The official start of Fall and the Harvest Moon greet markets as they grind into third quarter end and look for the next spice to add to the ongoing rally back in risk. There is a common origin for the act of seasoning and the change in seasons – adding flavor or spices to food or drying, maturing foods or timber, against the time for sowing and harvesting all come from the same Latin root.

If we learn anything in the past week, it’s about timing as the Monday bear market ran into hibernation on the reality of Trump tariffs on China not leading to the end of the world. Similarly, time is the critical component for the week ahead as its timing that drives alpha, along with risk management.

Perhaps we see the return of seasoned traders in leading the pack of returns for the next few weeks. The issues that dominated September aren’t going to go away – just read the weekend headlines – China/US trade issues, UK/EU Brexit talks, Italy’s Budget, German Coalition troubles, Iran Sanctions and oil prices, FOMC policy and normalization in other central banks.

All of the uncertainty around these themes make for the week ahead to be one of difficult choices for investors as they decide to either ramp up risk to drive 3Q returns or to pull back and prepare for more noise and volatility. The drop in the VIX and the higher US yields are a clear indication that most passive flows were running with the bulls last week. What is maybe in the stew for next week comes from the seasoning choices of active managers. The seasonal pressure on risk will be hard to fight – 68% of the time the last week of September has been negative for US shares.

While we all know that past performance is no indication for future returns, caution maybe in the future for investors as they seek to make something good out of a mixed 3Q with the UK, China, Canada, Spain and Italy all in the red while the DJIA is up over 10%, Japan Nikkei up over 7%, India Nifty 50 over 4%. Mean reversion trades will be competing with the momentum chasers into month and quarter-end.

What Happened over the Weekend?  

Risk off news over the weekend will dominate Monday trading despite China and Japan holidays:  

1) Is the US/China trade war back on?  China called off trade talks for next week. Most now expect little chance for new discussions until after the November mid-term elections. The next issue will be if US President Trump follows with further sanctions responding to China’s retaliation. US Secretary of State Pompeo made it clear – the US is “determined to win” the trade war.

2) Italian politics uglier?  Italy’s Deputy PM Salvini pushed back on the central bank’s fiscal caution. He told Corrriere della Sera newspaper: “We’ll do a courageous budget; the deficit isn’t a problem.” The La Repubblica newspaper on Saturday published a leaked tape with PM Conte’s spokesman threatening a purge of Finance Ministry. Casalino said that FinMin Tria “is somewhat involved” in attempts to stymie spending increases. “It’s not acceptable that E10 billion can’t for found for funding citizen’s income. In response, the PM Conte on Sunday was quoted by ANSA newswire saying he has confidence in “all the ministers.”  

3) German politics uglier? Merkel is battling to avert another crisis with her coalition over the spy-chief affair. FT reports that emergency talks with the SPF and CDU are being held today. SPD leader Andrea Nahles told the Bild newspaper that she did not expect the government to collapse over the removal of spy chief Hans-Georg Maassen from his post last Tuesday. The affair has dominated political debate in Berlin for the past two weeks and exposed the fragility of the coalition. But she added: “The basis for our co-operation must be mutual trust and reliability. If that is no longer the case, the government will fail.”

4) OPEC long-term outlook sees US output rising, OPEC lower despite global recovery. Blames US sanctions on Venezuela and Iran for $80bbl oil.  “Declining demand for OPEC crude is a result of strong non-OPEC supply in the 2017–2023 period, most notably from U.S. tight oil,” the Organization of the Petroleum Exporting Countries said in its long-term world oil outlook.  “The U.S. remains by far the most important source of medium-term supply growth, contributing ... two-thirds of new supply, driven by surging tight oil output,” it said. Russia and OPEC rebuffed Trump’s call for an immediate supply boost. “My information is that the markets are adequately supplied. I don’t know of any refiner in the world who is looking for oil and is not able to get it,” Saudi Oil Minister Falih said.

4) Iran Revolutionary Guard vows to avenge military parade attack which killed 25 and wounded over 70 people.Ahvaz National Resistance, an Iranian ethnic Arab opposition movement which seeks a separate state in oil-rich Khuzestan province, claimed responsibility for the attack. Islamic State militants also claimed responsibility. Neither claim provided evidence. All four attackers were killed. Before leaving for the United Nations on Sunday, Iranian President Hassan Rouhani accused other countries including the United States of provoking the shooting attack.

Question for the Week Ahead: What really drives the USD?  

The US dollar reversal last week begs the question about whether the FOMC rate decision next week matters. The USD didn’t respond to higher US rates last week and few see next week changing this break down in correlation. If yields aren’t the driver, then what is?

