The Daily Prophet: Trumponomics Is Making Emerging Markets Great

Connecting the dots in global markets.

President Donald Trump likes to tweet about how U.S. stocks are at a record, suggesting the gains represent confidence in his policies and administration. It's accurate that U.S. equities are at or near all-time highs, but relative to most other markets -- which is what matters to investors -- America is a laggard.

That's especially true for emerging markets, which are on fire. The MSCI Emerging Markets Index gapped higher Thursday for the fourth consecutive day, bringing its gains for the year to 20.7 percent. That compares with 9.34 percent for the S&P 500 Index. What's behind the biggest divergence since 2009? It has a lot to do with the seeming inability of the Trump administration to make much progress on issues that matter most to investors: cutting taxes, reducing regulations and coming up with an infrastructure spending plan. The thinking is, that should curb U.S. growth and keep bond yields low. That, in turn, will bolster the appeal of higher-yielding emerging-market assets as the dollar weakens.

Federal Reserve Chair Janet Yellen said in testimony to Congress on Thursday that 3 percent U.S. economic growth -- the Trump administration's target -- would be an admirable but difficult feat to achieve over the next few years. "A tightening cycle in the U.S., or other developed markets, that can be best described as a snail's pace coupled with fundamentals -- growth momentum and external balances -- that are better than they have been in years is a formidable tailwind for emerging markets," Jason Daw, Societe Generale's head of emerging-markets strategy, said in a research note. "This keeps the balance of risks skewed to the positive side, and at a minimum significantly limits the pain when sentiment sours."

One day after concluding that Yellen may be wavering on the pace of rate hikes because of the recent slowdown in inflation, bond traders had a rethink. As a result, they pushed bond yields higher for the first time this week, to 2.34 percent. Maybe bond traders should take their cue from Japanese investors, who know low inflation when they see it and who just happen to be loading up on foreign debt, including U.S. Treasuries. Data from Japan's Ministry of Finance show that Japanese investors have been net buyers of foreign debt in eight of the last 11 weeks, bringing purchases to about $57 billion against $10 billion of sales. While the data doesn't say what exactly they are buying, the strategists at BMO Capital Markets say "the series has historically correlated well with flows into Treasuries." They said foreign demand is one reason for their bias to be long the Treasury market. Economists are slowly capitulating on their calls for higher yields. The median estimate in the latest monthly Bloomberg News survey is for 10-year yields to end the year at 2.60 percent, down from the 2.90 percent forecast in March.

Crude's decline has been a big reason for the drop in inflation expectations. On Thursday, though, oil managed to gain for a fourth day, to about $46 a barrel, as the International Energy Agency raised its estimates for growth in global demand. Even so, it's hard to miss the negative vibes that are cropping up almost daily. Even as the IEA gave its demand forecast it also said that the global glut doesn't appear to be shrinking as quickly as expected. Three years into the biggest  downturn in a generation, industry bosses gathering at the World Petroleum Congress in Istanbul said they see the recovery slipping further from view, according to Bloomberg News' Rakteem Katakey. Better times might not return until 2020, according to Total SA CEO Patrick Pouyanne and Weatherford International head Mark McCollum. While many cite production from shale oil drillers as a big reason for the global oversupply of crude, just take a look at Canada's oil sands, where companies such as Devon Energy, Suncor Energy and Cenovus Energy have ramped up operations, according to Bloomberg News' Robert Tuttle. Oil sands will be second to shale as the biggest contributor to global supply growth over the next two years with half a million barrels a day of production scheduled to enter the market, according to IHS Energy.

The big news in the foreign-exchange market Thursday was centered on the New Zealand and Australian dollars. The two currencies posted some of the biggest gains, benefiting from China data showing that imports surged 17.2 percent in dollar terms. Australia's dollar rose to its strongest level since March against the greenback, while New Zealand's appreciated to its highest since February. Investors and economists closely watch the antipodean currencies for clues to what's happening in China because of the large amount of trade conducted among the three nations. In the case of Australia, the economic data has been trending higher. The Citi Economic Surprise Index, which measures data that exceed forecasts relative to those that miss, has been hovering around its highest levels since early 2016. Also, currency strategists have started to raise their forecasts for the Australia dollar again after holding them steady for about three months, according to data compiled by Bloomberg.

China also factored into the market for aluminum, which jumped the most in eight months on speculation that China Hongqiao Group, the country's largest producer of the metal, will deepen output cuts. Aluminum surged as much as 2.9 percent to $1,943 a ton on the London Metal Exchange, the biggest intraday gain since Oct. 25, according to Bloomberg News' Mark Burton. The lightweight metal used in transport, packaging and construction has rallied 14 percent this year. Citigroup analysts e-mailed a note to clients citing a report from Mymetal that Hongqiao will suspend 600,000 metric tons of annual capacity amid a government crackdown. Such a cut would equate to 1.6 percent of China's total operating capacity, analysts Jack Shang and Ada Gao said in the note, which didn't provide any further details about the original report. Aluminum settled 1.8 percent higher at $1,923 a ton at 5:53 p.m. in London after Hongqiao issued a statement saying it's still discussing voluntary curtailments and plans to offset the closure of old capacity with supply from new plants.

It will a big day for U.S. economic news Friday, with reports on the consumer price index, retail sales, industrial production and consumer confidence. While most of the attention will like be on the CPI in the wake of Yellen's remarks this week that the recent slowdown might be more than just temporary, don't discount the importance of retail sales. Last month, the Commerce Department report showed sales dropped in May by the most since the start of 2016, or 0.3 percent. This month the median estimate of economists surveyed by Bloomberg is for a gain of just 0.1 percent. That's unlikely to bring any relief for investors in retailer stocks, which are some of the worst performers this year. Target Corp., rattled by a sales slump and tougher competition from Wal-Mart Stores Inc. and online retailers, said Thursday that its sales would likely increase this quarter, reversing an earlier forecast for a decline.

If you'd like to get The Daily Prophet in e-mail form, right in your inbox, please subscribe to this link. Thanks!

Saying There's a Bubble in ETFs Makes Little Sense: Ben Carlson

Fed's Yellen Leaves Markets With the Wrong Impression: Tim Duy

Cryptocurrencies Have Value. The Key Is Finding It: Aaron Brown

China Can Laugh Off a Bond-Rating Downgrade: Matthew Winkler

Bank of England's Quest for ‘Normal,’ in Brexit Era: Daniel Moss

Bloomberg Prophets Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

    Before it's here, it's on the Bloomberg Terminal.