EUR 8.70 For Business Accounts Only

The Morning Track back-to-basics-2

- The Morning Track – Back to Basics by Bob Savage
http://trackresearch.com/articles/the-morning-track-back-to-basics-2/

Every article about markets starts today with the return of volatility. The S&P500 yesterday moved up and down by 1-2% for a total of 20% on the day – more volatility than in almost all of last year. This means trading models and the signal to noise ratio is different, driving down trading volumes once positions are sized correctly to the opportunities. The 8% correction is shares will bring out value hunting but so far this has been a modest exercise overnight. Note that the MSCI Asia EM index was up more than 2% and ended down on the session as FX returns to haunt and rallies in EM FX put doubts back about trade and growth. China’s Shanghai Composite fell 1.8% and the CNY rallies to 6.25 – dominating the overnight trading. The risk-on vs. risk-off mood goes to the bears still. Fears are rising for a “dead cat bounce” into the US session. Markets are going back to basics – like the bid/ask spread and the real liquidity available and the balancing act of rate
s, FX and equity correlations. Drivers for risk today return to economic, political and central bank policy news. A number of headlines stand out and move markets:
1) Merkel’s CDU and SDP reach agreement on coalition government – the deal now goes back to SPD members for a vote - periphery bonds rally with FinMin going to SPD which support a EU investment budget and EU Finance Ministry;
2) Central banks back in focus today with RBI on hold – as it waits for more data on inflation and more clarity on the fiscal deficit. Note India December CPI was at a 17-month high of 5.2% well over the 4% target. Waiting has costs to credibility. Later today, Brazil BCB expected to cut rates to 25bps – 6.75% would be new record lows – but statement of future plans more important to market. RBNZ is expected to be on hold, but risk of sounding more hawkish seems higher given recent data on growth/inflation.
3) US Congress close to a 2Y budget deal. House passed a short-term measure to fund most of the government through March 23 but Senate is working on something else. The emerging agreement is expected to increase military spending by $80 billion a year and nondefense spending by $63 billion a year. Key is to watch the inversion of the US bill curve to measure market jitters here.
4) EC Commission Winter forecasts for GDP higher, inflation higher – The coordinated global recovery continues to be expected. The EC commission sees 2018 GDP up 2.3% from 2.1% in Autumn 2017, 2019 up 2% from 1.9%. Inflation seen up 1.5% from 1.4%, 2019 1.6% unchanged.
All this puts the markets back to watching news along with prices – and the risk is still going to be set by rates as they correlate with equities and underpin FX. The rally up in core EU yields and the lower US ones make the USD rate correlation wobble again today but what the FOMC speakers say today may change all that. US 10Y remains central for basic risk management.