E Free Speech

Talk is supposed to be cheap but the words and time used to understand such are dear. The price of freedom is not free. Last night was about the Trump State of the Union Address and the RBA Governor Lowe Year Ahead speech. Both moved markets. Economic data was light but grim with the surprise drop in German factory orders suggesting even more weakness in Europe and elsewhere. Political news was more mixed. The hope for a US/China trade deal rose a bit with the US sending Lighthizer and Mnuchin to Beijing again and India led the rally up in Asia shares. OPEC wants to have a formal deal with Russia to shift the cartel – and Oil is 1% lower as API shows US crude supply rose 2.5mb last week. Trump sets Feb 27-28 meeting with North Korea’s Kim in Vietnam. NATO sets a summit in London for December. The focus on the day ahead will be linked to US foreign policy and trade with the hope for a better 2019 permeating all positions right now. The Australian RBA speech overnight maybe a foreshadowing of trouble for others with Poland and Brazil rate decisions ahead. Shifting from a hawkish bias to neutral isn’t that extraordinary but the price action in the AUD is worth watching as the bellwether for trade and rates colliding. The US 10-year bond sale today and the USD marching towards 1.13 EUR are both linked again. AUD weakness plays into the AUD/JPY carry trade, which is highly correlated to selling the VIX or buying EM equities. AUD/JPY maybe telling us 2800 in the S&P500 is less likely than a revisit to 2600. 

Question for the DayAre we setting up Emerging Markets for trouble again? The weaker outlook for China and German economies in 2019 sets the tone for the day. Markets are reversing some of the feel-good calm from extended rally up in equities. The place to watch for larger trouble maybe in emerging markets. 

The bounce back in many EM positions has been notable – witness the 7% gain in South Africa. Yet, the forecasts are turning, a new Reuters poll suggests that ZAR is expected to lose 3.5%over the year. The larger issue is about global trade where a US/China deal continues to be the baseline assumption and a return to “normal” for growth. 

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Gary Anderson 7 months ago Contributor's comment

Can anyone really believe that Trump will turn into Mr nice guy? I can't. Nice information here about Germany. Amazing how sentiment is so cheery about a trade deal with substance. That is a real long shot.