Markets in Asia and Europe are bid for risk – albeit without much enthusiasm. There is a stoic side to today’s price action. The list of stoics starts with Epictetus, continues with Seneca and become part of the Western Philosophical Traditions with Marcus Aurelius. Virtue and wisdom is happiness and judgment should be on behavior, not words.
We can’t control the outside world, but can only be responsible for our reactions to it. This is as good a place to start for understanding Monday and what it means for risk trading ahead. Here are the things that are showing up on the radar screen in a light week for economic news and apart from the big three themes that still dominate trading US/China trade, Italy and the EU budget battle, UK/EU Brexit terms and UK political sustainability.
Think differently and you may have a better week – 1) USD shortage concerns. Cross-currency swaps suggest US yield curve flatness is pushing savers like Japan to buy into Europe and elsewhere. 2) China short-term rates are now below the US. The ability for the CNY not to weaken will follow. 3) Leveraged loans and corporate spreads are a key focus for risk again. Many of the new loans are held in CLOs and the level of debt has returned to pre-2008 crisis levels. 4) French-German proposal a “breakthrough” for Eurozone reform. France and Germany agreed on Friday to back a joint euro zone budget focused on financing investment and reforms that help euro zone economies converge. These stories are mostly negative for rates and FX leaving the equity rally in Asia and Europe suspect. Spending to grow is the mantra until borrowing makes this prohibitively expensive or central bankers lose their will to be easy or inflation really shows up. When you look at these stories and try to find the right barometer for risk we have to go back to CNY and wonder if the 7.00 level is back in play and matters.
Question for the Day:Is China winning the trade war? The battle for confidence still rests on the outcomes of the big three stories – UK Brexit, Italy’s Budget and the US/China trade tariffs. The ability for China to hold on for a longer battle remains in play post the APEC summit and Pence/Xi speeches. The doubt that markets are fully pricing in a prolonged conflict continues to be in play.
