End of August and the mood is sour with the usual set of geopolitical worries dominating – from Trump Trade to ECB rate hikes/QE ending, to Brexit and to EM FX chaos. This is not the way the summer bull rally story is supposed to end.The chance for a sequel into September beguiles but isn’t convincing. These are the key stories apart for a myriad of important economic data that moved markets:

• US President Trump on Bloomberg: Threatens to pull US out of WTO, backs $200bn in new China tariffs next week, warns EU won’t escape US ire over trade issues. The equity selling in Asia and Europe links back to this story. 
• French EU affairs minister Loiseau on BBC Radio: UK`s Brexit proposal is `not possible` and that France is preparing for `no-deal` Brexit. But GBP is holding 1.30 today as Raab meets Barnier for 6 hours.  
• ECB Nowotny: Italian troubles shouldn’t delay ECB rate hikes. This maybe one reason for Italy jitters ahead but the BTP market is better this morning and fears about Italy aren’t the reason for EUR pain – Trump auto tariff fears are driving  
• Turkish local news: Turkey has cut some taxes on TRY deposits and hiked some taxes on FX deposits.  The TRY has managed to recover less than 2% on this from 6.7895 to 6.3925 on the day.  

The economic data is also part of the bear returning in Autumn fear as Japan Industrial Production missed mostly because of trade worries, as China PMI was better but the guts show trade issues, as German retail sales missed and as the Eurozone flash inflation was lower than expected, leaving room for the ECB to be less aggressive despite the Austrian CB comment last yesterday. There is everything in the news to be cautious on risk and so its not a surprise to see most equities lower, most bonds higher, commodities lower, safe-haven FX higher with CHF leading. The pivotal ending today is about CAD where the market is prepared for trouble if you believe the positioning data with 1.35 hopes but with the political hopes of Trump and Trudeau aligned for a NAFTA deal today it’s a risk for a larger 1.2880 breakout. The big picture for C$ is not so optimistic and perhaps that is what matters into September, the bigger picture, forget the endings for the month and fear the sequels into the Autumn.

Question for the Day: Are we supposed to buy the EM dip?  The divergence between EM and DM equity markets remains in play for September.Pain trades in ARS, TRY, BRL, INR and ZAR stand out.The question to ask is whether the modest rebound from the middle of August in shares is a siren call to rejoin market or whether it’s just not yet safe given that the FOMC rate hike for September has all but been promised, given the Trump trade deal hopes for China are post mid-terms and given that positions aren’t yet extreme enough. The value vs. growth plays are in contrast here and the technical signals remain telling us to sell.

BoAML's Fund Manager Survey for August showed fund allocation to EM equities at -1.0%, having fallen 44% since April 2018 highs, but still well above prior crises lows of -17% in 2008 (Global Financial Crisis), -31% in 2013 (Taper Tantrum), and -33% in 2016 (China/Oil).

What Happened?

• Japan August Tokyo core CPI 0.9% y/y after 0.8% y/y – more than 0.8% y/y expected. The core-core CPI up 0.6% y/y from 0.5% y/y. Processed food rose 1% y/y from 0.8% - with weather effecting pork and beef prices. Mobile communications fell 3.7% y/y from -6.7% y/y. Accommodations rose 10.2% y/y from 1.9% y/y – partially due to Obon holiday timing.
• Japan July unemployment rate 2.5% from 2.4% - worse than 2.4% expected. Employment rose 970,000 y/y after 1,040,000 in June y/y while unemployment -190,000 y/y. 

• Japan July industrial production -0.1% m/m after -1.8% m/m – weaker than 0.3% m/m expected.METI forecasts for August +1.2% m/m, September +0.5% m/m. The Government downgraded its view for the first time in 6M - "While production is picking up moderately, there are signs of weakness in some areas." Previously, it simply said output was picking up moderately. The industrial production decrease in July was led by declines in output of passenger cars, production machinery and steel – all key export items. Heavy rains that hit southwestern Japan caused a parts supply shortage and a distribution network breakdown, leading to a decline in transport equipment and production machinery. Car exports to the US and Europe also slumped. Exports of steel products to the U.S. also slowed in light a higher import duty levied by the Trump administration.