Some point to the role of China in the price action last week with the Chinese charm offensive in full play at the Summer Davos as the Chinese Premier Li vowed not to use the CNY as a weapon in the trade war, pushed for more opening reforms in the economy and sparked talk of a tariff cut to follow.

US/China trade talk hopes were part of the rally back in risk particularly in the commodity currencies – AUD, CAD, NZD and in much of the EM with ZAR, the big winners. So perhaps, the most important issue for the USD is in trade as it drives foreign capital flows – either to the S&P 500 and US bonds or to EM shares and bonds. The shift in bond holdings by China from US to other nations is part of this story and its highlighted most clearly in the EURCNY move with the break of 8.00 suggesting the EUR/USD could move to 1.20. 

Of course, there is another issue for the USD at play with the current account deficit and US budget deficit a drag against the balancing act of the FOMC gradual rate hikes slowing down the economy. There is a small window here for investors to believe in the USD hegemony where higher real growth leads to higher real rates and pays for the increased government debts and higher debt-servicing costs. There are many that then wrap this issue into the US mid-term elections and see that the US risks for a do-nothing Congress are higher leaving the heavy lifting for growth back on the shoulders of the FOMC and the rest of the world. This puts the role of the USD and trade issues into perspective as well. Funding the US current account is part of the EM story and the balancing act.

Market Recap:

The abrupt shift in mood from Monday to Tuesday dominated last week – with the fears of escalating trade wars with China moderating as the Premier Li said they wouldn’t use CNY as a tool and that they would spur stimulus to offset any slowdowns along with some talk of cutting tariffs. China shares rallied sharply. In Japan, Abe won a third term as LDP leader – setting him up to become the longest serving PM in history. The BOJ did nothing as expected but it shook up markets Friday with a cut in the 25+ year buying.  

US jobless claims fell to 1969 lows at 201,000. US bond yields touched 4-month highs at 3.10% on Thursday. The data Friday was also important as it showed slowing European growth against ongoing US strength with flash PMI reports. In a Friday speech, UK PM May seemed to abandon her Chequer’s plan, blaming its failure on the EU’s inability to compromise and stated that the negotiations had reached an impasse after the Salzburg meetings.

Equities: The MSCI all-country World index rose 1.62% to 527.86 on the week. The MSCI emerging markets index 2.23% to 1051.43 on the week. 

• The US S&P500 rose 0.85% to 2929.67 on the week – setting new record highs.The DJIA lead up 2.25% to 26,743.50 on the week – also at new record highs – while the NASDAQ fell 0.29% to 7,986.96 on the week. Higher US rates helped financials but hurt REITs and Utilities. Value outperformed growth on the week. The Cboe VIX fell 3.23% to 11.68 on the week.
• The Stoxx Europe 600 rose 1.7% to 384.29 on the week – back to 3-week highs with focus on trade, Italy still.Best performer was Italy MIB up 3.12% to 21,536.74 while the worst was the Swiss market up 0.28% to 8995.38 after the SNB remained on hold. The UK FTSE rose 2.55 % to 7490.23, the German DAX rose 2.53%to 12,430.88 and the French CAC40 rose 2.65% to 5,494.17 on the week.
• The MSCI Asia Pacific Index rose 2.61% to 166.20 on the week.The China Shanghai Composite rose 4.325 to 2797.48 on the week – surprising many after US tariffs – but the best performer was Japan with the TOPIX up 5.50% to 1804.02 and the Nikkei 225 up 4.59% to 23,689.93. Hong Kong Hang Seng rose 2.45% to 27,953.58. The worst performer of the big bourses in Asia was India Nifty 50 off 1.99% to 11,143.10. Kore Kospi rose 0.90% to 2339.17 while the Australia ASX 200 rose 0.47% to 6,194.56%

Fixed Income:

US rates touched 10-year yields at 3.10% Thursday, 4-month highs, reflecting the certainty of another FOMC rate hike to 2.25% and a steepening of the yield curve suggesting less buying of US long-end from other nations – particularly China. The big news driving up global rates was not about data but more about risk-moods in equities and elsewhere.

The recovery in EM led to a general reappraisal of safe-haven in core bonds. Throw in that the Norges Bank hiked 25bps to 0.75% as expected, SNB was on hold and the BOJ also on hold and you have no urgency to fear faster moves outside of the US, but more to the point, steady growth and less fear leaves rate normalization everywhere else ongoing.

