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.