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The Weekly Track gone-2

- The Weekly Track – Gone by Bob Savage
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Summer is long gone. The mood swing in markets last week was attributed mostly to US trade uncertainty and the FOMC rate hike but underneath all of the soggy price action is a feeling that the storyline driving markets in the summer – “goldilocks” is transforming into something else. US divergence continues with the US economy growth, inflation and outlook remaining robust. The EU is different with ECB expectations of tapering high but growth moderation continuing and clearly not breaking out like the US. China is expected to moderate further as trade tariffs kick in and Japan, while doing better with BOJ Kuroda and PM Abe still very much in charge, shows trade issues as well. Perhaps the biggest shift over the summer was in emerging markets and the hope in 4Q is that there is a return to bargain hunting investment flows supporting growth and currencies there – but the Brazil election, deepening recession in Argentina and Turkey and ongoing pain in South Africa a
nd India suggest this is more than idiosyncratic outflows. The role of China and trade tariffs is one shift to consider as investors jump into October and 4Q. The view of the summer, that a Mexico deal on trade would lead to a new NAFTA with Canada, better deals in Europe and eventually one with China has stalled. South Korea and hopes for Japan are the exception and the hope over the last week. Nevertheless, the fear of a prolonged trade war is being priced. The view on US an EU politics also changed as hopes for the new Italian coalition playing by the rules on budgets ends and as the US mid-term elections loom. Hopes for further stimulus spending in the US – infrastructure and more tax cuts – clash with the realities of the growing deficit and expectations of a gridlocked Congress. The market last week did something very different with the USD gaining and stocks losing. This shift matters and might be important if it continues into October and the heavy economic da
ta. The breakout of the USD index over 95 opens 95.70 and risks for 98 again. This may reopen the talk of CNY 7.00 busting, restart 115 JPY and 1.14 EUR. The USD gains run on back of FOMC rate policy, US growth and the view that the US can outlast China in any prolonged trade war.