E Markets: Scapegoats

“And Aaron shall cast lots over the two goats, one lot for the Lord and the other lot for Azazel. And Aaron shall present the goat on which the lot fell for the Lord and use it as a sin offering, but the goat on which the lot fell for Azazel shall be presented alive before the Lord to make atonement over it, that it may be sent away into the wilderness to Azazel.” - Leviticus 16:8-10

A scapegoat is an animal ritualistically blamed for the sins of others, then driven away, cast into the desert, to carry away the evils of the entire community.  In order to go from fear back to greed, markets will have to find a scapegoat, something to blame for the last week’s turbulence and anxiety, define its community, and then find somewhere to cast that negative energy other than emerging markets or bonds. There is no one cause for the selling of risk-assets last week suggesting we may be looking for a flock of them.

Some blame the FOMC rate hike and future path for more of such. President Trump likes this argument. Others blame the President and his China tariffs as the trade war becomes more of a cold war with expectations that this may take years, not months, to resolve. China itself was blamed as well, even as its trade report showed little effects yet, but a report that China was cracking down on traveling citizens bringing undeclared designer handbags and other goods into the country – being an example of the tit-for-tat battles spooked markets.

Others point to the IMF meetings and the WEO warnings on global growth with higher rates and protectionism highlighted. Finally, some blame the 3Q earnings ahead with outlooks for 2019 very much in doubt even as profits now are expected to remain strong as many see this the best of times.  

The key US headline stories beyond the political noise of trade came with the US CPI and University of Michigan consumer sentiment reports. Markets are a confidence game and many see the fall in the S&P500 as a warning signal for growth into 2019 while others see it as a buying opportunity. So turning the tide of sentiment in markets and in the economy requires an event, or more facts like a benign CPI report, or just less selling like Friday’s bounce.

The obvious cure for bear markets is time, and perhaps, it’s like the magic Lo Shu Square found on the back of a turtle, after a flood of selling, wait 15 days. So shoot for the end of the month and look for the return of a bull market or prepare for the US mid-term elections and the larger pull down of political worry.   

What Happened over the Weekend?  

Plenty of stories about Saudi Arabia and the missing Washington Post Reporter; lots of US mid-term election focus with tight races; more on votes in Germany, Luxemburg and ongoing talks on Brexit – but perhaps the most immediate story and key focus is on CNY and the role of the PBOC.  

  • Key theme – PBOC prepared for all risks in CNY policy. The Chinese central bank governor said the country’s currency was at a “reasonable and equilibrium level,” Bloomberg quoted Yi Gang as saying.
  • New theme - Saudi/US rift after Trump threatens “severe punishment” on Khashoggi disappearance and Saudis reject such threats and political pressure. In an interview with Lesley Stahl of CBS’s “60 Minutes” that is airing Sunday, Trump called the journalist’s suspected murder “really terrible and disgusting.” “We would be very upset and angry if that were the case,” he said of Saudi Arabia’s potential responsibility. “As of this moment, they deny it, and they deny it vehemently. Could it be them? Yes.”  Key measure of whether this matters will be on oil prices and on mid-east balance of power – measured by Israel and Syria stability. 
  • Old theme – Merkel leadership in questionSunday voting in Bavaria left Merkel’s allies with the worst election result since the 1950s losing to the far-right. The CSU won just 35.5% losing its absolute majority for the second time since 1962. The Greens were second and AfD third, forcing a coalition leadership in the key state assembly. 
  • Tired theme – EU/UK Brexit talks and politics.  EU ambassadors were told there is no deal yet on Sunday according to Reuters. While Politico reports an EU breakthrough. 

Question for the Week AheadWas US CPI sufficient to stop the FOMC from 4 more hikes? 

Markets are looking for some cause to celebrate amidst the ashes of last week’s fire-sales in risky assets. The benign CPI report from the US and the confirmation of the same in Europe (with final French, German and Italian HICP) all confirmed that despite higher energy prices, CPI isn’t accelerating.  In fact, there are many that see the momentum flipping the other way. 

The key question then becomes the response function of the FOMC to the data and to the Board’s view of neutral. The story line of the market has been that Trump tax cuts and stimulus have propelled the economy at the end of the cycle, along with the tariffs inevitably hitting consumers and corporate import prices, all adding up to higher inflation risks in the months ahead.

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