Tag Archives: #riskon

A Paean to John Maynard Keynes

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The positive vibe still remains
Encouraging stock market gains
Likewise bonds are sold
With dollars and gold
In paeans to John Maynard Keynes

As the market walks in ahead of today’s jobs report, once again poor data has been set aside and the equity bulls are leading the parade to acquire more risk assets. Stock markets are rallying, bond markets selling off and there is pressure on gold and the dollar. Granted, the moves have not been too large, but the reality is that the default market activity is to buy stocks regardless of valuation.

Let’s start with a quick look at current data expectations:

Nonfarm Payrolls 183K
Private Payrolls 179K
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

These are all pretty good numbers, and if the forecasts are right, it would certainly reinforce the idea that the US economy is ticking over nicely. Of course, the problem is that we have seen some pretty bad data in the past week which may call this evaluation into question. Recall Monday’s terrible ISM Manufacturing data, as well as Wednesday’s double whammy of ISM Non-Manufacturing and ADP Employment, both of which sharply disappointed. While yesterday’s Durable Goods was right on the mark, I would argue that based on the data seen this week, the US economy is clearly slowing down into the fourth quarter.

Adding to the general gloom is the data we have seen from elsewhere, notably Europe, where this morning’s German IP report (-1.7%) was the worst monthly print since April and took the year on year decline to -5.3%, the slowest pace since the financial crisis in 2009! Remember, Factory orders in Germany were awful yesterday, and the PMI data, while not as bad as expected regarding manufacturing, was much worse than expected in the service sector. The point is Europe is clearly not going to be driving the global economy higher anytime soon.

And of course, the other main engine of growth, China, has continued to present a picture of an economy in slow decline with excess leverage and financial bubbles still abundant, and with a central bank that is having trouble deciding which problem to address, excess leverage or slowing growth.

With this as a starting point, it is easy to see why there are so many bears in the market. But there is an antidote to this unrequited bearishness…the Fed! While Chairman Powell has repeatedly explained that the FOMC’s current practice of purchasing $60 billion per month of Treasury bills is NOT QE, it is certainly QE. And remember, the Fed is not just purchasing T-bills, they are also adding liquidity through overnight, weekly and monthly repo operations on a regular basis. In fact, they are taking all the collateral offered and lending money against it, not even targeting an amount they want to add. It certainly appears that they are simply adding as much liquidity to the markets as possible to prevent any of those bears from gaining traction. So in reality, it is no real surprise that risk assets remain in demand.

In fact, the Fed’s ongoing active stance in the money markets has me reconsidering my long-held views on the dollar’s future. The macroeconomic story remains, in my estimation, a USD positive, but one need only look at the dollar’s performance during QE1, QE2 and QE3 where we saw dollar declines of 22%, 25% and 16% respectively to force one to reconsider those views. ‘Not QE’ could easily undermine the dollar’s strength and perhaps, despite the ECB’s ongoing efforts, drive the dollar much lower. In conversations with many clients, I have been hard pressed to come up with a scenario where the dollar falls sharply, short of another shocking US electoral outcome where, as a nation we vote for left wing populism, à la Senator Warren or Senator Sanders, rather than our current stance of right wing populism. However, if the Fed maintains its current stance, expanding the balance sheet and adding liquidity with abandon to the money markets, there is every reason to believe that the dollar will suffer. After all, we continue to run a massive current account deficit, alongside our trade and budget deficits, and we are flooding the markets with newly issued Treasury debt. At some point, and perhaps in the not too distant future, the market may well decide the US dollar is no longer the haven asset that it has been in the past. In any case, while I consider the issues, it would be sensible, in my estimation, for hedgers to consider them as well.

And with that cheery thought, let us look forward to this morning’s market activity. My sense is that the combination of modestly higher than expected Initial Claims data during the survey week, as well as weak ISM employment sub-indices, and of course, the weak ADP number, will result in a disappointing outcome today. I fear that we could see something as low as 100K, which could see a knee-jerk reaction lower in the dollar as expectations ratchet up for more Fed monetary ease.

