Global Markets Update: Key Breaks For US Treasuries And Brazilian Real
Several key markets have seen massive technical breaks in the past two weeks. The most crucial break is that of the US 10-year Treasury, which on August 15 broke through short-term support around 2.70% – which now represents major resistance. Having previously anticipated a move to 2.75-3.00% by year-end, we would not be worried unless USTs move through 25-year trendline support at around 3.50%, as this would signal the end of the long-term secular downtrend in US interest rates.
Key Emerging Market (EM) currencies have sold off in line with this move in US yields, with the bellwether Brazilian real crashing through the BRL2.32/US$ level, closing in on massive support at BRL2.45/US$ – beyond which a move to BRL3.00/US$ would be on the cards.
Aided by heavy intervention, the BRL could take a breather, which could signal an easing of the relentless pressure on beleaguered currencies in EM, but the technicals suggest that upside will be limited.
Somewhat off the radar, the Canadian dollar has finally broken lower versus GBP and EUR. Against sterling, the move through CAD1.63/GBP ends three years of sideways trading, and the sky is the limit (a move to CAD1.80/GBP – last seen in 2009 – is a logical first target).
Below is a short extract from the beginning:
The shrinking differential between emerging and developed market growth continues to inform our global macro strategy. Our overall view is that while the US and eurozone are probably past the worst in their respective economic cycles, for emerging markets, the past decade of near-perfect conditions is over, and the next few years will prove to be much more challenging. This has major implications not just for global macro trends, but for our major asset class strategies, which include developed over emerging market equities, continued downside pressure on EM currencies, and higher interest rates in the developed world.
The key dynamic through which this is playing out in financial markets is the rise in real rates in the US. 10-year US Treasury yields have converged with nominal GDP growth for the first time since Q110, and the yield on 10-year Treasury Inflation Protected Securities nudged above the crucial 0% mark in June. These are signals that markets are increasingly pricing in a normalisation of economic growth, and mark a sharp reversal from the yield lows seen around the launch of QE3 in September 2012. So rather than focus on the potentially negative market impact of QE3 tapering (which we think is likely to come in September), we believe that this move higher in yields is a positive dynamic for the US - at least to the extent that optimism toward sustainable growth is rising.
For countries that have taken advantage of these unusually low yields for the past three years, the reversal of these conditions is negative. Low developed state yields have particularly helped emerging markets by keeping capital flows going to higher-yielding countries, encouraging credit growth and stimulating economic activity. The reverse of this is now happening. It is no coincidence that countries with the biggest external financing needs (India, Turkey, and South Africa, for example) have had the sharpest market corrections in recent months. Countries coupled to the Chinese growth story via commodities and direct trade are also in trouble, but we have warned about this risk for years. There are increasing risks that the market sell-off could morph into a full-blown economic crisis, though we are not quite at that stage yet, and the relatively low level of net external debt compared with other major historical crises suggests that the risks of full-blown sovereign crises are limited to a few basket cases. Further macro pain for EM is ahead, however, and we continue to see the differential in growth between developed states and emerging markets shrinking over the next two years.
This Week's Trivia Question
Last week, we asked, which late 20th and early 21st century Asian leader successfully ran for office in constituency number 666 in the late 1990s, before switching seats in subsequent elections? The answer is North Korea's late leader, Kim Jong Il. In case readers were puzzled by the term elections, North Korea does in fact hold nominal legislative elections every five years, but these are of the kind where voting is compulsory and there is only one candidate per district. It is unclear why Kim chose district 666 in 1998, but he later changed to 649 and thence 333.
This week, our question is about elderly leaders, in view of Zimbabwean President Robert Mugabe's inauguration for a further five-year term at the age of 89. Our question is, which European head of state was earlier this year re-elected to a second term, which, if completed, would take him to the same age as Mugabe would be in 2018? And which other southern African leader ruled his country until he was in his mid-90s, in the 1990s?