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Time to dust off the ‘hawkish cut’ outlook – September FOMC to lift the USD

  
  Analysis
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Morgan Stanley expect the sept September meeting of the Federal Open Market Committee to cut

  • by 25bp
  • But the dot plot published alongside is unlikely to show more rate cuts for the balance of 2019 and into next
  • expects confusing dots reflecting diversity of views on the committee
More:
  • ” …. FOMC materials are likely to be insufficiently dovish to meet the market’s lofty expectations”
  • “USD is likely to outperform on the day, particularly against risk-sensitive currencies like high-yielding EM FX and the dollar bloc” 

Big German banks warn against further rate cuts (expected from the ECB this week)

  
  Analysis
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Both Deutsche and Commerzbank Banks have weighed in against forecast further cuts from the European Central Bank this week:

  • would benefit those with assets
  • further burdening savers.
  • neither sustainable, nor responsible
The central bank is expected to cut as [part of measure to support the Eurozone economy. As an example of the slowing of the EZ economy was the data from Germany last week:
  • Germany July industrial production -0.6% vs +0.4% m/m expected
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European Central Bank policy meeting is on September 12,
Its an amusement to debate who wins, who loses, and what the ECB should of should not do. Nothing wrong with that. Its also of more direct to use to traders to debate will the ECB will or will not do. I’ll have previews of what to expect upon approach to the meeting, but for now, here is something for EUR bulls and bears:
  • EUR/USD to stay weak, ECB next week
  • Risk for EUR is positive for next week’s ECB meeting – BAML
Both Deutsche and Commerzbank Banks have weighed in against forecast further cuts from the European Central Bank this week:

Brexit becomes a Dog’s Breakfast as Dollar’s Correction Continues

  
  Analysis
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The Dollar Index fell the most in three months yesterday and is experiencing mild follow-through selling today.  With hopes that Hong Kong has turned a corner, news that in-person US-China talks will resume next month, and a no-deal Brexit is well on the way to being averted, investor risk appetites are robust today.  Global equities are higher as are benchmark yields, while gold is being pushed back below $1550.  Most Asia Pacific equities advanced, though India and Malaysia were exceptions and Hong Kong saw a bout of profit-taking after yesterday’s surge.  In Europe, the Dow Jones Stoxx 600 is advancing for the third consecutive session and the fifth in six sessions to trade at one-month highs.  The S&P 500 has been crisscrossed the 2820-2950 range several times in recent weeks and is poised to gap above the top today.  Interest rates are backing up, and the 10-year yields are 3-5 bp higher.  The dollar is edging lower against most major and emerging market currencies.  Among the majors, the yen and the Swiss franc are experiencing minor losses, while among the emerging markets, the Turkish lira is off about 0.25%.  The lira may snap a three-day, five percent advance as Prime Minister Erdogan weighs in again on the need for aggressive rate cuts to ambitious growth hopes.
Asia Pacific
 
The PBOC’s dollar reference rate has been extremely stable in around CNY7.0850, and it is the market that blinked first.  The dollar’s broad pullback yesterday saw the model projections eased below CNY7.0940.  The onshore and offshore yuan has also converged near 7.1460. Chinese officials have been slower to roll-out additional stimulus than many observers have expected.  We had thought there was a good chance of a cut in reserve requirements over the summer.  Nevertheless, the State Council appears to be hinting of action soon, and a window of opportunity is seen before the October 1 national holiday.
With the latest round of tariffs and counter-tariffs in the US-China spat going into effect on the start of the month, securing face-to-face meetings proved difficult.  This had contributed to the pessimism.  However, now Chinese officials will come to the US next month, according to reports.   Still, the prospects of a deal are remote.  Trust between the two at a low ebb after two tariff truces were ended by the announcement of new action on Twitter, and China shows reluctance to change fundamental behaviors.  Separately, the US trade figures show that China was the third-largest buyer of US crude oil in June and July (buying 5.7 mln barrels and 7.1 mln barrels respectively).  South Korea was the largest buyer, followed by Canada.  China puts a 5% levy on US crude as of September 1.

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US Senators warns not to invest in Chinese companies

  
  Analysis
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U.S. senators have said a retirement fund for federal employees should not invest in China.