One other thing to keep in mind is that as we approach year-end, market liquidity starts to dry up. There should be no problems today, nor next week, I expect, but after that, trading desks see staffing thin out for vacations and risk appetite for the banks shrinks significantly. Nobody wants to risk a good year, and nobody will overcome a bad one in the last week of the year. So to the extent possible, I strongly recommend taking care of year end activity by the end of next week for the best results.

Good luck and good weekend
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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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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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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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Centrists’ Dismay

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In three weeks and some the UK
Will head to the polls and convey
To markets worldwide
If Brexit’s the side
They favor, to centrists’ dismay

In London today, and all week actually, the Confederation of British Industry is having their annual conference. As such, both Boris and Labour leader Jeremy Corbyn will be addressing the largest UK trade association to describe their views of the future based on an electoral victory on December 12. In brief, Boris is promising certainty with regard to Brexit as well as some tax cuts and spending on goodies. Meanwhile, Corbyn is promising to nationalize certain industries (British Telecom to give “free” high speed internet access to everyone in the country and the National Energy Grid to force more green activity and decisions) in order to achieve his party’s goal of poverty equality for all.

However, the weekend’s polls show that Boris is expanding his lead with the average result now showing the Tories with 42%, Labour with 30%, the LibDems at 14% and the rest of the assorted parties making up the balance. Arguably, the biggest weekend news was that every Tory running for a seat has signed a pledge to support the Brexit deal if elected. In essence, the Tories are leading and projected to get a majority, and they have pledged to complete Brexit. The market response has been pretty positive, at least the FX market, with the pound rallying a further 0.5% this morning after having rallied 1.0% last week. In fact, at 1.2950, we are pushing back to the highs seen in the immediate aftermath of the Brexit deal changes. As I have maintained since the election was called, I expect Boris to win and Brexit to go ahead shortly thereafter. At this point, it certainly seems like the UK will be out of the EU by the current January 31 deadline. As to the pound, I think we can see a move to 1.32-1.34, but probably not much more at this point. We will need to see significant progress on the ensuing trade agreement with the EU to see much further strength.

Other weekend news of note showed that the PBOC cut its seven-day repo rate by 5bps, to 2.50%, which despite the tiny movement cheered both traders and investors. Later this week, they will reveal the 1-year Loan Prime Rate, which is their new benchmark interest rate, and anticipation has grown they will be reducing that as well. The lesson here is that managing inflation, which has been rising rapidly due to the explosive growth in food, notably pork, prices, is a secondary concern. Instead, due to the fact that the economy is slowing even more rapidly, as evidenced by last week’s terrible Retail Sales and IP numbers, the PBOC’s marching orders are clearly to support GDP growth. Remember, despite the fact that President Xi is president for life, if GDP growth slows and unemployment rises, he will have some serious problems. In fact, it is this situation which has most pundits certain that a trade deal with the US will get signed. Both presidents need a win, and this is a relatively easy one for both.

Speaking of the trade deal, there was a high-level conversation over the weekend, between Liu He and the tag team of Mnuchin and Lighthizer, and both sides indicated progress continues to be made. That said, there is no indication that an agreement on where the presidents will meet to sign a deal has been reached, let alone an actual agreement on the deal. So, much remains to be done before this process is finished, but I am confident that we will read a string of positive tweets on a regular basis beforehand. Meanwhile, the PBOC’s modest rate cut had only a minor impact on the renminbi, which continues to trade just below (dollar above) the 7.00 level. Until a deal is finalized, it is hard to make a case for a large movement.

One last noteworthy item is from South Africa, where S&P has changed its outlook to negative from neutral. This is often a precursor for a ratings cut, and given S&P already has the country firmly in junk territory, at BB, Moody’s decision to maintain its investment grade rating last month seems more and more out of place. The rand is under pressure this morning, down 0.4%, although it remains closer to the top of its recent trading range than the bottom. What that means is there is ample opportunity for the rand to decline more sharply if there is any hint that Moody’s is going to move. The problem for South Africa is that if Moody’s changes them to junk, the nation’s debt will fall out of the MSCI global bond index and there could be as much as $15 billion of net sales. The rand would not receive that warmly, and a quick move back to the 15.50 level is to be expected in that case.

