Summary
A healthy wave of risk appetite for European and U.S. stock markets.
Yuan and lira retreat
And yes, it is overshadowed by continued emerging-market tremors. An offshore yuan decline increased by some 100 pips to stand at some 230 pips as I write. It helps that renminbi barely moved in the onshore session. That relative stability enabled Shanghai Composite and Shanghai Shenzhen 300 indices to rally for the first time in six sessions. Decent gains by Chinese bank, oil, real estate and basic resource shares, go some way to explaining why
Britain’s laggardly FTSE 100 trumps expectations for another weak session. China and APAC in general also pave the way for a sea of green across European STOXX sectors, including troubled mining and oil sectors. Uneventful German industrial inflation data added another wash of calm. In short, it would be a stretch to conclude the wheels won’t ‘come off’ markets again sometime soon, but global shares should remain orderly whilst stability prevails in recent currency hot spots.
Lira in focus
At the same time, enhanced lira monitoring continues. As the CBRT continues to roll out marginal interventions USD/TRY continues to strain at moorings. On Monday, the central bank unusually cancelled both the regular deposit auction and the repurchase auction it typically holds at least daily. A swap agreement emerged with Qatar (limited to $3bn), after the gulf state pledged a $15bn investment last week.
Last week, Turkey’s bank regulator essentially closed off one avenue of liquidity by capping swap schemes and non-swap derivatives to 25% of equity. Extinguishing a key avenue of external hedging is effectively a form of tightening. Instead, Turkish banks may have to resort to lira financing rates that were temporarily hiked to 19.25% last week.
The swap caps also restrict speculation and possibly increase risk of capital outflows. In other words, they’re not a sustainable solution, backing the view of just about everyone in markets that Turkey is merely buying time.
USD/TRY nears 6.13
And assessments of just how much time policymakers have bought between crises is up for debate. Like USD/CNH, USD/TRY has also extended gains by about 100 pips since late morning to stand near 6.10. The only real reassurance for those hoping the lira will steady is that the dollar’s latest attempts to vault 6.13 on the way to 6.21 are being thwarted. Those levels have roughly signalled volatility spikes in recent days. Meanwhile, President Tayyip Erdogan has, predictably, kept up a stream of bellicose bulletins. They’re just as much crafted for a domestic audience as they are lobbed at markets and Washington. Rallying lira shows financial measures are not enough to right the ship, whilst perceptions of the government’s economic intentions may yet help create another storm.
Jackson Hole to sway euro and sterling most
A window of relief for EMFX offers unmissable opportunities for riskier beta on Monday, at least, and a potential environment for selection and rotation during the week. Bearing in mind the seasonal damp in activity, complemented by a relatively light calendar, only another currency market flare-up may stand in the way of good equity market progress for the short run. The Fed’s view of U.S. economic strength has scarcely stopped reverberating since its last on-hold policy statement, so it would be a surprise if Wednesday’s minutes prove to be a material risk event. On Friday afternoon, chair Jerome Powell will speak before the beginning of the bank’s Jackson Hole Symposium. For market participants, the main interest for in the pow wow, is that it has a history of being a venue at which the Fed has signalled the beginnings of a shift.
All things considered, this probably won’t happen this time. Moderate volatility across deflated euro and sterling and other currencies struggling against the dollar are therefore the likeliest effect the meeting will transmit to markets.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions."