In the Global Week Ahead, NAFTA talks may become a big item. Our neighbor to the North is keenly focused on this. Read on.
Here’s a quote from Scotiabank’s FX team in Canada—
“We don’t think that a US-Mexico agreement that excludes Canada is a viable threat. The agreed upon 75% local content requirement for the auto sector would be unattainable for US plants that use a lot of Canadian content if Canada is excluded from the deal, and therefore the US and Mexico would need to renegotiate auto content requirements and by corollary perhaps the minimum wage tie-in.
“The NAFTA agreement requires Trump to deliver a notice of intent to withdraw six months in advance of possibly doing so. It appears that the President does not have sole authority to make the withdrawal call six months later. He may need Congressional approval to do so—and the new 2019 Congress, where the GOP may not have majorities in both houses, would be unlikely to provide it. So the most likely scenario after failure to reach agreement would likely be a prolonged state of purgatory as NAFTA 1.0 remains in place.”
Here is what the Canadians wrote on the U.S.-China tariff tit-for-tat…
“It is possible that China’s non-US trading partners will benefit from the spat and that China may well ‘win’ over the longer term. Premier Li guided this past week that he intends to cut import tariffs on broad imports again after having done so previously in July.
“The effect is likely to be two-fold. For one, it fits into the picture of China having its own ‘whatever it takes’ moment to coin the Mario Draghi phrase. China is acting to stabilize markets and ease policy and the country has among the greatest degrees of policy flexibility anywhere. Reducing import levies, which drops consumer prices, could well stimulate domestic consumption.”
Both Canada and China are going to game the midterms, in short.
Away from NAFTA talks, here are five big Reuters’ world market themes. These are likely to dominate thinking of investors and traders in the coming week. I put them in order of importance for equity markets.
They are all rate-related this week, as the Fed meeting brings focus to fixed income markets everywhere.
1. U.S Treasuries have broken 3.0%
U.S. Treasuries — and maybe financial markets across the world — are at a critical juncture.
The bond selloff is gathering pace, pushing 10-year yields above 3 percent to the highest since May and within sight of levels last seen in 2011.
Is this the breakout, the reversal of the 30-year bull market, that some people have spent years predicting? If 10-year yields break above 3.128 percent, that view will gain credence. There are still plenty of political, fundamental and relative valuation reasons for buying bonds. But once a market move picks up momentum, it can be hard to stop.
The 10-year Treasury yield matters because it is the rate against which trillions of dollars of borrowing around the world are referenced. It touches every market in the world.
But markets, curiously, are not paying as much attention as one would expect. Wall Street sailed to new highs in the past days, emerging market stocks are up four weeks out of the last five, and market volatility remains low. Even Treasury market volatility.
It could get more interesting in the coming week.
2. The Fed hikes and issues a presser
A rate hike at the U.S. Federal Reserve’s Sept. 25-26 policy meeting is all but certain — taking the rate to 2.00 percent-2.25 percent. And the odds have also increased for a December rise and more bumps up into 2019.
But market watchers have already turned their attention to the question of when to call the next economic downturn.
The traditional indicator is the yield curve inverting — in the United States this has been a pretty accurate predictor of recessions. However, another interesting sign could be read from the relationship between the fed funds rate and employment.
The fed funds rate has risen above the employment rate ahead of prior recessions - and the unemployment rate, currently 3.9 percent, is now near the lowest in 18 years.
So the fed funds rate and the employment rate are still a far bit apart. But they are inching closer and another hike will trim the gap a little bit more.
3. Mainland China may ease it reserve requirement ratios -- RRR
Much of the emerging market universe is in a rush to tighten monetary policy, but in China speculation is rife that authorities will ease reserve requirement ratios (RRR) again.
For one, the pattern of this year’s RRR cuts has been a quarterly one. Second the economy has been looking more sluggish. And finally, new U.S. tariffs of 10 percent on about $200 billion of Chinese products will kick in on Sept. 24, rising to 25 percent by year-end. China’s retaliatory tariffs on 5,207 U.S. products also enter into force in the coming week.
With trade wars set to take a toll on the economy, Chinese authorities, despite a campaign to curb risky financing, may have little choice but to provide support. Not via any grand stimulus plan, but through targeted measures, such as cutting RRRs.