The focus on FOMC, RBNZ and another hike in EM from Indonesia will lead next week for fixed income. Throw in the hefty $106 billion in supply from the US and you have the makings for more volatility. BOJ is adding to this as well with its shift in buying for the 25+Y Rinban shaking up that market and adding to a general mood that equities matter to fixed income.

• US bonds see bear curve steepening on the week: 2Y 2.80% up 2.2bps, 3Y 2.888% up 3.5bps, 5Y 2.948% up 4.5bps 10Y 3.063% up 5.5bps, 30Y 3.20% up 7bps on the week.
• Canadian 10-year bond yields rose 8.5bps to 2.425% on the week with BOC rate hike back in play and oil/NAFTA adding to noise.
• Japan JGB yields up 1bps to 0.118% on the week – BOJ holding pattern with Rinban tweaks to steepen curve in play.
• Australian 10-year bond yields rose 10bps to 2.70% on the week – better China trade hopes, mixed data, all driving with supply focus next week.
• UK Gilt yields rose 2.5bps to 1.551% on the week – was much worse for Gilts but reversed with Brexit deal hopes dashed in Austria.
• German Bund yields rose 1bps to 0.458% on the week – not much going on despite ECB normalization talk and periphery noise – 0.50 key still.
• French OAT yields up 1bps to 0.775% on the week – Macron sees a bit better politics but weaker data holding back with .85% pivotal
• Italy BTP yields fell 15bps to 2.825% on the week – less fear about budget but this weekend maybe lifts political rifts in coalition. Watching 2.75% as key
• Spanish Bono yields flat rose 0.5bps to 1.488% on the week – tracking France and Germany not Italy.
• Portugal 10-year bond yields rose 1.5bps to 1.86% on the week – supply and growth focus.
• Greece 10-year bond yields fell 2bps to 4.025% on the week – watching for end of capital controls with 3.90%-4.20% key range.

Foreign Exchange:

The US dollar index fell 0.75% to 94.22 on the week with focus on 93.80 and 94.95 as breakouts.

In Emerging Markets, the USD was mostly lower. LATAM: MN up 0.3% to 18.828, BRL up 3.0% to 4.05; ASIA: CNY up 0.15% to 6.8570, INR off 0.5% to 72.20, KRW up 0.1% to 1115.70; EMEA: ZAR up 4.2% to 14.321, RUB up 2.6% to 66.455 and TRY off 1.9% to 6.291. 

In Crypto Currencies: BTC $6770 up 3.6% on the week, still off 53% on the year. Futures rose 5.3%. Sunday, BTC trades $6755 losing Saturday, gaining Sunday. ETH rose 14% to $245 with $190 base holding and tests for $270 next. XRP also worth highlighting running to $0.80 on Friday from Tuesday $0.27 on hopes for xRapid going live next month. Closed up 43% to $0.58 for the week.

• EUR: 1.1750 up 1.05% on the week – 1.1820 and 1.1850 resistance holding with ECB vs. FOMC rate focus and 1.1680 base building.
• JPY: 112.60 up 0.45% on the week with EUR/JPY 132.30 up 1.5% on the week – watching US rates, BOJ tweaks and equities as the drivers with 112 base for 113.40 next.
• GBP: 1.3075 flat on the week with .8980 up 0.95% on the week.The Brexit hopes for a deal in Salzburg squeeze GBP to 1.33 resistance and Friday failure leads to 1.3050 test with 1.29-1.34 big picture.
• CHF: .9585 off 1.0% on the week with EUR/CHF up 0.1% to 1.1260 with focus on EUR not CHF but Italy and EM fears remain and SNB less convincing. Watching .9550 for .94 risk.
• CAD: 1.2915 off 0.95 on the week with 1.2880 holding but 1.3050 resistance intact – hopes for NAFTA lessening leaves rates key with oil/crosses driving.
• AUD: .7290 up 1.9% on the week with China hopes driving and NZD up 2.1% to .6685 as GDP beats – RBNZ next driver with AUD wash out of shorts complete.

Commodities: 

The S&P/GSCI rose 2.05% to 2,785.12 on the week. Copper, Palladium and NatGas led the commodities while Lumber, Rice and Orange Juice lagged with losses.

