Last week was volatile as was the week before, with equities correcting like the credit spreads.
The true genesis of this slight correction is difficult to identify but from our point of view, it is due to:
- A classical correction after a sharp increase
- Earnings season was a bit below expectations in euro zone, with some specific risks that have awoken markets concerning assets overvaluation (Altice for instance),
- News flow coming from emerging markets is still bleak with significant specific risks and weaker Chinese data. Chinese bad news were expected, however it is still not good for the market
The U.S. inflation came out slightly above expectations with core inflation at 1.8% vs 1.7% expected, whereas headline inflation has been at 2% as expected. Retail sales are in line and real estate data is well oriented. In the meantime, fiscal reform passed its first milestone (the easiest one…) with a House vote. Therefore last week was constructive in the U.S.
Euro zone activity data continues to be decent (Zew – level of investors’ confidence, industrial production, German GDP…) with current account balance at the highest point ever and with Mr. Draghi increasingly confident about GDP growth over the next years.
Furthermore, data coming out of China was weaker with retail sales and industrial production below expectations. China is the only major area where economic surprises are negative (data coming out below market expectations).
Turkish state of affairs is not getting better with Mr. Erdogan criticizing publicly his central bank (admittedly, he has a long history on this). There is little chance that the latter will intervene in the short term, however it is in our eyes the only way to fight current market mistrust. The currency is cheap, but news flow is negative and should remain so at least until next inflation print early December. Thus we have cut the position.
NAFTA fifth round negotiation began last week. Nothing has leaked for now but there is no doubt that Mexican assets will be impacted this week one way or another.
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