A healthy wave of risk appetite for European and U.S. stock markets.
Yuan and lira retreat
And yes, it is overshadowed by continued emerging-market tremors. An offshore yuan decline increased by some 100 pips to stand at 230 pips as I wrote this. It helps that renminbi barely moved in the onshore session. That helped enabled Shanghai Composite and Shanghai Shenzhen 300 indices to rally for the first time in six sessions. Decent gains by bank, oil, real estate and basic resource producers’ shares there, go some way to explaining why Britain’s laggardly FTSE 100 trumps expectations for another weak session. China and APAC in general also pave the way for a sea of green across European STOXX sectors, including troubled basic resources. Uneventful German industrial inflation data added another wash of calm. In short, it would be a stretch to conclude the wheels won’t ‘come off’ markets again sometime soon, but global shares should remain orderly whilst stability prevails in recent currency hot spots.
Lira in focus
Enhanced lira monitoring continues. As the CBRT continues to roll out marginal interventions USD/TRY continues to strain at moorings. On Monday, the central bank unusually cancelled both the regular deposit auction and the repurchase auction it typically holds at least daily. A swap agreement emerged with Qatar (limited to $3bn), after the gulf state pledged an $15bn investment last week. At the same time, local swap schemes, and non-swap derivatives were capped to 25% of equity last week by Turkey’s bank regulator. Extinguishing a key avenue of external hedging is effectively a form of tightening Turkish banks may have to resort to lira financing rates that were temporarily hike to 19.25% last week. The swap caps also restrict speculation and possibly increase risk of capital outflows. In other words, they’re not a sustainable solution, backing the view of just about everyone in markets that Turkey is merely buying time.
USD/TRY nears 6.13
And assessments of just how much time policymakers have between crises is up for debate. Like USD/CNH, USD/TRY has also extended gains by about 100 pips since late morning to stand near 6.10. The only real reassurance for those hoping the lira will steady is that the dollar’s latest attempts to vault 6.13 on the way to 6.21 are being thwarted. Those levels have roughly signalled volatility spikes in recent days. Meanwhile, President Tayyip Erdogan has, predictably, kept up a stream of bellicose bulletins. They’re just as much crafted for a domestic audience as they are lobbed at markets and Washington. Rallying lira shows financial measures are not enough to right the ship whilst perceptions of the government’s economic intentions may yet help create another storm.
Jackson Hole a euro and sterling event
A window of relief for EMFX—the risk-on/off pivot point of late—offers unmissable opportunities for positive beta in the very short term, before possibly providing a good environment for selection and rotation. Bearing in mind the seasonal damp in activity, complemented by a relatively light calendar, only another currency market flare-up may stand in the way of good equity market progress this week. True, we do have Federal Reserve minutes on Wednesday, though the Fed’s view of the U.S. economy’s economic strength has scarcely failed to reverberate since the last on-hold policy statement, so it would be a surprise if minutes prove to be a material risk event. On Friday afternoon, chair Jerome Powell will speak before the beginning of the bank’s Jackson Hole Symposium proper. For market participants, the main interest for in the pow wow, is that it has a history of being a venue at which the Fed has signalled the beginnings of a shift. All things considered, this probably won’t happen this time. Moderate volatility across deflated euro and sterling and other currencies struggling against the dollar are therefore the likeliest effect the meeting will transmit to markets.
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