EM not out the wood yet: will it spread?
Emerging market currencies and world equities suffered another sell-off yesterday as investors remained worried that the crisis in Turkey and Argentina could spread to other vulnerable emerging market economies. The atmosphere is still very gloomy this morning as European equities slid further, following in Asian equities’ footsteps. The EuroSTOXX 50 fell 0.85%, the DAX gave up 0.65%, while the SMI slid 0.45%. In the FX market, the deterioration in risk sentiment gives leg to the US dollar rally, which started last Friday, while safe haven currencies hold ground as investors take shelter.
Most investors believed the uncertainty that prevailed during the summer months would disappear when traders would come back from vacations. Unfortunately, it looks like it is here to last. We have the feeling it is now legitimate to wonder whether this is just a temporary situation or could potentially develop into a crisis. The market’s wait-and-see mind-set over the last few months has demonstrated that investors couldn’t find any reason to push stocks higher and that we could be ahead of difficult times. After all, a crisis usually start at the fringe before moving to the core.
Don’t expect too much from today’s BoC meeting
NAFTA trade talks between the US and Canada are resuming today – and this certainly not expected to be a quick resolution period. Indeed, negotiations already started last Tuesday and finally came up with no clear agreement on any single topics discussed, including agriculture, where US trade representative Robert Lighthizer office gave a statement on Friday complaining that Canada was not making any concessions on this subject. A situation that is not going to facilitate Bank of Canada business, whose monetary policy path will be put aside in current situation.
Although recent negotiations on the agriculture matter did not come up with a solution straight away with its US counterpart, recent negotiations on the matter have proven to be successful in the past. This is the case for instance with the EU, where Canadian authorities signed one year ago a new trade agreement with the UE named Comprehensive Economic and Trade Agreement which simplifies exports of goods and services from the EU or Canada and which eliminated 98% of tariffs between both countries, including on dairy products. Additional topics such as maintaining original NAFTA dispute settlement mechanism incl. countervailing or anti-dumping duties, steel aluminum tariffs and a cultural exemption clause (protecting Canada’s cultural sectors such as media) will be discussed in the coming weeks.
Accordingly, as negotiations are on progress, the BoC is expected to remain cautious at today’s MPC meeting, hoping that NAFTA negotiations will be concluded in a successful manner and maintaining its Overnight Lending Rate stable at 1.50% after rising it during last meeting on 11. July 2018 by 25 bps.
Continued weakness is expected for the loonie. Trading along 1.32, USD/CAD is heading along 1.3210 in the short-term.
