Risk aversion trade may be over, look again at Emerging Markets
(by Peter Rosenstreich)
Despite the current risk-averse environment, we suspect a lot of the hype is the result of a slow news cycle heading into the Easter holiday rather than geopolitical structural shifts.
We remain skeptical that Russia would truly escalate the situation to defend a regime that just used chemical weapons on its own citizens.
In regards to North Korea, the rhetoric sounds similar to past threats. However comments by The Global Times, an arm of the Chinese state-owned media, cautioned North Korea actions that would “threaten the security and stability of northeast China” would be met with force, indicating a new dimension of China involvement.
The current lull between key central banks rate decisions and the general lack of core drivers in financial markets has exacerbated the panic around today’s news flow. We would look to add Emerging Markets positions against safe havens USD and JPY in anticipation that next week will refocus on fundamental economic themes.
However, we would avoid South Korean Won as the currency has been under significant selling pressure and CDS are also on the rise. It has been noted that 15th April is former North Korea leader Kim II-sung's birthday, which carries additional risk of events.
We would avoid long Euro due to the upcoming French elections where uncertainty should drive the single currency lower. USDJPY 109.50/55 should provide an excellent entry point to capture our view.
On one hand we suspect that the current risk aversion trade is overdone and on the other, US economic data indicates a marginal repricing of Fed rate hikes.
March's small business indicators released yesterday remain elevated and the JOLTS report suggested additional tightness in the labor markets. US inflation expectations have also dropped to a four-month low and US treasury yields have fallen to their lowest level since the election of President Trump.
Yet yesterday, Fed members including John Williams still talked of three to four hikes in 2017, which suggests the current Fed Fund price is low.
Barring geopolitical escalation or a significant negative outcome of the French election, markets will need to increase Fed hike expectations and push USDJPY higher.
French Elections: GBP will provide protection if Le Pen wins
(by Peter Rosenstreich)
Another currency deeply affected by speculations has been the GBP, on which we remain pointedly constructive. First we suspect that the GBP will provide a level of protection from a surprise Marine Le Pen outcome in the French elections.
Secondly, inflation continues to pick up in the UK further adding to the debate over BoE monetary policy strategy.
While real-estate inflations has eased marginally (reflecting softer house price growth and weaker ONS data), it remains at a decent pace.
Yesterday's UK PPI data surprised to the upside as input prices rose 17.9% y/y. Headline CPI rose 0.4% falling from the elevated 0.7% but above the expected 0.3% (annual remained steady at 2.3%). Core CPI also fell to 1.8% from 2.0%.
Yet despite the easing, there is enough price pressure in the system to force the BoE to discuss a policy stance. Just the hint of tightening policy in the UK will keep GBP supported.