Back room deals with cigar smoke and the smell of money meeting greed. The mood for markets and how they deal with politics as a key driver doesn’t get easier. The uncertainty of US trade policy balances against stronger US economic data all coated with ugly US politics.

The last week brought a general de-risking after a long summer of relative calm. The arguments that emerging market pain won’t affect developed markets began to fray and the divergence of US outperformance holding for another six months also was cast into doubt. Buying the dip last week didn’t work and it will be key to watch to see if it fails again next week.

Both bonds and stocks lost value last week highlighting the pain of positioning. On one hand, US trade policy towards China with the threat of ever more tariffs seems to be leading to a dramatic slowdown of growth there and in emerging markets in general. On the other hand, US politics are seen tempering Trump with the mid-term elections expected to swing to the democrats and a Congress untied in opposition to his policies. Leaders in Beijing bank on this point while Washington seems convinced of the China pain leading to better terms. The reality is that both may not happen as expected and risk markets are two binary for the grey world in which we live.

Politics as usual are raising dark clouds over markets that have been comfortable with central bankers leaving easy money inflating assets if not the real economy. The hope for a dovish turn of the FOMC as inflation seems contained lost ground with 2.9% y/y wage growth and the US CPI/PPI data in the week ahead maybe more important accordingly.  

The turn into next week will be in the clash of how the ECB and BOE describe their reaction function to emerging market pain and the US/ China trade war risks along with their own domestic issues. Most rational players want normalization to happen but not if it kills the recovery there. The complication in the US and abroad is in the role of politics adding to doubts about central bank independence and how populist politics threaten the credibility of all institutions globally. There is nothing usual in this shift and the surprises are still likely to come from politics rather than economics making traders a lot less comfortable and volatility is something to expect in the weeks ahead. The biggest risk for next week is in the headlines we don’t expect – as we learned from the Japan typhoon and earthquake or the NY Times Trump senior aide editorial.

The focus next week will be on Europe given the ECB and BOE meetings and the list of things that matter to analysts is well understood. Fear will come out of anything not expected.

What Happened over the Weekend? 

Focus is on the Swedish Election, China Trade reports and the Trump Trade policy. But other politics remain in the headlines from Germany to Australia.

1) China August trade surplus $27.9bn from $28.05bn – less than $39.9bn expected. Exports were up 9.8% y/y after 12.2% - a bit less than the 10% expected – while imports rose 20% y/y after 27.3% - more than the 18.7% y/y expected.

2) Sweden polls are all over the place. Market is not certain of this outcome but fear a rise in anti-immigrant policy and swing to right.

3) Australia by-election in NSW swings against Liberal coalition.The rural voters in Wagga Wagga voted out the party for the first time since 1956. The new PM Morrison faces parliament push back Monday over the Liberal Party treatment of woman.

4) North Korea 70th anniversary military parade doesn’t showcase ICBMs. There were no nuclear tests and editorials pushed for unification with South Korea. This is a shift for Kim Jong-Un who has been pushing economic development over his nuclear ambitions in the previous parades.

5) Merkel’s grand coalition hits new low in polls. A poll from Emnid for Bild weekly shows the CDU and CSU off 1% to 29% - that is off from 32.9% from the election win last year. SPD was off 2% to 17% on the week and from 20.5% during the Sep 2017 election. The joint coalition is 46%, the lowest for any of the grand coalition under Merkel from 2005-2009 or 2013-2017.

Question for the Week Ahead: Are markets too calm for the policy and political risks ahead?

Since 2009 we have been trained to buy the dip, ignore the fear of contagion and to soldier forward with the promise that central bankers will always provide financial stability. Whether you look at bonds, stocks or even G10 FX, the lack of any sharp uptick in volatility suggests little fear about contagion in 2018 – whether that is about emerging markets or FOMC policy mistakes or about Trump trade uncertainty. The US data last week should be viewed as potentially changing this calm given that the doves on the Fed look vulnerable to rising inflation reports – with the CPI/PPI in the week ahead critical to their arguments to remain credible.

The other point about volatility is the underlying trend in US shares has been muting anything from politics. Stocks can ignore politics if the FOMC is seen as only “normalizing” rates rather than tightening them. Stocks can also ignore politics as long as the economy remains robust along with corporate profits and margins. The trend is your friend with the Fed and Trump allowing investors buy-the-dip opportunities. This, too, maybe doubted with politics heating up into the US mid-terms and the correlation of Trump/Republican polls and more aggressive policy pushes on trade higher. This fear of a more erratic Trump ties into the Thursday NY Times editorial and the upcoming Bob Woodward book on the President. Polls drive politicians to act.

