Argentine Assets Selloff

August 19, 2019

Last week saw the Argentine Peso and the county’s equities sell-off aggressively as the populist Mr Fernandez significantly outperformed the incumbent Macri in the Primary elections. This is the first nationwide measure of political sentiment and the result was well outside of all polls completed before the result. The IMF bailout completed last year during the currency crisis is now in peril and investors are pricing in a high likelihood that a new government would default on its overseas debts. The currency plunged nearly 25% in the week, adding further pressure on the central bank to defend the Peso and fight the anticipated inflation. There is unlikely to be significant contagion from this crisis to other emerging market economies or markets, although some emerging currencies have been impacted by nervous investors rotating into safer assets.

UK Employment Strong

Data out last week showed that UK employers continued to create jobs in the there months to June, adding 115,000 to the workforce. This was significantly higher than the 65,000 that the market expected and a sharp turnaround from the 28,000 recorded in the prior period. The strong employment growth coincided with accelerating wage growth, which rose to an annual rate of 3.9%, from 3.6% in May. The rising wages are reflective of the tightness in the labour market with employers finding it increasingly difficult to fill positions across many sectors. Nevertheless, with inflation under control, households are experiencing a prolonged period of rising real incomes, helping to support robust retail spending.

US Equities Tumble

Fears of a global recession caused investors to dump equities on Wednesday last week, with the main S&P 500 index falling nearly 3% in one day. The move in equities coincided with a rally in haven assets, primarily US treasuries and gold as lower interest rates were priced in. Disappointing data from Germany and China were combined with concerning signals from the bond market that recession risks were increasing. Critically, the yields on shorter dated bonds in the US and UK dipped below those of longer maturity debt, suggesting that investors are expecting growth and rates to be lower in the future. However, while such inversions have always preceded recessions in recent history, there have been occasions where an inversion has not resulted in a recession or one has happened many years later. Reading too much into such an event can therefore be dangerous.

Market Data

  % 1w* % 1m*
UK -1.52% -4.14%
US -1.49% -0.71%
Europe ex UK -1.91% -1.95%
Japan -2.38% 1.04%
Emerging Markets -1.55% -4.93%
Oil -0.56% -2.21%
Gold 0.51% 8.89%

(* GBP Returns)