Emerging Markets

Once again, let's start with emerging economies, many of which continue to reel from the impact of Donald Trump's presidential victory. In a number of markets, the situation resembles the "taper tantrum" of 2013, after Ben Bernanke hinted at the conclusion of QE3.

1. The sharp correction in several currencies prompted some central banks to intervene (or threaten to intervene). Here is Bank Indonesia propping up the rupiah.

Singapore's central bank pledged to contain the currency "volatility."

Moreover, India's state banks bought the rupee on behalf of the RBI.

Here is the JPMorganEmerging Market Currency Index.

2. Sovereign credit default swap rates, while still quite low relative to recent years, are on the rise. Here is Malaysia.

South Korea is dealing with the added uncertainty of worsening domestic political scandal.

Source: @WSJ; Read full article

Even China's CDS spread has widened.

3. Yields are rising globally, with the more vulnerable emerging economies hit the hardest. For example, Indonesia's bond yields saw one of the largest 2-day increases in years.

Here are Mexican and Ukrainian bond yields - both rising as a direct result of the elections outcome in the US.
 

 

4. Emerging markets shares are tumbling as capital flows out. The chart below shows the relative performance of the MSCI Emerging Markets Index vs. the MSCI World Index.

Below we have the Dubai stock market (the Gulf markets took a hit this on Saturday) followed by the Philippine market index. It will be interesting to see how Donald Trump interacts with Rodrigo Duterte.

 

5. It doesn't help matters when some of the economic data from emerging economies remain subpar. Here are Brazil's retail sales and Mexican industrial production.

Source: Goldman Sachs, @joshdigga

6. As discussed before, a few markets are bucking the trend.

• Egypt's stock market is up 12 days in a row in response to the nation's currency devaluation ("free-float").

• Venezuela's stock market is up 17 days in a row. Many are using shares the as a way to "hide" from the bolivar's rapid deterioration (second chart below shows the black market exchange rate).

 

Europe

1. The Polish zloty fell sharply against the euro (and the dollar) in response to Trump's victory. Closer US - Russia ties are viewed as a negative for Eastern and Central Europe. Poland's anti-EU rhetoric is not helping.
 

 

Source: Bloomberg.com; Read full article

2. European bonds are feeling the pressure of the global bond rout. Here is the price of the current German 30yr government bond.

3. Italian bond spreads to Germany continue to widen as the referendum approaches - raising political risks. The second chart below shows the spread between Spanish and Italian 10yr government bonds.

 

4. Investors who are focused entirely on the US are missing the trend in global inflation expectations. Below is the Eurozone forward inflation swap rate, a trend which could impact the ECB's policy trajectory.

Canada

1. The Canadian dollar continues to drift lower, falling below 74 US cents. 

2. Next, is a letter to the editor regarding NAFTA as it pertains to the US-Canada trade.

The "proportionality clause" in NAFTA was the key item that the US got in first free trade agreement: energy security provided by guaranteed Canadian oil. If Trump wants to reopen NAFTA, go for it ... many in Canada are waiting. 

The free trade agreement also wiped out Canada's manufacturing - what happened to the States during the last decade happened in Canada in the late 80's and early 90's. Many feel that Canada got the short end of the stick.
James

Here is a quick overview of the Proportionality clause in NAFTA.

plea.org: - ... the "proportionality clause" states that Canada is obligated to make a certain proportion of the total supply of certain goods, for example, oil and gas, available for sale to the United States. The proportionality clause means that under NAFTA, Canada would have to provide oil and gas to the United States even if Canada is unable to meet its own energy requirements. ... Canada agreed to the proportionality clause to ensure that there would be a constant market for our oil and gas. The agreement was signed at a time when there was no real perceived threat to the limited availability of such resources.

This provision dictates that Canada cannot institute policies that would encourage conservation of petroleum supplies for future generations of Canadians. It also affects the ability of Canada to reduce greenhouse gas emissions because a certain level of production must be maintained to meet our needs and the proportion that must be made available to the United States. Furthermore, the ability to divert oil products to the eastern provinces from the western oil patch is affected. At present, the eastern provinces rely on oil imported largely from OPEC companies.

The United States

1. With the bond markets closed on Friday, let's take a look at what the inflation swap market is telling us about CPI expectations.

2. US consumers have also upgraded their views on price increases. Inflation expectations remain low, but they no longer seem to be falling.

3. Treasury ETFs fell further on Friday. 

4. The US dollar continues to grind higher.

5. Finally, here is a hint at where financial regulation in the US could be heading.

Source: @WSJ, h/t ‏@DiMartinoBooth; Read full article

Commodities

1. Precious metals got pummelled on Friday as the dollar and longer-term bond yields continue to rise.

 

2. The year-to-date industrial metals rally has been spectacular.

Source: Goldman Sachs, @joshdigga

Is the rally overdone? This next chart shows speculative metals holdings, combining positions in the US and the UK. The unwind could get ugly.

Source: Goldman Sachs, @joshdigga

3. Related to the above, iron ore futures in China have been up for seven days in a row.

4. As discussed numerous times before, it was only a matter of time before oil production begins to turn higher in the US (albeit very gradually). Well, here we go.

Source: EIA

At the same time, oil inventories in the US have risen faster than expected.

Given the above trends and with a fossil-fuel-friendly administration about to take the helm in the US (and the dollar grinding higher), oil prices have declined. 

Will OPEC pull off a surprise production cut? As the OPEC discussions continue, Iran is accelerating output.

Source: Bloomberg.com; Read full article

Credit

US corporate high yield has taken the worst hit since February on rising yields around the world and softer oil prices.

Equities

Finally, Donald Trump's victory sent US gun manufacturers' shares reeling. With the risk of "them takin' our guns away" significantly reduced, demand for guns is expected to decline. 

Food for Thought

1. Let's begin with the following infographic showing how difficult it will be to modify existing trade agreements given the complex supply chain.

Source: @NickTimiraos, @Tmp_Research; Read full article
2. Here is why Republicans are calling for a corporate tax cut in the US. While the effective tax rate for the largest US corporations is lower than what the chart shows, it's the middle-sized firms that get hurt the most by these high taxes.

3. Working hours needed to escape poverty for the lowest 10% earners.

Source: @ftdata, @Tmp_Research; Read full article

4. Nations with the highest GDP growth tend to favor global trade.

Source: @FactTank, @Schuldensuehner, @DeanDijour
5. Police injuries in the United States. 

Source: @WSJecon, @Tmp_Research; Read full article

6. Percentage of Americans who are military veterans.

Source: @FactTank, @Tmp_Research; Read full article
7. Americans holding more than one job. So much for the "gig economy" concept.

Source: @resfoundation, @TorstenBell, @Tmp_Research
8. The S&P500 performance by President (since Hoover). 

Source: @WSJ, @paul1kirby, @Tmp_Research