• Oil: $70.78 up 2.59% on the week, Brent up 0.91% to $78.80 with both watching OPEC this weekend and likely bid on Saudi/Russia comments. The $70 pivot in WTI opens $72.50 while a $80 break in Brent could bring $87 with 55-day base at $75.50 holding.
• Gold: $1200 up 0.45% on the week.Lower USD helps but there is no momentum and $1183-$1215 consolidation continues.Silver up 1.7% to $14.30 with $14 pivotal base for $14.55 retest. Platinum up 4% to $828 and Palladium up 7.6% to $1052.75 – Auto/trade hopes key.
• Corn; $357.25 up 6%. Focus is on USD and trade talks along with weather for harvest. Wheat up 8.7% to $521.75 and Soybeans up 3.1% o $847.25 – weaker USD key.
• Copper: $2.8218 up 5.05% on the week with $2.70 the pivot and $2.95 next resistance. Tracking equities and China growth hopes. Iron Ore rose 0.69% to $68.85 with October futures.

Calendar for the Week Ahead:

there will be a slow start to an important week with holidays in much of Asia with key focus on the US/China trade war, the FOMC rate hike delivery and the usual month-end portfolio rebalancing and data from US home sales and prices to GDP revisions to trade and durable goods. The heavy US refunding will also be watched given the rate moves last week. For Europe, the focus will be on ECB speakers, bond auctions, and the usual month end data from German IFO, jobs, flash CPI to European flash HICP. The Asia data is light except for Japan where Tokyo CPI, jobs, retail sales and more speeches from Kuroda drive. RBNZ and Indonesia also have rate decisions. The UN General Assembly in New York will fill out headlines with side meetings key.

Monday, September 24: Japan and China Holiday, German IFO

• 0400 am German Sep IFO business climate 103.8p 103.2e / current 106.4p 106.1e / expectations 101.2p 100.2e
• 0430 am UK FPC Statement
• 0600 am UK Sep CBI Industrial Trends Survey 7p 5e
• 0830 am US Aug Chicago Fed National Activity Index 0.13p 0.02e
• 0830 am Canada July wholesale sales -0.8%p 0.4%e
• 1030 am US Sep Dallas Fed Manufacturing Index 30.9p 31e
• 1130 am US 3M $48bn and 6M $42bn Bill Sale
• 0100 pm US 2Y $37bn note sale

Tuesday, September 25: BOJ Kuroda, US house prices, UN General Assembly

• 0750 pm Japan Aug Corporate Service Prices (y/y) 1.1%p 1.2%e
• 0750 pm Japan BOJ Board Minutes
• 0100 am Japan Jul final LEI 104.6p 103.5e
• 0130 am Japan BOJ Kuroda speech
• 0200 am German Aug WPI (m/m) 0%p 0.2%e
• 0440 am UK BOC MPC Vlieghe speech
• 0900 am US July S&P/Case Shiller home prices (y/y) 6.3%p 6.2%e
• 0900 am US July FHA housing price (m/m) 0.2%p 0.4%e
• 1000 am US Sep Richmond Fed Manufacturing Index 24p 22e
• 1130 am US 1M Bill sale and $17bn in 2Y FRN
• 0100 am US 5Y $38bn note sale
• 0430 am US weekly API crude oil stocks 1.25mb p -0.5mb e

Wednesday, September 26: US new home sales, FOMC hike, Powell press conference

• 0645 pm New Zealand Aug Trade Balance NZ$4.44bn p
• 0245 am French Sep Consumer Confidence 97p 97e
• 0245 am French Sep Business Climate 110p 110e
• 0540 am German 5Y BOBL sale
• 0600 am UK Sep CBI retail sales survey 29%p 15%e
• 0900 am Swiss SNB 3Q bulletin
• 1000 am US Aug New Home Sales (m/m) -1.7%p 0.5%e / 0.627mn p 0.6emn e
• 1030 am US weekly EIA crude oil stocks -2.057mb p -3.7mb e
• 0200 pm FOMC rate decision – 25bps hike to 2.25% expected,
• 0230 pm FOMC Powell press conference

Thursday, September 27: RBNZ, OPEC meeting, Eurozone Economic Sentiment, German preliminary CPI, US durable goods, trade, final 2Q GDP

