EM Risks Bubble Over

Just as US-China trade talks move in reverse, a new EM crises moves forward. The worst day in the history for Argentine stocks, coupled with continuing protests in Hong Kong added to a risk off tone on Monday. Silver are gold are soaring at 17.50 and 1535 respectively. CFTC positioning data showed just how hated the pound has become as well as further stabilizing of sentiment in the euro. The Premium trade issued late Friday to exploit the bounce is now +400 pts in the green. US CPI is due next. 

Unease about China-US trade was the biggest factor in the round of risk aversion on Monday but some emerging market risks are beginning to catalyze. Argentina's primary elections ended in disaster for local markets. The vote is largely indicative, but showed that Peronists have a nearly insurmountable lead ahead of October elections. The Merval Index fell 38% in the biggest one-day drop on record, while the Peso fell 17%.  Argentina is ring-fenced from the global financial system and the contagion in neighbouring countries was modest, but it served as a stark reminder of political risk.

Protests in Hong Kong continue to draw massive numbers and on Monday they shut down the airport, which is the seventh-busiest in the world. Social media videos showed Chinese police conducting large-scale drills in neighbouring Shenzen. If Beijing intervenes, it will spark an international incident in what will be a test of China's power and resolve.

The resulting moves led to modest risk aversion in FX but larger moves in bonds. US 30-year bond yields fell 12.6 bps and touched a fresh low since 2016. Gold also hit a fresh six-year high.

Italy Politics back in Disarray

League leader Matteo Salvini is attempting to force a snap election and that would trigger memories of euro risks in past votes, but there are reasons to believe that this time is different. The ECB's bond buying has essentially sanitized political risk in the eurozone, at least on the fiscal side. Italian 10-year yields rose 30 basis points on Friday but hit just 1.80%. That's a distant cry from the +7% levels in the eurozone debt crisis. The tide is also slowly turning against austerity in the EU with Germany under pressure to spend as the economy stumbles.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -44K vs -53K prior GBP -102K vs -90K prior JPY +11K vs -4K prior CHF -16K vs -14K prior CAD +24K vs +21K prior AUD -55K vs -53K prior NZD -12K vs -17K prior

The net short in the pound is at the most-extreme since April 2017. At some point the pound will overshoot – and we might be there already as talk about USD parity becomes widespread – but there needs to be some kind of catalyst to spark a reversal and it's difficult to envision anything positive on the Brexit front. Yen and euro shorts are shifting as carry trades unwind.