There are plenty of reasons to pause in the bull run up in US equities today, but only if you think that a yellow light means stop rather than caution. The usual signals of trouble – like safe-havens gaining are in play – like CHF and JPY in FX gaining, with core bonds bid, with the steepening of the VIX and its break down with new highs in S&P500 not leading to new lows for the VIX, with EM FX like TRY, ZAR and ARS all sharply lower. The question is whether the contagion of EM means anything to US or other developed markets. Yesterday, the CNY weakness was ignored but today the drop in CNY seems to matter a bit more as the story line about how trade plays out begins to get more confusing.

The markets have been trading on the assumption that Trump will get a new NAFTA deal this week then move to Europe and others ahead of the US mid-terms. China isn’t in that timeline but some think they will be 2019 resolved. Trouble is that more tariffs may happen first and that is an unknown risk for China growth and EM in general. The 4.2% GDP for the US yesterday added to a rising view that US isolationism and protectionism isn’t a problem for the US but for everyone else. Whether that story remains in play as the day progresses will determine whether yellow flashing leads to red or not.

The economic data today seems to be another factor in the risk mood – with Japan retail sales better than expected but mostly due to fuel costs rising. New Zealand business confidence sank further leading to RBNZ rate cut hopes and smashing the NZD lower. The Australian capex was negative in 2Q – first drop in 6 quarters. The Swiss KoF fell back to near the long-term average ending hopes for a sustained above trend growth for 2018. The UK M4 and mortgage approvals both missed suggesting no pipeline for growth into the ever tenser Brexit deadlines this fall. German jobs were in line, inflation a bit lower while import prices remain higher leaving the EUR a bit soggy on the day. There is a clear drop in global confidence which maybe something that shows up in PMI flash reports tomorrow – witness the Eurozone ESI drop today with consumers clearly lagging. The chart that many are watching is EURCNY at 8 as this hits at the contagion from EM infecting the developed markets. Perhaps this is just another yellow-light but given the levels the 8 for the EUR maybe the same as 7 is for USD bringing the China NBS PMI tomorrow into play as another concern for risk.

Question for the Day: Are US assets over priced or just reflecting GDP? The shift from value to growth come out clearly with the US GDP release yesterday. The fear factor for markets in the US is that the FOMC is going to hike rates faster to match the faster growth. The supporting factor is that corporate profits are over 16% and justify the current pricing. The gap between potential and actual growth is the realm of R* and models which the FOMC Chair downplayed in his Jackson Hole speech. The big picture suggests we have room for more growth to play out before the models kick in. That maybe right but its going to be data dependent and that means uncertainty which supports the VIX bid despite the S&P500 record highs.