Submitted by Michael Every of Rabobank

“You are a person with a snow-job; You got a fancy gotta go job; Where the cocaine decision that you make today; Will mean that millions somewhere else; Will do it your way”

- Frank Zappa, Cocaine Decisions

I feel GREAT AGAIN! Let’s start! Yeah, let’s start!! Start! Start! Where-to-start-where-to-start-where-to-start-where-to-start? OK, so…US tariffs on Mexico, which were due to kick in today at 5%, now won’t be happening. US President Trump has struck a deal with the Mexican president to force the latter to step up border security north and south to stop people and drugs flowing into the US, as well as to accept asylum-seekers back to Mexico, where their claims will now be processed. Claims Mexico will soon be buying lots more US farm produce from the US, which Trump also tweeted, do not appear to have been agreed by both sides, however. So it’s ‘Phew!’ – from the markets; ‘A glorious victory!’ - from those pro-Trump; ‘Nothing was achieved!’ - from those anti-Trump; and ‘There will be lots more of this ahead’ – from me.

Indeed, even though there are reports that Germany and its juicy auto sector will be next in line, it must surely be China. Even US Treasury Secretary Steven Mnu-China has come out to blame Beijing for the breakdown of trade talks, to say that he would be perfectly happy with imposition of higher US tariffs, and to counsel US CEOs that they need to look at diversifying their supply chains away from China. When you’ve lost Mnu-China, you really are in trouble, Mr Xi. Indeed, I hear more and more anecdotes of an avalanche of supply-chain disruption underway, particularly in the tech sector. That has huge implications for the Chinese economy – and currency. So how will China react? Escalate – yet that sounds like its own ‘cocaine decision’. For example, Beijing will be setting up a new agency to control the export of its technology. Really? It wants to ram 5G and 1984-style facial-recognition equipment down everyone’s throats, it won’t share AI and hypersonic missiles with anyone, and apart from that what has it got?

Let’s also see what China does with its ‘white lines’, where one million people all dressed in white hit the Hong Kong streets yesterday in a “final stand” against the passage of a China-backed extradition law seen as fatally undermining the One Country, Two Systems model. If Beijing backs off, it shows large street protests still work…and in the past the unelected authorities in Beijing have shown themselves oddly more sensitive to people in the street than the elected governments of some other countries; yet if Hong Kong’s administration presses ahead with the legislation anyway this Wednesday it shows they no longer care for local or world opinion. That could matter a lot. It won’t win many friends; foreign firms could leave Hong Kong for Singapore, where you won’t be at risk of ending up in the Chinese judicial system; and the US could remove recognition of Hong Kong’s special status. Were that to occur, Hong Kong would no longer be able to trade freely to the US….and how does the HKD peg to USD hold if there is no way for the city to earn USD?

“You are a person who is high class; You are a person not in my class; And the cocaine decision that you make today; Will mean nothing later on; When you get nose decay”

Meanwhile, in the UK the Tory Leadership campaign to replace now-caretaker PM May, former Justice Secretary Michael Gove has confessed he used cocaine 20 years ago. This was not a crime, but a “mistake”. OK, two decades is a long time ago,…but his pledge to get rid of VAT sounds suspiciously like the kind of idea one would come up with after a quick snort. By contrast front-runner Boris Johnson, whose hair always makes him look more like a glue-sniffer, is saying he won’t pay the GBP39bn Brexit bill if he doesn’t get what he wants. Oh, and another strong Tory leadership candidate Jeremy Hunt is arguing he will get the EU to reopen the Withdrawal Agreement. (I’m not sure what he’s smoking.) In short, whoever takes over government in the UK is set for an imminent ‘cocaine decision’ on Brexit.

“I get madder every day; Cause what you do 'n' what you say; Affects my life in such a way; I learn to hate it every minute! Cocaine decisions; Cocaine decisions

Then of course we come to Friday’s key data, where US payrolls came in at just 75K vs. 175K expected, with large downwards revisions to the previous few months data. In the market’s eyes the US economy is losing its buzz quickly. Indeed, three rate cuts are now priced in for the Fed this year. This puts me in the odd position of actually being a relative optimist: yes, the US is likely heading for a recession in 2020; but no, this one piece of notoriously-volatile, lagging data is unlikely to be its harbinger. Nonetheless, markets are pricing for the Fed to keep peddling more drugs to it – and the Fed, for their part, appear perfectly willing to play that role. As such, it’s surely just when, not if, we get more rate cuts, and then more QE. Bond yields are right to fall; but how do US equity markets (where cocaine has never and will never play any role, honest) ignore the fact that if the Fed is cutting it’s unlikely to mean good things for corporate earnings? Or don’t those matter any more than the fact that pushing more ultra-easy monetary policy destroys economic health and hurts tens of millions?.

“We must watch the stuff you make; You have let us eat the cake; While your accountants tell you Yes Yes Yes; You make EXPENSIVE UGLINESS (How do you do it? - let me guess . . .) Cocaine decisions; Cocaine decisions; Cocaine decisions”

As for USD, near-term there is going to be weakness, one would expect. However, like I said above, if the Fed is doing this, it’s for a reason, not out of charity; the Asian industrial economy is already in real trouble, for example. Let’s wait and see just how generous the Fed--under this US presidency--is with its rocket-fuel Eurodollar liquidity in the next downturn, most so to China. The risks still remain of that cross, and hence most EM FX, breaking bad.