The Federal Retirement Thrift Investment Board plans to switch to an MSCI index with Chinese companies.
  • But the Senators say this would “expose nearly $50 billion in retirement assets of federal government employees, including members of the U.S. Armed Forces, to severe and undisclosed material risks” from corporate ties to the Chinese government.
All part of the trade war merry-go-round.

ECB monetary policy meeting today – preview of a live one – and where to for the EUR.

  
  Analysis
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The European Central Bank Governing Council will be dovish today, and may even cut the main rate.

  • 1145 GMT for the announcement
  • 1230 GMT is President Draghi’s press conference
  • Most expect the depo rate to remain on hold at -0.4%, although the probability of a cut (to 0.5%) is priced around 38% … which is not negligible …. this meeting is ‘live’.
Here’s a quick preview from TD:
  • The odds of a dovishly more proactive ECB look twice as high as those of a hawkish disappointment
  • The press conference is key to the ECB’s view on the rate floor, potential QE, low inflation expectations, and reinforcing a “symmetric” inflation target
And, on the euro:
  • With our base case fully priced and EUR weak, we see some scope upside if Draghi delivers as expected.
  • Dovish risks prevail, which could send EURUSD lower into fresh ranges. 
  • Next week’s FOMC may constrain follow-through.
European Central Bank dovish draghi

Barclays on the FOMC – 25bp cut in July, more to come by end of 2019

  
  Analysis
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Scanning through some of the late week info from via banks, this via Barclays, in brief:

  • Powell’s testimony was dovish, surprisingly so
  • Increases confidence on 25 bp cut to come this month
  • two more 25bp cuts to come by the end of the year
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No surprise from Barclays on the July forecast, this is consensus. A further 50bps to come by year end is a bit of an eyebrow raiser though.

Citi on the FOMC, 25 bp cut this month and another by year end

Citi see an increased downside risk for the US economy …. but acknowledge:
  • that view is clearly not shared by Chair Powell
  • July … a 25 basis point cut is likely to provoke two or more dissents, 25 basis points may be the compromise policy outcome
  • Following … one additional 25 basis point cut, most likely in September

Week ahead: US earnings, South Africa rates, EC president vote

  
  Analysis
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No summer hours here. Investors are bracing for a busy week as earnings season gets under way in America, in Europe parliament votes for a new president for the European Commission and on both sides of the Atlantic, investors face a deluge of economic data. Here’s what to watch in the coming days. US earnings Banks unofficially kick off second-quarter earnings season on Monday and investors will be tuning in to see whether corporate America is headed for its first earnings recession since 2016. Citigroup starts the earnings party on Monday and JPMorgan Chase, Goldman Sachs and Wells Fargo follow suit on Tuesday. Prospects of rate cuts by the Federal Reserve are unnerving investors that are watching to see if this could squeeze banks’ profit margins. My colleague Rob Armstrong has more in his excellent bank earnings curtain raiser. I

in all, nearly 60 companies in the S&P 500 are expected to report results including the big banks, Netflix, Microsoft, Schlumberger and Johnson & Johnson. US data Markets have largely pencilled in a cut by the Fed at its monetary policy meeting this month, though investors continue to debate how many cuts the central bank may push through this year and how deep the cuts will be. To get a better picture of the US economy and clues to Fed policymakers’ thinking, investors will closely parse a string of economic data for updates on consumer and industrial health. Americans are expected to have tightened their purse strings a little last month with headline retail sales expected to rise 0.2 per cent month-on-month, following a stronger 0.5 per cent increase in May. Control sales, which strip out volatile items like food, energy and building materials, are expected to rise 0.3 per cent. Investors will also tune into consumer sentiment data later in the week. Updates on the industrial sector come via regional manufacturing surveys as well as industrial production data, which is expected to show factory output cooled. The economic calendar also includes updates on the housing market. UK data

The economic calendar across the pond also promises to be busy with jobs data, inflation and retail sales on the docket. As markets consider the possibility of a rate cut by the Bank of England, “next week’s raft of UK data are likely to give ammunition to both sides of the argument,” noted economists at ING. While wages are expected to tick back up, they said “the high street isn’t feeling the benefit of this modest improvement in real wage growth”. However, they added: “With Brexit noise only likely to increase over the coming months, and a risk that trade tensions could worsen, we think the Bank of England will keep rates on hold for the rest of the year.”