• 0500 pm RBNZ rate decision – no change from 1.75% expected
• 0600 pm RBNZ Orr press conference
• 0200 am German Oct GfK Confidence Survey 10.5p 10.6e
• 0230 am BOJ Kuroda speech
• 0300 am Indonesia Rate Decision 25bp hike to 5.75% expected
• 0400 am Italy Sep business confidence 104.8p 104.5e/ consumer 115.2e 114.9e
• 0400 am ECB Aug M3 (y/y) 4%p 3.8%e/ 3M annual 4.1%p 4%e / private loans 3%p 3.1%e
• 0400 am ECB Economic Bulletin
• 0500 am Italy Aug PPI (m/m) 0.3%p 0.2% e (y/y) 3.2%p 3%e
• 0500 am Eurozone Sep Economic Sentiment 111.6p 111.2e / Business Climate 1.22p 1.19e / Consumer Confidence -2.9p -2.5e
• 0545 am Italy 5Y and 10Y BTP sale
• 0500 am France 10Y OAT sale
• 0600 am German Sep preliminary HICP (m/m) 0%p 0.1%e (y/y) 1.9%p 1.9%e / CPI 0.1%p 0.2% e
• 0830 am US weekly jobless claims 201k p 207k e
• 0830 am US 2Q final GDP 2.2%p 4.2%e / price index 3.2%p 3.2%e / Core PCE 2.2%p 2.0%e
• 0830 am US Aug wholesale inventories 0.6%p 0.2%e
• 0830 am US Aug goods trade deficit $72.2bn p $70bn e
• 0830 am US Aug durable goods orders -1.7%p +2%e / ex transport 0.2%p +0.4%e
• 1000 am US Aug pending home sales (m/m) -0.7%p +0.9%e
• 1230 pm US Dallas Fed Kaplan Speech
• 0100 pm US 7Y $31bn note sale
• 0430 pm US FOMC Powell speech
• 0545 pm Canada BOC Poloz speech

Friday, September 28: Japan IP, retail sales, unemployment, China PMI, flash EU HICP, US PCE, Chicago PMI, University of Michigan and Canada GDP

• 0730 pm Japan Sep Tokyo CPI (y/y) 1.2%p 1.1%e / Core 0.9%p 0.9%e
• 0750 pm Japan Aug unemployment rate 2.5%p 2.4%e
• 0750 pm Japan Aug Industrial Production (m/m) -0.2%p +1.5%p
• 0750 pm Japan Aug retail trade (m/m) 0.1%p -0.1%e (y/y) 1.5%p 2.2%e
• 0750 pm Japan BOJ summary of opinions
• 0930 pm Australia Aug private sector credit (m/m) 0.4%p 0.4%e
• 0945 pm China Sep Caixin Manufacturing PMI 50.6p 50.5e
• 0245 am French Aug PPI (m/m) 0.6%p 0.4%e
• 0245 am French Sep flash HICP (m/m) 0.5%p -0.2%e (y/y) 2.6%p 2.6%e
• 0300 am Spanish Sep flash HICP (m/m) 0.1%p 0.8%e (y/y) 2.2%p 2.4%e
• 0300 am Spanish 2Q GDP revised (q/q) 0.7%p 0.6%e (y/y) 3%p 2.7%e
• 0300 am Swiss Sep KOF leading indicator 100.3p 101.1e
• 0400 am German Sep unemployment -8kp -9k e / rate 5.2%p 5.1%e
• 0430 am UK 2Q GDP revised (q/q) 0.2%p 0.4%e (y/y) 1.2%p 1.3%e
• 0500 am Italy Sep flash HICP (m/m) -0.2%p -0.1%e (y/y) 1.8%p 1.7%e
• 0500 am Eurozone Sep flash HICP (y/y) 2%p 2.1%e / core 1%p 1.1%e
• 0830 am US August personal spending 0.4%p 0.3%e / income 0.3%p 0.4%e / PCE index 0.1%p 0.2%e
• 0830 am US Richmond Fed Barkin speech
• 0830 am Canada Aug industrial PPI -0.2%p +0.6%e
• 0830 am Canada July GDP (m/m) 0%p 0.2%e
• 0945 am US Sep Chicago PMI 63.6p 62.5e
• 1000 am US Sep final University of Michigan Consumer Sentiment 96.2p 100.8e
• 0445 pm US NY Fed Williams Speech

Conclusions:  

Is MXN the best indicator for EM all clear?

The mood swing about global trade and risks turned with the US/Mexico trade deal last month.This left many expecting a deal with Canada, then Europe, then after the mid-term elections with China. Hope that all is fine in the world for trade is usually reflected by Asia FX but the risk aversion in EM is frequently shown in Mexico given its near 24-hour / 7-days a week liquidity and its open electronic pricing. Hedging EM risks has been part of the USD/MXN story in 2018.The chart of USD/MXN suggests that maybe much of the EM pain trade has been overdone but the USD uptrend remains intact. 

The other story that maybe at play here is in the role of Canada. Mexico is the cheaper alternative for much of the NAFTA manufacturing and it’s a key part of supply chains in the US and in Canada. The lack of progress in the latest round of US/Canada talks is something to watch as it nears month-end and leads to another risk for C$ blow ups. CAD/MXN maybe the key to watching whether the Trump trade noise is going to help or hurt markets into November.