And those are the big stories this morning. Generally, I would characterize the markets as in a modest risk-on mode, with the dollar slightly softer, the yen and Swiss franc as well, while Treasury yields have edged higher and equity markets have edged higher as well. But, overall, it is pretty dull.

Looking ahead to the data releases this week, there is nothing of major consequence with Housing the focus:

Tuesday Housing Starts 1320K
  Building Permits 1381K
Wednesday FOMC Minutes  
Thursday Philly Fed 6.0
  Initial Claims 218K
  Leading Indicators -0.2%
  Existing Home Sales 5.49M
Friday Michigan Sentiment 95.7

While we do see the Minutes on Wednesday, given the onslaught of Fed speakers and consistency of message we have received since the last meeting, it seems hard to believe that we will learn anything new. One thing to watch closely is the Initial Claims data, which last week printed at 225K, higher than expected and where another higher than expected print could easily kick off a narrative of slowing employment, something that has much larger implications. There are a few Fed speakers, with uber-hawk Loretta Mester regaling us twice this week, although, again, it seems we have already heard everything there is to hear.

So today is shaping up to be quiet, with the modest risk-on behavior likely to continue to soften the dollar. We will need something bigger (e.g. a successful trade deal confirmed by both sides) in order to shake things up in my view.

Good luck
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Most Concerning

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While cities worldwide keep on burning
The news for which markets are yearning
Revolves around trade
Is phase one delayed?
If so, that would be most concerning

This morning it seems that everything is right with the world, at least based on market behavior. After all, equity markets are rallying, Treasury yields are rising and haven currencies are falling, the perfect description of a risk-on day. And what has everyone so optimistic this morning? Why, for the umpteenth time, the White House has indicated that the US and China are close to signing that elusive phase one trade deal. By all accounts, this deal is basically a swap of Chinese promises to purchase more agricultural products from the US, allegedly upwards of $50 billion worth, while the US will roll back the tariffs most recently put in place and will not impose new ones come December 15th. And don’t get me wrong, that would be great if it helped relieve some uncertainty in both markets and business planning. But I would conservatively estimate that this is the tenth time that optimism on a trade deal has led to increased risk appetite in the past three months, and we still don’t have a deal in place. My point is we’ve seen this movie before and we know how it ends…no deal and the opportunity to see it yet again in another few weeks’ time. I challenge anyone to show me evidence that this time is different!

And yet, it continues to be effective insofar as these constant announcements have helped maintain optimism in the market. The biggest risk is that the next story describes a complete breakdown in the trade talks and the chance of a deal, even a phase one deal, being completed disappears. Risk assets would not take that lightly. But another risk is that the deal is signed, and it is as modest as it appears to be. While that would be good news initially, it would remove one of the key market supports, the prospect of that deal. I fear we would see a classic sell the news outcome in that event as well. Something to keep in mind.

Meanwhile, the world is literally burning; at least a great number of large cities are besieged by mass protests with fire a constant result. Perhaps the best known situation is in Hong Kong, where things have gone from bad to worse, the protesters’ demands are being studiously ignored and the threat of China intervening directly grows by the day. Hong Kong’s economy has been severely impacted, falling into a recession in Q3, and the official forecast for GDP growth next year is now -1.3% by the Hong Kong government.

But Hong Kong is hardly alone. Santiago, Chile has been the sight of major demonstrations, with estimates of more than one million people turning out recently. That is more than 5% of the population! In the past week, in the wake of the news that the government wanted to scrap the current constitution and write a new one, the currency collapsed 12% and the local equity market fell 6%, taking its losses since mid-October to 15%. But this morning things are looking up there as Congress has come to an agreement on how to go about this process, with the evidence leaning toward a constitutional convention that will include many voices. When the FX market opened this morning, the CLP rebounded 2.5%. Of all the protests ongoing around the world, this may be the first where a solution is being created.

