E Markets: Decisions

The trust but verify mood to markets is notable today. China-US trade talks restarting set the mood over the last 48 hours to embrace risk and search for value trades. The Turkish Central Bank hiking rates to 24% stabilized TRY further adding to the sense that we are in the reversion cycle over the fear one for emerging markets. Throw in that the ECB sounded hawkish and upbeat enough to keep the USD weaker against the EUR and you have the makings of a risk-rebound. The decisions from Trump, Draghi and Carney yesterday make investors have to decide today whether to chase the recovery or not. There is clear evidence that some investors are buying protection here, ready to take advantage of this modest calm. Witness the 20%-26% November VIX spread put on yesterday. There are good reasons to doubt. 1) China. The biggest story overnight is about China and its slowdown with retail sales and industrial production slightly better but investment slowing despite government efforts to stimulate. 2) Japan. The second story is from Abe on the BOJ. The Japanese PM noted that "he doesn't think that easing should go on forever," although Abe did stress that "it is up to the BOJ to decide when to end easy policy." Japan and the US are aiming for trade talks in late September. 3) UK. BOE Carney warns that a bad Brexit will be as bad as 2008 for UK economy. On the day – these stories didn’t matter – the risk mood and the weekend trading rules dominated. The decisions made yesterday to push forward with normalization in Europe is the stand out and the EUR is the new barometer to measure any changes more than rates or EM. 

Question for the Day: Does a weaker USD mean a better global growth rate? The question for the day and perhaps the week ahead is whether a weaker USD helps stabilize emerging markets sufficiently to restart hopes for coordinated global growth. 

The FOMC meeting at the end of the month is clearly in play after the modest CPI yesterday but the odds for any pause in hikes seems limited and so the rationality of the market in selling USD isn’t about rates as much as some trajectory of normalization outside the US – namely Europe. The biggest problem markets have is in believing in the rest of the world rather in than some tempering of FOMC rate hikes or in the US trade policy negotiations.  Better growth isn’t about the USD that is like saying umbrellas cause rain. Nevertheless, the USD has had a bad week and that may be good for some US exporters and for those that were being squeezed into US assets at the expense of home investments.

What Happened?

  • New Zealand August BNZ Business PMI up 52 from 51.2 – near expectations. The index remains below the long run average of 53.4.  Production rose to 52.6 back into expansion from July. New orders rose to 53.2 but employment fell to 48.1 – worst since Aug 2016. 
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