E Markets: Goldilocks

Stories led sales, sales lead markets, markets lead central bankers. This logic will be tested today as the Goldilocks story about the Fed gets tested with the FOMC minutes and more Fed speeches. The not-too-hot growth for 2019 – estimated back at 2% by Wall Street analysts mixes well with the tame CPI estimated back below 2% thanks to global slowdowns.  We all love zero real rates except the investor community looking for returns. The Fed Mester and Williams comments yesterday suggest more of a Powell collar than put on the S&P500. A rate hike risk given the rebound in equities and financial conditions is in play and the minutes will highlight the risk of the dissenters on patience and pauses. Adding to this risk for a rate turnaround is the USD. The Trump team leaked that the US/China trade talks today center around FX and a stable CNY. The decades-long push for China to become more market-led and less communist party leader led is being reversed. The “stable” CNY means a weaker USD to Trump and this maybe enough to send the FOMC back to talking tough. But there are larger implications for the world order afoot as the stable CNY may also mean its too strong for exports to Europe and EM. The battle in China and FX rests on getting the balance of capital inflows, the right economic growth – whether recharged from profligate government spending or forced lending or by exports. This isn’t a Goldilocks tale but one of Hansel and Gretel as the path home looks to be lost as the bread crumbs of capitalism have been eaten by populism. Many fear that the Trump approach to China is wrong, that reversing a blind faith in open markets puts the US back a notch in credibility and trust with its brethren in the EU and UK. However, the first sign of madness is expecting a different outcome from the same old actions. The US approach to China over markets has failed in the last 20 years and something new has happen in order for globalization to continue. This isn’t just on the US, it’s on the rest of the world. Goldilocks maybe enjoying her last gulp of porridge today as the rest of the story progresses from a quick nap to a nightmare being chased by bears. The rapid gains in the CNY last night merit watching as this chart bleeds over to the EUR and JPY and EM and makes the USD valuation game return to focus for investors – making bonds look rich, EM look cheap and the rest look unappetizing.

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