Finally, the heart of the issue for markets in September came out of the summer trading where US outperformance was explained by better economics and higher rates being justified. The ability for the US to remain robust even as the rest of the world wobbles is the fear for 2019 or maybe 4Q. The shift from 2018 start where global synchronized recovery justified buying Europe and EM has changed.

Market Recap: 

This was a bad start to September for risk assets and while it was a short one for the US and Canada given their Labor Day holidays, the darker moods persisted with focus on US trade policy uncertainty, with no Canada deal a key story and $200 billion in China tariffs feared. Trump talk about Europe and Japan also hit markets.

US data was stronger this week with the focus on Friday employment report where wages rose 2.9% y/.y – a cycle peak. Japan got hit with two natural disasters – Typhoon Jebi – the worse in 25 years – and a 6.6 quake in Hokkaido – both are hits to the Japan economy. Countering that was stronger Capex data which are expected to lift 2Q GDP revisions next week.

In EM, South Africa entered an official recession, Brazil say a front-running presidential candidate get stabbed and in Argentina Macri has to deliver another new austerity program to help stability ARS confidence.

Equities:

The MSCI all-country World Index fell 1.93% to 512.97 on the week. The MSCI emerging market index fell 3.20% to 1,022.98 on the week. The major bourses all lost this week with Asia hardest hit – focus was on China trade tariffs and slowing global economy risks.

• The US S&P 500 fell 1.02% to 2,871.68 on the week. Valuebeat growth last week. Technology shares reversed with Congressional testimony hurting, semiconductors hit as well on demand fears. The DJIA fell 0.27% to 25,916.54 on the week. The NASDAQ fell 2.30% to 7902.54 on the week. The Cboe VIX rose 15.71% to 14.88% on the week or up 2.02 pp net.
• The Stoxx Europe 600 fell 2.22% to 373.77 on the week. German DAX was the worst off 3.27% to 11,959.63 on the week while Italy MIB was the best up 0.88 To 20,447.69 on the week. The UK FTSE fell 2.08% to 7,277.70 while the French CAC40 fell 2.86% to 5,252.22.
• The MSCI Asia Pacific Index fell 3.45% to 160.07 on the week. The Hong Kong Hang Seng was the worst off 3.28% to 26,973.47 on the week, The India Niffy 50 was the best off 0.78% to 11,589.10 on the week. The Japan Topix fell 2.94% to 1684.31 with the Nikkei off 2.44 % to 22,307.06. The Australian ASX200 fell 2.78% to 6,143.81 on the week and the Korea Kospi fell 1.78% to 2281.58.

Fixed Income:

Friday proved to be the big pivot day for US bonds with the rise in wages driving up expectations for more FOMC hikes.This hasn’t yet been fully reflected in global yields and it will be something to watch on Monday. The general risk-off mood in EM and pain in global shares left most bonds bid or holding.

In Europe, the focus was on the better Italian government headlines over their budget and that relief left the core EU bonds lower.The pain in EM and its connection to developed markets was along with trade worries a key driver still. For next week, the expect the US auctions to matter and be a focus particularly given the 3% 10-year yield pivot. The US sells $48bn in 3M and $42bn in 6M bills Monday, $26bn in 52-week and $35 bn in 3Y notes Tuesday, $23bn in 10Y notes Wednesday and $15bn in 30Y bonds Thursday.

