E Markets: Throttled

We all know the euphoria of speed, racing fast with no fear, dashed with the throttle back as the joy-killer, the brake back to reality, forced usually by some mechanical limitation rather than some regard for the actual speed limit. The balancing act of rates against equities is back in play today, as the gridlock joy of the US election fails to sustain with debt markets everywhere waiting for the FOMC decision. While few expect anything today, most see a December hike and the meeting statement remains important as to guiding views for 2-3 hikes for 2019. The throttle back of growth in the US follows with less government spending, higher rates and ongoing fears about trade wars with China lingering. The mid-term certainty isn’t sufficient. There was a significant amount of overnight news to digest and that adds to the view that the bounce back in risk is more a correction than a new trend. 

  • RBNZ rate cut hopes are dwindling after decision and statement – keeps NZD bid
  • Australia Payne and China Wang meeting make clear US/China relations still key for AUD
  • China trade surplus shows big imports ahead of tariffs – and less metals and oil
  • Japan Ecowatchers index bounces with government spending on natural disasters but Reuters Tankan weaker, core machinery orders lower and BOJ summary of opinions adds to BOJ policy tweaking fears for 2019. Leaves JPY watching 114 expiries but no momentum
  • German trade surplus shows less exports and more doubts about overseas demand
  • ECB Bulletin keeps expansion talk and QE end path despite seeing higher uncertainty and lower growth.
  • Italy hit with EU commission growth outlook cuts – BTPs suffer on budget doubts that follow

While each one of these points is hardly enough to turn markets, the total effect mixed with US natural doubts about the election meaning make the reversal of mood more like a throttle back – as the speed of change and news needs to moderate, like that of the USD selling from yesterday, today’s buying throttles the downtrend talkers – and with it hope for a simple, low-volatility leap higher in risk.

Question for the Day:Are the EU commissions the key for the day? The FOMC meeting maybe on the agenda, but the price action so far is about growth outlooks dropping for 2019. The pain trade for Italy returns as the growth hopes dwindle – this isn’t that different than the US where higher growth is used to push up hopes for cutting the deficit. 

The EU commissions forecast headline says it all – less dynamic growth amid high uncertainty. The commission argues that European growth peaked last year. “From 2.4% in 2017, euro area GDP growth is forecast to moderate to 2.1% this year and 1.9% in 2019, slightly below the growth rate projected back in the summer. It is then expected to ease smoothly to 1.7% in 2020.” Blame for much of the uncertainty is put on the US trade policy and on the US risk of overheating and a FOMC policy mistake. 

The key for Europe, and perhaps for the world, is the shift in dependence on trade to one of domestic demand for being the key driver for growth. This puts many back to demographic and productivity analysis for where to put their money in the medium and long-term. The EU commission makes clear that growth is going to be home-grown and this puts the Italian budget efforts at loggerheads with the mechnical limits set on debt.  

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