E 'Tis The Season

While we all know ‘tis the season to be jolly, markets are not in the mood yet. The spectrum of interest in trading markets rather than enjoying the holidays drives today as the TGIF risk-reduction mood meets the bad-news-means-good policy reflexivity hope that competes for investor positioning into the last two week for 2018. Holiday trading rules are different than normal, as illiquidity and illogic dominate and beat out other factors of value, momentum and carry. This is a day where news flows matter in the longer-term but not in the short-term. The reason we are in a panic rests with the central bank put on risk asset hope. There are some notable negative surprises to consider for that faith – 

  • European flash PMI show growth weakest in 4-years and that French business has been badly hurt by the yellow vest crisis with PMI contracting for the first time in 2 ½ years – all of which puts ECB policy of ending QE in question; 
  • Russia’s central bank raised rates 25bps to 7.75% surprising the market, reflecting the need to contain RUB weakness
  • Chinese retail sales and industrial production are much weaker than expected, raising prospects for PBOC easing action and more fiscal stimulus from Beijing;

Not all news is negative – Japan Tankan was better than feared, but outlooks are worse. The Japan flash PMI was better as well. WPI fell in India and leaves some hope that RBI is on the right path regardless of Modi pressures. The net result is that we are going back to a US growth divergence world – unless the retail sales today disprove some of that – the US rate moves and oil drops have left room for FOMC pausing and ongoing 2019 growth above potential. The USD is king still – while the EUR suffers. If you want to trade global risk just focus there. EUR 1.1180 is the next target.  

Question for the DayIs the ECB and others wrong about the soft-patch? Markets are going to focus on growth outlooks for 2019 and the risk of a recession globally as trade fears and political messes drive down confidence everywhere. Yesterday brought the ECB and the Draghi news conference where the central bank set forth the expected end of QE and lowered its growth and inflation forecasts. Draghi argued that the slowing growth was normal after a year of over-potential gains. 

Today the German Bundesbank released their own forecasts and this is how they put it: “Germany's economy looks set to continue booming for the time being, and it will ride out the recent setback in the third quarter of 2018, which was largely down to temporary supply-side difficulties in the automotive sector. In their latest projection, the Bundesbank’s economists expect the economy to quickly overcome the dip in growth these problems caused.” The problem for markets is that the forward-looking data from the flash PMI reports today and other indicators of late all suggest that 4Q growth in Germany and in Europe as a whole is weaker than expected and 1Q is setting up for further trouble. The soft-patch risks turning into quick-sand should there be other shocks to the economy. 

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