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 - Argentina - 200 Years of Defaults and 2 Years Hoping for Something Different

The Daily Update - Argentina - 200 Years of Defaults and 2 Years Hoping for Something Different

In a rerun of a familiar saga, Argentina’s default probability jumped back above 75% (5 years) following a primary election upset that blindsided most of the market. Former man of the moment, Argentina’s President Mauricio Macri, was defeated by Alberto Fernández and his running mate former President Cristina Fernandez de Kirchner in yesterday’s vote – by 32% to 47% – causing a large volume of sell-offs in the country’s debt and instantly doubling credit default swap prices.

The Daily Update - Goldman Sachs and Morgan Stanley Issue a Warning

The Daily Update - Goldman Sachs and Morgan Stanley Issue a Warning

Over the last few days, economists at both Morgan Stanley and Goldman Sachs have warned that the chances of a recession have increased as the ongoing trade wars are going to have a larger impact on the global economy than first thought.

At Morgan Stanley, their chief economist, Chetan Ahya, said that the firm believes a global recession will come in about 9 months if the trade disputes continue to escalate, with the Trump administration raising tariffs top 25% ‘on all imports from China for 4-6 months’ …..

The Daily Update - Italy's Political Circus / Draghi Might Have a Friend / Trump Attacks the Fed ... Again

The Daily Update - Italy's Political Circus / Draghi Might Have a Friend / Trump Attacks the Fed ... Again

Yesterday Matteo Salvini, Italy's far-right deputy prime minister, withdrew his support from the governing coalition, at the same time calling for a snap election. The move comes after months of fighting between the anti-establishment Five Star Movement and Salvini’s League Party. Tensions between the 14 month-old coalition leaders peaked in a row over the financing of a multi-billion euro high-speed rail link to France.

The Daily Update - Don't Stand in Front of a Runaway Train

The Daily Update - Don't Stand in Front of a Runaway Train

The US Treasury market paused for breath yesterday as yields moved higher across the curve by a few basis points. The catalyst was a weaker auction on $27Bln of ten-year notes which had a 1.7bp tail. This should be put in context that this month’s 10-year auction is at levels some 40bp lower than last months and so some hesitancy from bidders should have been expected. Needless to say, the curve is still pricing in a full 50bp ease from the Fed this year.

The Daily Update - The Japan / South Korea Spat Escalates

The Daily Update - The Japan / South Korea Spat Escalates

Earlier this week, South Korea announced plans to invest approximately USD6.5bn in research and development for local parts, equipment and materials over the next seven years in an effort to cut reliance on Japanese imports. The move comes amid a worsening diplomatic spat between the two countries that has led to consumer boycotts. Sales of Japanese-branded cars in South Korea slumped in July by 32%. Relations between the two former friends have become increasingly fraught in the wake of the row over forced labour during Japan’s occupation of the Korean peninsula before and during World War Two.

The Daily Update - The U.S. Treasury Department Points the Finger

The Daily Update - The U.S. Treasury Department Points the Finger

Yesterday, the U.S. Treasury Department, after many veiled threats from the President, finally designated China as a currency manipulator, something no President has done since the Clinton era in the mid-‘90s. The move comes after China’s central bank allowed its currency to weaken, falling to as low as 7.14 against the dollar overnight, amid the ongoing trade dispute that has rocked global markets. In a press release the Treasury Department stated ‘Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator’ adding ‘As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions’.

The Daily Update - Escalation

The Daily Update - Escalation

The US-China trade war escalated further overnight with news reports that the Chinese government has requested state-owned companies to suspend imports of US agricultural products. This appears to be in retaliation to Trump’s proposal to add 10 per cent tariffs on another USD 300 billion of Chinese imports which was announced on Thursday last week.

US Treasuries surged with the long bond now up over 5 points since the end of July (at the time of writing) and stock markets have taken another tumble declining around 1-2% so far this morning.

The Daily Update - Global PMI'S and NFP

The Daily Update - Global PMI'S and NFP

The Purchasing Managers Index (PMI) Manufacturing reports have now been released for the month of July after Switzerland’s data was released this morning. On the one hand (remember that one handed economist?) July’s readings were a little better than June (well, less bad would probably be a better description) where 14 nations saw a higher absolute number (compared to 10 better in June). Lower data than the previous month fell to 19 nations (from 26 a month ago). The G8 nations reported 4 higher than last month (Canada, Italy, Japan & Russia) and 3 lower (France, Germany & the US) whilst the UK was unchanged

The Daily Update - Trump Slow, Fed Confusing

The Daily Update - Trump Slow, Fed Confusing

So the result of the Stratton Street sweep stake as to the timing of President Trump’s reaction to the Fed 25bp rate cut last night, drum roll……..3 hours and 17 minutes after the Fed announcement (3 hours and 7 minutes after my guess) is the winning ticket with a “Powell let us down” tweet.

The Fed cut rates for the first time in a decade although there were two dissenters, Rosengren and George; they also announced they will stop their balance sheet runoff two months ahead of schedule now in August.