These two are just the most well-known situations, but the gilets jaunes continue to protest in France more than a full year after they started. And a quick survey shows ongoing protests, a number of which are quite large and disruptive, in Peru, Indonesia, Lebanon, the Netherlands, Haiti and Israel. The point is there are a lot of very unhappy people in the world, and much of their collective angst seems to be driven by a sense of inherent unfairness in the way those (and most) countries’ are run. This is a background issue generally, but as can be seen on a daily basis in the US and the UK, these issues can have much broader impacts on economies as a whole. After all, one could argue that both the Brexit vote and the election of President Trump were protest votes as well. And certainly, the US-China trade war is a consequence of those outcomes. My point is that while most of these things may not have a daily impact, they are important to recognize as part of the fabric of the market background.

Turning to today’s markets, though, as I mentioned, rose-colored glasses are the order of the day. Equity markets are generally higher gains in Asia (Nikkei +0.7%, Australia +0.85% and South Korea +1.05%) although Shanghai actually fell 0.65% after the PBOC did not cut rates as many had hoped/expected in the wake of yesterday’s very weak data outturn. European indices are also generally doing well this morning (DAX +0.2%, CAC +0.4%) although the FTSE 100 in the UK is having a rough go, down 0.4%, because of a sharp decline in British Telecom which has fallen 2% after Jeremy Corbyn promised to nationalize the company and give everyone in the UK free broadband access. It is remarkable what politicians will say in an effort to get elected!

Bond markets have fared less well as risk has been acquired since havens are no longer needed. So Treasury yields have bounced 3bps with Bunds following suit. And in the FX market, haven currencies are also under pressure. Overall, the dollar is softer, as is the yen, which has fallen 0.3% and the Swiss franc, which has fallen 0.25%. On the positive side in G10 is NOK, which has rallied 0.65% after a stronger than expected Trade Balance helped burnish optimism that GDP growth would maintain its recent solid performance and the Norgesbank would not need to join most other central banks and ease policy. In the emerging markets, aside from CLP mentioned above, we have seen broad-based, but modest strength across most of the rest of the space, with no real stories to note.

Yesterday we heard from a whole bunch of Fed speakers and to a wo(man) they explained that the economy was in good shape (the star performer according to Powell) and that there was no need to adjust policy at this time. Data yesterday showed that Initial Claims jumped more than expected, to 225K, which is not concerning if it is a one-time situation, but needs to be carefully monitored as a precursor to a deterioration in the labor market.

This morning we see Empire Manufacturing (exp 6.0), Retail Sales (0.2%, ex autos 0.4%), IP (-0.4%) and Capacity Utilization (77.0%). All eyes will be on the Retail Sales data as last month’s surprising decline has some on edge that the US economy is starting to show some cracks. But assuming an in-line outcome, I expect the dollar to soften modestly through the rest of the day as risk is accumulated further.

Good luck and good weekend
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Decidedly On

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While risk is decidedly on
Investors have kept being drawn
To dollars, so they
Can still overpay
For stocks, and sometimes, a junk bond

With the trade story still titillating markets, or at least distracting them, a funny thing has happened to the broad picture; the dollar has continued to rally despite the market’s embrasure of risk. Touching on the trade story, we continue to get dueling headlines from both sides as to how things are progressing, but the key is that both sides say things are progressing. The latest is confirmation that any phase one deal will, in fact, include a rollback of some portion of the existing tariffs, and there has been absolutely no discussion regarding the mooted tariffs to be imposed on December 15th. In addition, this morning, EU President Jean-Claude Juncker announced that he was certain there would be no US tariffs on European automobiles going forward, at least no additional ones.

This has been more than sufficient to encourage the equity bulls to continue to drive indices to new highs, at least in the US, but to generally rally around the world. At the same time, this week has seen a massive selloff in haven assets, specifically in US Treasuries and German bunds. For instance, last Friday, the 10-year closed at a yield of 1.712%. This morning it is trading at 1.924%. We have seen a similar, albeit not quite as large, move in the bund market, where the yield has risen from -0.386% to -0.247%. Still a 14bp move, given the low absolute level of yields, is nothing to dismiss.

