Leaders give vision to their nations greater ambitions – some call it the long view – but for traders this isn’t so helpful while investors just want the big story – that is the problem of the day with geopolitics again the focus in Asia and despite key economic reports and a flurry of ECB/Fed speakers today, most expect that to continue as the central driver of risk for markets into this weekend’s German and New Zealand elections. The EUR leads the USD lower, bonds are mixed, equities mostly lower. Also throw in that talk of a snap general election in Japan now floats a date for October 22 and you have a vision party ahead. There are two key stories that balance out overnight – On one hand is the threat from North Korea to detonate a hydrogen bomb over the Pacific, and on the other, the super strong flash PMI reports from Europe. The stronger growth in Europe means ECB Draghi will have a harder time not following the FOMC and tapering. The tie breaker will go to EU politics, as UK PM May gives her Brexit speech in Florence at 9.15 am EST – leaving that to be a vision event where success has been defined as restarting EU talks and uniting her own Conservative Party divisions. The UK Press expects here to seek a 2-year transition period after 2019 and also to pledge to strengthen the legal protections for the 3 million EU citizens living in the UK. Paying into the EU budget during the transition is what the market expects and wants to hear for the GBP rally to continue. While all that seems obviously boring, the devil is in the details, with the GBP rally stalled today and EUR gains notable even as Draghi talks about youth unemployment. For anyone looking beyond the FOMC rate hike risks for a driver in USD, the story today is the EUR as the alternative to the USD. The uptrend in the EUR has held and the next risk is a new high – whether because of the Merkel re-election or because of doubts about US growth and rates – or a bit of both. The vision thing is going to dominate market attention whether from the UK or the US.

The IMF revised Chinese growth forecasts higher in July – were they premature? Retail sales, industrial output and fixed investment have slowed The Real Estate sector is still buoyant but home price increases are moderating Narrow money supply growth has slowed, other parts of the economy will follow

For the Week ahead, the focus will be on the storm damage, the new US political landscape,the UK Brexit vote and risk to GBP reversal, the China data confirming growth and stability and perhaps a ceiling for CNY, the USD trend lower and the upcoming election risks– with Norway’s election this weekend to Germany and New Zealand in 2 weeks. If we learned anything last week it’s that the forecasts aren’t always accurate but they generally catch the risks ahead. The focus in the US was on Harvey damage and Irma fears. Irma hits Florida with a Category-4 storm that will envelope the entire state, and then drives like Sherman, to Atlanta and perhaps follow on to Memphis. The zig was that the East Coast expected the worst of the storm, and the zag is that it’s now the Gulf Coast that suffers. That forecast isn’t good for US crops with cotton, orange juice, lumber and soybeans all at risk. The zigzag in the path from east to west hurt many seeking shelter in Florida as those in the South felt Tampa was safe only to find it’s now in the direct path. The zig-zag in forecasts was reflected in US politics last week as well as President Trump sided with the Democrats to pass a $15bn Harvey aid bill and extend the debt ceiling debate to December. This puts the Republican Congress on notice and begs the question of whether the US has a 2-party system or something else as the GOP big tent gets ripped in the storm winds. The silver lining of the storm maybe in the force to unite and agree on tax reform. The FOMC added to forecast uncertainty as Vice-Chair Fischer resigned with his departure set for October leaving the December hike risk much lower. Throw in the new delayed debt ceiling debate in December and you have all the reasons to wait for 2018 before more “normalization.” There was another zig-zag last week – North Korea – which tested a Hydrogen Bomb but decided on National Day not to launch a ICBM to celebrate – its restraint will set the tone for the Asia regional risks as both China and Russia push for talks rather than more sanctions while US and Japan want oil embargos on the hermit nation to stop Kim from further nuclear threats. Markets will be watching for the next provocation even as Putin seems to be playing a new role in a tired conflict similar to his intervention in Syria 2-years ago. Last week was supposed to be about central bankers – and they didn’t disappoint either – but they had much to compete with as the ECB Draghi did his best to sound dovish but the EUR rallied to 2 ½ year highs while the Bank of Canada become more aggressive and surprised with a 25bps hike – sending CAD to 2012 trend resistance up over 7% since June - and the Brazil COPOM cut 1% - with the BRL gaining anyway. Forecasting the moves short and medium term for markets requires agility in assessing the factors as they change faster than the weather with growth, inflation, interest rates and politics all competing for primacy. If we learned anything this year its that the ides of the month are difficult and have been notable in their reversals. The sharp rise in gold and the drop in bond yields in the US and Europe are warning signals for risk but maybe we all just need a bit more zig and zag to understand the growth and value propositions ahead.

The month of July has brought a sharp rebound in risk-parity strategies with some moderation of fears about the ECB and other central banks rushing to normalize rates, despite the Bank of Canada hiking rates and despite the data from Europe that continues to suggest tapering time is past due. Bond selling that started in earnest at the end of 2Q has stalled, while equities have rallied to new record highs. 2Q earnings are part of that story, along with a view that this is global “Goldilocks.” The FOMC is widely seen shifting to a modest balance sheet run-down in September without a rate hike, with less than a 50% chance for December linked to inflation data. The USD is sharply lower on the month – the 5th such month in a row - as the US growth has slipped in lock step with hopes for anything good out of Washington – particularly some tax reform – as healthcare reform stalls. The Trump Russian investigation has also been highlighted as a problem for the US as it tears apart the Republican consensus and blurs the focus on the Trump Agenda. Oil has consolidated with US production matching OPEC output cuts but the dramatic drop from 2Q reversed with inventories finally correcting into Summer peak demand. Geopolitical concerns are high with North Korea and US trade policy both in focus. The G20 became the G19 in July with US Paris Accord drop out being seen as isolationist. The risks in politics abated somewhat in Europe but popularity of present leaders is in doubt almost globally: inn Japan – with Abe losing the Tokyo Municipal elections and also in the UK as PM May struggles with a minority coalition into Brexit talks. The French support for Macron eased back in July with his military stand-off losing some voters and as many doubt his ability to move on Labor reforms fast enough. The favorite global leader according to a number of polls remains German Chancellor Merkel who leads with an 87% chance for re-election. The most despised leader maybe Putin but the most likely to lead to revolution is Maduro in Venezuela as protests rise after his power grab dissolves the National Assembly in favor of a Constitutional change. The fears of trouble in China have abated with its 2Q GDP, and that focus on growth throughout the world, drives the return of the risk rally, as better growth globally mixes with lower inflation to drive the stretch for yield.