbreak is slowing down will result in an immediate risk grab-a-thon. If it gets worse, look for havens to get bid up quickly.

Good luck
Adf

Don’t Be Fooled

Said Christine Lagarde, don’t be fooled
That we’re on hold can be overruled
If data gets worse
Or else the reverse
Then our policies can be retooled

Madame Lagarde was in fine fettle yesterday between her press conference in Frankfurt following the ECB’s universally expected decision to leave policy unchanged, and her appearance on a panel at the WEF in Davos. The essence of her message is that the ECB’s policy review is critical to help lead the bank forward for the next decades, but that there is no goal in sight as they start the review, other than to try to determine how best to fulfill their mandate. She was quite clear, as well, that the market should not get complacent regarding policy activity this year. Currently, the market is pricing for no policy movement in 2020. However, Lagarde emphasized that at each meeting the committee would evaluate the current situation, based on the most recent data, and respond accordingly.

With that as a backdrop, it is interesting to look at this morning’s flash PMI data, which showed that while manufacturing across the Eurozone may be starting to improve slightly, overall growth remains desultory at best. Interestingly it was France that was the bigger laggard this month, with its Services and Composite data both falling well below expectations, and printing well below December’s numbers. Germany was more in line with expectations, but the situation overall is not one of unadulterated economic health. The euro, not surprisingly has suffered further after the weak data, falling another 0.2% this morning which takes the year-to-date performance to a 1.6% decline. While that is certainly not the worst performer in the G10 (Australia holds the lead for now) it is indicative that despite everything happening in the US politically, the economy continues to lead the G10 pack.

Perhaps a bit more surprising this morning is the British pound’s weakness. It has fallen 0.3% despite clearly more robust PMI data than had been expected. Manufacturing PMI rose to 49.8, well above expectations and the highest level since last April. Meanwhile, the Composite PMI jumped to 52.4, its highest point since September 2018, and indicative of a pretty substantial post-election rebound in the economy. Even better was that some of the sub-indices pointed to even faster growth ahead, and the econometricians have declared that this points to UK GDP growth of 0.2% in Q1, again, better than previously expected. Remember, the BOE meets next Thursday, and a week ago, the market had been pricing in a 70% probability of a 25bp rate cut. This morning that probability is down to 47% and the debate amongst analysts has warmed up on both sides. My view is the recent data removes the urgency on the BOE’s part, and given how little ammunition they have left, with the base rate sitting at 0.75%, they will refrain from moving. That means there is room for the pound to recoup some of its recent losses, perhaps trading back toward the 1.3250 level where we started the year.

Away from those stories, the coronavirus remains a major story with the Chinese government now restricting travel in cities with a total population of more than 40 million. While the WHO has not seen fit to declare a global health emergency, the latest count shows more than 800 cases reported with 27 deaths. The other noteworthy thing is the growing level of anger being displayed on social media in China, with the government getting blamed for everything that is happening. (I guess this is the downside of taking credit for everything good that happens). At any rate, if the spread is contained at its current levels, it is unlikely to have a major impact on the Chinese economy overall. However, if the virus spreads more aggressively, and there are more shutdowns of cities and travel restrictions, it is very likely to start impacting the data. With Chinese markets closed until next Friday, our only indicator in real-time will be CNH, which this morning is unchanged. Watch it closely as weakness there next week could well be an indicator that the situation on the ground in China is getting worse.

But overall, today’s market activity is focused on adding risk. Japanese equities, the only ones open in Asia overnight, stabilized after yesterday’s sharp declines. And European equities are roaring this morning, with pretty much every market on the Continent higher by more than 1.0%. US futures are pointing higher as well, albeit just 0.25%. In the bond market, Treasuries and bunds are essentially unchanged, although perhaps leaning ever so slightly toward higher rates. And gold is under pressure today, along with both the yen and Swiss franc. As I said, risk is back in favor.

There is neither data nor Fedspeak today, so the FX market will need to take its cues from other sources. If equities continue to rally, look for increased risk appetite leading to higher EMG currencies and arguably a generally softer dollar. What about the impeachment? Well, to date it has had exactly no impact on markets and I see no reason for that to change.

Good luck and good weekend
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No Longer Appealing

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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