The safe-haven reversals overnight merit attention – we were euro traders Tuesday and Japanese yen today. If we can’t get JPY back over 109.15 watch out for a return of fear and loathing in all markets, writes Bob Savage Wednesday.
After a panic, a nervous calm with a shot of courage from surviving the worst. That maybe the best way for thinking about today’s price action with Asia selling stocks, Europe buying them back and with fixed income the tail of the dog wagging furiously for attention again.
This is business as usual – 2018 and the return of volatility caused by politics and policy uncertainty.
Italy still dominates markets with an early election now expected for July or another attempt at a populist government then an election.
The Italian BTP market recovers modestly, with the 5-year and 10-year sale successful enough – there was no big risk premium paid, no risk of being shut out of markets – a business as usual story.
The euro (EUR) rallies back. Risk-mood flipped from negative in Asia with the U.S. /China tariffs back on driving down shares there and throughout the region as the turnabout in U.S. policy threatens talks going forward.
The safe havens have similarly flipped from the Japanese yen (JPY) touching 108.35 but bouncing back with focus on rates. The world has shrugged off the Italian contagion trade and moves on. There is no “Rexit” Rome leaving the EUR but there remains "Brexit" and the British pound (GBP) suffers accordingly.
The EUR doesn’t reflect any of the pain that even the French election jitters caused. This is not 2012, it’s 2018 and markets have learned that central bankers are the safety net but not a reliable one. That puts the expectations for rates as key to trading risk more than political analysis for now.
We dive next into the U.S. jobs report (up 178,000 from April to May) and global PMI reports dragging growth and inflation back into focus.
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Weekend commentary: The long holiday weekend produced more excitement than the previous week did in total. When endings are more important than beginnings we doubt the process and how we got here as being as crucial as the results, but ends don’t justify the means particularly if they undermine the future next path.
The moral quandary of markets reflects the ongoing uncertainty of policy clashing with politics. There are three key focal points that drive risk across all markets into this week: Italy, OPEC and North Korea.
While many will note that geopolitical fears didn’t matter to markets last week, citing the S&P 500 (SPX) gains and the USD stability, others will see the glass-half-full and see the rips in globalization tearing about confidence and growth for the rest of the world.
The moves in the Turkish lira (TRY) and in EUR reflect this point. Risk-on and risk-off thinking dominated the markets last week and may plague it further throughout the summer making for more volatility with less no table returns.
The pain of market volatility and political uncertainty can destroy investor and consumer confidence. Expect that to be the focus in the month and weeks ahead.
The end result for June and 3Q ahead may still lead to modest risk asset gains but via a tortured path. The key is the underlying global recovery strength with Italy counterbalanced by lower oil prices and North Korea peace hopes.
Last week saw speculators lose money in the EUR, GBP, JPY, Australian dollar (AUD) and Oil while they made modestly in the Canadian dollar (CAD) and Gold. Market remains net long EUR despite the month-long decline – all of which suggests we have yet to see the capitulation trade.
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