• US bonds sold on Friday jobs, curve slightly steeper - 2Y up 7.5bps to 2.703%, 3Y up 8bps to 2.772%, 5Y up 8.3bps to 2.821%, 10Y up 8bps to 2.939%, 30Y up 8.2bps to 3.101%.
• Canada 10-year bond yields rose 6bps to 2.283% on the week – keeping pace with the US and listening to a surprisingly hawkish BOC Wilkins post their dovish statement and on-hold decision.
• Japan JGB yields up 0.5bps to 0.098% on the week – but drift from 0.125% highs – new BOJ buying looks a lot like the old policy – 30Y sale key next week.
• Australian 10-year bond yields rose 3bps to 2.545% on the week – RBA on hold, data supportive with jobs next week key – rest of world driving.
• UK Gilt yields rose 3bps to 1.455% on the week – with Brexit politics still dominate, but next week shifts back to BOE and data.
• German Bund yields rose 6bps to 0.385% on the week. Mixed to weaker data with core hit on periphery carry trade returning.
• French OAT yields rose 5bps to 0.717% on the week. Mostly tracking Bunds with mixed economic data and Macron losing political support.
• Italy BTP yields fell 20bps to 3.025% on the week. Big relief rally from 3.25% but 3.00% is the pivot and 2.80% is the bigger breakdown zone. New government budget still key.
• Spanish Bono yields fell 0.5bps to 1.46% on the week. Nothing new here – data mixed on growth – politics stable enough.
• Portugal 10-year bond yields fell 2.5bps to 1.885% on the week – tracking Italy barely.
• Greek 10-year bond yields fell 9bps to 4.245% on the week – with Macedonia a negative and tax cuts a doubt but Italy helps with 4.40% cap.

Foreign Exchange: 

The US dollar index rose 0.27% to 95.36 on the week. Focus is on 94.95 support and 95.55-65 resistance. US rates balance against US politics.In EM FX, USD was bid for the week: LATAM: MXN off 1.2% to 19.317 with 20 key, BRL off 2.3% to 4.056 with stabbing of Presidential candidate important; ASIA: CNY off 0.2% to 6.8440 with 6.80-6.90 range watch, KRW off 0.85% to 1122.80 with 1110 base for 1130, INR off 1% to 71.738 with focus on 72.50 next; EMEA: RUB off 3.5% to 69.90, ZAR off 3.6% to 15.237, TY 6.409 up 2% - with 7 in play, CBRT key. In Crypto Currencies: BTC fell 12% to $6,187 on the week, with futures off 9.3% on the week. ETH off 11.5% to $190 on the week.

• EUR: 1.1555 off 0.4% on the week – 1.15-1.18 prison holding with US rate spread balanced against politics.
• JPY: 111.00 flat on the week – with 110-112 range holding – focus is on equity mood, CNY/JPY cross and BOJ. EUR/JPY 128.25 off 0.45% on the week reflecting sour equity moods.
• GBP: 1.2920 off 0.3% on the week – with Brexit a worry but data and BOE next week key with 1.2750-1.3050 consolidation. EUR/GBP off 015% with focus on .9050.
• CHF: .9690 flat on the week – better Italy news but still EM pain and other worries – EUR/CHF 1.12 off 0.4% on the week with 1.1050 risk.
• CAD: 1.3160 up 0.9% on the week – no NAFTA deal and BOC dovish enough but 1.3250 caps so 1.30 still in play with some trade deal by end of month expected.
• AUD .7105 off 1.15% on the week – trade and China fears mix badly with politics over anything from RBA or better growth. NZD .6535 off 1.3% to new lows on the year with .6450 next.

Commodities:

The S&P/GSCI total return index fell 1.62% to 2,707.50 on the week.

• Oil: $67.75 off 3.55% on the week – hit on US inventories and on EM pain casting doubt about global demand. Also unwind of Gulf Storm Gordon fears. Brent Off 0.75% to $76.83 – both WTI and Brent are stuck in bearish technical positions with $66 WTI and $75 Brent in play.
• Gold $1197 off 0.35% on the week – USD bid hurt but technical also hitting from $1215 cap with risk of $1160 again.Silver off 2.5% to $14.17 on the week. Platinum off 0.7% to $782.25 and Palladium off 0.3% to $980.30 on the week.
• Corn: $367 up 3.9% on the week – points to Mexico deal, weather with WASDE next key for grains. Wheat off 4.3% to $511.25 hit on harvest. Soybeans up 1.53% to $844 – ARS mess part of the story.
• Copper: $2.6750 off 1.6% on the week with Dec futures off 3.2% to $262.25. Stocks and copper correlation back in play. China data key driver ahead.Iron Ore October up 3.3% to $68.02 with finer grade squeeze ongoing.

Calendar for the Week Ahead:

The ECB and BOE are going to be key events as they give forward guidance on their path to normalization. Neither are expected to change policy but both are in the process of removing some easy money. The balancing act is against politics and emerging markets with Swedish elections likely the headline grabber Monday with risks of more populism (read as anti-immigration leaders).

