E Markets: Not Enough

Sufficient and necessary conditions permeate all strategies for trading and today is no exception. The bounce back in US markets yesterday from the lows was a necessary condition to believing in the “buy-the-dip” function that has worked so well over the last 10 years of ZIRP and QE. Unfortunately, this is not enough to make the markets “bid” and keep them safe.

Bond markets in the US are reflecting this clearly as they continue to rally. So have the rest of the global safe-haven bonds – like Bunds and even French OATs.  Rate hikes despite financial instability of late is the key worry and focus today with the Bank of Korea looking likely for a November move, KRW is better, Kospi is worse.

The Swedish Riksbank refrained from moving and talked about doing less so a December hike maybe a February one. SEK is weaker, and the OMX is flat. This leaves the Bank of Canada for the main entertainment on rates ahead – with the CAD off 0.1% – with almost everyone expecting 25bps hike but a dovish outlook – making it one and done. The pressure from Trump on the Fed Chair Powell continues though most see it as a mid-term election ploy while the Fed Beige Book today may paint a very different picture on inflation risks and need for more hikes. Overnight the focus beyond the equity tape and bond reactions was on PMI data, which clearly disappointed in Europe, UK May and her battle within her party (facing the 1922 committee over Brexit) grabs more headlines with GBP lower and Gilts bid, while the Italian budget issue continues with PM Conte saying there is no plan B, no budget change ahead for making it all good with the EU and yet BTPs are bid with ECB policy focus key. The dive in the EUR is the story in FX and it maybe something for the US markets as the USD bid combats better earnings and drives financial conditions. Watching 1.13 barrier for more trouble. 

Question for the Day: Will US economic divergence drive markets again?  The weakness in the European PMI reports puts the pressure on the US data to prove divergence. The GDP Friday for 3Q will be the pinnacle of this story but the risk-on mood that started in Asia faded quickly and the fear beating greed tape requires something “good” to reverse. Necessary conditions for another bounce in the US markets seem clear – 1) better US economic data, 2) less fear of FOMC overreactions – so speakers sound gradual rather than overshooting hikes, 3) better earnings, 4) less fears about China trade and geopolitical noise. All of these could happen but they may not be obvious at the open. So far the Fed Surveys for October suggest some weakness in the US data ahead.