Linkage Friday: Another Bullish Voice on China, and Views of France's Labor Reform

Just thought I would dash off a few quick thoughts before we all throw in the towel for the weekend.

Macro: Wow...the horsewhipping of USD continues unabated, with some very big levels either getting taken out--1.20 in EUR, .81 in AUD, and CAD approaching 1.20. Not to be left out is the kiwi which is finally outperforming after getting kicked around for much of the metals-driven rally over the past three months. Looking at EUR crosses you see....nothing. This is more of the same--China demand, risk-on, reach for yield...welcome back, 2006.  We missed you.

If you are young enough that you weren't on a trading desk back then, well this is what it was like.

Interesting to note the strong bounce higher in yields after the gap overnight--I would guess more flow driven/profit taking at this point but no doubt the theme is intact. Stocks not quite the BTFD theme but notable there was absolutely zero follow through to the modest selloff earlier in the week.

I'm going to take the easy way out and post a few links to some insightful things I saw this week:

The WSJ had a great article on the "mystery", or "conundrum" if you go back to the Alan Greenspan days, of higher growth paired with stubbornly low inflation. I like how this one identifies what are really productivity gains--tech companies bringing new capital investment and business methods to staid industries that allow them to cut prices as they grow, rather than encouraging demand-push inflation.

This article, which was almost in response to the one above, goes into the Fed's thinking on the topic. I continue to be torn on if they will pull the trigger and hike in December--the easing of monetary conditions driven by the market moves above tilt me towards the "hike" camp but it won't take much more bad data or low inflation figures to give them an excuse to sit on their hands.

Getting back to the China issue, I'll again cite the folks over at BCA, who had this chart and commentary, which is supportive of the guys at China Beige Book that I mentioned earlier this week:

"China’s August macro data to be released in the coming weeks will likely surprise to the upside. Some market signals from global assets that are traditionally sensitive to Chinese growth trends have shown remarkable strength of late, likely signalling further upside in the Chinese business cycle. Metals prices have been firm across the board. Stock prices of metals producers in major producing countries have significantly outperformed their respective benchmarks, likely pointing to an imminent upturn in China's leading economic indicator. The Baltic Dry Index, the benchmark for bulk shipping rates that is largely driven by Chinese materials demand, has stayed elevated, probably a sign that China's bulk commodities intake has remained fairly robust. All of this still paints a bullish backdrop for global risk assets, despite the obvious geopolitical risk."

At this point, someone is going to have to tell me why this is going to stop...my facebook feed just popped up a "memory" from five years ago where a friend had posted an article called, "China's Mother of All Debt Bombs" and asked me my opinion. I said it would blow up sometime in the next 1 to 20 years. I'll chalk that up as the right call. 

Lastly a couple of links to The Two Pillars of French Labor Reform, and Macron's Labor Gambit at Project Syndicate. I think these, especially the second one, sum up the situation rightly--the reforms are big, in that they are being proposed in a political environment where they could actually pass...but they are small in that they are really incremental relative to how many other country's operate. They will only be successfully if they are the beginning of a reform movement, rather than Macron's political suicide. Only that will drive the resurrection of the "animal spirits" in France and drive profits and employment. 

As I mentioned earlier, I think that is worth taking a swing at French equities relative to other eur-based equity indices, although I must admit I am not knowledgeable enough on the components to know how the risks pair off. After all, I'm just a bond guy...I'll leave that to the equity pros...

   

Shawn
TeamMacroMan2@gmail.com
@EMInflationista