EUR 20.34 For Business Accounts Only

The Weekly Track twin-peaks-2

- The Weekly Track – Twin Peaks by Bob Savage
http://trackresearch.com/articles/the-weekly-track-twin-peaks-2/

We continue to want to determine the cause of February’s risk reversal and cast blame. It’s a bit like the 1990 Lynch television show as we all search for the murderer of Laura Palmer amidst a cast of quirky misfits. This search for truth leads to a rounding up of the usual suspects – US rate hikes and FOMC balance sheet reductions, Geopolitics and US tariffs, US debt and fiscal stimulus, China deleveraging, EU politics and Italian populism, Japan Abe poll drop and risks for BOJ. In the last week much of those worries were investigated and proved innocent – US 10Y rates broke 3% and the markets held; FOMC rate hike expectations held at 3-4 with next week’s meeting expected to be a non-event; China talk of easing continued post its RRR cut; Italy continued to see its debt markets outperform in Europe despite the 5-star movement talks with the Center Left; Japan BOJ continues to ease. The drop of geopolitical fears maybe the most notable story of last week but it
seems at odds with the notable pain trade in Emerging Markets FX and equities. Markets last week had the best and worst of times. There is a fear over profit margins peaking. The employment costs rose by the most in 11 years in 1Q even as 1Q profits are the best since 2010 at 23.2%. Fears about geopolitical risks ebbed as the Korea meeting of Moon and Kim Jong-un dominated headlines, while Macron and Trump kissed though Merkel and Trump didn’t. The push for the equity bulls is about the present mood and global coordinated growth supporting robust valuations. The tug of the bears is about the “layer cake” of tail risks being ignored along with higher rates and policy mistake risks. The US remains the key driver for volatility and for growth in 2018 with next week being another key week for both as the FOMC meets and the US ISM/unemployment data dominate outlooks for 2Q. There is one drag that continues to push back against the nascent USD recovery linked to US re
al rates rising and better growth hopes thanks to corporate earnings, that is the twin deficits of the US government debt and the current account. The ability for the USD to hold its gains next week will be about these fears also changing.