“I see a red door and want to paint it black” – Rolling Stones
In many ways, today is the key for understanding how the 2018 year will end. Not just because of retail spending in the US, but also because of the binary nature of the present market set up. Things are either black or red and there is no middle ground. The ability for investors to believe in the growth story overnight took a hit with European flash PMI reports, but facts about 4Q growth in Europe remaining soggy don’t matter. Nor does the meat of details about why German 3Q GDP was so weak. Economic facts matter far less than political reality today. The choices in Italy and UK over the path forward for a larger European Union are at risk – its black or red. Similarly, the US/China talks on trade will be set at the G20 next week as Xi and Trump meet, even as the US ratchets up a campaign against China’s Huawei Technologies. Either we see more tariffs and an extended trade war or we won’t. For the bulls, there are multiple keys – the goal for 2019 is that it will be less scary than 2018 with the policy divergence of the US and the rest of the world contained by a newfound dovish FOMC, that global growth rebounds and that EM capital flows return. For the bears, the US trade and Fed risks are joined by the UK and Italy threats to the EU – making the growth hiccup a stomach flu for the next year as 2019 transitions to a 2020 recession. Here are the key political stories driving this black Friday.
For the risk-on mood that started in Europe, you merely need to track the EUR. The weaker growth spurs hope that you have a less aggressive ECB. Markets are back to banking on central bank stabilizers for financial conditions. The US FOMC hopes are similarly turning, making the EUR/USD relationship central to understanding other markets.