The Daily update - Not Just Rate Changes At The Fed

The Daily update - Not Just Rate Changes At The Fed

The expected 25 basis point (or even 50 basis point) rate cut expected later may not be the largest change today for the Federal Reserve. A Senate bill also due today could soon force a third mandate (or fourth if you include financial crisis mitigation) on the Fed: one requiring them to balance the US current account within five years. The Federal Reserve’s existing official mandates are, of course, price stability and full employment.

The Daily Update - Abuse via Tweet Mr President

The Daily Update - Abuse via Tweet Mr President

All the action in markets yesterday surrounded sterling and the UK Gilt market where the pound ended the day -1.3% and 10-year gilt yields lower by 3.5bp as the market moved up the chances of a no-deal Brexit to around 50%. Boris Johnson, digging in his heels on a no-deal, and the constant squabbling from many differing parties caused the sell-off with few expecting any respite over the coming weeks.

The Daily Update - Solar to Singapore

The Daily Update - Solar to Singapore

Ambitious plans to power Singapore with the world’s biggest solar farm, from approximately 2,500 miles away in Australia’s Northern Territory, have taken a step closer to becoming a reality. Called Sun Cable, the 10-gigawatt-capacity array of panels will be spread across 15,000 hectares outside Tennant Creek, deep in the Northern Territory and will be backed up by battery storage to ensure it can supply power 24/7.

The Daily Update - Neutral, Hawkish, Dovish??

The Daily Update - Neutral, Hawkish, Dovish??

Following on from yesterday’s ECB meeting where, as expected, a rate cut was pushed out to their September meeting, focus will now be on the Fed meeting next week.

We expect a 25bp cut on the 31st July with a slightly hawkish shift in language as this will be the first rate cut since the Global Financial Crisis. This will be taken as a ‘Fairly neutral’ cut leaving the door open for further cuts should the outlook not improve or the obvious downside risks remain in place from the trade frictions etc. This should result in minor market moves, a move up in the curve with a flattening bias and some risk asset disappointment.

The Daily Update - Watch Out For Fleeing Americans

The Daily Update - Watch Out For Fleeing Americans

An interesting report out today from NatWest Markets looks at the effect US investors have on the value of the US dollar and the relative swings in its value. According to Federal Reserve data American fund managers hold $85trn of liquid assets dwarfing global central banks reserves at $12trn and sovereign wealth funds at $5trn.

Of the $85trn, $12trn is in foreign assets, which is about 14%, and it has been growing steadily since the 1970s when foreign assets were just 2% of total assets.

The Daily Update - Persistent Misery Indexes

The Daily Update - Persistent Misery Indexes

Disappointments across the board today in European Purchasing Manager Indexes has added strength to the argument for further easing from the European Central Bank in coming months. The Eurozone Composite PMI undershot its modest 52.2 target coming in at just 51.5; the Services PMI was in-line but the Manufacturing figure was just 46.4, representing an even greater contraction (anything below 50) than the 47.7 forecasted

The Daily Update - We Want High Grade, Long Duration

The Daily Update - We Want High Grade, Long Duration

The Middle East has been one of the best performing regions so far this year with, for example, Mubadala 6.875% 2041s (previously IPIC 2014 before the companies merged), trading at all-time highs this month. Issued at a spread of 350bps over US Treasuries, this bond is currently trading at around 150bps over. This AA-rated bond still remains attractive even at these levels. We calculate that the issue offers an expected return and yield of around 12.3%, the bond is also over three notches cheap, offering significant downside protection. The fact that Mubadala is Abu Dhabi’s sovereign wealth fund, thus 100% state-owned adds a further layer of protection.

The Daily Update - US Debt Ceiling - As Regular As Clockwork

The Daily Update - US Debt Ceiling - As Regular As Clockwork

It’s that time again, that ‘time’ being, of course, the next round of negotiations on the US debt ceiling that come round as regular as clockwork. The February 2018 suspension of the US debt ceiling expired in March earlier this year. This means that a dysfunctional Congress has been tasked to somehow hammer out a compromise that heads-off a potential technical default when current stopgap measures run out in the autumn.

The Daily Update - Rates the Fed and a Nightmare

The Daily Update - Rates the Fed and a Nightmare

The market moved yesterday to offer the probability of 44% for a 50bp rate cut, from 35% previously, at the Fed's meeting on the 31st July. This was on the back of four Fed members speaking, giving further clues as to what the Fed is likely to do. This is usual to see a ‘gaggle’ of Fed speakers two weeks before the meeting because come 12 o’clock tomorrow all members enter the blackout period when no further comments are allowed until after their meeting.

The Daily Update - Fed Generally Positive / Others Not So

The Daily Update - Fed Generally Positive / Others Not So

According to the Federal Reserve’s Beige Book released yesterday the US economy continued to expand at a modest pace with a ‘generally positive’ outlook from mid-May through early June, with little changing from the previous reporting period. The Fed said that ‘many’ of its 12 regions saw slight gains in retail sales and home sales, whilst auto sales remained flat. The labour market continued to expand and remained ‘tight, with contacts across the country experiencing difficulties filling open positions’.

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