E Markets: Resolution?

Event risks for the week are coming to a head. The UK Brexit saga is in the endgame, the Italy/EU budget clash has a deadline today, US/China trade hopes resume and the world gets a host of economic data again – most of it notably weaker and troubling for 2019 outlooks. Against this is the talking headlines that drive up some modicum of hope after a riotous sell-off in tech shares in the US yesterday. Markets are uneven and unsettled even with the talking hope – calling today a bounce back in risk would be an overstatement. Witness the ongoing downdraft in oil prices and the USD holding its gains. 

The bellwether currency for risk confusions today is the GBP which has managed to shake off the weaker jobs report and focus entirely on the hope that UK Brexit deals bring back some value to the Pound.  The 1.2770-1.3280 pennant formation suggests this is indeed a market coming to a head with the bear trend at 1.3770 holding for now and perhaps the bigger picture opportunity.  

Question for the Day: Do trade talks matter more than money supply? The one reason that markets are slightly positive today rests with China and hopes that the US/China trade talks lead to some resolution or detente in the brewing cold war. The data out overnight paints a more troublesome picture as the China restructuring drives growth expectations lower as money supply drops, loan growth falls and the nascent private sector funding mechanisms that worked so well in 2010-2016 – social finance – collapses. Markets maybe blinded by the trade tariffs concerns and miss the on going tightening of policy that hits growth in China. The data tomorrow on retail sales, industrial production and investment will be watched accordingly. Academic literature on China GDP and CPI and M2 all points to the same conclusion, weaker money supply matters particularly in China. The drop in today’s total social financing reflects the seasonal pattern of October holidays along with the limit of annual quotas on local government special bond issuance – that hit a 6-month low at CNY86.8bn down from CNY738.9bn in September. 

The expectation is that China will soldier on with more stimulus plans. The October fiscal budget report suggests there are limits there as well – with revenues down 5.1% to CNY1.35trn and spending up 8.2% y/y to CNY1.2trn. Revenue from individual income tax rose 7% y/y down sharply form 13.8% in September.

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