The focus today is on Canada with the Bank of Canada expected to stay at 1.5% while U.S./Canada trade talks continue, and trade statistics are both released. While everyone but Trump and Trudeau want a deal fast, the risk of failure remains, says Bob Savage Wednesday.

The U.S. divergence in growth, monetary policy and in trade drives markets today. This isn’t that different than yesterday or the summer overall, but the isolationism of U.S. policy on trade is seen as the key driver for pain abroad and indifference at home.

The sharp bounce in U.S. Manufacturing ISM to 14-year highs highlights this point. Isolationism isn’t new to the U.S., but many see that as ancient history and beg for a return to the old-world order. The relentless moves in EM and rise in the U.S. dollar (USD) reflect the capital flows to the U.S. and leave many investors nervous waiting for a mean reversion trade in U.S. assets.

The Mexico agreement brought relief last week but that didn’t last long. The view of U.S. isolation working for more than a few months requires Canada and Mexico deals.

The USD also reflects the doubts abroad with Europe shifting from Italy to Greece again today.

While a rally in Italy is usually a sign for relief in Europe it’s not working today – Deputy PM Salvini said the budget deficit would be around 2% with the flat tax plans postponed for now but a reduction in pension age and basic income plans instead.

Early ECB Benoit Coeure warned that Greek banks’ capital is lower than elsewhere in Europe, consisting partly of deferred tax assets, and there is still a large amount of non-performing exposures (NPE) as a legacy of the crisis.

The ability to extend and pretend on debt both in Italy and Greece requires growth and that is the crux of the issue today as the Service PMI reports were weaker in China, weaker in Italy and not good enough to drive up hopes for rate normalization to match the FOMC.

Even good growth as shown from the Australian GDP today isn’t sufficient to counter trade worries going forward.

Markets are fickle and right now, they are obsessed with isolationism working making the USD bid hold, while risk moods focus on the new EM punching bag of South African rand (ZAR) after yesterday’s weaker GDP confirms its recession.

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