Tag Archives: #riskon

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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