It was a remarkably active session overnight as seemingly one by one riskier asset classes and curious investors followed the Turkish Lira down the rabbit hole in classic risk-off fashion as the markets are getting increasinly consumed by geopolitical risks again. Fasten up as this will surely get bumpier with Tariff’s, NAFTA and North Korea dominating headlines still.
The tumultuous trifecta of higher US Yields, stronger US Dollar and high Oil prices continue to wreak havoc on EM risk as business and governments alike as suffering from stronger dollar and higher US interest rates which negatively impacts external debt borrowing costs, while higher oil prices are exposing significant energy dependency risks. The underperformance of emerging market currencies and heightened global geopolitical risks should continue to wear on investors risk appetite. In Turkey, which has been absorbing the biggest body shot of late, the corporate sector is saddled with a record $ 337 billion in foreign currency debt which has been increasingly challenging to fund due to political and currency turmoil.
And of course, it’s difficult to ignore the waning optimism on China Trade relations even more so with President Donald Trump’s hawkish national security advisor, John Bolton in the mix. Investors could continue to fade the markets misplaced optimism on trade and global growth. But of course, as we’ve seen countless times before, the President tends to walk back some of his more boisterous rhetoric time and time again. So back on the twitter hamster wheel, we go.
The FOMC minutes were very much in line, and Forex traders barely blinked. The Fed is finding few hints of accelerating inflation and wage growth while hinting they would be comfortable to let inflation run higher to avoid making a policy error.
But the main story for FX was Turkey’s 300 bp hike. With the Lira apparently on a collision course with the USDTRY 5 handle, the market was preparing for some form of band-aid intervention after the central bank called an Emergency meeting. But the 300 bp was much more than expected and while the Lira has recovered handily, is the tightening enough to break the inflation and FX death spiral.
Sentiment has been pressured after OPEC threatened to turn on the taps to counter the global supply concerns in Venezuela and Iran which have been overhanging the market for months. But adding to the negative sentiment was the EIA reporting a weighty build in crude oil inventories of 5.8 million barrels for the week ending May 18. Leaving trader scratching their heads trying to figure out where this saturation is coming from. But despite the bearish indicators prices are holding up well likely supported by chatter that Sinopec, Asia’s most massive refiner, will increase US crude oil imports to record highs.
But recent flow is suggesting short-term traders are looking to sell the $ 80 chart-toppers anticipating a possible compliance shift within the OPEC-Non Opec supply agreement
It does appear the market optimism on trade, and global growth was misguided, and the resulting risk-off moves overnight have provided a boost to gold prices. But with the US dollar firmly in the driver’s seat and Turkeys central bank providing a lifeline to local currency markets, gold fell shy of breaking the critical 1300 mark.
Non the less geopolitical risk is starting to permeate once again offering a boost to gold sentiment.
The FOMC minutes were viewed dovish despite a June hike on the cards. But what is right for gold bulls is the Feds remains closer to the three-rate hike scenario than four as inflation remain elusive. The slightly more dovish interpretation is providing near-term support for gold.
But the Fed, in general, remains very data dependent with both inflation and wages at the top of their shopping lists suggesting
US equity market rebounded convincingly after the FOMC minutes suggested the Feds will stay the course of interest rate policy by not singling a shift to the 4-rate hike camp for 2018. And are willing to let inflation run higher to avoid a policy error.
From my chair, there was no definitive conclusion but rather the sameness suggests Fed policy will remain extremely dependant on both inflation and wage growth. But that interest rates are going up is not that hard of a call it is whiter we get 3 or 4 for 2018 is the decision
However, given the geopolitical overhang from trade and tariff, this equity bounce could be little more than a short-term reprieve.
Risk sentiment has turned lower on geopolitical concerns an on the backdrop of a stronger USD $Asia will continue to trade from a defensive posture.
MYR: The Ringgit remains mired in political risk as the market tries to understand details about the new government’s plan to deal with the fiscal deficit after repealing GST. And of course, the Credit agencies continue to look over Malaysia shoulder. Yesterday weaker CPI will keep the BNM on hold but the market no fuss no muss reaction suggests this could be the inflationary low water mark as higher oil prices will filter through in the months ahead
USD: Currency market continue to confuse as the meltdown in EM currencies saw riskier G-10 profiles remain relatively calm. The FOMC minutes expressed no concern about the rising USD. The dollars fate will continue to be intrinsically linked to data and centeral bank policy divergence.
EUR: The PMI data continues to look very shaky indication a negative trend across all EU sectors which suggest an extension of dovish ECB narrative.
JPY: EM risk and geopolitical concerns will continue to thwart upside momentum near-term
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