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Stone's Weekly Market Guide - Week of September 2, 2018

Chart of the Week: Some emerging market (EM) countries with weaker fundamentals continue to experience stress as reflected in the depreciation of their currencies. Turkey (TRY), Argentina (ARS), Indonesia (IDR) and South Africa (ZAR) saw their currencies fall against the US dollar last week and year-to-date as shown. Argentina raised their short-term interest rate to 60% from 45% last week to (unsuccessfully so far) defend the peso. The IMF is meeting with Argentina this week regarding their loan request. Other EM countries like Brazil and India remain vulnerable as well. While the global backdrop remains supportive of risk assets, EM stress seems likely to add to volatility in the global markets.

Selected EM FX YTD - Source:Bloomberg, Stone Investment Partners

A table of some fundamental measures for various EM countries is shown below. I showed the 4 countries with the largest current account deficits in my FX chart, but certainly other countries are feeling some amount of financial stress.

EM Fundamentals - Source:Strategas Research Partners

Our high frequency financial stress indicators for Turkey have really shown no improvement and most aren't far from peak levels. In addition to the currency exchange rate, the cost to insure against default (CDS) and 10 year government bond yields (IESM10Y) are shown.

Turkey Daily Financial Stress Indicators - Source:Bloomberg, Stone Investment Partners

Geopolitical: Markets will continue to watch for additional trade news as usual. Last week started with the positive news of a bilateral NAFTA trade deal with Mexico. The week ended without a deal with Canada, but negotiations will continue this week. The U.S. also indicated that tariffs on an additional $200 billion in Chinese goods will begin this Thursday with China likely to retaliate in kind.


U.S.: Despite the holiday shortened week, it is a busy one with the August monthly payroll report being the highlight. Another month of strong job growth is expected and details like average hourly earnings will be watched for signs of inflation pressures. August ISM manufacturing and non-manufacturing reports should continue to reflect a strong economy though losing some momentum from the 4.2% GDP growth in 2Q. 3Q GDP estimates from the Atlanta and NY Fed are 4.08% and 1.98%.


Europe: The Eurozone reports the final reading on 2Q GDP and German July factory orders are expected to rebound. U.K. August PMI for manufacturing reported at 52.8 with construction and services to come.


Asia: Japan saw August vehicle sales fall -0.2% Y/Y with the services PMI reading coming Tuesday. August Caixin PMI data from China at 50.6 didn’t confirm the improvement shown in the official PMI, but still held relatively steady. Chinese trade data will also be watched given the current trade environment.


The central banks of Kazakhstan, Australia, Chile, Malaysia, Canada, Poland, Sweden, Serbia and Ukraine meet with all expected to hold their policy rates steady.

Despite no trade agreement with Canada last week, the S&P 500 set an all-time closing high on Wednesday and held onto a gain of 0.93% for the week. Technology and consumer discretionary led the gains with price momentum continuing to outperform. Despite higher oil prices and only a slight decline in the general energy sector, MLPs were particularly weak at -3.5%. The 10-year U.S. Treasury yield fell to 2.86%.


Both developed international and emerging market stock indexes were higher. Japanese stocks were strong, while Europe was lower. ETFs tracking EM stocks were lower which probably better reflects the reality of the week given the stresses in EM. Since there are differences in the times that markets are open for trading, ETFs are a better indicator as to the true market performance of EM stocks in my view. There are other factors as to why the returns differ, but I prefer market prices as a signal. The indexes remain useful as they help us note that the U.S. dollar was generally stronger against EM currencies which should not be a surprise given our Chart of the Week. Disclosure: the author owns VWO.

EM Index and ETF Returns - Source:Bloomberg, Stone Investment Partners

The 10-2 yield curve steepened after hitting a new post-Great recession low during the prior week and ended at 23.3 basis points, and our improved measure of 3 month 6 quarters forward – 3 month narrowed to 69.1 basis points. Please see our past post for our analysis of the economic and financial market implications.


US 10 - 2 Year Yield - Source:Bloomberg, Stone Investment Partners

US 3Mo6QtrsFwd - 3Mo Yield - Source:Bloomberg, Stone Investment Partners

The PDF version of Stone's Weekly Market Guide is linked here.

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