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Uneven Stevens; Sterling On The Clock

Published 19/06/2018, 10:23
Updated 14/12/2017, 10:25

Summary

The flight to safety continues after Washington doubled the threat of counter-retaliatory tariffs to $200bn.

Gravity, except for VIX

Leading European equity markets have opened with a downward force similar to that seen in Asia, where the Nikkei dumped 400 points and Shanghai and Shenzhen indices lost around 4% a piece, although Sydney’s ASX 200 escaped the rout with barely a scratch, ending just two points lower. Australia is the logical supplier of much of the replacement oil and energy China may need to source.

With commodity prices also slumping into the Asia-Pacific close, the beginning of Wednesday’s stock trading session could also be implicated. If the VIX Market Volatility Index really has been relegated to the status risk-off proxy of last resort, it’s done its job so far this week, with VIX futures posting their biggest intraday move so far this month. The rise was a modest 14.4 points at most on Monday, but both the underlying volatility gauge and futures contracts have already surpassed yesterday’s highs. Anxiety might still be contained, but now, there’s no doubt nerves are increasing. The watch is on for sharp slides in algo-related liquidity that typically accompany pronounced market gyrations nowadays.

China goes qualitative as quantitative runs out

$200bn worth of imports, on which U.S President Donald Trump says a new 10% tax could be levied, dwarfs the volume of U.S. exports to China last year, $129.89bn. That’s unlikely to mean the end-game is in sight though. Beijing promised 'Strong countermeasure' in a 'qualitative' and 'quantitative' response, 'if the U.S. becomes irrational and publishes that list of new tariffs'. That points to a tweak of duties China said it would impose on U.S. energy imports on Friday. Those included natural gas, of which China imports not a single cubic foot. Liquid natural gas (LNG) was absent. It will now probably be added. That will cast a shadow on the 22% of all U.S. LNG production China bought in the first five months of the year.

Targeting the sector also calls into question Washington’s goal of reducing the trade deficit with China. Energy would be an easy import for China to increase. Dented oil, gas and coal revenues would also hit industries in Trump’s electoral base. Both sides are thereby gearing up for escalation and will be committed to initial moves for tactical reasons. Both the yuan and the dollar have reversed on Tuesday morning.

Yen, franc up

And so, yet another outbreak of safety-seeking drags on the dollar, underlining the dependence of its bull case on broader market stability. Declines against franc and the yen are both present and correct as are ascents by Germany’s benchmark bund, and 10-year Treasurys. The latter’s kick yields deep into the 2.8% handle in a third session of price gains out of four. As Treasury momentum builds, dollar buying may wilt in theory, though the greenback was still gouging out big chunks of value from the euro and sterling at last look.

Sterling also hangs increasingly on the arms of the Brexit clock that will tick down to 280 days to Brexit on Friday. PM Theresa May has about a day and a half to somehow coral Conservative pro-EU rebels into voting for the Brexit Bill on Wednesday. Key rebel Dominic Grieve who resigned as Attorney General says he does not want to collapse the government, which is somewhat less than a promise not to. It’s all worth a string of new 2018 lows for the pound against the dollar, and the weakest in seven months. Coming one day ahead of the Bank of England statement, the market feedback clearly discounts even the MPC’s best shot at rekindling expectation of another hike.

Cable has inched one pip past June’s prior low at $1.3205. GBP/USD is now firmly in the Nov. ’17-April ’18 cycle that peaked at $1.43, from an upswing at $1.3074. Sterling’s temporarily undefined rate differential vs. the ECB accounts for a tiny bid against the single currency.

Merkel adds to cartful of woe

Non-traders dislike talk of Fibonacci but added euro pressure is clear at 38.2% of the attempted recovery from late May that was destroyed last Thursday. Chancellor Angela Merkel remains under political pressure after a creaky deal on immigration with the leader of the CSU, her CDU’s key coalition partner.

Like May, she too must forge a deal that pleases political partners and adheres to EU principles of free movement by the EU summit on 28th June. It’s one more weight adding to the cartful on the euro. Daily oscillators still offer plenty of room and few technical factors will detain EUR/USD much further in its grind back to late-May’s 2018 low of $1.1506, 40 price points away just now.

Portugal ignored

The European Central Bank’s forum in Sintra Portugal would ordinarily have reached a high point on Tuesday afternoon with Fed chair Jerome Powell’s participation in a Policy Panel with ECB President Mario Draghi, Haruhiko Kurodo, BoJ Governor, and Philip Lowe, governor of the RBA. It was already doubtful the first three would have much of great significance to add to last week’s momentous policy statements and commentary. The likelihood of further currency moves from their comments today looks even lower now. U.S. Housing Starts will be out at 1.30 PM BST and will also probably be ignored.

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.

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