View from London: Market Flips from Hating Pound to Buying It
09/15/2017 2:55 am EST
What seems most clear for U.S. markets is that the USD, equities and the rest of the world matter but the driving force for position failure is in bonds with 2.24% 10 year the level to watch, writes Bob Savage, CEO of Track Research in his Friday commentary.
Our hearts and prayers to those at Parsons Green Tube Station in London, the victims of another terrorist attack. An explosion during rush hour hurt a number of people but no deaths.
Also, overnight Japan saw another missile launch from North Korea as many expected. This followed threats of nuclear destruction by Kim for both the U.S. and Japan following more UN sanctions. The diplomatic reaction was that South Korea has now changed its course on engagement and 10 minutes later tested its own short-range missile and the UN security council will have yet another emergency meeting tomorrow.
For markets, both incidents have been ignored – or more accurately – seen as non-events for changing the bigger picture of growth and rates.
Gold rallied and reversed, U.S. bonds rallied and reversed, the JPY rallied and then reversed on the North Korea news while the GBP is higher more because of the threat of a December rate hike becoming more likely as BOE Carney and Vlieghe comments suggest. GBP is filing the Brexit gap with 1.3563 the June 27 highs broken and next the 1.37 and 1.38 barriers.
This is a market full of dull pain – like a constant headache – geopolitical risks don’t matter but do slow the reaction functions to other worries.
The biggest story for markets is in rates as the market flips from hating GBP to buying it, with UK rates up 30bps in 10-year over the week as the Bank of England seems more likely to raise rates to fight inflation than to support the confidence and the economy from “Brexit” hits.
The speech that drove GBP and Gilts today is from BOE MPC Vlieghe who noted that the time for a hike in rates is moving nearer, just like BOE Carney yesterday.
The focus on policy normalization is different than reflation – and that becomes clear from the China data overnight where M2 is at record lows and CNY loans and Total Social Finance continue higher – as banks give out loans but don’t underwrite bonds and as collateral like copper and other industrials wobble.
The data ahead for the U.S. will be important to continue on this theme for policy normalization vs. real inflation concerns. Retail sales, industrial production and consumer sentiment all play into the FOMC next week – even as everyone sees them on hold but is confused about December with the risk of a hike there going up.
What seems most clear for U.S. markets is that the USD, equities and the rest of the world matter but the driving force for position failure is in bonds with 2.24% 10Y the level to watch (with 55-day at 2.235% and 100-day at 2.24%).