The problem is that monetary easing will pressure the yuan, which is not far below the key 7-per-dollar level, the rate that in past years tended to inflame capital outflows. Those outflow fears are less than they used to be. But policymakers will still have to tread carefully.
4. Italian Debt
D-day looms for Italian government debt markets. Known as BTPs, the bonds are trading nervously before the Sept. 27 deadline for Italy’s coalition government to present details of its 2019 budget. Focus will be on the budget deficit, the cause of months of investor angst.
In one corner is economy minister Giovanni Tria. Unaffiliated to any party, Tria has assured markets he will keep the deficit below limits stipulated by the European Union — 3 percent of annual GDP. That pushed Italian risk premiums steadily lower over the summer — 10-year yields are more than 50 bps off end-May highs.
But Tria is up against coalition cohorts Luigi Di Maio and Matteo Salvini, deputy prime ministers, who have become increasingly vocal in urging more spending to meet election promises.
The horse-trading has raised market volatility. But longer-term, a rules-busting budget that raises conflict with the EU, could trigger a credit ratings downgrade and foreign investor exodus. And all that could hit just as the ECB’s bond-buying program nears its end.
5. Did the Emerging Market tornado blow itself out?
Don’t say it too loudly, but the emerging market tornado might just have blown itself out. The principal reason is the dollar’s sudden loss of power, as well as China’s reassurance that yuan devaluation is not on the cards.
But the coming week could make or break the rebound — hinging on whether the Fed meeting ends up recharging the dollar or if Beijing’s retaliation to U.S. trade tariffs is harsher than it has signaled.
But there have been other changes, too — for instance Turkey’s whopping interest rate rise that stabilized the lira and signs of progress in Argentina’s talks over an IMF loan. Some prominent investors have also said the selloff might be overdone — many currencies are trading well below what could be considered fair value.
There is a blizzard of data from the likes of Brazil and India and plenty of central bank meetings too and it will be copper powerhouse Chile’s turn to lay out its budget.
Top Zacks Rank Stocks—
I noticed three Japanese stocks doing well this week. It’s been a crummy year for this country’s stock market. But is the bottom in?
Their Prime Minister is likely to be the longest serving one it that nation’s history. Political strength and stability brings benefits to markets.
With U.S. stocks trading at rich valuations, this is a non-US market to position some cash, and wait for that inevitable rotation to better value.
Softbank Corp STFBY: This is classed as a wireless non-US stock. Its market cap is $107B. The Zacks Value score is B.
Sony Corp (SNE - Free Report) : What Japanese stock list would be complete without this marque name? It’s a $75B market cap stock. The Zacks Value score is B.
Honda Motor (HMC - Free Report) : It’s a $55B market cap stock. I can’t imagine this group is not going to enter the electric and autonomous car race in a big way, in the coming years. The Zacks Value score is B.
Key Global Macro—
The IFO data out on Germany on Monday did not surprise. They were good.
The Fed won’t surprise this week either. They will deliver a 25 bps rate hike. But the presser could be interesting.
On Monday, the German IFO indexes came out. Business Climate went to 103.7 from 103.8, Current Conditions stayed at 106.4 after posting a 106.4 reading. Expectations declined a tick to 101.0 from 101.2.
The unemployment rate in Taiwan stayed low at 3.7%. No sign of U.S. China trade tensions, yet.
On Tuesday, Mexico’s proxy GDP comes out. Look for a rise to +2.3% y/y from +1.15%.
???U.S. consumer confidence numbers come out. It has been high at 133.4.
On Wednesday, the FOMC issues its rate decision. This will be the big stock catalyst this week. Look for a 25 bps rate hike to 2.25%.
U.S. new home sales should stay flat at 630K.
On Thursday, Germany’s HICP consumer inflation rate hits the tape. It is forecast at that rubicon +2.0% y/y.
A final reading for Q2 US GDP comes out. It could get to 4.5% from 4.2%.
U.S. initial claims look extremely low at 201K.
On Friday, the important Caixin manufacturing PMI comes out for China. It should be 50.2. Once again, just barely in expansion territory. That is managed data. If it hits lower than that, look for market to notice.
The HICP for all of the Eurozone comes out. It is 1.0% y/y now.
Brazil’s national unemployment rate hits, as an election campaign is underway. That should be 12.4%.
The Chicago PMI should be strong again. The last reading was hot at 63.6.