E Investors Tested Last Week

[Ceiling and Visibility Unlimited]

"CAVU was the kind of weather we Navy pilots wanted when we were to fly off our carrier in the Pacific," he said. "We had little navigational instrumentation, so we wanted to CAVU, ceiling and visibility unlimited, and because of the five of you whose hugs I can still feel, whose own lives made me so proud, I can confidently tell my guardian angel that my life is CAVU and it will be that way until I die. All because of you."

Letter from George H.W. Bush to his children.

The last week tested many investors as they awaited the outcome of the G20. The bounce back in risky assets, excluding oil, highlights the present confusion bringing the best week for the S&P 500 in seven years and oil had its worst month in a decade. Surely this wasn’t just about US/China trade hopes or OPEC discord, this last week brought more clarity on the UK Brexit, the Italian Budget, the US and global economy – all managed to squeak by with less than feared outcomes but clear signs of a slowing global economy.

The other big event was the FOMC Chair Powell comments on US rates being “near neutral.” He backtracked from 3-4 hikes in 2019. That dovish tone, mixed with the hope for a US/China trade deal, sent markets higher with both bonds and equities benefiting. The Saturday truce between Trump and Xi over US trade tariffs is clearly temporary and a prelude to a long month ahead with more talk and less clarity over the path towards a real agreement. Expect the promise of Trump to not put more tariffs on China and Xi’s to buy more US goods will help Soybeans, NatGas, tech shares and ease some auto manufacturing fears.

Expect the conversations of Saudi, Russia and others at the G20 to set up for a more productive OPEC meeting in Vienna next week. The effect of this will likely clear up the skies for risk further as hope becomes the currency of the season. None of this will likely solve the US political discord at home and abroad, nor the Russia/Ukraine, Saudi/Iran, Saudi/Turkey animosity. The passing of the 41st President George Bush will suggest the end of a political era where republicans could speak and be listened to by Democrats and vice-versa. His death marks an end to US cold-war Presidents and the end of coalitions of the willing – as was seen in the first Gulf War against Iraq.

Also, notable last week, was the bounce back in carry trades. Yields mattered again, particularly in FX with the AUD/JPY and NZD/JPY rally notable despite their own mixed economic data. In emerging markets, the lower oil prices showed up supporting India and Korea along with the Bank of Korea raising rates to stem capital outflows and curtail frothy house prices, while it hurt Russia and Brazil. Rates still matter. The risk rally that started last week rests on whether oil and other commodities believe in the truce and growth stories for 2019.

AUD/JPY becomes the barometer for measuring this faith with 84.80 and 90 targets should a Santa Claus rally ensure while further acrimony or any other geopolitical surprising will likely return us to 80 and 78 stops.

What Happened over the Weekend?

  • Georgia protests over election – Vashadze and opposition parties vow to challenge election result in court, while protesters block parts of Capital Tbilisi.
  • Macron tells PM to hold talks – after worst unrest in Paris since 1968. Riot police on Saturday were overwhelmed as protesters ran amok in Paris’s wealthiest neighborhoods, torching dozens of cars, looting boutiques and smashing up luxury private homes and cafes in the worst disturbances the capital has seen since 1968.
  • Andalusia region votes in test for Spanish PM Sanchez.The election in Spain’s most populous region, a stronghold for Sanchez’s ruling Socialists for decades, is taking place amid a fragmented political landscape in which major parties struggle to secure majorities. Opinion polls show the Socialists winning the most seats but falling short of a majority.

Question for the Week AheadAre markets set up for a bigger bounce back in risk?

For most in a bear market, bounces are either to be sold or ignored, but for markets in a correction, bounces lead to FOMO – fear of missing out – and they bring back the dominant themes that drove the bull market. Confidence matters and it will likely be the key for understanding December trade dynamics. For the US, this means a return to US divergence on growth, hopes for a slow and gradual FOMC, ongoing USD strength and continued political noise.

The key point about US markets is that the 3Q earnings were strong and not rewarded while pessimism about 4Q and beyond was some of the worst on record. Factset notes this point in their weekly.

The pain trade around 4Q has been related to China and the Trump/Xi truce maybe the key for watching the bounce back in risk. The CNY is likely a key barometer as the 7.00 line holds against the USD even with some rates in China now below US ones.

The UK Brexit risks remain front and center for December as well with many still assuming the worst case scenario – no deal, no PM and a new election in the UK with a Corbyn victory. The BOE modelled outcomes last week may be the key for understanding the market reactions going forward to new headlines.

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