• China August CFLP Manufacturing PMI 51.3 from 51.2 – better than 51 expected.The Services PMI 54.2 from 54 – less than 54.8 expected. Manufacturing output drove the increase picking up to 53.3 from 53.0. However, Manufacturing New orders index dropped by 0.1 from July to 52.2, the lowest in six months. New exports order index continued to contract from last month to 49.4, likely a result of the trade conflicts with the US. The Imports index fell further in contraction to 49.1 in August from 49.6. The
  expectations index, in line with the pace, rose to 61.4 from 60.2 last month, offsetting losses made in previous three months.
• Bank of Korea leaves rates unchanged at 1.5% - cites fragile jobs market and tame inflation. Market had partially priced a 25bps hike. “The Korean economy has continued its trend of solid growth. Exports remain buoyant, on the back of the ongoing growth in the global economy, and private consumption is also rising moderately. However facilities and construction investment has sustained their adjustments, and employment conditions became more sluggish.” 
• Australia July private sector credit rises 0.4% m/m, +4.4% y/y after 0.3% m/m – as expected - with investor mortgages 0.1% m/m, 1.5% y/y after -0.1% m/m.  Overall housing credit rose 5.5% y/y – the slowest pace since Dec 2013. Business credit rose 0.5% m/m, 3.4% y/y after 0.3% m/m. Personal credit fell 0.1% m/m, -1.4% y/y. Both M3 and broad money was flat m/m, slowing from a 0.2% rise in June, though the y/y growth was flat at near 26-year low. 

• German July retail sales -0.4% m/m, 0.8% y/y after 0.9% m/m – weaker than 1% m/m gain expected. June revised down from 1.2% m/m. The 2Q sales up 0.1% q/q after -0.2% in 1Q. July 3M average now -0.3% q/q after 0.3% in June. 
• Eurozone July unemployment rate 8.2% after revised 8.2% - as expected.June revised from 8.3%.Youth unemployment drops to 16.6% from 16.8%.

• Eurozone Aug flash HICP 2.0% y/y after 2.1% y/y – less than 2.1% y/y expected. The flash core HICP slips to 1% y/y from 1.1% y/y – also less than the 1.1% y/y expected.Food/alcohol/tobacco 2.5% y/y while energy 9.2% y/y. 
  • French August flash HICP 0.6% m/m, 2.6% y/y after -0.1% m/m, 2.6% y/y – more than 0.3% m/m, 2.5% y/y expected. The flash CPI was up 0.5% m/m, 2.3% y/y from 2.3% y/y in July. French PPI for July was up 0.6% m/m, 4.0% y/y after 0.1% m/m, with oil up 0.8% m/m, 42.6% y/y while industry import prices rose 0.4% m/m, 5.2% y/y
  • Italy August flash HICP -0.1% m/m, 1.7% y/y after-1.4%m/m, 1.9% y/y – more than 1.6% y/y expected. The core HICP up 0.9% y/y after 1.1% y/y.The national CPI up 0.5% m/m, 1.7% y/y. with ex energy 1.1% y/y from 0.9% y/y. 

Market Recap:

Equities: US S&P500 futures off 0.15% after a 0.44% loss yesterday.The Stoxx Europe 600 is off 0.65% to 2-week lows with carmakers the biggest losers with Trump comments driving. The MSCI Asia Pacific Index was off 0.2% with Korea up as BOK held rates at 1.5%.

• Japan Nikkei off 0.02% to 22,865.15
• Korea Kospi up 0.67% to 2,322.88
• Hong Kong Hang Seng off 0.98% to 27,888.55
• China Shanghai Composite off 0.46% to 2,725.25
• Australia ASX off 0.51% to 6,427.80
• India NSE50 up 0.03% to 11,680.50
• UK FTSE so far off 0.5% to 7,477
• German DAX so far off 1.0% to 12,368
• French CAC40 so far off 1.25% to 5,410
• Italian FTSE so far off 0.8% to 20,328

Fixed Income: Bonds globally remain bid as equities continue in the red. Economic data mostly soft along with ongoing EM concerns driving. The focus in EU is different with Brexit in UK and Italy Fitch review later today along with more ECB speakers. UK Gilts 10-year yields are flat at 1.455% but core Europe sees German 10-year Bund yields are up 0.3bps to 0.346%, French OATs up 0.6bps to 0.692% while periphery rallies with Italy off 3bps to 3.175%, Spain off 1.5bps to 1.455%, Portugal off 0.5bps to 1.90% and Greece off 0.5bps to 4.31%.

