Markets Morning - EM markets getting wobbly, stocks down, USD up

Market Analysis /
Greg McKenna / 05 Sep 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (8am Wednesday September 5)

Stocks are off, rates are a little higher, and the USD is again on the move. That’s the short summary of overnight trade as the ISM manufacturing PMI shot the lights out with a print of 61.3 against expectations of 57.7. It’s a number that spoke to economic strength, supply chain pressures, and hiring shortages.

Last night we also saw the Atlanta Fed upgrade its GDPNowcast for Q3 GDP to 4.7%. US 2’s are at 2.65%, the 10’s are at 2,90%, and the curve is at 24.5 points rounded.

So the US dollar is a little stronger this morning with Euro down 0.3% at 1.1581, USDJPY is up by a similar amount to 111.39, while the Pound lost just 0.1% to 1.2856. The commodity bloc was under more pressure though. The Kiwi and CAD have lost about 0.65% each with USDCAD breaking out as trade tensions weigh. They sit at 0.6555 and 1.3172 respectively. The Aussie is also lower by 0.4% as copper dips again and as the USD pushes higher – AUDUSD is at 0.7181. It’s done half okay I think because Q2 GDP today is expected to be reasonable at 0.7% qoq and 2.8% over the past year.

The main currency game again however is EM markets. Argentina, despite a pledge of support from President Trump, saw the peso slide another 3% with USDARS at 38.90, The South African rand fell 3.3% after GDP growth was unexpectedly appaling and as the nation slipped into recession – USDZAR is at 15.32. The Colombian and Chilean pesos both lost around 1.3%, the Indian rupee is off half a percent, the Indonesian rupiah 0.8% lower, and the Mexican peso has lost 1.1% with USDMXN at 19.40. Can we say contagion yet – oh and the Turkish lira lost another 0.6% to 6.68 while the Iranian rial just keeps plumbing new lows.

No wonder Bitcoin is strong at $7,345 – up 0.4%.

To stocks then and there’s been a negative reaction the the Nike/Colin Kaepernick deal with the shares sliding last night. Tech came under a bit of selling too though Amazon joined Apple in the winner takes all trillion dollar club. Anyway, at the close the S&P was off the mat with a loss of just 0.16%, 5 points, to 2,896. The Dow ended up losing just 0.05% to 25,952, while the Nasdaq 100 was down 0.42% (same for the Russell 2000) at 7,622.


In Europe it was an ugly night with the DAX losing 1.1%, the CAC dropped 1.3% and the FTSE 100 lost 0.62%. So much for the weaker pound effect. And the weaker AUDUSD effect seems to be lost on SPI traders this morning who have knocked another 19 points after yesterday’s 18 point loss. Metals and mining are underperforming again and it was a sea of red on base metals so maybe this isn’t a big enough discount.

Speaking of base metals, copper lost 2.49% to $2.58 in HGc1 terms last night while most other base metals were down in Shanghai and London trade. It all fits the EM, growth, market funk narrative folks. US stocks are just not getting the message – or, more correctly that’s actually the safe haven right now. Anyway, Gold lost 0.75% to $1191, silver was belted close to 2.5%, and oil back off the resistance I’ve been talking about again overnight. WTI is at $69.33, down 0.7% and Brent is at $77.77, down half a percent.  

On the day Australia’s Q2 GDP is the key event here at home with expectations of solid growth high. It’s also services and by extension composite PMI day around the globe. China will be important this morning, but so too Europe, Japan, Korea and EM economies. Retail sales in Europe are out tonight along with US and Canadian trade data before the big one with the release of the Bank of Canada’s interest rate decision. I’m expecting governor Poloz and his colleagues to keep rates at 1.5%.

