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Daily Agenda: Markets Shrug Off Rousseff Impeachment

Brazil Senate vote to impeach was anticlimactic; Apple to repatriate overseas profits; U.K. and Chinese factory activity picks up; Trump renews vows to deport illegals.

The anticlimactic vote by the Brazilian Senate to impeach President Dilma Rousseff had a relatively muted impact on markets as the economic woes of Brazil, and the major developing economies, can’t be corrected by a single regime change. Now, nearly a decade after the once-vaunted BRIC economies withstood the impact of the credit crisis, a collapse in commodity prices and elevated debt levels has left many once-promising emerging economies—including Brazil—mired in sluggish growth. Still, broad emerging market equity indices have performed admirably in 2016 as investors bet that relatively faster growth in those economies would be valued during a period of malaise in the developed world, particularly in Europe and Japan. Emerging market equities suddenly appeared to be compelling bargains this year, after years of battered stock prices made worse by rising share prices inflated by central bank policies in the developed economies. Brazil’s market has been part of the rally, as the benchmark Ibovespa index has risen significantly year-to-date on a local currency basis even as the real slid versus the U.S dollar due to political and economic crises. The increased flows of capital for Brazil-specific exchange-traded funds has been particularly noteworthy. For now, with no indication that the impeachment will improve investor confidence in Brazil, the EM stock rally seems to be driven by low multiples rather than macroeconomic confidence.

Apple to repatriate profits to U.S. In a series of media interviews on Thursday, Apple CEO Tim Cook indicated that the tech giant will begin repatriating unrealized profits from offshore in response to the European Commission’s tax ruling on the company’s Irish subsidiary earlier this week. Multiple tax lobbyist group have claimed that the total amount Apple holds offshore that is not subject to U.S. taxation at more than $180 billion. After the EC ruling, Ireland’s Finance Minister Michael Noonan indicated country would appeal.

U.K. factory activity picks up pace. Purchasing-manager index data released today by IHS Markit indicates that industrial activity in Britain rebounded from a post-Brexit vote slump as a lower pound drove export demand. Headline PMI for the U.K. registered at 53.3, a positive reading after a contraction of 48.3 in July and significantly stronger than consensus forecasts. The pound rose by roughly 1 percent versus the euro and also climbed versus the U.S. dollar following the release. Uncertainty of the timing of the actual departure remains a key issue for markets but Prime Minister Theresa May has pledged to follow through with the referendum decision.

Trump doubles down on plans to deport illegals. Only hours after a surprise visit to Mexico to meet with that nation’s president, GOP candidate Donald Trump delivered a speech in Phoenix in which he renewed his pledge to expel illegal immigrants if elected. Controversially, Trump again stated that the cost of building a wall along the southern U.S. border would be borne by Mexico despite statements of President Enrique Peña Nieto that the country would reject any such plan. Many political analysts viewed the fiery and divisive rhetoric as a shift by Trump to embrace core supporters at the expense of expanding his base.

Chinese PMI surprises to the upside. Manufacturing activity measures released in China today were stronger than expected with the official National Bureau of Statistics headline PMI index registered at 50.4, the highest level since 2014. Meanwhile, a separate measure calculated by Caixin/Markit contracted sequentially to 50. The Caixin/Markit index tracks smaller, private sector operators and the positive reading suggests that the marginal recovery in activity is broadbased though larger, state-controlled enterprises are the greater beneficiaries of monetary policy actions. Critically, new orders were a strong driver of improvement across both measures as the traditional busy autumn period begins.

Jobless claims rise by less than forecast. Weekly initial claims data released by the Department of Labor on Thursday indicated that the US employment market remains strong after the ranks of newly jobless increased by 2,000 in the week ended August 27 versus consensus forecasts for 5,000. The data, arriving one day ahead of the monthly DOL employment report, suggests that expectations for a further decline in the headline unemployment rate may be met. Continued claims rose for the prior week rose by 14,000 according to the report.

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