Markets Morning - Turkish woes hit markets as traders hedge against contagion

Market Analysis /
Greg McKenna / 13 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 (7.47am Monday August 13)

After the Turkish Lira fell around 20% last week as the argument with the US over the release of a Pastor intensified and as the ECB becomes increasingly worried about EU exposures to Turkey, the Lira has opened up in early Asia was down another 10% earlier at 7.09 but it’s caught a bid now and has “only” lost 5.38% at 6.77 as more traders enter the fray.  

It’s only early Asia and it is a Monday. So this could be a head fake and get washed away in the next 24 hours.  

But comments from the Turkish President that this is economic war and news he’s trying to bully business over the weekend hve intensified the pressure as we open the new week. Also it’s equally clear from comments of Finance Minister Berat Albayrak [Erdogan’s son-in-law] this morning that the government is not backing down and may introduce capital controls. He echoed his father-in-law saying the Turkish currency is directly being targeted by the US president and that Turkey wouldn’t convert or seize FX deposits. Cue the rush for the exits.

Anyway, it was the troubles in Turkey which were responsible for the risk off tone in markets Friday.

The S&P 500 dropped 0.71% to 2,833. The Dow was down a similar amount at 25,313 while the Nasdaq 100 dropped 0.79% to 7,408. Those losses were pretty tame compared to European markets where the DAX lost 1.99%, the CAC dropped 1.59%, and the FTSE 100 lost 0.97%.

I’m not exactly sure what SPI traders were doing or watching because somehow they added 11 points where prices on the ASX 200 closed Friday in local trade. My sense is the ASX200 won’t see those gains and will come under some heavy pressure likely testing and breaking the uptrend at 6,260.

On forex markets the trouble in Turkey and the risk of sentiment helped the USD break out and close above significant resistance in DXY terms and below the head and shoulders neckline in EURUSD terms. This morning the DXY is at 96.27 while the Euro is down again – Turkish Lira impact – in early Asia trade at 1.1371. That US July CPI Friday printed 2.4% in core terms and 2.9% in headline terms (post crisis high) also helps the USD as it reinforces the Fed’s tightening cycle.       

Elsewhere on forex markets the Yen is a little stronger with all the market funkiness and is trading at 110.47 this morning. Naturally that also means the Aussie dollar is lower and is currently trading 0.7268 off half a per cent in trade so far this morning. Sterling is down just 0.14% at 1.2749 while the Kiwi has lost about the same and is at 0.6571 and USDCAD is up 0.2% at 1.3169.

On commodity markets gold still cant take a trick and is at $1210, copper was lower Friday and is at 2.75 in HGc3 terms. Oil bounced a bit after the IEA said replacing the Iranian oil the US is sanctioning is “very challenging”. WTI is at $67.63 while Brent is at $72.81.

Bitcoin is at $6325, up 2.3% while US rates are lower as you’d expect with the funky market. 2’s are back down at 2.6% while the 10’s are now down at 2.86%.

Looking ahead it is very quiet on the data calendar front. Chinese loan and money supply data is about it. All eyes are gong to be on Turkey and worries of contagion. For the moment that’s not happened to the extent we’ve seen in the past.

Have a great day.

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

International

TURKEY

  • As someone who wanted to be an archaeologist before I decided it was markets that held my future I’ve always been fascinated by the ancient cultures from the Euphrates, across to Rome. So I’ve always kept a close eye on what’s going on in the region even if they weren’t markets I was trading.
  • My focus on Turkey was heighted when I read George Friedman’s book “The Next 100 Years” in 2009 or 2010. Friedman argued that Turkey would again rise. Something I was surprised at but something that renewed my interest in the politics of the country. That’s a politics I watched with dismay over recent years as Recap Tayyip Erdogan has increasingly taken power for himself and crushed any notion that Turkey is a democracy or even the somewhat secular state founded by Mustafa Kemal Atatürk . I’ve written all that so you know I’m not just a Turkey Macro Tourist right now. Not for a minute do I have the depth of understanding of a EM strategist – but this is not about markets, its about politics.
  • So to that end I would repeat what I tweeted this morning, this is the inevitable consequence of the inexorable process Erdogan has been taking Turkey through in recent years...He's doing what he wants with seeming impunity while trying to play the NATO/Russia card. Seems like the US has had enough.  
  • SO why is the Turkish Lira getting belted another 10% in early Asia trade? Erdogan doubled down again over the weekend it seems saying the Lira’s collapse was a political plot and that the US is using the currency to target the regime. Might be true given this tweet from President Trump Friday.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Also a Turkish journo Abdullah Bozhurt, who is clearly no friend to Erdogan, said in a tweet that over the weekend the President “1) Threatened industrialists for dumping their Turkish lira; 2) Threatened businesspeople for not selling their products; 3) Threatened the US with consequences in the region & on the US soil; 4) Threatened with slashing interest rates as opposed to expectations.” The finance minister and a spokesman for the President of Turkey have also doubled down this morning. Eamonn from Forexlive has a good summary here.
  • The data flow across the planet is nowhere near as poor – relative to expectations – as it has been. Except perhaps in Europe and China which is very curious.
Click on me, I'll expand
Click on me, I'll expand
  • And to that end on China, I agree with the two tweets here especially @HayakAndKeynes. Europe, that’s another matter. But Germany would usually benefit from Chinese stimulus.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • So much more Macro – but that’s the key points for today.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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