But Trump and trade policy will remain central with $200 billion in China tariffs looming and setting up the markets for their view of China monthly growth data. The retail sales and industrial production and CPI are all key. As for other stories – Australian jobs, New Zealand PMI and UK jobs, industrial production and trade all matter along with German ZEW and industrial production. For the US there is some key data – retail sales, industrial production and CPI/PPI – all set the backdrop for more FOMC hikes. The EM world will focus on Turkey rate hike risks, India WPI and South African growth.

Monday, September 10:

Japan GDP revisions, China PPI/CPI, UK IP, trade deficit

• 0750 pm Japan 2Q GDP revised (q/q) 0.5%p 0.7%e (y/y) 1.9%p 2.6%e
• 0750 pm Japan July C/A surplus Y1.175.6bn p Y1.852bn e / Trade BOP Y820.5b p Y243b e
• 0930 pm China August CPI (m/m) 0.3%p 0.5%e (y/y) 2.1%p 2.2%e
• 0930 pm China August PPI (y/y) 4.6%p 4.0%e
• 1105 pm RBA Deputy Bullock Speech
• 0100 am Japan August EcoWatchers Current 46.6p 46.7e / outlook 49p 50.5e
• 0300 am Turkey 2Q (q/q) 2%p 0.5%e (y/y) 7.4%p 5.1%e
• 0430 am UK July Industrial Production (m/m) 0.4%p 0.4%e (y/y) 1.1%p  1.2%e/ Manufacturing 0.4%p 0.2%e (y/y) 1.5%p 1.5%e
• 0430 am UK July Goods Trade Deficit G11.38b p G12.52b e / total G1.861bn p G2.1b e
• 0430 am UK July GDP (m/m) 0.1%p 0.3%e /3M avg 0.4%p 0.5%e
• 0430 am Eurozone Sep Sentix Investor Confidence 14.7p
• 0600 am UK August 3M NIESR GDP estimate 0.5%p 0.7%e
• 0300 pm US July Consumer Credit $10.2bn p $12.5bn e

Tuesday, September 11:

UK jobs, German ZEW, US JOLTS

• 0930 pm Australia July NAB business confidence 7p 5e / conditions 12p 15e
• 1145 pm Japan 30Y JGB sale
• 0130 am French 2Q Payrolls (q/q) 0.2%p 0.2%e
• 0430 am UK August claimant count jobs 6.2k p -5k e / Avg. Earnings 2.4%p 2.5%e / ex-bonus 2.7%p 2.8%e / ILO 3M July unemployment 4.0%p 4.1%e
• 0500 am German Sep ZEW current conditions 72.6p 72.3e / economic sentiment -13.7p -14e / EU sentiment -11.1p -14.9e
• 0500 am Eurozone 2Q employment (q/q) 0.4%p 0.4%e (y/y) 1.4%p 1.4%e
• 0600 am US August NFIB small business optimism 107.9p 105e
• 0815 am Canada Aug housing starts 206.3k p 210k e
• 1000 am US July JOLTS job openings 6.662m p 6.646m e
• 1000 am US July wholesale inventories 0.1%p 0.3%e
• 0100 pm US Treasury sells 3Y notes
• 0430 pm US weekly API inventories -1.2mb p +0.15mb e

Wednesday, September 12:

EU IP, US PPI, Fed speeches, Beige Book

• 0830 pm Australia Sep Westpac Consumer Confidence 103.6p 101e
• 0300 am Spanish Aug final HICP 2.3%p 2.2%p
• 0400 am Italian July Industrial Output (m/m) 0.5%p -0.4%e (y/y) 1.7%p 1.5%e
• 0500 am Eurozone July Industrial Production (m/m) -0.7%p -0.5%e (y/y) 2.5%p 1.1%e
• 0540 am German 30Y Bund Sale
• 0830 am US August PPI (m/m) 0.0%p 0.2%e (y/y) 3.3%p 3.2%e / core 2.7%p 2.8%e
• 0930 am St.Louis Fed Bullard speech
• 1030 am US weekly EIA crude oil inventory change -4.302mb p -1.3mb e
• 1200 pm US WASDE report
• 1245 pm Fed Gov Brainard speech
• 0100 pm US Treasury sells 10-year notes
• 0200 pm US Fed Beige Book

Thursday, September 13:

Australia jobs, China M2, IEA oil report, BOE rate decision, ECB rate decision with Draghi press conference

