View from London: We Are All One Tweet Away from Volatility
09/26/2017 12:49 pm EST
Oil may be a better guide today to risk jitters after the elections yesterday and ahead of the Fed talk on bonds. The USD is bid but not yet breaking back into a safe-zone, writes Bob Savage, CEO of Track Research in his Tuesday commentary.
Trash talking continues to dominate trading, whether it’s North Korea, the Senate health care reform hopes, Kurdish independence, EU Brexit talks or coalition building in New Zealand and Germany – politics still matter.
We are all one tweet away from more volatility.
The trading overnight started with the concerns that North Korea’s threat to shoot down U.S. aircraft since the US had declared “war” on Kim left risk monitoring central to markets. The U.S. has gamed out four or five different scenarios for how the crisis with North Korea will be resolved, and “some are uglier than others,” National Security Adviser H.R. McMaster noted.
China said that it "totally disapproved of the war of words" between North Korea and the United States, repeating its view that the two countries should resolve their differences through diplomatic and political means.
At the same time, the PBOC started to enforce the latest UN sanctions on North Korea.
The European session was less stressful in that the French business sentiment was better than the New Zealand version.
That the German auction was better than last time and that the markets didn’t fall out of bed, but for the euro (EUR/USD) which managed to break the 55-day moving average and trade through 1.1800 – something that helps equities, leaves bonds flat and makes many wonder if Merkel won the election or is losing the coalition.
Brexit talks seem to be another talking point overnight as the British pound (GBP/EUR) is weaker but not in lockstep – making it clear that many are less warm to Europe exceptionalism. This leaves the oil market as the last big mover and potential reversal for today as Brent rallied 4% Monday on threats of Turkey shutting off Kurdish/Iraqi oil if they vote for independence – with the counting on-going after heavy voter turnout yesterday – preliminary results due later today. Turnout was 72 percent, with 3.3 million of 4.58 million registered voters taking part, the election commission said.
What seems most important is that the spike up in oil hasn’t translated into a weaker USD or to gains in EM but rather left the markets more anxious.
EM flows have been choppy with China and Taiwan standing out as the least crowded of the lot. Oil may be a better guide today to risk jitters after the elections yesterday and ahead of the Fed speak-a-thon today with many banking on Yellen comments to stir up further bond selling.
The USD is bid but not yet breaking back into a safe-zone while oil prices may be setting up for a larger pullback to test the buying over the last 2 weeks.