2 to 8 October: Tour de Force

From the end of the financial crisis until the beginning of this year, the US economy sat at the front of the global growth peloton. Team America were the first, most aggressive and most coordinated in adopting performance enhancing fiscal, regulatory and monetary stimulus and this led to an outperformance of its currency and equity markets. This year, however, global peers have threatened a break-away; performance across European and Emerging economies has improved and US numbers have disappointed given Trump’s inability to consummate reform and gradual FED tightening.

However, there has been jostling for position over the past few weeks:

• At the end of September, FED minutes and speeches reiterated the desire to raise rates in December. This pushed Treasury yields and the USD higher and prompted the largest weekly outflow from emerging markets since the Presidential inauguration (USD 1.8bn from equities and USD 1bn from bonds in the last week of the month).
• There were signs of a US “second wind”, with blowout employment and PMI data sending the USD higher. However, as we cover below, there was a large weather-related distortion and we continue to characterise the US as later cycle.
• Emerging market data releases (for example China’s official NBS PMI rising to its highest level of 2017 and positive surprises from Brazilian vehicle sales) continued to be robust suggesting strong (and in the case of Latin America) improving momentum. This prompted a quick (positive) reversal in equity markets.
• Politics threatened to puncture the outlook in Spain (Catalonian independence) and the UK (Brexit and questionable leadership from Theresa May).

For now, the net result is a continued push higher; the MSCI All Country World equity index hit an all-time high and the VIX volatility index hit an all-time low last week.

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