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Judging from investors’ reactions, the only thing worse than
the low volatility environment is when volatility spikes higher, as it did
yesterday. Higher volatility is associated
with weakening equity markets, falling interest rates, pressure on emerging
markets, a strengthening yen and, sometimes, as was the case yesterday, heavier
gold prices.
the low volatility environment is when volatility spikes higher, as it did
yesterday. Higher volatility is associated
with weakening equity markets, falling interest rates, pressure on emerging
markets, a strengthening yen and, sometimes, as was the case yesterday, heavier
gold prices.
A fragile stability has
enveloped the markets after US equities markets stabilized yesterday and the
dollar recovered from earlier losses. Those dollar gains have been pared and sterling
recovered from what many are calling a mini-flash crash, during which sterling fell nearly 3/4 of a cent in a matter of minutes with no apparent trigger. A combination of
algorithmic trading, market fragmentation, and less
liquid conditions often in the US afternoon are seen as the main culprit.
enveloped the markets after US equities markets stabilized yesterday and the
dollar recovered from earlier losses. Those dollar gains have been pared and sterling
recovered from what many are calling a mini-flash crash, during which sterling fell nearly 3/4 of a cent in a matter of minutes with no apparent trigger. A combination of
algorithmic trading, market fragmentation, and less
liquid conditions often in the US afternoon are seen as the main culprit.
The recovery on Wall Street
helped Asian and European markets steady today. The MSCI Asia Pacific Index eked out a small 0.15%
gain, cutting this week’s loss in half. We note that the South Korea’s
KOSPI managed to post a small gain today
and on the week, despite tensions on the peninsula not relaxing much, though the Korean won weakened (0.2% on the day to be the weakest of the Asian
currency complex). The won is
essentially flat in the week. The
US has reportedly sent another aircraft carrier into the region. Separately,
China intercepted a US aircraft over the East China Sea.
helped Asian and European markets steady today. The MSCI Asia Pacific Index eked out a small 0.15%
gain, cutting this week’s loss in half. We note that the South Korea’s
KOSPI managed to post a small gain today
and on the week, despite tensions on the peninsula not relaxing much, though the Korean won weakened (0.2% on the day to be the weakest of the Asian
currency complex). The won is
essentially flat in the week. The
US has reportedly sent another aircraft carrier into the region. Separately,
China intercepted a US aircraft over the East China Sea.
European shares are doing
better. The Dow Jones Stoxx 600 is up nearly
0.5% in late morning turnover, leaving it off 1.2% for the week and snapping a three-week advance. Materials and
energy are leading the market higher. Real
estate and consumer discretionary are lagging, but all sectors are higher.
better. The Dow Jones Stoxx 600 is up nearly
0.5% in late morning turnover, leaving it off 1.2% for the week and snapping a three-week advance. Materials and
energy are leading the market higher. Real
estate and consumer discretionary are lagging, but all sectors are higher.
Emerging markets are doing
better today as well. The MSCI Emerging equity market
index ended a seven-day advance Wednesday and fell 2% yesterday. Ahead of
the Latam open, it is up about 0.4% today. It four-week rally is at risk.
Mexico surprised many yesterday
with its sixth consecutive rate overnight rate hike (6.75% from 6.50%).
The peso had largely recovered from its mostly Brazil-induced slide
before the central bank met and it has continued to edge higher today.
better today as well. The MSCI Emerging equity market
index ended a seven-day advance Wednesday and fell 2% yesterday. Ahead of
the Latam open, it is up about 0.4% today. It four-week rally is at risk.
Mexico surprised many yesterday
with its sixth consecutive rate overnight rate hike (6.75% from 6.50%).
The peso had largely recovered from its mostly Brazil-induced slide
before the central bank met and it has continued to edge higher today.
Brazil’s situation does not
appear to have stabilized much. The country ETF that trades in Japan
fell another 6.5% earlier today. Of the two men who led the impeachment of the former president on corruption charges,
one is in jail, and the other is
president and allegedly is recorded supporting payoffs to the one in jail.
The other more liquid and accessible emerging market currencies like the
South African rand and the Turkish lira are also recovering from yesterday’s
slide.
appear to have stabilized much. The country ETF that trades in Japan
fell another 6.5% earlier today. Of the two men who led the impeachment of the former president on corruption charges,
one is in jail, and the other is
president and allegedly is recorded supporting payoffs to the one in jail.
The other more liquid and accessible emerging market currencies like the
South African rand and the Turkish lira are also recovering from yesterday’s
slide.
Also, earlier today S&P
lifted its rating on Indonesia one step to BBB-, which brings its back into
investment grade status. This brings S&P
into line with the leading rating agencies. However, it has a stable
outlook, while Moody’s and Fitch have positive outlooks. The currency
gained a little ground while the stock market surged to a new record high, and
gained 2.5% on the day.
lifted its rating on Indonesia one step to BBB-, which brings its back into
investment grade status. This brings S&P
into line with the leading rating agencies. However, it has a stable
outlook, while Moody’s and Fitch have positive outlooks. The currency
gained a little ground while the stock market surged to a new record high, and
gained 2.5% on the day.
