David Roberts

Trio of concerns start to bite

David Roberts

We have written over recent weeks that, in a world where much seems right – at least in terms of markets – there are three reasons to be nervous: trade tariffs, the end of quantitative easing (QE) and concern about debt downgrades in Italy.

With August drawing to a close and many people returning from holidays, these appear to be biting: markets are getting jittery and volatility is spiking, with weak emerging markets (EMs) a symptom of poor trade policy and tightening monetary policy. In light of our three concerns, our funds currently have no EM, no Italy and we are reining back credit risk.

On the QE front, as easy money is withdrawn from the system, traditional dollar borrowers are coming under pressure and EMs are in the crosshairs. Amid Turkey’s current troubles, the country’s central bank deputy governor Erkan Kilimci is leaving his role and the currency has fallen back to within 5% of its all-time low. In Argentina meanwhile, the country has raised rates from 45% to 60% in an attempt to defend the peso.

This combination has spooked all EMs and we are happy to remain zero weighted, particularly with a new set of tweets from President Trump suggesting $200bn of new tariffs on Chinese goods weighing further on sentiment. US markets, which had largely ignored EM weakness to that point, dropped on this China chat.

Elsewhere, we may see further ratings agency action on Italian debt, of the “not good” kind – and although the country’s 10-year bonds now yield well over 3%, that is something else we are happy to avoid.

Overall, next week looks crucial to determine short-term direction: markets look expensive, a correction is overdue and I for one would welcome that.


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Friday, August 31, 2018, 3:05 PM