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Thursday 15

November, 2018 2:39 AM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

Its dark days again in emerging markets (EM) and negative flows here have resonated in a modest risk-off feel to developed markets.

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31.08.2018 09:32 AM

Its dark days again in emerging markets (EM) and negative flows here have resonated in a modest risk-off feel to developed markets.

Argentina has been at the centre of the markets thought process, with the Argentine central bank hiking the seven-day repo rate 15ppt to a lofty 60%, while committing to no cuts until December, and that is not going to do the economy any favours at all. We even saw the central bank selling USDs to help stabilise the USDARS cross, and at one stage we saw the ARS respond positively to this, although it was relatively brief and traders resumed selling the peso in earnest. Argentine CDS (Credit Default Swaps) blowing out 101 basis points on the day reflect the perception around the sustainability of future debt payments and comments from a key government official that they could be on the hunt for support from the IMF won’t have helped here either.

LatAm EM currencies, such as the BRL and CLP, have taken a hit in appreciation, as has the TRY and ZAR and the moves were not confined to FX markets. Just take a look at the CSI 300 ETF (ASHR), where we can see this closing 2.9% lower, suggesting traders see China’s mainland market under pressure today. The MSCI EM futures index also closed 2.6% lower, and we can see this working well within a bearish channel, and the balance of probability here suggests staying positioned for lower levels.

(Daily chart of MSCI EM futures)

(Source: Bloomberg)


The news flow that Donald Trump is pushing forward with a further $200b in tariffs on China's exports should not shock, as it had widely been speculated on. That said, the devil is in the detail and we don’t know if the charge will be a flat 25% across the board or a less restrictive 10% -  or a mix of different rates. A straight sweep of 25% would be a powerful message and one would then suggest an elevated risk that the US trade representatives will push tariffs on the remainder of trade even further from here and, of course, we would still need to see China’s rebuttal.

I say it ‘should not shock’, however, it certainly hasnt done sentiment any favours, hitting the EM trade when it was down and giving the negative tape further momentum. USDCNH has pushed higher by 0.7% and is eyeing the recent significant high of 6.8955, where a break here suggests the all-time highs set in January 2017 at 6.9895 come into play. The fact we are staring at yuan weakness again despite clear measures from early August to stabilise the yuan should be noted.

The S&P 500 fell around 0.5% on the tariff news, closing -0.4% on the day, with materials sector closing 1.3% lower and this should be reflected in the ASX 200 move, with BHP et al. highly likely to underperform. High yield credit spreads widened four basis points, reflecting the mood on the floors and there was a bid in the Treasury market, driven by the five-year part of the curve (the US 5-year Treasury closed 3bp lower at 2.75%). In the rates market the probability of a December hike from the Fed fell a touch and is now priced at a 64% chance (this also assumes September is a done deal), while traders lowered its rate hike expectations by 3bp between December 2018 and December 2020 to 33bp.

I mention moves in the ASX 200, with material names likely to underperform, but impressively Aussie SPI futures suggest we should see a flat open, with the Aussie futures index stagging a late session rally to close modestly higher than where they were trading at 16:10aest – the official close of the ASX 200 session. The Nikkei 225 should see sellers on open too and its hard to think that Chinese equities will open anything but lower, despite buying from the state-run banks. Tactically, I would be selling the open of the ASX 200 on pure order book dynamics alone, as I see no real reason to buy here and a number of concerns that could easily see the sellers kicking in, with traders managing positions ahead of the weekend. This move could take another leg lower at 11:15aest when we get the PBoCs daily ‘fix’ and the open of the mainland markets. One to watch.

In G10 FX, it’s been all JPY inflows, with some punchy moves lower in NZDJPY and AUDJPY. NZD has emerged as the ugliest kid in the schoolyard, momentarily stealing this crown from the AUD, thanks largely to some awful business confidence numbers yesterday (now at 10-year lows), while Fonterra has lowered its 2018-19 for farmgate milk by 3.6%. Unless trading the AUDNZD cross, neither the AUD or NZD hold any attractions at all and aside from bouts of mean reversion there are no reasons to own these currencies. AUDUSD has traded into $0.7250, finding support just above the recent low of $0.7238. EURAUD looks comfortable above 1.60 handle and happy to ride this higher, lifting the stop closer to the market.

Published by Chris Weston, Head of Research, Pepperstone
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