The Daily Update - OUCH, Argentina, ZEW and Boris the clock stopper

As the dust settles after the rout in Argentina debt markets it appears some of the largest Emerging Market funds took the brunt of the collapse with returns dropping up to 3.5% on the day. This leaves many with a less than 1% return for the year to date. The question now; are they a buy at this juncture, we think not. The outlook for a US recession is increasing in probability and if that is an occurrence over the coming twelve to eighteen months the last place we think you want to be is in lower-rated assets as the spread widening that may occur could be punishing, hence our stance in longer maturity higher-rated assets.

Yesterday was all about economic data as US CPI came in a little higher than expectations and the German ZEW index came in at disastrous levels.

On the US CPI both overall and ex-food and energy indices came in up 0.3% with firmness broad-based although there is thought to be some impact from the tariffs in the data. The headline rate moved up from 1.6% to 1.8% YoY and the core rate up to 2.2% from 2.1%. Energy prices were strong as gasoline jumped by 2.5% but there was also surprising strength in used car pricing, apparel and medical care. We continue to monitor the data as our long-duration positioning is reliant on a relatively low inflationary outlook.

So to the German ZEW report…..Ouch. The current situation index came in at -13.5 from the -6.3 expected, bad enough but the expectations index which was expected at a lowly -28 came in at -44.1 from the prior months reading of -24.5. Now call us old fashioned if you want, but does Germany really need a hard Brexit, on top of the very obvious weakness in the manufacturing sector, we think not. Could be Boris’s timing is spot on.

The Daily Update - China receives MSCI approval

As was widely expected, MSCI Inc. announced that it is to include Chinese A-shares on the world's most followed Emerging Market Indices; a symbolic victory for China. According to the statement, 222 of China’s large-cap onshore stocks will be included in the MSCI Emerging Markets Index via a two phase process from May to August next year. MCSI stated: ‘This decision has broad support from international institutional investors ... primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements’.

The Daily Update - Global Markets

Greed and fear drives financial markets and investor risk appetite has returned after a bout of extreme pessimism at the start of February.  The VIX index of volatility remains in the low part of the range and the S&P is trading just off its all-time high reached earlier in April despite US earnings forecast to fall (-6.1% yoy according to Thomson Reuters).  Increased risk appetite is also prevalent in fixed income markets with the high yield and energy sector having rebounded but also seen by strong investor uptake in the new issue market.

Wealthy Nations Daily Update - Argentina

In the short period that Mauricio Macri, the President of Argentina, has been in office he has unquestionably made considerable progress in addressing the some of the country’s constraints to growth.  The latest is that he has ended the stand-off between his predecessor Cristina Fernandez de Kirchner and Elliot Management et al. reaching a settlement with the key (85 percent of) holdout creditors by agreeing to pay 75 percent of the value owed on the debt.  Argentina also has to settle with the remaining holders (15 percent of the debt).

Wealthy Nations Daily Update - Sino-Argentine nuclear deal

Another Chinese nuclear deal has been signed; at the G20 summit on the shores of Antalya, Turkey.

This time the deal is between China and Argentina and is worth an estimated USD 15bn. According to sources, Chinese banks and associated companies will provide investments and loans worth 85% of the project costs, and loans will be repaid at an annual rate of 6.5% over 18 years. Roughly 60% of materials will be locally manufactured; the remainder imported from China. State-owned China National Nuclear Corp. (CNNC) in co-operation with Nucleoeléctrica Argentina SA (NASA) will build both reactors, the first of which will cost circa USD 6bn and will utilise Canada Deuterium Uranium or “Candu” technology, while the second will be made using China’s own Hualong-1 reactor technology; something China has been keen to export.

Wealthy Nations Daily Update - Argentina

Argentina’s current stand-off with creditors in the debt market has removed it from many investors’ radar but an imminent change in leadership as the ongoing Presidential elections run to a second round may start to bridge the way for the country to access the markets again; the market seems to be starting to factor this in with Argentinian debt one of the best performing assets this year.

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