We Won’t Back Down
The Dow managed to scrimp out a new record high as investors vote for higher earnings over superstition while nudged along by Fed speculation.
It’s been a testy 24 hours for investors as global market toppled on a cascade of risk aversion flashpoints and despite a potpourri of explanations floating around, PBoC Governor Zhou’s warning against “excessive optimism” seems the most likely trigger.
The Hang Seng led the global route falling more than 2 % at one point closing down -1.9 % However suspected intervention to prevent any awkwardness during the Party Congress saw Mainlands SHCOMP only down .34%
But Risk aversion accelerated as the Spain/Catalonia conflict came oh so close to crossing the Rubicon or should I say Ebro. Spanish Newswires were ablaze with headlines that Article 155 is now extremely likely to be triggered. Predictably, that sent a wave of panic across all asset classes. Oil prices fell off the cliff, Euro wobbled, USDJPY dropped like a stone, and US yields took a hit.
The veracity of the moves was a bit peculiar, but the expanse of the movement is a graphic reminder just how thin traders are positioning these days given the uncertainties surrounding US politics, the Fed Chair race, Spain, Brexit and China’s Congress.
As for today, we should expect another session of headline risk via the protraction of current market narratives.
Politico reports: “Federal Reserve Governor Jerome Powell is the leading candidate to become the chair of the US central bank after President Donald Trump concluded a series of meetings with five finalists Thursday, three administration officials said” .I think what we can glean from this release is its either Powell or Taylor.
The headline saw the USDJPY drop to 112.41 ( -25 pips)in thinly traded markets, but if anything this move could foreshadow the market lean on a Powell nomination as he is perceived less hawkish than co front-runner Taylor.
The New Zealand Dollar
Investors were spooked by a potential shift in RBNZ policy. Both Labour and NZ First are looking to revamp the Central Bank by appointing outside director while moving away from the single decision-maker model. While the markets were shellshocked, but in a world of political upheaval, perhaps it best to expect the unexpected. However, the profundity of this political swing is no small matter as the coalition could bring about a dual mandate for the RBNZ incorporating a full employment target alongside the traditional inflation target an likely currency consequences. So far there has been little appetite to buy the dip while traders remain in ” sellindipity” mode expecting an extension of the current trend
The Japanese Yen
Appears to be a short-term shake out with risk aversion ratcheting higher and likely accelerated by a sharp drop in oil prices. Short term traders were caught long on the USDJPY momentum trade heading into Sunday’s election. Longer term positioning came under little threat so far, and the market remains tentatively bid on dips
The long dollar trade looked so much clearer yesterday, but with EU risk simmering and Fed musical chair headlines still looming large, its difficult to envision a push higher on USDJPY into the weekend despite an expected strong showing from Abe on Sunday
The British Pound
The Pound got pounded after UK retail sales hit a four year low. And to rub salt in the wounds, the August figures were all revised lower too. It has been an intense week for Sterling traders who will be happy to hear the closing bell as politics continue to make things messy. Brexit remains the primary focus, but the political confusion makes for an awful market to trade.
Have we seen the worst of the Catalan fallout? Probably not as currency headwinds are likely to remain high to gusty. However, as we’ve seen so often when EU political risk looks to be nearing the point of no return, it has an uncanny way of working out favourably for the market. As cooler heads prevailed the market reaction overnight was widely considered way overdone and a modicum of risk appeal has filtered back into the EU markets.