E Markets: Ashes

Welcome to Ash Wednesday, when thinking and rethinking are required as we contemplate life and death and the inevitability that we are all dust and will return to it in good time. When markets don’t react the same way with the same stimulus, investors need to rethink the logic of what got them into their position and what will force them out. Geopolitical risk reduction was a key part of 2019’s bull run with a patient FOMC thrown on top for fun. The rise of US non-manufacturing ISM puts that into question and leaves the jobs report Friday as an event risk for rates again. The hope for a soft and easy Brexit was dashed again overnight as EU/UK talks ended with no agreement last night. The US/China trade deal has been priced as both Xi and Trump want and need a deal, but the fallout from that is in doubt as the quantitative targeting of buying US goods at the expense of other nations – Europe, emerging markets – means higher prices, less USD from exports. There is a rising view that any deal is not good enough for the longer-term sustainability of global trade and growth unless you believe that the US can thrive alone. Yesterday’s push from Trump to scrap India’s and Turkey’s participation in privileged trading programs is another warning signal of such fears. Overnight the biggest headline was about the fallout from the failed second Kim/Trump summit in Vietnam. There is a nuclear arms race in play across the world. North Korea appears to be rebuilding its Launch Site for missile testing, Saudi and Iran are in a race to join India and Pakistan and North Korea with nuclear bomb technology.  Rethinking the world after WWII continues as the Pax Americana, post the fall of the Berlin Wall, crumbles into a more dangerous world where the US no longer wears the white hat, nor does anyone else. There is rising geopolitical risks as authoritarian nations see there own unhappy citizens and act to the extremes, just as the democracies see the rise of the populist. Both undermine faith in the rule of law and the order of things. The USD was the winners today in such a world and that is without much rethinking but the real dust-up overnight was in the weaker AUD, which broke .7050 support and looks set to test .68 again. 

The AUD weakness is important as it contrasts with the China share rally for the 3rdday. Manipulation of the China equity market during the National People’s Congress and its push for stimulus to support the economy isn’t as believable as the AUD and the GDP report today. The per capita growth recession hasn’t been a topic since 2003. 

Question for the Day: Has US divergence returned? The US GDP against that of Europe or Asia returns as the explanation for USD strength and US equity gains. Today’s 4Q Australian GDP is a case in point for the AUD where a 0.2% q/q gain versus 0.3% q/q expected leads to FX volatility. The logic goes that US growth at 2-2.5% in 2019 will outshine Europe, Japan and elsewhere in the G15, will be competitive with emerging markets when viewed against their FX risks and will lead to another FOMC rate hike or two. The playing out of the Goldilocks story rests on US inflation remaining tame and no other shocks or surprises being delivered. The compare and contrast to consider is from the forecasts for GDP against the rest of the world.

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