Week Ahead - Risk Events & Opps: Tax-reflation (sell EM), Tory Conf'ce (sell GBP), Catalonia

Week Ahead - Risk Events & Opportunities: Tax-reflation (sell EM), Tory Conf'ce (sell GBP), Catalonia, NFP, China RRR

It’s a big week for:

  • US tax: House of Reps may vote on 2018 budget resolution this week. Passage would be affirmative for tax reform momentum. I don’t anticipate resistance for this fast-tracked procedure – at least within the House. The Senate Budget Committee will mark-up their budget resolution this week (McCain likely to maintain preference for bipartisanship but he needs support – Collins?). Meanwhile, expect Trump criticism to intensify during/after his Puerto Rico visit (Mon-Tue).

  • UK Tory unity (?): Tory Party Conference (Sun-Wed) will be in full swing in Manchester. Watch interpretation on PM May’s opening speech (Sun). Chancellor of Exchequer Hammond speaks (Mon) but bulk of speakers come later (Tue): UK Home Sec Rudd/Trade Sec Fox/Brexit Sec Davis/Foreign Sec Boris Johnson. PM May concludes (Wed) as the EU Parliament votes on a non-binding Brexit resolution (Wed). On the monetary front, BOE’s Haldane speaks (Thu/Fri).

  • Spain/Catalan referendum: Monitor results and rhetoric from Sunday’s referendum. Best case for risk is that “No” wins. But it may not be as straightforward (Catalan govt could always say policing interfered with the vote). Worst case is a showdown for legitimacy between Barcelona and Madrid.

  • Global PMIs/US autos and NFP: Manufacturing PMIs will be out (Mon) in EZ, UK and US (ISM). Any signs of slower momentum in EZ would add to EUR pressure. For the US, auto sales (Tue) and NFP (Fri) will be watched, though may be ‘noisy’ post-Harvey/Irma.

  • G3 CB-speak: Kaplan (Mon), Yellen (Wed), ECB Conference/Minutes (Thu, Praet/Ceoure), BOE Haldane (Thu), Fed Harker/George/Williams (Thu), Haldane (Fri).

  • Japan: Q3 Tankan is out (Mon, likely positive for Abenomics credibility), but watch verbal sparring from from Ms Koiko and her enlarged Party of Hope.

  • EM: Argentina tax revenue (Mon), Turkey CPI (Tue), Brazil IP (Tue), India RBI MPC (Wed), Poland NBP MPC (Wed), Philippines CPI (Thu), Colombia CPI (Thu), Brazil CPI IPCA (Fri).

  • Holidays: China is out (Mon-Thu) as are India (Mon), HK (Mon/Thu), Korea (Mon-Thu).

This week’s themes/trade ideas:

  • Reflation #1 – US: Keep with the reflation theme (stronger USD, elevated UST 10s, generally higher US equities) as the number-crunching/debating continue (watch Sunday morning talk shows). The risk to this view is that we see signs of inflexibility from key GOP senators (watch McCain), Freedom Caucus (thus far, they’re on board with the framework) or if Trump faces fallout for Puerto Rico. Chair Yellen succession chatter (tbd in 2wks) is also positive for reflation momentum.

  • Trade ideas: Long highly-taxed US corporates, Sell UST 10s on dips <2.30%, Long USD vs GBP and EMFX.

  • Reflation #2 – EM: I currently prefer to express US-led reflation via EM assets – rather than DM – given scope for catch-up. EM equities, FX and FI are likely to extend last week’s losses.

  • Trade ideas: Turkey TRY (before CPI on Tue), Pakistan KSE (before Mattis Afghanistan testimony on Tue), India Sensex (before risk of less dovish RBI on Wed). Balance these equity shorts with a strategic – and idiosyncratic – long on Argentina Merval.

  • Catalonian aftermath: Violence, mass arrests and the possibility of an independence declaration may weigh on Spanish assets.

  • Trades ideas: Wider Spain-Bund spreads. Explore shorting Barcelona-based Spanish corps or banks (eg La Caixa – Spain’s third largest). Ibex and Dax may underperform CAC/MIB.

  • Brexit – mixed messages: Any doubts over a unified Tory Brexit plan (or especially on PM May’s tenure) would be negative for GBP (or at least stall recent gains).

  • Trade ideas: EU is in a weaker bargaining position until a working coalition emerges out of Berlin, so prefer to short cable (vs USD) rather than GBP-EUR. BOE hawkishness is a risk to this trade, but much is priced in.

  • China policy: China is on Golden Week holidays till Friday, but markets are likely to read the latest round of PMIs coupled with the this weekend’s targeted RRR cut as a positive for the China risk complex and only reinforces a perceived “Party Congress Put” before the big meeting in a couple weeks.

  • Trade ideas: Long industrial metals, AUD (tactical, prefer RV vs NZD), Shcomp.

[More risk events & opportunities in Calendar]