E Markets: Ebullient

Equities are bouncing, markets are back to bargain hunting as the US/China trade talks continue, as Macron pledges tax cuts and wage hikes to placate the yellow-vest movement, as UK May delays her Brexit vote and tours Europe for a better deal. There are some uglier stories as well – as the INR drops 1.6% after another RBI Governor Urjit Patel resigns – the second in two years putting pressure on PM Modi to find a solution and to deal with his election loses in 3 key states, as Japan Topix closes at 18-month lows, as EU Juncker says there is “no room” for a Brexit renegotiation, as Italy PM pushes Europe to overcome its short-sighted rigor on fiscal policy rules. What seems clear about today is that the US/China focus is lower and the European one is higher as the UK fears are kicked down the road and the ECB meeting and ending of QE supports the EUR.  Markets are in a ebullient mood even though very little good news has hit the tape – Confidence fell in Australia, house prices are lower there as well, Japan machine tool orders drop further, China M1 and M2 suggest no new credit demand even as Total Social Finance rose and the UK jobs report shows unemployment near 43-year lows and wages up to 2008 levels suggesting the BOE has less room to deal with Brexit no-deal scenarios. The bounce in the German ZEW was a surprise but the erosion of current conditions troubles and the improvement in outlooks remains below long-term averages. This puts the EUR/USD into focus today in the G10 and the INR in the EM world as politics remain in play everywhere. This mood swing won’t last unless we see a 1.1440 melt-up. 

Question for the DayIs the IMF right about the risks for 2019? There is a clear story about 2018 that many analysts are thinking through for 2019 – that the Trump tax reform and fiscal stimulus mixed with deregulation led to the 2018 US divergence and caused the FOMC to hike rates faster. What happens to Europe in 2019 is now the key focus with QE ending and rate hikes to normal the next agenda item with a new ECB President. How this mixes globally matters. The IMF speech from Lipton today is worth readling. The fund had been urging governments to “fix the roof” during a sunny last two years for the world economy, IMF First Deputy Managing Director David Lipton said. “But like many of you, I see storm clouds building, and fear the work on crisis prevention is incomplete,” he said at a banking conference hosted by Bloomberg. He also warned that strains could leave policymakers under pressure and in uncharted waters.

Lipton listed 5 key challenges:

1)  Trade War between US and China– The IMF estimates “that if all of the tariffs that have been threatened are put in place, as much as three-quarters of a percent of global GDP would be lost by 2020. That would be a self-inflicted wound.”

2)  China global responsibility. “China now is a globally integrated $13 trillion economy whose actions have global reverberations. If China is to continue to benefit from globalization and support the aspirations of developing countries, it will need to focus on how to limit adverse spillovers from its own policies and invest in ensuring that globalization can be sustainable. Lipton suggests more Intellectual Property protections, lower trade barriers for investments and more market-oriented economic reforms for resource allocation.“

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