E Markets: No Do-Overs -

E Markets: No Do-Overs

Sep 03, 2018Jeremy ParkinsonFinance0

End of the Summer and there are no do-overs as Europe gets back to work and starts to think about the lessons learned and apply them for an Autumnal risk-rally. The problem remains one around politics and emerging markets.

This week will focus still on Trump trade policy and how it plays out in Canada and Europe. Overnight stability in the CNY helped bring a bit of relief that China isn’t taking the bait and playing tit-for-tat with the US even as $200bn more in tariffs loom large. However, FX markets continued to show volatility, G10 focus was on GBP weakness. UK Brexit concerns dominated GBP today with UK PM May under further political pressure, her Telegraph editorial suggested no second referendum and no compromise to the Chequers plan which EU Barnier strongly opposed over the weekend. The AUD fell to 20-month lows with weaker retail sales. The EUR stuck in weaker part of range with Italy PMI at 2-year lows. But, Fitch affirmed Italy’s BBB rating Friday, while downgrading the outlook to negative, and Salvini offered that Italy’s budget with “touch” the 3% EU budget deficit limit but won’t break it. BTPs are bid and pressure on EU shares reversed. TRY stabilized after the CBRT vowed to take necessary actions to support price stability and said policy will be adjusted in the September meeting. This followed the 17.9% y/y inflation for August – showing TRY weakness driving prices.

Argentina is waiting for a new fiscal plan today and hopes for more flexibility from IMF. The world seems a dangerous place and one where the economic data today reveals the cracks in optimism despite solid growth as both Asia and European PMI reports sag a bit and outlooks dive. The focus today is on the GBP which is the big mover while the shift tomorrow maybe back to the commodity currencies with the RBA and BOC decisions looming this week.

Question for the Day: What is the risk for debt from China’s Belt and Road push? Chinese President Xi opened the China-Africa forum today. There were a few key takeaways from his address all of which seems pointed at US trade policy disputes. 1) China insists on “win-win” relations with nations in the fight against protectionism and unilateralism. 2) China promises to further open-up to the rest of the world, as isolations means “no future” for any country. 3) China aims to develop relationship with global partners on a path of fairness and mutual respect. The key push was to deepen cooperation with African nations in the One Belt and Road Initiative.

Whether China succeeds to change the world order and rise to super power status equal to the US rests on whether this OBRI plan succeeds in driving real growth outside of China.The chart from Center for Global Development and its blog on the subject are worth reading today as the key issue for September remains what happens to EM as investors balance value and buying this dip against further fears of debt deleveraging and catching the falling knife of asset sales and FX turmoil.

What Happened?

New Zealand 2Q Terms of Trade rose 0.6% q/q after -2% q/q – less than +1.0% q/q expected. Total export prices rose 2.4% due to rise in dairy, meat and wool prices. Dairy prices rose 3.2% due to a 5.2% rise in volumes and a 7.6% rise in values. Meat prices rose 3.6% due mainly to 5.4% rise in lamb prices. Meat volumes rose
4.7% and values rose 3.7%. Wool prices rose 4.0% as a 1.2% rise in values offset the 2.1% decline in volumes. Total import prices rose 1.7% due mainly to rise in petroleum and petroleum product prices. Crude oil prices rose 14% but volumes fell 35% and values fell 26%. The services terms of trade fell 5.8%, after around 6.0% rise in Q1. Export prices for services fell 1.9% and import prices rose 4.2%.

Australia July retail sales 0% m/m after 0.4% m/m – weaker than 0.2% m/m expected. In trend terms, all categories of retail sales were up in July except household goods retailing which was flat both in July and June. The latest outcome was due to slowing in all categories of retail sales, except other retailing which rose 1.7% in July versus a 0.2% rise in June. Household goods retailing fell 1.2%, marking the biggest fall since the 2.8% drop in December last year. Department stores continued their weak trend, down 1.9% in July and has declined for five out of the last seven months this year. Food categories slowed in July, with food retailing up 0.3% versus a 0.4%
rise in June, and food services up 0.6% after a 0.8% rise.

Australia August AIG Manufacturing PMI rises to 56.7 from 52 – better than 52.1 expected. All 7 activity indices expanded. Sales rose 15.2 to 60.7 – though some of this maybe weather related due to destocking of some agricultural products. New Orders rose 8.5 to 59.6. Exports rebounded up 8.5 to 58.4. Prices rose sharply – input prices up 9.3 to 77.4 – most since Mar 2011, while selling prices rose 5.1 to 58.1 most since April 2017. The drought caused some of the price pressures particularly food and beverages. The weaker A$ helped export orders. Wages rose 4.1 to 64.7

Australia 2Q business inventories up 0.6% q/q after 08% q/q – more than 0.3% q/q expected. 1Q revised higher from 0.7% q/q. This helps 2Q GDP as inventories are unlikely to subtract from growth. Corporate profits rose 2% q/q after 6.5% q/q – better than 1.3% q/q expected.1Q revised from 5.9% rise. Mining profits rose 4.4% q/q in Q2 compared with a 12.2% rise in Q2. Retail profits rose 1.5% after a 6.0% rise. Construction profits unexpectedly declined in Q2, down 5.3%, but this followed a strong 11.8% jump in Q1. Wages and salaries rose 1.2% q/q from 0.9% revised in 1Q.