Risk-reload will boost Euro
Over the past few months, it seems that employment-growth has lost its importance, as the equity sell-off and stronger US yields encourage investors to take a more balanced allocation. Today’s announcement of non-farm-payrolls (NFPs) will be no exception, as investors continue to reload on risk. In the longer-term, we maintain our long EUR view.
The greenback spent most of October rallying, with the dollar index rising more than 2% from 95.13 to 97.12. Even though US economic came in soft, global risk-off sentiment encouraged investors to maintain long USD bias. Data were even disappointing: August’s final Durable Goods Orders came in at 4.4% monthly, down from 4.6% in the previous month. The measure bounced back in September, up 0.8% versus a -1.5% median forecast. September’s NFPs printed well below median forecast (134,000 versus 185,000 expected), while inflation eased to 2.33% annually from 2.7% in August. Retail sales tumbled in September, but an upside surprise in GDP, 3.5% versus 3.3% expected, cheered investors.
Game theory says buy China
The Hang Seng and Shanghai composite rose 4.21% and 2.70%, capping for a strong week. The surge is due to reports that US President Donald Trump is looking to reach an agreement with China’s President Xi Jinping about their trade dispute. We believe dealmaker Trump has over-played his hand. He has threatened tariffs on the balance of China’s USD 500 billion-plus exports to the USA and so painted himself in the corner. By executing the full tariff, he will have no more firepower to negotiate: any dealmaker knows this position is unacceptable. The high probability is that Trump and Xi will reach an agreement at the Argentina G20 Summit in late November. This will suit both presidents’ need for showmanship.
Given this expectation, we are positive on Chinese assets. Just a glimpse of a US-China trade agreement has driven traders back into BRL, ZAR, TRY and INR high beta/high rerate correlated currencies. The rapid returns based only on media headlines indicates how critical this issue has become.