• US Bonds are bid across the curve watching Trump trade/equities – 2Y off 0.8bps to 2.641%, 5Y off 1.2bps to 2.738%, 10Y off 1.1bps to 2.844%, 30Y off 1bps to 2.994%. 
• Japan JGBs bid in quiet session focus on weaker IP and China trade with BOJ policy still key – 2Y up 0.3bps to -0.127%, 5Y off 0.6bps to -0.086%, 10Y off 0.3bps to 0.094%, 30Y up 0.1bps to 0.838%. BOJ tweaks August plans. Rinban today was unchanged in size with 1-3Y cover 3.29 from 3.71, 3-5Y 3.41 from 2.84 and 5-10Y 3.38 from 2.91. 
• Australian bonds see bull curve flattening on US/China trade and weaker housing credit – 3Y off 3bps to 1.972%, 10Y off 5bps to 2.516%. 
• China PBOC skips open market operations for 8th day, neutral on the day, net drained CNY170bn on the week. Money market rates were slightly higher with O/N up 3bps to 2.27% and 7-day up 0.5bps to 2.617%. 10-year bond yields fell 1.5bps to 3.58%.

Foreign Exchange: The US dollar index flat at 94.74 - caught watching 100-day at 94.02 against the 55-day at 95.02. In EM FX, mixed USD with focus still on ARS watching 41.36 $ highs and 60% rates – ASIA is USD bid: TWD off 0.1% to 30.718, KRW off 0.4% to 1113, INR off 0.3% to 70.942 – India GDP key; EMEA is USD offered: ZAR up 0.15% to 14.695, TRY up 1.2% to 6.57, RUB up 0.45% to 67.97.

• EUR: 1.1665 flat. Range 1.1655-1.1690 with 1.1720 capping and 1.1610 next support all about rates, trade story and month-end momentum. 
• JPY: 110.75 off 0.2%. Range 110.69-111.13 with EUR/JPY 129.25 off 0.2%. All about equities and risk mood on trade with 110.70 break opening 110 again. 
• GBP: 1.3005 flat. Range 1.2993-1.3029 with EUR/GBP .8970 flat – Brexit news flow light so trading light with 1.30 pivot for 1.29 or 1.3150 in play. 
• AUD: .7235 off 0.4%. Range .7227-7268 with metals and rates driving .72 key support for .7050 next. NZD off 0.25% to .6640 with .6634 lows so far and .6580 next. 
• CAD: 1.3005 off 0.15%. Range 1.2971-1.3023 with NAFTA deadline in play against Trump tirade elsewhere mixed with focus on oil and data ahead. 1.30 pivot for 1.3120 or 1.2880 still. 
• CHF: .9665 off 0.3%. Range .9652-.9700 with EUR/CHF 1.1275 off 0.3% - all about risk moods with trade and equities key. .98 top for $ with .9550 targets. 
• CNY: 6.8246 fixed 0.2% weaker from 6.8113, gains to 6.8310 into London from 6.8360 close yesterday, now 6.8340 up 0.1% with 6.8222-6.8507 range. CNH trades 6.8550 flat with 6.8384-6.8738 range. 

Commodities: Oil lower, Gold up, Copper off 0.15% to $2.7460, Iron Ore off notably in China.

• Oil: $69.72 off 0.75%. Range $69.64-$70.36.Iran and US supply factors balancing against weaker equities and stronger USD today. WTI watching $68 base for $71.05 July 10 highs then $71.63 May 22 highs. Brent $77.18 off 0.75% - watching $78.87 bear downtrend channel then $7925 July 10 highs against 55-day at $74.58
• Gold: $1206.20 up 0.5%. Range $1200-$1207.USD and trade fears dominating price action. Gold watching $1217.1 Aug 10 highs against $1199 and then $1160.40 Aug 16 lows. Silver $up 0.7% to $14.66 - watching $14.483 Aug 23 against $14.92. Platinum up 1.2% to $799.35, Palladium $981.50 up 1.15%. 

Conclusions: Why does ARS even matter to markets? Roughly 48% of the world’s $30 trillion in cross-border loans are priced in the U.S. currency, up from 40% a decade ago. Exchange-rate fluctuations affect the ease of servicing that debt, a key concern in the current emerging markets rout. ARS sets the parameters for other EM pain trades and drives risk managers to look more closely at other EM trades.It’s not contagion but math and science – as risk for BRL, TRY and others sets up on ARS as a worrying example.