E Markets: Back To Work

The world post the US Labor Day Holiday is getting back to work on the usual worries, and with the new month, investors seem busier jockeying for positions into the end of the year race for returns. The fear of missing out on a larger rally up in risk assets balances against the significant doubts from emerging markets, ongoing geopolitical fears about US Trump trade policy and increasingly doubts about Brexit. For today, the USD is back in the driving seat winning despite an RBA that was not dovish, helped by weaker UK Construction PMI, ongoing concerns in the EU about trade both with the US and UK and the rising Balkans conflict.

The Croatia/Serbia border discussions remind investors of the 1990s war and chaos there. Russia may use this as justification for its Crimea take-over and further EU expansion may stall if the EU blinks. Against that new story, the old one about Italian politics seems to be better – or at least mean reverting – as the League gains in the latest SWG polls to 32.2% from 17.4% in the March elections and 30.3% back in July. This has lifted periphery bonds but it hasn’t led to EUR/CHF higher. Argentina is going to be under the microscope again today with Macri unveiling his austerity plan yesterday and battle plan against the crisis measured by ARS which is off 0.43% at 38.5 now with 40 the line in the sand to watch. For trading today, the biggest mover is oil and it is mostly due to the Gulf Hurricane Gordon which seems set for disruption of oil production and refineries. Oil breaking out means more trouble for central bankers as the wrong kind of inflation hits consumers and trade concerns hit corporations. This is a day where the USD bid has implications for risk-off more than risk-on. The USD bid maybe more about weakness abroad than at home but the correlation matters more than the causality. A retest of 96.60 seems underway.

Question for the Day: Are EM markets at the extremes? The depreciation of ARS and TRY has led to a shift in policy from central bankers in EM. They are raising rates to fight the inflation from weaker FX. The correlation of rates to FX to stocks is rising and its important as this is the transmission mechanism for contagion to developed markets. The FT and WSJ are all about EM contagion analysis. This is the key for understanding risk taking in September and whether you buy the dip or not will be linked back to the argument that Emerging Markets. as a whole, have reached extreme oversold levels for stocks, bonds and FX. Value buying rests on these assumptions. For my two-cents, the pain trades in FX are not fully fed through to real economies in emerging markets and the rate hikes needed to bring capital flows back haven’t yet convinced investors – 60% in Argentina perhaps being the exception.

What Happened?

Australia 2Q Current Account Deficit $13.5bn after A$11.7bn – worse than A$11.5bn expected. The net primary income deficit rose A$1.1bn in Q2 to A$15.9bn. The main reason for the higher deficit was increase in direct investment liabilities, income on equity and investment fund shares which rose A$715 million. The balance on goods and services was A$2.8bn in Q2 compared with A$3.3bn in Q1. In seasonally adjusted chain volume terms, the balance on goods and services deficit fell in Q2, and is expected to contribute 0.1% to Q2 GDP growth. Also adding to 2Q GDP is government spending up 1% q/q, adding 0.2% to 2Q growth. Terms of trade fell 1.3% in Q2, following a 3.3% rise in Q1. The fall was due to an increase of 1.4% in the implicit price deflator (IPD) for goods and services credits, and an increase of 2.7% in the PID for goods and services
debits.

RBA leaves cash rate unchanged at 1.5% – as expected – upbeat on growth outlook despite US trade policy uncertainty. “The Bank’s central forecast is for growth of the Australian economy to average a bit above 3 per cent in 2018 and 2019. In the first half of 2018, the economy is estimated to have grown at an above-trend rate. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.”

Spanish August unemployment rose 47,047 up 1.5% m/m to 3,182,068 after falling 27,141 or -0.86% in July – near expectations. The seasonality of jobs in Spain notable.

Swiss August CPI 0% m/m, 1.2% y/y after -0.2% m/m, 1.2% y/y – more than 1.0% y/y expected. The core (ex-fresh food and energy) CPI was 0% m/m, 0.5% y/y while the HICP was 0% m/m, 1.3% y/y.