Market fragility perfectly illustrated

There is a certain fragile nature to global markets since the financial crisis, the remnants of which can be seen in the continued use of QE programmes and historically low interest rates.

These concerns continue to manifest themselves as Central Banks, the ECB in particular, refuse to allow themselves to “break the shackles” given the enormous debt overhang that still faces Eurozone banks and the ability of its weaker nations to grow despite a weakening currency and monetary policy accommodation.

There is an almost blind acceptance that globalization has taken away natural barriers which would have ensured that crises don’t spread so quickly or so readily.

This fear has been a feature of the recovery from 2008 with another crisis being seen as just around the corner awaiting a catalyst for it to become a reality. The issues currently facing Turkey haven’t happened overnight. The overseas borrowings of Turkish firms, freed from exchange controls, have been worrying markets for some time. The Lira has been weakening all year although not at the pace that has been seen recently. The diplomatic squabble between Turkey and the U.S. shouldn’t be enough to destroy the Turkish economy or bring further dark clouds across Eurozone bank’s balance sheets, but the use of a sledgehammer to crack a nut by President Trump has simply demonstrated how easy events are to set in motion and how easily fissures in global markets can blow wide open.

The dollar index took a breather yesterday following as emerging markets recovered a little poise. It fell back to a low of 96.16 and closed at 96.29.

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Sterling still under shadow of no deal Brexit

This week is an important one for UK data releases although the release of the employment and inflation reports as well as data for retail sales are unlikely to distract traders for long or provide them with a reason to either take profit on short sterling positions or, heaven forbid, establish a bullish position.

Sterling is in the grip of a view that has quickly taken hold that the UK is going to crash out of the EU next March without an agreement on the future relationship between the two.

Why has this view taken such a hold? Quite simply because a Government Minister voiced it as his personal view and the Governor of the Bank of England unwittingly became an extra in the developing farce by voicing his concern over a no-deal Brexit. The part where he said this was not his current view on the outcome of Brexit talks has been conveniently ignored by a typical August market that doesn’t allow the facts to cloud a good story.

Sterling has fallen to a fourteen-month low versus the dollar although it continues to fare a lot better versus the euro. Yesterday the pound paused for breath, reaching 1.2792 versus the dollar before settling back to close at 1.2767 while versus the single currency it fell back to a low of 1.1178 and closed at 1.1191.

The market is now heavily oversold in Sterling which means that a correction could be imminent or if there is no catalyst for such a move it will enter a stage where little happens until the next piece of news which drives it through support currently in place at around 1.2645.

Today’s employment report is unlikely to provide that catalyst as unemployment is expected to remain unchanged at 4.2% and wage inflation to remain at 2.7%

Euro recovers a little as Turkish crisis stalls

The nature of the Eurozone is such that it backs up perfectly what I say above about a nervousness that pervades the financial soundness and frugality of its members.

It seems that French Spanish and Italian banks are heavily involved in unhedged foreign currency borrowings by Turkish Corporates. Since the Turkish Lira has fallen from Eur 4.87 on April 30th to 8.1250 yesterday, the local currency debt burden on those companies has worsened considerably and could easily add to the bad debt’s being faced by those country’s banks. Although not mentioned so far it is highly likely that German banks also have significant holdings.

The euro has been allowed to fall gradually by the ECB as a means of providing weaker economies a platform from which to export without attracting too much attention from the U.S currency manipulation police. However, if the pace of decline accelerates inflationary alarm bells may start to sound and the ECB may find itself dragged out of its tauper.

Today, several Eurozone members release inflation data, with the consolidated release later in the month. No change is likely with harmonized price rises to remain at 2.1%. Today’s release of GDP data will show that the entire Eurozone grew at a moderate yet respectable 2.1 in Q2 YoY.