Markets Morning - The Lira settles but not Turkey, stocks up USD on the march

Market Analysis /
Greg McKenna / 15 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


Market Summary (7.40 am Wednesday August 15)

The pressure has been relieved, but not released on the Turkish lira as traders tire of selling after the currency seems to have found a base around 7.2 against the USD.

Overnight The Turkish President and his finance minister son-in-law show no signs of backing down however as Turkey probes social media types who talked down the lira, Erdogan announced a ban on the import of US electronic goods, while Berat Albayrak said Turkey  “will march with the lira and the lira will strengthen”.

You’d be excused for thinking these are neophytes on the world stage. But Erdogan is no such thing. More likely he knows what he’s doing. SO while the Lira’s fall stalls and while hands clench and teeth gnash over when he’ll relent and allow the IMF in or the central bank to hike rates I wonder if that’s the correct paradigm.

Perhaps the Erdogan narrative needs to be recast in the Mugabe or Maduro mold. I hope not, but I fear so. He knows what he is doing.

Anyway, despite the rally in US stocks markets are not back to sweetness and light. Indeed the rally in the US markets is in many ways a consequence of the capital flowing to them and out of other regions as the US looks to be the least bad – indeed a good – option for investments. The latest BAML survey highlights global investors allocation to US stocks is at a 5 year high.

So at the close the S&P 500 is up 0.64% at 2,839, the Dow is 0.45% at 25,299 while the Nasdaq is 0.6% higher at 7,445.

Europe has its own troubles before the Turkish crisis on its doorstep again highlighted the plight of EU banks. Sure Q2 GDP in  Q2 beat by 0.1% in both Germany and EU wide last night. But it still trails the US as do corporate profits and outlooks. So this morning the DAX is flat, the FTSE 100 lost 0.4%, and the CAC dipped 0.2%.

In Asia yesterday China markets fell on the back of a disappointing triple treat of retail sales (+8.8% yoy), industrial production (+6% yoy), and investment (+5.5% yoy) all of which missed to the downside. But the Nikkei roared 2.3% higher and the ASX200 was up 0.76% to and back near the top of the range at 6299.6 – lets just call it 6,300. SPI traders have only subtracted 4 points despite the fall in base metals and continued underperformance of miners. Ahhh yield.

On forex markets the march of the US dollar continued. At one point last night the Euro was solidly above 1.14, the Pound was trading with a 1.28 handle, and even the Aussie dollar looked like it was climbing off the mat. All that’s faded though with EURUSD at 1.1344, down 0.6%. GBPUSD has done a little better with a 0.4% loss – it’s trading at 1.2714 while the Yen at USDJPY 111.21 has lost a similar amount. The Aussie is down 0.45% at 0.7235 and at the lowest levels since January 2017. The Kiwi gave up its gains too and is back at 0.6569 while the CAD was a rare winner with USDCAD down – not a typo – 0.44% at 1.3074.

On commodity markets is red all over the screens for base metals. Copper is down 1.73% in HGc1 terms, 1.55% in 3 month terms. That means it’s back at recent lows and at risk of falling another 10 cents if the charts are correct. Gold held its own for a change and is at $1193 while oil is mildly lower after a roller coaster ride in the past 12 hours or so. WTI has fallen in the last hour after the release of a bigger than expected build in API crude data. WTI is now at $66.63 while Brent is at $72.22 well off the the highs overnight of $68.37 and $73.93 respectively.

Bitcoin fell out of bed but has held support and is back at $6000 – or thereabouts with a 3% loss. US 2’s and 10’s have lifted a little and sit at 2.63% and 2.89% respectively.

On the day the Bank of Indonesia’s meeting and policy decision will take on a little more interest for developed markets than usual. Not many forecasters expect a move. But if it was me with IDR near the 2015 highs I’d nudge rates a little higher in the current circumstance to make the point “ I’ve got this”.

Before that though we get the Westpac consumer sentiment data in Australia as well as what’s likely to be another disquieting wage price index for the second quarter. Chinese house prices and FDI are out and then tonight Sterling traders will be on tenterhooks for July inflation data in the UK. All forex traders will be doing likewise when the US releases retail sales and industrial production data for July along with business inventories and the NY Fed Empire manufacturing survey.

Have a great day.

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


  • If you are wondering why the US dollar is doing well, why US stocks are marching to their own drum. Look no further than the latest BAML global investors survey of 243 investors managing $735bln. The FT reports, “a net 67 per cent of those questioned in Bank of America Merrill Lynch’s August global fund manager survey said the profit outlook in the US was the most favourable of all global regions, a record 17-year high”. And investors are putting their money where their mouth is as this chart – via the FT – shows.
  • I mentioned above that perhaps we need to start thinking about Erdogan more like Magabe or Maduro and I’m genuinely thinking that. That’s important for markets because as Mohamed El-Erian wrote in the FT yesterday, “Emerging markets need Turkey to deliver a circuit breaker”. But that has happened yet he says because, “Turkey’s policy response has so far had little resemblance to one that typically acts as a circuit breaker to the risk of contagion to other markets”. Exactly. Erdogan is on the record as saying he doesn’t like higher rates and that he’s the one who returned the nation’s sovereignty by chasing out the IMF. So where does he go? He battens down and rides it out most likely.
  • The trouble with that though El-Erian says is, “the longer Turkey maintains this posture, the greater the risk that unfavourable technical spillovers will be accompanied by more disruptive economic and financial contagion for both the country and emerging market assets as a whole”. Indeed, INDEED!
  • Why do I think he’ll dig in? Because of things like this CNBC report that Turkey is chasing down social media accounts which were apparently posting negatively about the Lira. That’s not a democracy folks. That’s Magube’s Zimbabwe or Maduro’s Venezuela. And when I see quotes which the finance minister – via Reuters – apparently gave to his ruling party colleagues that “we will protect the lira, we will march with the lira and the lira will strengthen greatly in the coming period” I’m convinced this is political and we may all be looking through the wrong lens. Anyway, I hope I’m wrong and sense prevails.   
  • I haven’t talked much about Brexit this week with everything going on. But two things this week seem to heighten the chances of a hard Brexit. The first is that Foreign Minister Jeremy Hunt said “everyone needs to prepare for the possibility of a chaotic no-deal Brexit,” adding “there is absolutely no guarantee that we will get a deal”. Crucially, in the context of the next point I’ll make about what Angela Merkel’s view is, Hunt said “we do need to see a change in approach by the European Commission”.
  • Which brings me to Madame Chancellor. Merkel said at a town hall meeting earlier this week that, “hopefully it will not come to an unregulated Brexit, but rather to a reasonable, negotiated agreement”. Yep. But then she added (my bolding), “the exit agreement cannot be static. If Britain wants to benefit (from the EU in the future) it must commit to re-accepting EU rules”. Danger Will Robinson.    
  • Speaking of Britain, last night’s employment data was both good and bad. Good because it showed the unemployment rate falling to 4%, a figure not seen in many decades. But the employment change underwhelmed expectations with a 42,000 increase against expectations of 100,000 new jobs. AND, earnings dipped back a little from the previous month to a 2.7% yoy result without bonuses and 2.4% with.
  • And quickly. China’s triple treat was a dud yesterday with all three measures of the economy undershooting expectations. That fairly screams slowdown. SO it’s no surprise that we heard yesterday that more infrastructure spending has been approved. More interestingly in many ways yesterday I saw that a Chinese regional investment arm defaulted on a bond this week. The FT reports (my bolding), “an investment arm of western China’s Xinjiang region has failed to repay a Rmb500m ($73m) bond, marking the first public default by a Chinese government-linked holding company”.   

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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