EUR 8.82 For Business Accounts Only

The Morning Track not-excited

- The Morning Track – Not Excited by Bob Savage
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Color me not excited. News flows are not matching up with market volatility as we see bonds higher, stocks mixed, FX stuck and commodities confused but holding more bid than offered. This is a risk-parity heaven where passive beats active, where machines make mockery of discretionary human thought. We can blame oursleve for the color choice and the programming. The US/China trade talk optimism is cited for calming bearish nerves in EM and elsewhere today. US President Trump said we’re going to make “a very good” deal with China in an interview, while an official noted that tariffs will be a sticking point to deal but technology transfer maybe close to being resolved in talks. The balancing act of good news on US/China is balanced against EM and DM headlines that leave few investors excited. Point is that US/China may end their battle in April or June but the effects on the rest of the world continue. The emerging market pain trade in 2019 remains in play for ARS, TRY
and BRL. The economic headlines overnight show New Zealand business mood weaker, Korea better but still below average, and European economic sentiment weaker still, and ability for central bankers to fix it all remains in doubt. Here are the headlines that stand out in EM and DM
• ECB and tiered rates in play. The Draghi speech yesterday mulled the effects of negative rates and with deposit hikes infeasible, tiering ala BOJ and Riksbank being studied. Praet speech adds to this speculation. One factor for tiered deposit rate policy is to alleviate the penalty of excess reserves. This allows for more rate cuts if needed.
• Waiting for Brexit clarity as the political stakes for UK PM May are all-in with her promise to resign should her deal pass Parliament. Of course, no deal passed with DUP opposition driving except the one to delay until April 12 – all of which makes it more difficult to see good outcomes with no deal odds rising. As an aside, Betfair odds put Rees-Mogg and Cox in the lead to replace May.
• The Turkish Central Bank (CBRT) raised the TRY swap sale limit to 30% from 20% for swap transactions that haven’t matured. TRY weakens to 5.6, forwards drop with implied rates O/N dropping from 1300% to 50%.
• Three more Vale dams in Brazil on high alert for disruption – adding to BRL pain trade as the Bolsonaro honeymoon ends. A constitutional change limits the budgets of local and federal to “free” spending of 10%. FinMin Guedes doesn’t seem happy, and the pension reform is rescheduled again.
• Thai poll agency says the pro-military party won the general election, but the stalemate in lower House likely. THB trade near 32. Under new rules, the 250 member Senate appointed by the junta will vote with the 500 members of the lower house to vote for prime minister. This means 376 lower house member needed to ensure PM without junta support.
The lack of clarity in UK and EU policy and Brexit matters to global growth as it stalls investment plans and drives down the views for a faster recovery. The focus for today is on the GDP revision in 4Q and what it means for 1Q outlooks. For those that want more on seasonal noise read the SF Fed blog on this point. The US trade deficit was less painful in January and that will help even out the 4Q to 1Q story. The role of the USD in this game of risk between global fear and US divergence is still where the excitement for traders lives. This puts the EM/USD relationship on the front lines and the TRY move today as the stand out counterpoint to anyone brave enough to not be excited.