E Markets: Very Close

We are often told that the world isn’t going to end by human hands but from a rock falling out of the sky, we have come close to proving this story many times. Close doesn’t count except in horseshoes and hand-grenades but it doesn’t help investors. While many see the return of bond vigilantes as the key driver for risk-off where global equities suffer, the mood change on US/China trade, UK Brexit and EU Italian budget issues also matters today ahead of the all encompassing jobs report for the US which many now expect to be stronger than the 185,000 NFP forecast after Services ISM employment and a drop in weekly claims despite the noise of the hurricanes this month. Markets are very close to that tipping point where bond yields matter again, where equities pay attention and where FX acts as an early barometer of change. The return of China Monday and the partial US Columbus Day holiday will make CNY a key focus next week. Today its GBP then the USD, then the EUR and ending with INR, as the news overnight was dull except for politics and policy: 

1) Brexit Deals? Reuters reporting that EU negotiators are “very close” to a deal on Brexit with the UK. Ireland’s EU Minister said there was “lots of common ground” on the border issue. 

2) China microchip hacking. The fall-out from the Bloomberg report yesterday won’t be fully understood for weeks. Both democrats and republicans agree this report puts China on par with Russia as a serious National Security Threat. Also, China responds to VP Pence accusations of meddling as “created out of thin air,” as the China foreign ministry statement argues he confuses “right and wrong.”

3) Italian people over markets? Reuters reports on the latest Italian deputy PM Di Maio blast that he will back the people over the markets. “We care about markets, but between the (BTP-Bund) spread and Italian people I choose the Italian people,” Di Maio said in an interview with RAI3 television. Also La Stampa reports that ECB Draghi met with President Mattarella obstensibly to warn him on the budget dangers.

4) India Reserve Bank blinks. The selling in the India shares and INR continues after the RBI keeps rates on hold– surprising the market. The INR touched 74 new record lows against the USD. The RBI left rates at 6.5% while many expected a hike to 6.75% as the currency is off 15% ytd. 

While the markets are going to obsess about US rates and the US jobs report, the pain trade in EM is still running with ARS, TRY the poster children but with BRL facing the election and INR facing stock outflows this market isn’t idiosyncratically led but very close to a crisis. Focus today is likely on USD/EUR 1.1450 and JPY 114.50 still but INR move is setting a tone to pay attention to for larger credit pain trades. Throw in that Putin visit and $5bn nuclear deal and you have a geopolitical story brewing as well.