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Macro Blog

There are few plausible explanations for the risk-on move yesterday. Maybe it’s the positive spin on Italy looking to be caving to the European commission; maybe it’s the hope that with some small adjustments May will get Parliament to approve her BREXIT treaty; maybe it’s the move up in oil reflects the rebound in EM growth; maybe Xi and Trump will come to agreement on trade. Maybe, maybe and more maybes.

So, what do I think?

Well, as I have written about in the last few weeks, I am still in risk-off mode:

  • x-US world growth is slowing, and the US will follow suit in the next few quarters.

  • Solving the Italy problem and the larger problem of what is the EMU will get even harder as the European economy continues to slow

  • The issue of immigration is one example of a problem that will get bigger as Europe slows

  • The Fed is still going to raise rates and US dollar will continue to strengthen.

  • In their calculus, near term positive factors outweigh the potential for a future slowdown

  • The performance of EM has no weight in their view of the world

  • May’s likely trouble with getting Parliament to approve the treaty will increase the probabilies of a hard Brexit or a new election i

  • Hard BREXT means WTO tariffs which could push the UK economy down 10 to 20%

  • New election raises the probability of a change in government.

  • EM FX, particularly in Asia and commodity countries, will sell-off along with their equity markets

  • USD stronger means weaker EM economies and FX

  • Lack of an agreement between the US and China puts more pressure on both

  • RMB will weaken pulling down the rest of the Asian currencies

  • Oil prices will head lower without oil producers agreeing to reduce supply

  • As I’ve written Oil prices will be driven by EM demand, and with their economies slowing with falling FX, their demand will slow

  • Market is already in excess supply

  • Cutting supply with weakening EM demand could mean producers are just pushing on a string

  • The US and China are unlikely to settle their economic war anytime soon.

  • It’s technology that is driving tarries not trade

  • Read the update on the section 301 tariff or Pence’s speech in Asia last week.

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