Global Stock Indices
All emerging markets. Argentina up on good politics. China breaking out through strong resistance. Europe down on strong euro. India stalls at resistance as RBI warns of a potential stock market bubble. We are buyers for the long term in Indian stocks on weakness.
The Reserve Bank of India said that there are evidences of a bubble building up in Indian stock prices based on an econometric model, but there is no bubble yet since the current stock rally is driven by strong fundamentals, it said in its Annual Report. – Economic Times, August 31
Global Bond Indices
Surprising rally in bonds almost across the world. Global economic recovery picking up and industrial metals rocking. The Great Distortion of the global markets continue anchored in the belief real rates and inflation can stay low forever. U.S. yield curve 15 bps flatter. Waiting for quantitative tightening to begin in the U.S. in September.
Credit spreads widen a bit with the pick up in stock volatility.
The dollar index tested and broke for a few minutes the 92 level. Bear trap? As we said during the week, Draghi is going to have trouble swallowing a 1.20 euro/$. On cue, the ECB came out dovish last night to talk down the currency.
“The exchange rate has become a bigger issue,” one of the sources told Reuters. “It is now less favorable for an exit and a stronger argument for a muddle-through option.” – Reuters
EM currencies strong.
Look at China. That is a big move, probably due to restrictions on capital outflows and tight monetary conditions, in part, a bit of politics to assuage the Trump administration, but mainly an effort to limit and reverse capital flight.
Industrial metals rocking with better China and strengthening global recovery. Crude oil could not hold $50 and now getting hit on refinery shut ins due to Hurricane Harvey. Corn and wheat under pressure since the U.S. Department of Agriculture forecast a larger-than-expected domestic harvest on Aug. 10.
Other Risk Indicators
Biotech finished month strong on the back of Gilead’s move into CAR-T treatment with the acquisition of Kite Pharma. Retailgeddon continues as Amazon marches on, though some recovery at month end. Energy can’t get off the mat and the commoidty remians range bound.
What Is On Our Radar
We expect risk to remain in beast mode, with a pick up in volatility, through most of September until the Fed announces quantitative tightening (QT), which is a game changer, even though it is not new news. Still looking for a nice sell off in October, but no bear market until higher policy rates and double-digit percent shrinkages in Fed and ECB balance sheets. ECB and strengthening euro a wild card.