Other favorite havens are the Japanese yen and the Swiss franc, both having fallen -1.1% this week. Gold? It too is lower by 3.45%, with Silver (-7.3%) and Platinum (-5.8%) faring even worse. And yet, despite this strong risk-on market sentiment, the dollar continues to perform well against all comers. In fact it is firmer against every G10 currency (SEK and NZD have been the worst performers, each down 1.4% this week), and it is firmer vs. most of its EMG brethren, with the South African rand (+1.6%) the major outlier based on the news earlier this week that it would not lose its last investment grade rating and so bond investors would not be forced to liquidate their positions.

But it begs the question, why is the dollar remaining so strong? Typically when risk is acquired, investors are seeking the highest yielding assets they can find, which includes EMG government bonds, junk bonds and equities. Usually, the carry trade makes a big comeback, where those who view FX as an asset class simply sell dollars and earn the points. But this time around, that doesn’t seem to be the case. In fact, one might point to the fact that US yields are the highest G10 yields, and higher than many EMG yields (e.g. South Korea, Singapore, Thailand, Hong Kong, Bulgaria, Slovenia, Croatia, Greece and the Czech Republic) and so on a risk adjusted basis, it appears that investors are far more willing to buy Treasuries and clip that coupon. At any rate, the dollar remains well bid across the board, and barring a sudden negative trade headline, I see no reason for this trend to change in the near term. This is especially true if US data continues to surprise to the high side, like we saw last week with the payroll numbers.

The upshot is hedgers need to beware of the current situation. While the dollar hasn’t had any days where it exploded higher, it continues to grind higher literally every day. Hedgers, at least receivables hedgers, need to be actively managing their risks.

One other thing supporting the dollar has been the change in market tone regarding the Fed’s future activities. It wasn’t that long ago, September, when the futures market was pricing in one more 25bp rate cut for December and one in March of next year. But now, looking out a full year shows there is not even one more rate full cut priced into the market. So the Fed’s dovishness has been effectively dissipated as made evident yesterday by Atlanta Fed President Rafael Bostic’s comments that if he were a voter, he would have dissented from cutting rates last week.

Looking ahead to this morning’s session, the only data we see is Michigan Sentiment (exp 95.5) at 10:00, although at 8:30 Canada releases their employment report. Yesterday’s Initial Claims data was mildly better than expected, just 211K, which indicates that the US jobs situation is not deteriorating in any real way. Perhaps a bit more surprising was the sharp decline in Consumer Credit yesterday, falling to just $9.5 billion, its lowest increase in more than a year, and a data point you can be sure will be highlighted by those pining for a recession. We also hear from three more Fed speakers, Daly, Williams and Governor Lael Brainerd, although both Daly and Brainerd are speaking at a climate change conference, which seems a less likely venue to discuss monetary policy.

Overall, the dollar remains bid and while it may stall as it runs into some profit-taking this afternoon, there is no reason to believe it is going to reverse course anytime soon.

Good luck and good weekend
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Removal of Tariffs

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According to some in Beijing
Removal of tariffs’ the thing
That ought to diminish
And fin’lly help finish
The problems the trade war did bring

Another day, another story about progress in the trade talks. Given the complete lack of movement actually seen, a cynic might conclude that both sides have realized just talking about progress is probably as effective as making progress, maybe more so. After all, making progress requires both sides to make actual decisions. Talking about progress just hints that those decisions are being made. And let’s face it; the one thing at which politicians have proven especially inept is making decisions. At any rate, the news early this morning was that part of the elusive phase one deal would be simultaneous rollbacks of the current tariff schedules. If true, that is a great leap forward from simply delaying the imposition of new tariffs. But the key is, if true. At this point, it has become difficult to recognize the difference between actual progress and trial balloons. The one thing going for this story is it was put out by the Chinese, not President Trump. Of course, that could simply be a negotiating tactic trying to force Trump’s hand.

It should be no surprise that the market reacted quite positively to the story, with equity markets in Asia turning around from early losses to close higher on the day. While the Nikkei just clawed back to +0.1%, the Hang Seng finished higher by 0.6% and Australia’s ASX 200 gained 1.0% on the day. Europe has followed the trend with the DAX leading the way, +0.75%, and the rest of the Continent showing gains of between 0.2% (CAC) and 0.6% (IBEX). And of course, US futures turned higher on the news, now showing gains of approximately 0.5% across all three.