EU Commission president On Tuesday the European Parliament votes on the next EU Commission president. Ursula von der Leyen has promised parliament a bigger say in Brussels’ decision-making as she seeks MEPs for the top post in Brussels for the next five years. “A successful vote will be largely ignored by markets, but a failure to garner enough support (which is still a possibility) could blow up the entire deal that the Council reached earlier this month, though we do think that Ms [Christine] Lagarde’s ECB nomination will be safe either way,” said strategists at TD Securities. South Africa rates On Thursday attention shifts to South Africa, where the reserve bank is widely expected to announce a 25 basis point cut to the repo rate, putting it at 6.5 per cent. Since the last SARB meeting in May, the monetary policy committee has undergone a massive transition. Strategists at TD Securities “think the message will be moderately dovish, suggesting potentially more easing,” and expect “slightly positive” reaction in the rand as they argue markets have “priced for more easing than we expect”.

US nonfarm payroll data – scenarios for the Federal Reserve’s FOMC interest rate decision

  
  Analysis
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ABN AMRO look at the implications for the next Federal Open Market Committee interest rate decision (meeting is on 30-31 July). ABN AMRO set the stage for Friday’s data:
  • Markets will be particularly sensitive to incoming data as we approach (the FOMC)
  • The key question for markets remains whether the Fed will cut 25bp or 50bp, rather than whether they will cut at all
  • a 25bp cut is fully priced by OIS forwards
  • a 50bp cut is 2/3 priced
The bank expects +175K, which is above consensus (160K), citing
  • the May number was a very weak +75k (the Jan-April average was +195k). 
  • … likelihood of some payback for the May weakness
OK, for Fed implications (bolding mine):
  • June nonfarm payrolls will therefore attract even more attention than usual
  • A somewhat weak print (120-150k) would not have a significant market impact, but if we were to see another sub-100k reading, markets would likely take it to mean a higher likelihood of a 50bp rate cut, at least as a kneejerk reaction
  • For the Fed, we doubt such a figure would be enough by itself to lead to a 50bp cut, and so we suspect such a market reaction would not last (by the same turn, we doubt a strong print would derail cuts).
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Hmmm. I reckon if its a sub 100K ABN AMRO might be surprised at the intensity of the market reaction. It would heighten the 50bp expectation again and see a lower USD in a  thinly trading (post July 4 US holiday) market.

Book Review :Risk Management in Trading -by Davis Edwards

  
  Education
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It is a commonplace that risk management is critical to trading success. What constitutes good risk management, however, is anything but commonplace knowledge. Was VaR the number that killed us, as Pablo Triana claimed, or is it a useful, perhaps even indispensable, tool? Should risk management teams have their separate turf or should they be integrated with the trading desks? And what do you have to know to be a risk manager?
Davis W. Edwards addresses all of these questions, with particular emphasis on the third, in Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks (Wiley, 2014). The book is a useful self-study guide for those who aspire to become risk managers; each chapter ends with a set of questions to test the reader’s knowledge, and there is an answer key at the back of the book. It also goes a long way toward satisfying the curiosity of those who want to know just what it is that risk managers really do. It does not, however, directly address the concerns of the individual trader who wants to incorporate sound risk management principles into his business model.
After three preliminary chapters (on trading and hedge funds, financial markets, and financial mathematics) Edwards gets to the heart of the matter. He discusses backtesting and trade forensics; mark-to-market accounting; value-at-risk; hedging; options, Greeks, and non-linear risks; and credit value adjustments (CVA).
To give you a better sense of the level of the book—and so you can test your own skills—here are a few questions from the quizzes.

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Cold Truth About Emotional Investing

  
  Education
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Consider an excerpt:

WSJ: What do you mean by emotional finance?

PROF. TUCKETT: What we try to do in emotional finance is start with the fact that the future is unknowable. The key thing about uncertainty is that it inevitably generates feelings. Because it matters to you, because your money’s on the line, so to speak, you’re bound to feel emotionally engaged.

WSJ: Some people think pros are more rational than individual investors.

PROF. TAFFLER: Although most of the fund managers we interviewed saw part of their particular competitive advantage as remaining, as they described it, unemotional or rational, in practice they were just as emotional as anyone else when they started to talk about the stocks they had invested in. There were lots of examples where they referred to them almost as if they were lovers.

If you’re entering into an emotional relationship with a stock, an asset or a company that can let you down, this leads to anxiety, which is often not consciously acknowledged. But it’s there, bubbling beneath the surface.

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