E Markets: Margin

On the margin, mood for risk-taking is better today. Some see this stability as emanating from the CNY holding a dull range (fixed at the best level in 3-weeks) and not rocketing through 7 despite weaker equities and lower rates. Some see it in the benign Chinese PPI-CPI combination that supports margins that shows no real impact on inflation from the weaker CNY or trade tariffs. Others see risk coming back with the normalization of correlations, in the return of bonds offsetting stocks, as oil prices steady and as the FX markets return to real rate watching.  Overnight economic data clearly mattered – with NZD the winner in the G10 space up 0.35% - as CPI surprised to the upside but volatility didn’t follow.  

On the negative side, the EUR is lower barely, mostly thanks to the weaker German ZEW and ignoring the noise over the Italian budget law approval and the relief rally in BTPs. UK Brexit talks and deadlines loom but main focus remains on the politics after it all with GBP higher today but on the 2-day window stuck in a range. The markets are searching for some marginal good news in the US to support this rally back up in equities with no on particularly excited about trading.  For the money, CNY and NZD maybe the ones that matter but the mood for more noise is wrapped around the EUR with the risk of 1.14 still lingering over politics and budgets while 1.18 seems more a ceiling if we see it again soon. All that suggests trouble remains in store for those facing margin calls in equities. 

Question for the Day:Is it safe yet for EM? The relative calm in CNY and the benign reaction to PPI and CPI have helped to steady markets globally. The key question is whether this is sufficient to buy this dip. The WSJ has an interesting chart to consider as to why this time its different. Worth considering what factors have made 2018 so much worse than previous sell-offs and whether those factors have reversed here. 1) Rates in the US are still going up. 2) Trade issues are not yet resolved. 3) FX and other monetary policies aren’t fully in line in many EM countries. 4) Global growth for 2019 remains in doubt. This maybe the story that just won’t go away and so perhaps calm is not equal to safe.

What Happened?

  • New Zealand 3Q CPI up 0.9% q/q, 1.9% y/y after 0.4% q/q, 1.5% y/y – more than 0.7% q/q, 1.7% y/y expected. This was higher that the 0.5% q/q, 1.8% y/y forecast from the RBNZ as well. The RBNZ sectoral inflation model for 3Q was unchanged at 1.7% y/y. Tradable inflation rose 0.9% q/q while non-tradable 0.8% q/q.  

  • China September CPI up 0.7% m/m, 2.5% y/y from 2.3% y/y – as expected – highest since February. Food prices rose 3.6% y/y from 1.7% y/y, non-food rose 2.2% y/y after 2.5% y/y. Housing rose to 2.6% from 2.5%. Notable declines in health care 2.7% from 4.3%, and other articles/services 0.7% from 1.2%. Only food/tobacco/alcohol rose to 3% from 1.9% and transport/communications 2.8% from 2.7%. 
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