While markets are calmer
than yesterday, nothing has been resolved. US political risks remain. Impeachment talk is
not only unfounded but not politically
realistic, even if some Democrats are pushing it. First, Trump’s support
among Republicans remains high, according to recent polls. Second, the
Republican’s have a 45-seat majority in the House of Representatives, where a
vote to impeach requires a simple majority. In Senate, where the
Republican’s have 52 seats, only 35 votes would be necessary to block a
conviction.
than yesterday, nothing has been resolved. US political risks remain. Impeachment talk is
not only unfounded but not politically
realistic, even if some Democrats are pushing it. First, Trump’s support
among Republicans remains high, according to recent polls. Second, the
Republican’s have a 45-seat majority in the House of Representatives, where a
vote to impeach requires a simple majority. In Senate, where the
Republican’s have 52 seats, only 35 votes would be necessary to block a
conviction.
The more realistic threat is
that the investigation into links with Russia distracts from the economic
agenda, especially given the inexperienced team in the executive branch in terms of shepherding legislation through
Congress. Investors are probably best served by monitoring progress on the economic agenda.
that the investigation into links with Russia distracts from the economic
agenda, especially given the inexperienced team in the executive branch in terms of shepherding legislation through
Congress. Investors are probably best served by monitoring progress on the economic agenda.
There are three developments
to note. First, with Lighthizer being
confirmed as Trade Representative, the 90-day notice to renegotiate
NAFTA formally was given. Ideas that a new agreement can be wrapped up by
the end of the year seems unrealistically ambitious. Second, Treasury
Secretary Mnuchin affirmed that a ultra-long bond (50-years or more) is being contemplated, despite a cool reception by
primary dealers. Third, Speaker of the House Ryan indicated that he still
favors the border adjustment tax, even though
the White House has indicated that its current form is not acceptable.
to note. First, with Lighthizer being
confirmed as Trade Representative, the 90-day notice to renegotiate
NAFTA formally was given. Ideas that a new agreement can be wrapped up by
the end of the year seems unrealistically ambitious. Second, Treasury
Secretary Mnuchin affirmed that a ultra-long bond (50-years or more) is being contemplated, despite a cool reception by
primary dealers. Third, Speaker of the House Ryan indicated that he still
favors the border adjustment tax, even though
the White House has indicated that its current form is not acceptable.
The euro has returned to
approach yesterday’s highs. The price action reaffirms the
importance of support we noted yesterday in the $1.1080-$1.1100 area. The
intraday technicals are getting stretched, and barring new developments, not much
more than a marginal new high seems likely. The JPY111.75-JPY112.00 may
be sufficient to cap a stronger dollar recovery against the yen as the US
10-year struggles to push above 2.25%, as it nurses a nine basis point decline
on the week. Sterling has edged back above $1.30. The $1.3055
retracement objective held yesterday and may be
tested again today. Intraday technicals warn against a significant break
above there before the weekend. The Australian dollar may have peaked
after it made a marginal new high for the week near $0.7470. Support is
seen by $0.7430.
approach yesterday’s highs. The price action reaffirms the
importance of support we noted yesterday in the $1.1080-$1.1100 area. The
intraday technicals are getting stretched, and barring new developments, not much
more than a marginal new high seems likely. The JPY111.75-JPY112.00 may
be sufficient to cap a stronger dollar recovery against the yen as the US
10-year struggles to push above 2.25%, as it nurses a nine basis point decline
on the week. Sterling has edged back above $1.30. The $1.3055
retracement objective held yesterday and may be
tested again today. Intraday technicals warn against a significant break
above there before the weekend. The Australian dollar may have peaked
after it made a marginal new high for the week near $0.7470. Support is
seen by $0.7430.
The US economic calendar is
clear. President
Trump’s first trip abroad is about to begin. Saudi Arabia is the first
stop. Canada reports April CPI and March retail sales. The pace
of inflation may tick up a little but remains
subdued. Retail sales are expected to increase
0.3% after a 0.6% fall in February. The Bank of Canada meets next week, and there is little doubt that policy
will remain steady. The US dollar is at new lows for the week and month
against the Canadian dollar. It has been flirting with the CAD1.3575
retracement target for several days. A convincing break targets CAD1.3510
initially and then CAD1.3440. However, the intraday technicals warn that
even a slight disappointment with the data could see the greenback bounce back.
clear. President
Trump’s first trip abroad is about to begin. Saudi Arabia is the first
stop. Canada reports April CPI and March retail sales. The pace
of inflation may tick up a little but remains
subdued. Retail sales are expected to increase
0.3% after a 0.6% fall in February. The Bank of Canada meets next week, and there is little doubt that policy
will remain steady. The US dollar is at new lows for the week and month
against the Canadian dollar. It has been flirting with the CAD1.3575
retracement target for several days. A convincing break targets CAD1.3510
initially and then CAD1.3440. However, the intraday technicals warn that
even a slight disappointment with the data could see the greenback bounce back.
Markets Trying to Stabilize Ahead of Weekend
Reviewed by Marc Chandler
on
May 19, 2017
Rating: