E The Morning Track – Dual Citizenship

Summertime begets travel and that means scratchy radio music in the car – where in some parts of the country there are 2 times of music – Country and Western – even though it’s hard to tell them apart. Diversity doesn’t always seem so simple. The same is true in markets today as there seems to be a dual citizenship problem for Europe and the UK cynically started by someone that claims Scotch and German ancestry. Trump visit to the UK proved to be the event that shifted the risk sentiment overnight, with two statements moving markets – first that a US-UK trade deal may prove impossible with UK May’s Brexit plan along with his endorsement of Boris Johnson as a potential “great PM;” –and second another swipe at EU immigration policy. GBP and Gilts reflect this and that bleeds into EU bonds. China trade and M2 data also don’t help as its clear that the PBOC remains tight and that the shadow bank system is being further controlled hitting leverage just as trade reflects significantly less domestic demand. As for the rest of the day, the bid to the USD means trouble for risk even as equities hold big gains from Asia and Europe follows more modestly. The safe-haven signals of JPY and CHF seem at odds with Dr. Copper and other metals. Earnings in the US will be a key focus along with the Fed reaction functions after a week where risk-on holds despite trade fears. The biggest stories seem less important when its Friday and summer beckons. Watching 95.53 for more fireworks – though they may be more about France and the World Cup than the US and its independence.

Question for the Day: Are currencies going to revert to PPP, are stocks going to go for value? The most interesting stories for this Friday are about 2Q earnings and 3Q outlooks. The most underlooked and most important maybe about inflation at 6-year highs and the FOMC Powell comments yesterday and today foreshadowing his Congressional testimony next week. The role of US/China trade war escalation simmers rather than boils just like the US economy with 4% unemployment. The flows of money this last week are indicative of the summer being one of discontent rather than easy vacations and trying to fight the USD rise, particularly in EM. 

According to EPFR global data (as released by BoAML) Europe equity funds see outflows of $4.2b in the week to July 11, marking an 18th straight week of redemptions for the region’s stocks, off $34b since the start of 2018. Compare that to the US where equity funds saw $4.3bn inflows this week, to EM funds with outflows of $1.3bn – 8th week of outflows – and to Japan with $1.9bn in inflows. For asset allocations – watch bonds - IG bond funds record inflows $2.3b; HY bond funds have inflows of $0.5b; EM debt fund inflows are $0.9b. The momentum for US equities may rest on how earnings play out.

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