Markets Morning - Fear is elevated but a panic was avoided

Market Analysis /
Greg McKenna / 14 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 (7.40 am Tuesday, August 14)

It really is all about stocks and US stocks in particular when it comes to true risk off isn’t it?

That’s a message I gave a journo I backgrounded yesterday morning and it’s the clear takeaway as I write this morning after surveying the financial markets landscape one day into the week and after 24 hours of turmoil.

Sure, the Turkish Lira has made an almost full round trip from 7.20 this time yesterday back to 6.40ish (after the CB injected liquidity) and now back at 6.82 for a 7% loss (news of a meeting in Washington has helped in the past hour). But USDJPY at 110.72 is 50 odd pips off the lows, the Nasdaq 100 is just in the red, and the S&P 500 is only down 0.4%.

So, while the Lira has lost 8%, the South African Rand is down 2.4%, and the Mexican Peso is off around 1.24%, we really haven’t seen things kick off the way they could have. Even European stocks didn’t fall too far.

One thing that does stick out though, something that suggests there is still a level of disquiet in markets, is that the Australian dollar is the worst performer of the big currencies with a 0.5% fall to 0.7267. Copper was flat to down a little depending on whether you look at HGc1 or HGc3 ($2.74, -0.36%) but there was some weakness across the base metals complex more broadly. That and the fact the Thomson Reuters CRB index is down 1% and sitting at five-month lows, along with the AUDUSD underperformance, and the VIX increase to 14.73 (up 12%) tells you traders are still concerned.

Not panicked but concerned about growth and the outlook nonetheless. And there is no sign either side of this latest Turkey mess are backing off.

Quickly around the grounds then. As reported the S&P is down 0.40% but it’s had a bearish engulfing day by the looks of my chart. That’s ominous, but 2,795 is still the key downside level that needs to be breached to get too concerned – S&P 500 is at 2,826.

The Dow is down 0.5% to 25,187, the Nasdaq100 is down 0.1% at 7,401 while in Europe the DAX lost only 0.53%, the CAC hardly dipped with a 0.04% and the FTSE 100 was 0.32% lower. That’s left SPI traders with just a small 3-point gain after the 26-point fall on the ASX 200 yesterday.

Back to forex now and the USD index is largely unchanged at 94.34, Euro is back at 1.1400 after trading a 1.1365/1.1433 range. Sterling is at 1.2760, down 0.1% and the Yen has given up most of its gains trading at 110.63 after trading through a 110.15/110.93 range. The Kiwi and CAD are both 0.1% either side of home at 0.6571 and 1.3130 respectively.

Oil has had a wild ride overnight. Both WTI and Brent fell completely out of bed after news of a Cushing build, and OPEC downgrade of 2019 forecasts. But it has bounced solidly of support zones for both these benchmarks such that 2% losses are now just 0.44% for WTI at $67.33 and around 0.1% for Brent which is trading at $72.76.

Bitcoin has had a wild 24 hours too. It’s traded a $6,145/6,544 range but is currently sitting at $6,285 up 1.6%. Gold is under acute pressure and closing in on my $1182 support zone – it’s at $1194, down 1.38%. While US rates retain a bid but have drifted a point or so higher overnight – 2’s are at 2.61% and the 10’s are closing in on 2.88%.

Yesterday’s Chinese loans and money supply data suggested the re-liquification efforts of the PBOC might be gaining some traction. But we’ll get proof or otherwise today with the release of the monthly triple-treat of retail sales, industrial production, and fixed asset investment for July. We’ll also get the NAB business survey out here in Australia and Japanese industrial production in our time zone.

Tonight, it’s German Q2 GDP and July inflation data as well as UK employment and the second read on EU Q2 GDP. The ZEW economic conditions and sentiment is also out for Germany while export and import prices are out in the US before the API crude data tomorrow morning.

Have a good day.

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

International

  • I’m not going to bang on about Turkey too much. The key things to know are that the central bank injected liquidity and freed up capital for the banking system yesterday afternoon my time. But while that relieved the pressure as the headline chasing algos sold dollars TRY is under pressure again. Erdogan seems in no mood to compromise but we’ve heard news this morning that John Bolton has met with the Turkish ambassador to discuss the pastor who is at the centre of all this. So we’ll see. A positive resolution may lift the markets spirits. But it’s hard to see that confidence in Turkey and its financial management will be restored in a hurry. Or that the pressure on it and EM will go away quickly.
  • And one thing if I may. Turkish President Erdogan has been playing the EU immigration NATO card aggressively for years to get away with whatever he wants to do. Perhaps that’s why the Germans, Merkel and Haas, were conciliatory last night. And it’s clear he’s now threatening a pivot toward Russia and other, again. So we’ll see if this is just about the pastor or not in the weeks ahead.
  • CNBC’s Karen Tso summed things up nicely overnight in a tweet.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Here’s one to keep the Euro on the back foot.  Reuters reported this morning that La Liga’s economic spokesman had a bit of a rant about the blowout in the Italian-German bond spread last night. Claudio Borghi said, “The situation can’t be resolved, and it is going to explode… Either the ECB offers a guarantee [to keep spreads around 150] or the euro will be dismantled”.  Here’s a tweet I saw float past last night which likely helped enrage Borghi – watch Italy folks.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The Singaporean GDP print yesterday missed by a mile. And data from South Korea has been disappointing recently. These two economies are ones I use, along with the performance of their currencies, as indicators of where investors see global growth. Of course the AUDUSD is important in my deliberations, but it’s more of a risk proxy rather than and actual indicator of growth.
  • Anyway the Kospi has been struggling lately and looks incredibly weak -that’s something to watch. But I want this morning to bring you attention to a thread from Reuters Energy analyst John Kemp on Twitter which I think summarises the risks the global economy and markets face right now. He highlights the Kospi closed at its lowest level in 15 month yesterday and that there are “multiple risk factors” facing the global economy right now including, “Rising U.S. interest rates, Rising U.S. dollar, Rising emerging market debt, Rising corporate leverage, Deteriorating credit quality, High oil prices (in non-dollar economies), Tariffs and trade wars; and Diplomatic uncertainty” That’s a cocktail Kemp says has “preceded most recent international crises”. Indeed they have.   
  • This is all partly why the USD is bid and 10 year  Treasuries are below 2.9%, let alone 3% right now.  As Daniel Lacalle said this morning….
Source: Twitter Screenshot
Source: Twitter Screenshot

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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