Last week US 10-Year Treasury yields rose 11bps with a level move up across the curve and global equity markets pushed new highs on slightly improved global economic outlooks. The renminbi (CNH) weakened from 6.57 to 6.62 partly due to the dollar strengthening with the DXY Index moving 0.66% to 93.70. The Merrill Lynch Fund Managers’ survey reported average cash balances were down to 4.7%: their lowest in 28 months. With this recurring ringing of “new all-time-highs” markets this week reminisced the 30th anniversary of Black Monday.
China’s 19th National Communist Party Congress began last week and continues through to the middle of this week. It looks like only President Xi and Premier Li will remain on the Standing Committee with Xi handed his second five-year term at the closing of the meeting on Wednesday 25th. Furthermore the PBOC governor announcement looks set to name Gui Shuqing, currently Chairman of the CRBC.
Over the weekend Abe’s gamble turned into a landslide victory causing the NIKKEI to rocket beyond 21,700, continuing 16 months of solid performance whilst the yen was pushed down given that the win removes some of the fear of the BoJ easing policy; Abenomics gets a new lease of life as Haruhiko Kuroda (or at least a like minded candidate) is expected to be reappointed as the Bank of Japan Governor. Touching 114 the Japanese yen stands at a 100 day low.
The fourth round of NAFTA negotiations ended last week; it was clear that the previous December target was unfeasible considering the "strong differences that remain" and that the "new proposals have created challenges". But it was agreed to extend the talks into the first quarter of 2018. On news of this, the Mexican peso rallied almost 2% from its weak point a couple of days earlier. The prior 7% depreciation of the peso over the past month was a sharp retracement of the bullish sentiment the markets had during the first half of the year; and amongst various causes was triggered by Trump's characteristic uncompromising and hard-line position on NAFTA. The agreement pertains to $1.2 trillion in annual trade between the US, Canada and Mexico: particularly vulnerable is the auto industry which has various back-and-forths between Mexico and the US across the various production stages. Mexico arguably has the best source of cheap labour for such production with an autoworker's salary less than $4 per hour; that is just 12% that of an average worker north of the border. This is one of the major sticking points with the US obviously wanting to sign a series of international labour agreements to increase the minimum wage of autoworkers.
In the week ahead the ECB announces its rates decision on Thursday and is expected to offer an update on its QE programme but leave both deposit and refinancing rates unchanged. There is the possibility here for both the targeted duration and the scale of the QE (currently €60bn) to be reduced. The US Q3 GDP read on Friday is expected around 2.5 - 2.7% according to Bloomberg economists survey and the Atlanta Fed GDPNow model respectively. This is weaker than the 3.1% growth in Q2 but would be taken to be resilient given the effects of natural disasters during the period. If the read is closer to the NY Fed’s estimate of just 1.5% it may cause markets to reevaluate the quarter. There is also the possibility that we will hear Trump’s choice for the next Fed Chair with John Taylor, Janet Yellen and Jerome Powell being the most worthy and likely candidates.
Also this week, alongside earnings season at full flow, key data releases include: Chicago Fed National Activity Index; EC Consumer Confidence; numerous PMIs across all major markets; CPI from Mexico, Russia, Japan and Australia; some GDP data from Mexico, Korea, UK and US; and US durable goods and new home sales.