E Markets: Singles -

E Markets: Singles

Nov 11, 2018Jeremy ParkinsonFinance, No picture0

Today is singles day in China. The heralded event for internet sales has not lost its glitter even with the moving on of Alibaba’s Ma. As of midday, Alibaba had chalked up 149 billion yuan — $21.5 billion — in sales – with $1bn in the first minute, $10bn in the first hour, so with hours remaining, the 2017 record of $25.3 billion in sales has already broken.

With or without Ma, business goes on. Politics matter but just how much is the question. The pressure of Chinese politics is opaque in comparison to that of the US and yet those risks remain just like they do in the US.

After last week’s US mid-term elections, the power of democracy shines through markets. Perhaps the largest voter participation in history doesn’t hit a home run but it’s a solid single against those that argue stability is better than giving the power to the ballot.

Economics may return to dominate markets into the last 1 ½ months of the year, but politics particularly in Europe continue to be the key with Brexit, Germany, Italy and the ECB replacement for Draghi all essential to keeping the EU intact. The EUR is fast becoming the favorite trade to short into 2019 as the economic divergence, political issues and policy divides make 1.10 more likely than 1.20. Compare this to the USD views at the beginning of the year where 1.30 targets were more plentiful than the snow in London.

Against this view is the growing consensus that the US goes into a recession in 2020. The risk of an FOMC mistake rises with jobs, the unwinding of the US tax cuts, fear of a prolonged China trade war (if not cold war) and the ever-growing debt weighing on the dollar and equities.

No one is sure that the rally into year-end for risk isn’t a screaming opportunity for shorting into 1Q2019. The world wants clarity but can’t find it in autocracy whether in politics or policy. Singles maybe less fun than doubles, less powerful than home runs, but more sustainable in the long run.

For the week ahead, the EUR/USD is the key FX barometer for measuring politics over economics. Oil will be in play given the Iran sanction waivers from the US and the weekend Saudi efforts to shore up prices at $70 Brent. The US bond market will be watching CPI and Powell while the US stock market gets the last dribbles of earnings and more on the rotation plays post the mid-terms. For risk players, EUR/USD is about watching for 1.05 bets over 1.20 to dominate into year-end.

What Happened over the Weekend?

Beyond US politics and recounts and the tragedy of yet more fires in California and the horror of a mass-shooting, markets will be watching the oil market and EM. The pain in both last week stands out and could be in play for a bit of reversal.

Argentina – IMF calls a bottom – “The bottom of the recession, the floor, will be hit the first quarter of 2019, and in the second quarter we are going to see a recuperation,” IMF mission chief for Argentina Roberto Cardarelli told reporters at a press briefing in Buenos Aires. The fund expects Latin America’s third biggest economy to contract by 2.8 percent this year and by 1.7 percent in 2019. “Average growth for the year will be negative, particularly because the end of this year will be negative. There will be a ‘carry over’ effect,” Cardarelli said. Analysts forecast 2018 inflation at about 47.5 percent and the peso has lost about half its value this year.

OPEC – considers new output cut – Saudi Arabia is discussing a proposal that could see OPEC and non-OPEC oil producers cut output by up to 1 million barrels per day, two sources told Reuters on Sunday. Riyadh was surprised by the waivers granted to customers such as China and India, a move which hit oil prices, at least three industry and OPEC sources

Question for the Week Ahead:

Is it inflation, US politics, China growth, Italy’s budget or UK Brexit that drive markets next?

When you have a swarm of issues that nag investors, the best course is to figure out the timeline for resolutions for each concern, rather than panic. The slow start to the week and an opportunity for trading the markets with some cold logic and hard facts. November isn’t October as the last two weeks become an exercise in year-end positioning, where fear usually loses out to greed. There is a need for certainty but few expect total resolution to the list of worries above, though many seem on course to resolution.

For example, the US inflation fear after the PPI Friday was high enough to make the CPI release in the week ahead important but unlikely to shift the FOMC reaction function which already has a December hike planned, apropos the meeting statement last week. Powell’s speech may be the more important risk for rates in the US and EM for the week ahead as he explains his forecasts. What matters with CPI and the Fed is how much overshooting of 2% targets will be tolerated. Short-term, inflation fears will be resolved sufficiently after CPI and Powell, longer term the credibility of the central bank rests on its forecasts being right and their reaction to surprises being benign.

This leaves the US political hangover after the mid-terms with recounts in a few states leaving many worried about the wider rift in US politics as the Democrats elect further left-leaning leaders and the Republicans further Trump-leaning representatives, effectively squeezing out the middle-ground.

The blue wave may have been a trickle but the House control flips to the Democrats and the next two years will be difficult for US President Trump as he faces more investigations, less support on budgets and more pushback on policy. The common wisdom is that the US is more divided after the election, but the preferences of the majority clearly leaned to the democrats and this puts the 2020 election very much in play with the republicans losing ground overall.