Fed won’t hike today

As US election risk fades, so does risk aversion. However, the risk rally has been weak. High beta, trade sensitive emerging market currencies INR, ZAR, TRY and CLP have seen heavy buying in the past week. Markets are pricing in a South African rate hike in November due to rising inflation, giving ZAR an extra boost. Traders remain cautions of the current rally, doubting the fundamentals. Markets are preaching the goldilocks conditions: President Trump will balance out fiscal and monetary easing. Heading into 2019, event risks are low and global growth slowdown is already priced in. Equity markets should further improve and USD weaken.

Today’s meeting of the US Federal Reserve Bank is likely to keep interest rates on hold in the current target range of 2.00-2.25%. Given this and that no press conference is scheduled, market reaction will be limited. In Europe, the European Commission will provide economic forecasts showing Italy’s 2019 deficit to be higher than estimates from the government in Rome. Switzerland’s unemployment fell to 2.4%, which is nearly full capacity: this is likely to trigger inflation. If Trump goes positive on trade in the second half of his presidency, Swiss growth would accelerate, potentially forcing the Swiss National Bank to hike earlier than expected (current expectation: 4-6 months after the European Central Bank’s first hike in September 2019).

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China equities will bounce bank

China is ideally positioned, but needs improvement on US trade tensions to stage a solid recovery. We continue to position for a strong China equity bounce.

China’s inflation has weakened slightly to 2.4% yearly in October from 2.5% in Sept due to weaker food prices. The net effect of tariffs is uncertain. China’s export growth (in USD) rose further from 14.5% yearly in September to 15.6% in October, beating expectations. China’s exports to the US fell to 13.2% annualised in October from 14% in Sept (12.9% in Q3). The 10% additional tariff on USD 200 billion of Chinese goods kicked in only on 24 September.

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