• 0700 pm Japan Sep Reuters Tankan 30p 29e
• 0750 pm Japan August Domestic PPI (m/m) 0.5%p 0.3%e (y/y) 3.1%p 2.9%e
• 0750 pm Japan July Machinery Orders (m/m) -8.8%p -1.3%e (y/y) 0.3%p 0.5%e
• 0900 pm Australia Sep Inflation expectations 4%p 4%
• 0930 pm Australia August Unemployment Rate 5.3%p 5.4%e / jobs -3.9kp +15k e/ participation 65.5%p 65.7%e
• 0245 am French August HICP final (y/y) 2.3%p 2.3%e
• 0300 am German August HICP final 2.1%p 1.9%e
• 0330 am Sweden 2Q final GDP (q/q) 0.8%p 1% e (y/y) 3.3%p 3.3%e
• 0400 am China August M2 (y/y) 8.5%p 8.5%e / CNY new loans C1.45trn p C1.30trn / TSF CNY1.04trn p CNY1.3trn e
• 0545 am Italy sells 3Y-7Y-30Y BTPs
• 0700 am Turkey central bank rate decision 17.75%p 22% e
• 0700 am UK BOE rate decision no change from 0.75% expected with 9-0 vote
• 0745 am ECB rate decision no change from -0.4% deposit rate expected – some QE taper timing expected
• 0830 am ECB Draghi press conference
• 0830 am US weekly jobless claims 203k p 210k e
• 0830 am US August CPI (m/m) 0.2%p 0.3%e (y/y) 2.9%p 2.7%e / Core 2.4%p 2.4%e
• 0830 am Canada July new housing prices (m/m) 0.1%p 0.1%e
• 1000 am Fed Quarles Testimony
• 1230 a\pm Atlantic Fed Bostic speech
• 0100 pm US Treasury sells 30-year paper
• 0200 pm US August Budget Deficit $77bn p $160bn e

Friday, September 14:

China IP, retail sales, US retail sales, IP, Michigan Sentiment

• 0630 pm New Zealand August Business PMI 51.2p
• 1000 pm China August retail sales (y/y) 8.8%p 8.7%e
• 1000 pm China August industrial production (y/y) 6%p 5.9%e
• 1000 pm China August ytd fixed investment 5.5%p 5.5%e
• 1230 am Japan July industrial production (m/m) -1.8%p -0.8%e (y/y) 2.3%P 3.1%e
• 0230 am India Aug WPI (y/y) 5.09%p 4.65%e
• 0300 am Sweden Aug CPIF (m/m) 0.5%p -0.1%e (y/y) 2.2%p 2.2%e
• 0400 am Italy August final HICP (m/m) -1.4%p-0.1%e (y/.y) 1.9%p 1.7%e
• 0500 am Eurozone July trade surplus E22.5b p E18bn e
• 0600 am BOE Carney Speech
• 0630 am Russia central bank rate decision – no change from 7.25% expected
• 0830 am US August retail sales (m/m) 0.5%p 0.4%e /ex autos 0.6%p 0.3%e / control 0.5%p 0.4%e
• 0830 am US August import prices (y/y) 4.8%p 4.6%e /export prices 4.3%p 2.5%e
• 0900 am Chicago Fed Evans speech
• 0915 am US August industrial production (m/m) 0.1%p 0.3%e / Cap Utils 78.1%p 78.1%e
• 1000 am US Sep preliminary Univ. of Michigan consumer sentiment 96.2p 96.8e
• 1000 am US July business inventories 0.1%p 0.2%e
• 1030 am BOC Business Review

Conclusions: Is the US economy booming? 

The data last week makes clear that the NBER won’t be calling for a US recession anytime soon.The US jobs report supports this view. Next week the Industrial Production data will be key along with retail sales. This is how the chart of the big four US data indicators stack up (from dshort.com).

The point about last week mattering to the divergence trade working through September is that US data returns to being important to the FOMC and to investors. The week ahead is going to pivot on this point.

The ECRI and its leading indicators are worth studying as well as they make the case for some concern given the drop in things other than ISM and jobs. There is a fear factor still for US markets that the next recession will sneak up on economists and traders. The ability of the FOMC to normalize and not make a policy mistake is part of that fear. Trump and trade policy is the other one. The way the rest of the world grows is the third.