E Red Flags

When bulls see red in the ring, they are meant to charge at the Matador. The brutality of the bull ring and the lopsided odds against the bulls make this a fitting place to see the present red tape in global risk assets and push the analogy that the current recovery in price may be like a bull charging towards its end as the business cycle turns over. Even with UK PM May surviving a no-confidence vote and US 4Q earnings upside surprises are insufficient to extend the present feel-good moment for traders. Between ongoing China growth doubts, threats of US tariffs on European autos, the ongoing US government shutdown and the doubts that a Brexit delay brings any real positives to the UK for the economy or politics – all that list drives the present red on screens.  

  • EU auto makers are off 1.5%after US Senator Grassley said he thought Trump was inclined to impose tariffs on European cars to win a better deal with the EU on agriculture. 
  • The UK votes on UK May’s Plan B for Brexit set for January 29 with much speculation that a new referendum will be called on the subject, along with an extension to Article 50 beyond the March 29 deadline. Hope for a “soft Brexit” deal continues as options in FX reveal 1-month buying back in vogue for GBP
  • US government shutdown hit on GDP seen over 0.1% a week. The New York Times reported that White House adviser Kevin Hassett has indicated that U.S. quarterly growth will be hit by 0.13 percentage points for every week the shutdown lasts – higher than previous estimates. The Fed Beige Book yesterday added to fears that the government shutdown hurts - “Outlooks generally remained positive, but many districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices and elevated trade and political uncertainty,” the report said.
  • China growth doubts linked beyond Trump trade issues.  The Noah Smith’s Bloomberg Opinion piece highlights the key worry about China in 2019, that the investment-led growth gets diminishing returns as it clashes with demographics and stalling productivity. The ability to spur domestic demand will require more than a trade deal. 

The list isn’t really new but the reaction of markets maybe making clear that the equity market needs more to not meet the Matador’s sword. Namely, US yields and the USD both need to keep going down to hold the rally up – this puts the EUR/USD chart into the spotlight as it seems to capture the difficult mix of risks on trade, politics, and global growth. Watching 1.13 as key for the bulls’ survival. 

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