And now, back to your regularly scheduled set of recurring market concerns.
Traders will pick up largely where they left off on Friday this week, with emerging markets still in the spotlight, the dollar rally on the frontburner, crude looking ahead to the May 12 announcement on the Iran deal, 10Y yields in focus with CPI on deck and everyone watching Trump’s Twitter feed for signs that the dementia/paranoia is getting worse.
On the EM front, the question is whether the run on the Argentine peso and the ongoing collapse of the Turkish lira primarily reflect idiosyncratic risk around central bank credibility (and in the case of Turkey, a completely unhinged executive) or are an example of what happens when a stronger dollar, rising U.S. rates and a determined Fed collide with inherently precarious EM dynamics. If the latter is the case, well then it’s likely that popular carry trades will continue to unwind and vulnerabilities will continue to be exposed.
Argentina attempted to arrest the slide in the currency with a series of nuclear rate hikes, culminating on Friday with a “say hello to my little friend” moment. So as Trump would say, “we’ll see what happens.”
As far as the lira goes, Erdogan was on the tape on Sunday with a series of predictably ridiculous comments that underscore his penchant for sticking with his “unorthodox” take on FX, rates and inflation (the latter is spiraling out of control).
Speaking in Istanbul, Erdogan appeared to parrot his traditional line about soaring inflation being the fault of high rates.
This. Is. So. Classic. Erdogan.
ERDOGAN VOWS TO BRING DOWN INTEREST RATES, INFLATION: AA
— Heisenberg Report (@heisenbergrpt) May 6, 2018
And then, in case the raging fire that is the Syrian civil war needed a little dash of kerosene, he was back talking about Afrin and “terrorists” (where “terrorists” always means “Kurds”).
and then right after that, he said he was gonna go on another Kurd huntin' expedition.
TURKEY TO START NEW CROSS-BORDER OPS TO CLEAR BORDERS: AA
— Heisenberg Report (@heisenbergrpt) May 6, 2018
I’m not sure any of that bodes well for the lira, which hit another record low on Friday before stabilizing. Here’s a short-term annotated chart that shows you how things have played out since the inflation data hit:
And here’s the chart that shows you how this has progressed since early elections were called:
Again, the question for EM more broadly is whether these are isolated, country-specific issues or whether they are a reflection of what’s going to happen as the Fed continues to hike. Clearly, every country has its own issues, but it seems like we may be seeing the beginning of an EM rout. Recall that Indonesian equities are in a downward spiral amid the rupiah’s woes:
It’s getting dicey out there:
And don’t forget Hong Kong, where capital flight concerns are front and center. “No one is suggesting that HKMA lacks the means to intervene to keep the currency within the band, but intervention implies reserve drainage, and prior reserve expansion was directly associated with a larger monetary base and a build-up in bank assets, and these in turn with a rally in commodity and equity prices,” Citi wrote in a recent note, adding that “it has been notable that even as aggressive intervention has brought the HK$ away from the weak end of its band, HIBOR has continued to rise”:
This all comes as the dollar is eyeing a fourth consecutive weekly gain:
All of this makes April CPI interesting. On Friday, payrolls and AHE missed, but the dollar’s brief dip was quickly bought, perhaps underscoring how difficult it’s going to be to put the brakes on the greenback short squeeze. Here’s BofAML:
This week, market focus will turn to U.S. CPI. Our economists expect another 0.2% m/m core CPI print on Thursday morning, unchanged from March. They anticipate core goods will see another slight decline, weighed down by apparel and autos. Though they look for positive prints in education and communication services. This should bring y/y core CPI up to 2.2% from 2.1% in March. PPI is also released this week, and we expect core to edge down slightly to 0.2% m/m.
“We estimate a 0.19% increase in April core CPI (mom sa), which would boost the year-over-year rate a tenth to 2.2% on a rounded basis, reflecting a slight pullback in apparel prices,” Goldman writes, while BNP notes that “expectations for April’s CPI report sync with the FOMC’s increasing confidence on the inflation outlook.” And that sync’s with the market’s perception that a total of four hikes is possible in 2018, which in turn is what’s weighing heavily on EM sentiment.
Obviously the risks to crude are to the upside ahead of the Iran deal announcement.
“It now seems more likely that the US will pull out of the agreement following the appointment of Iran hawks Pompeo and Bolton,” Barclays reminds you, adding that “the resumption of US sanctions could take 200-600kb/d of crude out of the market, but its effect depends on the definition of what products are under sanction, enforcement mechanisms, the implementation date, and Iran’s crude storage and blending decisions.”
Don’t expect the market to care about the details in the very near-term. Geopolitics have trumped (get it?) the rising dollar when it comes to crude and that seems likely to continue at least until there’s more clarity on what the relationship between Washington and Tehran is likely to be after this week. Here’s where we’re at:
On Sunday, Rouhani said the following live on Iranian state TV:
If America leaves the nuclear deal, this will entail historic regret for it.
Over the weekend, the Observer reported that Trump “hired an Israeli private intelligence agency to orchestrate a ‘dirty ops’ campaign against key individuals from the Obama administration who helped negotiate with Iran.” That news comes days after Netanyahu’s “Iran lied big time” presentation appeared to give Trump the pretext he needs. In an Op-Ed for The New York Times, U.K. Foreign Secretary Boris Johnson called a possible decision to abandon the deal “a mistake”.
Also on deck this week is the BoE, which is now almost certain to remain on hold, with a May hike having been steadily priced out and apparently deep-sixed by Q1 GDP, which showed the U.K. economy (basically) flatlining.
“We anticipate they will keep rates on hold, as a hike seems unlikely in the face of recent soft inflation and growth data,” BofAML wrote over the weekend, adding that they “still expect a hike later in the year given the BoE’s hawkish shift in February and penciled it in for November after the disappointing Q1 GDP print.” We’ll also get inflation data out of the U.K. this week.
There’s likely to be no shortage of banter regarding the failed trade talks with China. Trump turned a Saturday tax roundtable into another episode of David Dennison’s comedy hour and predictably, China was targeted. Here’s The New York Times:
President Trump kept China in his sights on Saturday, using a visit to the industrial Midwest to promote his hard-line trade tactics, while the White House rebuked the Chinese government for demanding that foreign airlines change how they refer to Taiwan.
“We’re going to have to rework trade with China,” he said to an enthusiastic crowd of about 600 in a theater here. “It can’t go on like that.”
Mr. Trump noted that a high-level trade delegation had just returned from meetings in Beijing, and that the administration would consider the next steps in what has become an increasingly bitter confrontation over steel tariffs and China’s theft of American intellectual property.
Just before he spoke, the White House issued a statement sharply criticizing the Chinese government for requiring United Airlines, American Airlines and other foreign carriers to refer to Taiwan, Hong Kong and Macau as part of China on their websites and in other materials.
Oh, and also over the weekend, KCNA accused the U.S. of “deliberately provoking North Korea” by suggesting that the denuclearization push was the product of Trump’s sanctions and threats.
So yeah, cue the mascot minefield meme…
Full calendar via BofAML
I do not understand why Herr H. has such a following in terms of comments on Seeking Alpha but they are so absent here?