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Markets Morning - China trade delegation and Turkish phone conference settled nerves

Market Analysis /
Greg McKenna / 17 Aug 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome

Greg

 

Market Summary (7.42 am Friday August 17)

The Hang Seng was down more than 1% in pre-market trade yesterday morning but news that China is sending a delegation to Washington for trade talks made that news irrelevant for developed markets with the resultant Yuan gains helping  currencies rise against the US dollar while the Australian stock market reversed the best part of the losses it had opened with to close down less than 1 point at 6,328

So even though the Hang Seng ultimately finished down 0.8%, the Shanghai Comp lost 0.6%, and the STI in Singapore dipped 0.7% Europe – for the most part – finished in the black while stocks in the US have had a solid bounce.

Thus the S&P 500 has bounced 22 points for a 0.8% gain to 2,841 as its see-saw week continues. Every sector is higher though, every one. The Dow has roared 1.58%, and the Nasdaq is 0.27% higher as tech faded toward the end of the day. The VIX is naturally lower. No point getting bearish US stocks unless or until that ledge of resistance/support gives way at 2,795 in S&P 500 terms.

In Europe the DAX was up 0.6%, the CAC rose 0.83% and the FTSE was 0.8% higher. Watch Italy though folks, the FTSE MIB fell 1.83% largely on corporate news but equally on residual concerns about the political outlook. The Italian/German 10 year bond continued to widen.

Notice I have mentioned Turkey yet!

Anyway, the Turkish finance minister held a global briefing where he said hopefully that Turkey will emerge stronger from the current situation but also promised there would be neither capital controls nor a need for the IMF. As Panglossian as that might be – is – that seemed to ease investor nervousness and the Turkish lira is up about 2.5% against the USD with USDTRY at 5.85. It must be said though that rate is off its lows after Steve Mnuchin said the US has more tariffs in the wings. Of course they do.  

But, as you can see the mood was far more positive last night and that helped base metals. Copper is 1.8% in HGc1 terms to $2.60. Though it’s worth noting some of the prices on the LME I’m seeing suggest this was a US based commodity recovery. Basic materials stocks did well in London and New York so that’s good news for the local market here in Australia today. SPI traders have subtracted 2 points though.

To forex markets now and the US dollar is a little weaker against the majors but they are generally off their highs against the Greenback. Euro is at 1.1374 up 0.3% after a 1.1337-1.1409 range over the past 24 hours. The Pound was similarly ebullient at one point with retail sales shooting the lights out. But GBPUSD is at 1,2714 up 0.14%. The Yen is down by 0.14% with USDJPY at 110.90.

Of the commodity bloc its evenly matched between the Aussie and Kiwi for best on ground over the past 24 hours. Both currencies are up about 0.3% from yesterday morning but both currencies are also off their highs of 0.7286 and 0.6608 respectively. AUDUSD is at 0.7262 while NZDUSD is at 0.6585. USDCAD is at 1.3160, up 0.15%.

Oil is higher as prices respect these important support zones for both Brent and WTI. At one point yesterday in Asia both contracts were breaking down. But this morning WTI is up 0.64% at $65.44 while Brent has gained 0.89% to $71.39. Gold is at $1173, the CRB index is up 0.65% overall, and Bitcoin continues to hold the $5765/6,000 support zone. It’s at $6,263 down about 1% after being up 0.6% at $6,409 a couple of hours ago.

On rates US 2’s are at 2.62%, the 10’s are at 2.87% and the curve is at 25. Shoot, cur recession calls.

And on the day RBA governor Lowe speaks before the House of Representatives' Standing Committee on Economics this morning while assistant governor Luci Ellis speaks at the ANU tonight.  Ofshore its Singapore trade, Reuters Japan Tankan, inflation in the EU and Canada, and then Michigan consumer confidence in the US.

And just quickly, vale Aretha Franklin. R-E-S-P-E-C-T.

Have a good day

Macro Stuff that affects everyone and everything – either today or eventually

International

  • I can’t recall if I wrote it here or said it in the video or just thought. But after President Trump’s tweet at turkey last week which really sent the market into a funk and in which he mentioned the strong dollar I wondered if he’d realised the benefits of a strong dollar to the US. I’m wondering that even more strongly this morning after the President tweeted about the strong economy and “our cherished DOLLAR” (his capitals). I may have the wrong end of the stick, I’m only a tweet away from being utterly upended. But this is an interest temperament and messaging change.  
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The Yuan, forex markets in general, and the ASX got a little excited yesterday when it was announced China was sending a trade delegation under vice-Commerce Secretary Wang Shouwen to Washington. The good news here is that the Chinese are looking to talk once more. And even though Larry Kudlow said the Chinese shouldn’t underestimate the president’s resolve and even though the parties are still some distance apart. So a quick fix is unlikely. But I like what Greg Valliere, Horizon Investment’s chief global strategist, wrote in his note overnight, “A deal with Beijing doesn't appear to be imminent, but there are signs that China wants to resume talks. The New York Times and others have reported that Chinese officials are increasingly alarmed by the country's weakening economy and its bearish financial markets, as rumors of layoffs circulate and dissent erupts among academicians and government officials over how to deal with Trump. Internal dissent in China is not tolerated…SO A MID-LEVEL DELEGATION FROM CHINA will be in Washington later this month, and we think some concessions could be on the table for high-level talks in the fall. Trump may be able to boast that his tough negotiating has begun to produce results, but a final deal with China still looks unlikely in 2018” (his bolding and capitalisation). Bloomy has a great look at China’s “feisty” negotiator and his task here.
  • Obviously I wasn’t on the call with the Turkish finance minister last night as I was snooze in prep for my 4am start. But from what I have read there is no inclination the Turkish government is going to play by the West’s/IMF’s/EU’s playbook. That means this is a bit of a gamble for Turkey and by extension emerging markets more broadly. Just quickly Finance Minister Albayrak told his audience of 6,000 that Turkey will emerge stronger, there will be no capital controls and that inflation and the current account would be reined in.  
  • It’s sounds like a Hail Mary play to me. But this is all political anyway, so Erdogan and Albayrak will push their hand until they are forced – if that happens – to cry UNCLE. Allianz’s Mohamed El-Erian told Bloomy, Turkey is “trying to go without interest rate hikes. It’s trying to do it without the IMF. That’s hard. It’s not impossible, but it’s hard. Certainly if successful they’ll have rewritten the EM crisis playbook. And if they aren’t and don’t ask for help we’ll be talking about Mugabe and Maduro.
  • And here’s another interesting one from Bloomberg on Turkey,  the nations seems to have sold about half its US Treasuries and has slipped under the significant holder limit of $30 billion UST’s. Bloomy reported “Turkey’s stash of U.S. Treasuries declined for eight consecutive months through June 30, the longest stretch since at least 2002, Treasury Department data showed this week. At $28.8 billion, the country’s holdings are down by more than 50 percent during that eight-month period”.
  • Bloomy also says – based on IIF data – Turkish companies have around $16 billion in foreign currency denominated debt due before the end of this year  

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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