Whether today is a sustainable change or not depends on the type of relief. Treating the symptom or the disease matters. Doctors for the market – commonly known as central bankers – did little to change things today. Witness the Norges Bank decision to keep rates unchanged but to likely hike in September.
What did change the mood overnight was two stories – 1) China/US talks on trade (US Malpass meets China Wang in late August) and 2) Qatar promising $15bn for direct investment into Turkey. There is also hope that Brexit talks restarting led to something better than a no-deal ending of UK/EU trade. However, the event of the day is the conference call of new Turkey FinMin Albayrak, seen as many as a key test for TRY holding below 6. Despite all the talk of relief, the sinking of Turkey and China has led this week to the MSCI EM index to reverse from its January highs to bear territory (down 20%).
Asia just didn’t buy into the relief trade while Europe has except for Italy. This brings out the key theme for the day – what type of relief has been delivered for the symptoms. The USD strength has led to gold to touch 19-month lows and most currencies beside the JPY to weaken substantially, that has led to another round of Hong Kong intervention to hold the HKD peg and it has brought mining shares to 5-year lows.
The USD relief starts with hope that US/China trade talks are real, continues with the Turkey alternative plans for its economy to have some credibility, and extends to how central bankers – particularly the FOMC – see the world financial stability.The summer vacation trading is easy to ignore and to push off as due to illiquidity and extreme over-reactions to the usual set of headlines about dire geopolitics.This begs investors to find the right safe-haven barometer to guide us through whether the doctors have fixed the markets or the just hidden the symptoms. The old FX saying is that CHF doesn’t lie – meaning a nation where negative rates and huge surpluses – remains a constant safe-haven even with SNB confusions. The risk off trade will gather steam if EURCHF 1.12 breaks much like 110 in JPY.
Question for the Day: Is the real problem Italy and Greece? The recovery from the great recession has been uneven for many nations. The focus on emerging markets has left many wondering if the real problem is elsewhere – with Italy politics daily driving doubts. The history lesson about too much debt and the cost of deleveraging without devaluation remains intact with Greece.
You can’t force a huge economic restructuring without all tools working – and the ongoing problems for Europe link back to the Greek bailouts where the inflexibility of the EUR clashed with the insistence of keeping the debt burden on the books (albeit restructured and pushed further out into the pretend and extend Neverland). Axios has an article worth reading today to consider all of this. The key question for risk is if the dominos for the weeks have already fallen and are fully priced – namely Turkey, then China, then Italy.
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