E Markets: Grinding

Markets can be a bit like a Grist Mill, grinding out returns requires energy and only those with the right technology find it palatable or long-term sustainable. Measuring success in bonds and stocks gets tricky and the next friction is sometimes found in the FX market as a leading indicator. The present news headlines paint a picture of hope more than greed driving the tape. The focus remains squarely on US trade policy with US/China talks restarting in Washington today and Japan/EU mixed reactions to new auto tariff threats. Consider the inconsistencies of Oil holding 3-month highs, Asia shares holding 4-month highs, Europe near 6-month highs, while negative yields for government bonds globally has risen 21%since October, bringing that total back to $11trn. FX markets reverse a bit from USD weakness yesterday with index up over 97.  

  • Grinding against the JPY is the BOJ Kuroda promises for more action should its strength hurt the economy. The Reuters Tankan drop from 18 to 13 adds to the need for action.
  • Grinding against the EUR, the tough US-EU trade talks ahead and an ECB sounding notably dovish along with Brexit, the Spanish election, ongoing doubts about French and German politics and Italy with its budget and growth dilemma. 
  • Grinding against the SEK is the weaker CPIF disproving the Riksbank optimism from last week. 
  • Grinding against the GBP is the Honda plant closing reflecting the global economy, but grinding against easy money BOE plans to counter Brexit fear are the UK wages and unemployment holding 44-year lows. GBP also finds support in the Labour Party splintering off of 7 MPs which eases back some fear ofan viable new Corbyn government into the next election. 
  • The AUD grinds against the Chinese freezing coal orders– with 40-day delays in customs at ports – and with the RBA minutes confirming the dovish SOMP.  
  • The RUB grinds against FDI doubts as the US founder of Baring Vostok sits in a Russian prison awaits trail for fraud on charges many inside Russia see as trumped up by disgruntled investors but finds support on the monthly tax pressures and oil.  

The returns for FX are mixed with GBP and CNY still the biggest focus and perhaps the least exciting.  The USD remains king with its one-eye leading in the land of the blind. Watching 97.25 and 97.70 for something more exciting than a grinding rally. 

Question for the DayIs FX a race to the bottom again? The EUR and JPY are both seeing reactions to policy talk of more easing. There are logic reasons behind the shift. The USD weakness in January was linked to the Powell turnabout on normalization. The question for the market is whether that patience plays out or is too late. The relative spread of rate differentials links back to inflation outlooks. This is where the FOMC shift worked and where the ECB has much more talking to do to catch-up. 

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