E Markets: No Weapons

The news from Asia overnight sets up today to continue the bounce back in risk mood. First, the Moon-Kim Korea summit produces another deal on denuclearization and peace. Second Chinese Premier Li vows not to use the CNY as a weapon in trade to boost exports and third, the BOJ stuck to its long-term promises of easy money. While this lifted Asia shares which continued the S&P500 bounce, the European session had two stories that mattered and stalled the rally – as Italy sees its BTP rally end on rumors that the 5-Star Leader pushed for more spending in budget – this was later denied but rates are higher in periphery. The second surprise came from the UK where CPI zoomed higher to 2.7% and that shifted up expectations for a BOE hike again.

The GBP has already squeezed, a bit like the EUR, and so the heavy lifting of markets pivots to fixed income today. The break out of US 10-year rates at 3.05% matters – with the Chinese selling of US treasuries as show from the TIC report yesterday evening one factor, but the budget deficit and better Emerging Markets the other two. Emerging Markets are bouncing today with TRY and ZAR both up over 1.5% driving capital flows as China seems to be winning the PR war on trade. No weapons in FX means that worries bleed elsewhere – with the correlation of FX to stocks in play in EM but not in developed markets as much. Focus today in the US will be on housing starts and the sensitivity of rates to growth.

Question for the Day: Does the 2-10Y rate move mean good news? The steeper US rate curve is notable in the last few days and yet the fear that US recessions will happen in late 2019 or early 2020 remain in play. The shift up in US rates has left many thinking that there is value in the front end finally with 2-5Y arbitrage in play as many see the FOMC doing 3-4 more hikes and then waiting. The risk of the FOMC doing too much rests on the data and inflation – with the tariff effects one worry and the labor market the other – so far neither have mattered. The lifting up of the curve in the US means something for other markets as well – correlation of USD to curve along with bank earnings are both likely to return to play. While many see the USD as vulnerable due to Chinese promises and the EM bounce back, there is more power in rates in attracting capital and in the growth implications for the curve move supporting equities.

What Happened?

New Zealand 2Q Current Account Deficit NZ$9.5bn y/y at 3.3% of GDP after 2.6% in 2017 – worst since 2009– worse than 2.9% expected. The 2Q C/A was NZ$1.7bn q/q, marking a sharp reversal from a NZ$88 million surplus in Q1. But on a seasonally adjusted basis 2Q deficit was NZ$2.7bn after NZ$3.2bn in 1Q. This was despite a surplus in goods balance of NZ$192mn compared with a deficit of NZ$385mn in Q1. Trade in services recorded a surplus but this was significantly narrower than Q1. There was a deficit in primary income of NZ$2.5bn in Q2 compared with NZ$2.6bn in Q1.

Japan August trade deficit Y444.6bn after Y231.9bn – near expectations of Y475bn. Exports rose 6.6% after 3.9% y/y – better than 5.6% expected – led by higher shipments of chip-making equipment, motor vehicles and ships. Imports rose 15.4% after 14.6% y/y – slightly more than the 14.9% expected – led by higher energy prices. Exports to the U.S. marked the first rise in three months while those to the European Union posted the 19th straight year-on-year increase. Exports to Asia and China showed the sixth straight y/y gains.