Macro Stuff that affects everyone and everything – either today or eventually



  • There is a divergence between the ISM manufacturing PMI’s strength and the print we saw from the Markit PMI in the US. Why that is I don’t know. Could be sampling, could be how the questions are framed, could be indifference to the Markit questionnaire in favour of the long established ISM that old blokes like me recall used to be called NAPM and referred to as napalm cause it blew us up a few times.
  • Anyway, the ISM was strong. The headline of 61.3 was a huge beat (highest since 2004), but manufacturing employment also leapt – from 56.5 last, 56.0 expected, to 58.5. That’s a potentially strong pointer to this week’s non-farms. Throw in that new orders leapt to 65.1 from 60.2 while prices fell from 73.2 to 72.1 but were better than the 71.1 forecast and we have a recipe for the fed to stay the course so many folks believe it will deviate from.   
  • The wash up of economic strength in the US has been an upgrade to the Atlanta Fed’s GDPNow guesstimate.  The forecast is now for 4.7% growth from 4.1% last week. The bank said that move higher was the result of the following, “The nowcasts of third-quarter real consumer spending growth and third-quarter real private fixed investment growth increased from 3.0 percent and 3.0 percent, respectively, to 3.6 percent and 4.3 percent, respectively, after this morning's construction spending report from the U.S. Census Bureau and this morning's Manufacturing ISM Report On Business from the Institute for Supply Management. The model's estimate of the dynamic factor for August—normalized to have mean 0 and standard deviation 1 and used to forecast the yet-to-be released monthly GDP source data—increased from 0.18 to 1.14 after the ISM report this morning”. Seems, like us old blokes, the Atlanta Fed puts more stock in the ISM not the Markit PMI.
  • St Louis Fed president Bullard said the US economy is in good shape, a September rate hike is likely but also said that 150 points of tightening would be excessive. Is that what the Fed is internally discussing right now? My guess, 100 points and then a pause. I cant actually find this anywhere heard it from a credible source though – Westpac NZ. But I did see on Fox he said the expectation is the economy is slowing.
  • Brexit news was important again last night. EU negotiator Barnier again walked back from last week’s positivity saying the Chequers idea is dead and the UK should aim for a Canada style deal. ISn’t he the guy who said the UK could do a deal like no other third country? Anyway, someone has had something to say to him – clearly. Anyway the good news, which lifted GBPUSD from the lows was that the EU is trying to work out a deal on the Irish border backstop.  
  • Deputy Italian PM Salvini, effectively backed down a little on his fight with Brussels over Rome’s spending. He said he’ll respect the rules but added – to save some political face – that Italy still needs to get stuff done for the people.
  • South Africa is back in recession and that was not expected. The big question is whether this is a finger out of the dike moment – or more correctly a tipping point – for EM markets and if the idiosyncratic issues are now adding up to something more structurally pernicious for EM markets. My guess? Yes it is. We are just one really strong non-farms or US 10’s at 3% away from the Jenge blocks tumbling down.
  • I ask that question because President Trump explicitly put his support behind Argentina last night and the peso still got belted. Reuters reported that after a call with the Argentinean president Macri, Trump said, “I have confidence in President Macri’s leadership, and I strongly encourage and support his engagement with the International Monetary Fund to strengthen Argentina’s monetary and fiscal policies to tackle the country’s current economic challenges,”.
  • Have a look at this CNBC story - We've got our first 2019 market forecast from Wall Street: Credit Suisse sees 11% surge.
  • And also have a look at this one where Blackrock says the Trade war is the biggest threat to the global economy but Daniel Lacalle, who I follow closely on Twitter disagreed and said, “The biggest threat to the economy is not Jerome Powell and it is definitely not Donald Trump. The biggest threat to the economy is extremely loose monetary policies that have created these enormous bubbles”. I’m with Daniel.    
  • And, is global inflation on the way back?  If it is, as Holger Zschaepitz wondered on Twitter last night then with the Bubbles Daniel is talking about and where monetary policy might head as a reaction to said lift in inflation could get very ugly for markets.
Source: Twitter Screenshot
Source: Twitter Screenshot

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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