What amazing employment numbers in the US! Economists had forecast a 225,000 increase in non-farm payrolls, a slight dip on the previous month, but we got a 321,000 increase, and the government made only a 2% contribution. When small and medium sized companies go on a hiring bonanza you know that things are good. If that wasn’t enough average hourly earnings (a number the Federal Reserve might be giving more weight to at the moment) rose faster than anticipated with a 0.4% increase, double the forecast and a substantial improvement on the 0.1% increase the month before. The State of the Union is strong indeed! US equities made new record highs, the US dollar achieved a 5 year peak, and treasury yields jumped. It becomes more and more difficult to imagine a rationale for the Federal Reserve to persist with its zero interest rate policy.


How different things are on the other side of the world. Here are a number of key negatives:


  • Chinese imports fell by the largest amount in 8 months, highlighting the weaker domestic demand conditions in the Middle Kingdom, likely as a result of the slowing real estate market


  • Japan experienced an even greater slowdown than we originally thought with GDP data revisions showing conditions are twice as bad as initially estimated. That sales tax increase in April has been a huge negative, and in light of this it’s hard to criticise Prime Minister Abe for wanting to delay any further sales tax hikes. But how do they plug the fiscal deficit? Up a smelly creek, and having to use their hands (or wishful thinking) to paddle…


  • In Europe we continue to see sluggish growth, albeit better than expected with an upward revision to the data. Meanwhile the central bank is having an internal battle between those who want to accelerate monetary stimulus and others who are sceptical about its effectiveness and indeed even its legality. Not such a strong Union there!


  • In Emerging Markets resource rich currencies are under severe pressure. The South African rand is as weak as it’s been since the peak of the global financial crisis in 2008; the Mexican peso has blown through key technical levels and looks set to test new lows in the months ahead; I’m almost bored telling you about the Russian rouble and Nigerian naira, but you should be in no doubt that they are in the accident and emergency ward as well; and that brings me to the Chinese yuan.. this is not a resource exposed currency, but it has weakened significantly today, I don’t know if this is the start of something but we need to pay attention. If this is a response to Japanese yen weakness we may all be in trouble. Currency wars benefit no one.



I don’t know how long risk markets can stay cheerful, but I’m guessing performance chasing equity portfolio managers could be in career saving mode right now. They could keep buying until the end of December, but here’s the thing.. if that is what is happening then we could be in for a nasty reversal at the start of January, it’s happened before. They’ll be buying to get a kick in performance to boost their calendar year performance, and they’ll stop as soon as the calendar year is over, leaving the markets to reverse as their marginal buying disappears. When those types of moves occur “experts” will pop out of the woodwork and assign “reasons” for the correction. Sometimes those prognostications create their own reality, and it could set off some disorderly activity in other markets. Please understand, this is entirely my conjecture, but we have seen similar scenarios in the past. What concerns me is that aggressive corrections might infect emerging markets and spark crises in countries which are probably already close to the brink.


Today is very light on the data front. We’ve already seen negative inflation in Switzerland, and disappointing retail sales, there’s not much else to see. We continue to remain constructive on the US dollar against most currencies. I’m a bit unclear about where the Japanese yen goes from here, the technicals suggest USD/JPY is in a very mature phase in its bull trend, and I continue to think the next significant move might be towards some yen appreciation, as I’ve said before trends need to rest occasionally in order to sustain in the longer term. For that reason I am more bearish about the prospects for the other major currencies in comparison with the yen, which doesn’t mean I don’t have grave concerns for Japan and its currency in the months ahead. The clear path over the next few days seems to me to be euro weakness. We shall see. As always we will tweet during the day if events merit it.