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Wall Street slides but losses not as intense as Europe’s: That said, there was a material pacing difference between speculative assets in the US versus some other areas around the world. US equity indices opened the day Wednesday with a gap lower but there wasn’t an immediate flush to extend the declines as the session wore through the morning and early afternoon trading. The S&P 500 and Dow gapped down to almost immediately come into contact with range resistance formed over the past few weeks – approximately 2,710 and 24,650 respectively. That was materially different than what we saw from European markets the session earlier. The DAX and FTSE 100 posted their largest single-day declines since March 23 in what looks like a substantial threat to the persistent trends of the past months. The retreat from Japan’s Nikkei 225 was similarly more consequential having broken a steady advance stretching back to late March. Have US market’s put in a cap to this tentative swell of risk aversion? We will soon find out.
EURUSD extends its tumble as data steps in for themes: Depending on where the pair closes, EUR/USD is on pace for its largest, single-day loss since February 7th and the second largest drop since October 26th. What makes this performance particularly remarkable is that it comes amid an already remarkable six-week bear trend that has retraced nearly 40 percent of 2017’s single-minded bull run. Having passed through another round of technical barriers with this session’s performance (the 38.2% Fibonacci retracements of the 2014 to 2017 bear trend and the same percentage of the 2017 to 2018 advance), a higher degree of conviction was necessary. Underlying but high profile themes like the status of the global trade wars the US has stoked and the concern surrounding an anti-EU coalition government forming in Italy were both active. Traditional data would also contribute. There was a range of indicators from the Eurozone and US this past session, but the GDP-proxy PMIs seemed to draw a clear distinction in economic performance. Where the composite activity index from Markit rose to 55.7 in May from 54.6 the previous month, the Euro-area’s equivalent dropped unexpectedly from 55.1 to 54.1. The conservation of energy principle from physics holds some truth in speculation and capital markets – a market in motion tends to stay in motion until something slows it.
Turkish Lira surges after central bank hikes rate 300 bps: Policy authorities in Turkey had been worryingly quiet in the face of a substantial slide in their local currency, the lira, that has noticeably accelerated over the past few months. Through Tuesday’s session, the intensity of the USD/TRY exchange rate’s climb had further increased its tempo on the way to fresh record highs. If left unchecked, the exchange rate would have quickly topped 5.0000 – only three months ago it was trading around 3.8000. With general elections in Turkey a month away, the need to stabilize the exchange rate was apparent. To draw all the oxygen out of the fire, the Turkish central bank held an emergency policy meeting at which they decided to increase one of its main lending rates (the late liquidity window lending rate) by 300 basis points from 13.5% to 16.5%. The response from the exchange rate was an intraday reversal that earned the lira a 7.8 percent rally from its session low. Whether this turns the tide or is just a temporary salve remains to be seen. Yet, with this move, it is clear authorities are willing to use extreme measures in order to address such problems moving forward.
Inflation is fleeting in the UK leaving little pressure for the BoE to act: Those expecting hikes from the Bank of England needed a strong beat from UK CPI this past session to pull the Pound out of its dive. Even an inline reading of 2.5% y/y would be the slowest pace for inflation in a year. However, that was asking for too much apparently. Both headline and core inflation missed forecasts with a 2.4% print from the former - a pace that is notably still above target for the 15th month. The Sterling fell by nearly 1% against the US Dollar following the news while gilt (UK government debt) yields moved lower. Rates markets continue to lower the probability of a 2018 rate rise.
Australian dollar’s rally competes with USD charge and Yen gains on risk aversion: On an equally-weighted basis, the Australian dollar was slightly higher through Wednesday’s session, but the conviction certainly wasn’t as obvious as what has been registered over the past week. That is likely due to the temperate drive behind the currency. Without a definitive foundation of monetary policy support, a distinct improvement in economic potential or just an unrestrained appetite for risk assets; the currency’s climb requires either a lack of impediment or favourable environment. With volatility picking up Wednesday supporting a Dollar rebound and general risk aversion that translated to pairs like AUD/JPY, progress was shaken. That said, the early bullish run has not completely stalled. But further progress may require a little more direct support to facilitate the same pacing going forward.
Crude oil spreads diverge from Brent to WTI and energy to risk: Crude oil faced negative headlines from the EIA weekly inventory report which showed a drop in US exports and a jump in inventories that led the Brent/WTI spread to widen with Brent crude trading around the $80/bbl mark. The broader focus now seems to be on oil and equities (as a measure of general risk assets) that may diverge even further when comparing crude to the MSCI All-country World Index. Commodities tend to rally late in economic cycles around the point that speculative enthusiasm hits its zenith and more speculatively-motivated assets start to show their concern through retreat.
Futures for the S&P/ ASX 200 show the Australian index may have some catching up to do: The ASX is set to drop at the open following global equities which took a spill overnight. Risk-off sentiment returned amid familiar concerns of increasing trade tensions and recognition of emerging markets facing heavy debt loads that will be exacerbated by the strengthening US dollar. Regarding global trade, RBA Governor Philip Lowe said Australia and China together could overcome the protectionist wave sweeping the world. The speech in Sydney addressed deeper economic ties with China through Australia’s growing exports to the country since 2000. The speech also struck a chord of comradery with Beijing as Lowe has recently called Trump’s tariff proposals “bad policy.”The ASX continued to give back gains from earlier this month and pre-session futures trading suggests BHP & Rio are set to open lower by ~1 to 2% respectively.
SPI futures moved -9.37 or -0.16% to 6032.51.
AUD/USD moved 0.0008 or 0.11% to 0.7548.
On Wall Street: Dow Jones -0.15%, S&P 500 -0.26%, Nasdaq 0.27%.
In New York: BHP -0.78%, Rio -2.39%.
In Europe: Stoxx 50 -1.27%, FTSE 100 -1.13%, CAC 40 -1.32%, DAX 30 -1.47%.
Spot Gold moved -0.35% to US$1292.53 an ounce.
Brent Crude moved -0.19% to US$79.42 a barrel.
US Crude Oil moved -0.76% to US$71.65 a barrel.
Iron Ore moved 0.55% to CNY457 a tonne.
LME Aluminum moved -0.44% to US$2270 a tonne.
LME Copper moved 1.45% to US$6979 a tonne.
10-Year Bond Yield: US 3.01%, Germany 0.51%, Australia 2.84%.
Written by: John Kicklighter, Chief Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX