Summary
Walmart’s resounding Q2 beat underpins rebounding sentiment.
Walmart (NYSE:WMT), Macy’s FOMO
The biggest U.S. retailer easily outpaced Wall Street low expectations, across e-commerce, same-store sales, revenues and profits. With valuations in WMT’s sector still damped by last year’s de-rating, FOMO buying looks imminent. After all, Macy's (NYSE:M) margin disappointment a day ago triggered a sell-off that was somewhat surreal in intensity after the group trounced forecasts, aside from gross margins. Macy’s shares, like Walmart’s, change hands at solidly higher prices just ahead of the U.S. stock market open. It’s rather early to conclude that established retailers have reinforced their prospects against digital evolution just yet. On Thursday though, resurgent demand for store operators helps keep Wall Street underpinned.
Figure 1 – Macy’s Inc. forward price/earnings ratio vs. peers
EM relief intact
A near two-year low in August’s Philly Fed print has trimmed September index futures a bit. It plays to fears about slowing aggregate demand after a recent smattering of downside surprises. The weakening oil market structure doesn’t help. But the global backdrop is still more promising on the surface than 24-hours ago. Sentiment remains much improved by the recovery of emerging market currencies. The most obvious trigger was China and the U.S. seizing a small window of opportunity between escalations to schedule more talks. The news was swiftly bid into the yuan after Wednesday’s fresh 19-month low. Currencies of China’s trading partners with deep current account deficits—see South Africa, Mexico and Thailand—also swept higher.
Lira lightens
In turn, Turkey’s lira has now recouped around 20% from Sunday’s record low. Modest stimulus, ranging from peripheral loosening to Qatar’s conspicuous $15bn offer, is the main cause. Note Qatar’s investment would be dwarfed by the total market cap of Turkey’s BIST 30 index: $71.56bn. The main takeaway is that regardless of widespread scepticism, there’s little point fighting the stabilisation. Indeed, in recent days, speculators had already moved on from Turkey in favour of renewed drives against CNY, RUB, MXN and even AUD.
Double-think
On the one hand, double-think about EM FX (riding updrafts with a bearish bias) will last for a while yet. On the other, it is instinctively recognised that flare-ups like Monday’s are rarely sustained at intensity for long. The latest upset fits historical patterns. Policymakers in Ankara and beyond have tacitly acknowledged this by doing relatively little policy loosening over the last few days. Hence, for the nearer-term, already overbought USD/EM surges could still be quite frequent, but they’re likely to fade at an increasing rate. Logically, some eye-catching rallies by battered currencies are also possible.
Where next?
For the longer-term global currency outlook, the burden of dollar-denominated debt is among chief considerations. The Bank of International Settlements now estimates the total at $2 trillion, three times higher than before the financial crisis. BIS said in July that financing costs rose 10 percentage points to 4.7% over just a few months. As dollar pain increases, it’s more than conceivable another emerging market currency will be targeted before too long.
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