Markets React to Year-End Surprises

Market Liquidity

We are getting closer to year-end, when liquidity traditionally gets tighter, and this means that economic and political surprises might have a disproportionate impact on asset prices. We could see this effect yesterday after U.S. Federal Reserve (Fed) Chairman Powell’s presentation – which was not truly surprising substance-wise (given what was priced in by the Fed Funds Futures – a smaller 50bps hike in December), but which nevertheless spurred a sizable market rally. Today’s weaker than expected U.S. ISM survey¹ – including yet another decline in the prices paid index (to mere 43.0) – is consistent with the slowing pace of rate hikes in the U.S.

South Africa Impeachment Crisis

News reports about potential impeachment proceedings against South Africa’s President Cyril Ramaphosa also produced an oversized reaction. The rand weakened by 266bps against U.S. dollar (as of 10:00am ET, according to Bloomberg LP – see chart below), 5-year CDS widened by 27bps, and the 10-year government bond yield jumped by 71bps. Observers are still divided as to whether this is a soft coup attempt or a sign that institutions work, at least in some emerging markets (EM), i.e., politicians/officials face consequences if they transgress. But many see a significant probability that Ramaphosa will not have to resign. Further, South Africa’s history shows that even if the president steps down, the transition process should be managed well. One big question – after the dust settles one way or another – is whether the current crisis will compromise South Africa’s reform agenda to the extent that threatens the country’s growth outlook and the fiscal adjustment process and debt sustainability.

Global Slowdown

The biggest “congregation” of today’s economic surprises was in the global growth area. China’s Caixin manufacturing PMI² (Purchasing Managers Index) actually improved in November – imagine what could happen if the re-opening gains pace. Activity gauges in parts of EM Asia (India, Philippines, Thailand) looked good, and we also got a major unexpected spike in Hungary (to 54.7), which tells us that the central bank’s policy stance should remain tight for the time being. However, the situation in Hungary’s regional peers – Poland and the Czech Republic – is much more concerning. The November PMIs in both countries stayed deep in contraction zone, putting more pressure on central banks to stay on hold. Another massive downside surprise came from Brazil – the manufacturing PMI collapsed from 50.8 to 44.3, drawing attention to the elections’ impact on confidence (and hence, on the government’s ability to meet its fiscal targets). Stay tuned!

Chart at a Glance: South African Currency Hit By Political Turbulence

Source: Bloomberg LP.

¹ The ISM survey is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is considered to be a key indicator of the state of the U.S. economy.

² The Caixin manufacturing PMI is a gauge of activity in China's manufacturing sector.