So risk is in vogue once again. Treasuries and Bunds have both sold off sharply, with yields in the 10-year space higher by roughly 6bps in both markets. And the dollar, as would be expected, is under further pressure this morning.

A trade truce cannot come soon enough for Germany, which once again released worse than expected data. This morning’s miss was IP, which fell 0.6% in September, and is down 4.3% Y/Y. So while yesterday’s Factory Orders seemed positive, they also seem like the outlier, not the trend. However, given the dollar’s overall performance this morning, it should be no surprise that the euro has edged higher, rising 0.1% as I type. But a step back for some perspective shows that the euro has actually done essentially nothing for the past month, trading within a range barely exceeding 1.0%. It will take more than just the occasional positive or negative economic print to change this story.

And perhaps there is a story brewing that will do just that. Several weeks ago there was a Bloomberg article about inflation in the Eurozone, specifically in Spain, that highlighted the dichotomy between the low rate of measured inflation, which in Spain is running at 1.0%, and the fact that the cost of home ownership and rent is rising at a double digit pace. It turns out that the European CPI measurements have rent as just 6.5% of the index and don’t even include the costs of home ownership. In contrast, those represent more than 30% of the US CPI measurement! And housing costs throughout Europe are rising at a much faster rate, something on the order of 3.0%+ over the past five years. In other words, a CPI basket constructed to include what Europeans actually spend their money on, rather than on some theoretical construct, would almost certainly have resulted in higher CPI readings and potentially would have prevented the poisonous negative interest rate conundrum.

With this in mind, and considering Madame Lagarde’s review of ECB policy, there is a chance, albeit a small one, that the ECB will consider changing the metric, and with a change in the metric, the need for further QE and NIRP will diminish greatly. That would be hugely euro positive! This is something to watch for going forward.

The other big news that just hit the tape was from the Bank of England, where while rates were left unchanged, two members of the MPC voted to cut rates by 25bps in a complete surprise. Apparently, there is growing concern inside the Old Lady that the recent weakening data portends further problems regardless of the election outcome. Of course, regarding the election, the fact that both the Tories and Labour are promising huge new spending plans, the need for low rates is clear. After all, it is much easier to borrow if interest rates are 0.5% than 5.0%! The pound, which had been trading modestly higher before the news quickly fell 0.4% and is now back toward the lower end of its recent trading range. Sometimes I think central banks do things simply to prove that they matter to the markets, but in this case, given the ongoing economic malaise in the UK, it does seem likely that a rate cut is in the offing.

As to the rest of the market, some of the biggest gainers this morning are directly related to the US-China trade story, with the offshore renminbi trading higher by 0.6% and back to its strongest level in three months’ time. In addition we have seen NOK rally 0.85%, which seems to be on the back of stronger oil and the fact that easing trade tensions are likely to further support the price of crude. Combining this with the fact that the krone has been mysteriously weak given its fundamentals, relatively strong economic growth and positive interest rates, it looks like a lot of short positions are getting squeezed out.

Finally, I would be remiss if I didn’t mention the Brazilian real, which yesterday tumbled 2.0% after a widely anticipated auction of off-shore oil drilling rights turned into a flop, raising just $17 billion, far less than the $26 billion expected. In fact, two of the three parcels had no bids, and no oil majors were involved. While they will certainly put them up for auction again, the market’s disappointment was clear. It should also be no surprise that the real is rebounding a bit on the open, currently higher by 0.5%.

On the data front this morning the only thing of note is Initial Claims (exp 215K) and there are two more Fed speakers on the agenda, Kaplan and Bostic. However, the plethora of speakers we have heard this week have all remained on message, things are good and policy is appropriate, but if needed we will do more.

And that’s really it. I expect we will continue to hear more about the trade talks and perhaps get a bit more clarity on the proposed tariff rollbacks. But it will take a lot to turn the risk story around, and as such, I expect the dollar will continue to be under pressure as the session progresses.

Good luck
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Not Been Sated

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

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

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

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

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

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

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

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

Good luck
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