The end of a long and not particularly uplifting week ......
ref :- Various
It's been quite a ride, and traders in the US and UK will think they probably deserve the upcoming long weekend ..... depending which side of the Atlantic you are, Monday is Memorial Day / the Spring Bank Holiday in those two countries respectively.
Those traders might deserve a break but they won't get one ..... not really. The markets never really close these days, and if you're managing any positions in any number of asset classes it would be particularly foolish to take your eye off the ball when things are as febrile as they are right now.
By way of a quick run around some of the week's major issues, we'll start with a couple we've been discussing this week :
ITALY : Law professor and novice politico Guiseppe Conte may have been approved for the post of Prime Minister by President Sergio Matarella, but that's just the first of many hurdles to overcome. Now he has to select a cabinet agreeable to the President, and most importantly he has to choose a candidate for the vital post of Economy Minister. A major concern over Mr Conte is that he might be permanently deferring to the leaders of the Five Star / The League alliance that proposed him for the job as PM, and immediately we have a case in point. Matteo Salvini of the League wants 81 year old Paulo Savona to be given the economics brief. Mr Savona is a former Industry Minister and does tick a number of boxes, but crucially is a Eurosceptic .... at least of the EU and the Eurozone in its current form, which he believes is designed to favour the likes of Germany. That's probably why President Matarella has intimated his doubts over Mr Savona's suitability for the job. The potential for Mr Conte's premiership running into serious problems before it has even got going is obvious. The atmosphere is not being improved any by the alliance's thoughts on Italy's banking sector, which is very different from those that the EU would like to hear ..... and we haven't even got into the alliance's "irresponsible" fiscal plans yet.
The Italian Government 10yr bond yield has been as high as 2.46% this morning. The Germany / Italy 10yr yield spread (which not so long ago some were saying was stretched at 140 basis points) has just hit 200 bp. Perhaps even more enlightening, Italy's 10yr paper now requires a yield 100 bp -- a full 1% -- higher than that of Spain, the country with which Italy is most closely bracketed.
TURKEY : As we write, not much change in the US Dollar / Turkish Lira exchange rate from when we looked at it yesterday, with USD / TRY trading at 4.72. That of course still means that the Lira has given up half the gains it made after Wednesday's 3% rate hike. On the other hand, it also means that pro-term it has at least staunched the blood-letting .... which was by no means certain yesterday. Traders seem to view IMF MD Christine Lagarde's reminder of the need for total central bank intervention as helpful, and of more immediate support has been the decision of that central bank to allow exporters to repay dollar-denominated debt in local currency, at least until July 1st.
A couple of officials have been reiterating the central bank's commitment to fighting inflation, which is good to hear if you assume that they don't have the same views as President Erdogan on how best to go about it. Actually, with rates now at 16.5% and inflation near 11%, the gap between the two is a fair bit larger than those in some other major emerging market nations with inflationary issues (e.g. S. Africa, Russia). The trouble is, sceptical traders and investors remain wary of how President Erdogan will marry inflation control with a pro-growth agenda that many would say is the last thing that Turkey needs right now. More than that, they're very nervous about what the President might do once he's got the renewed mandate of an election win on June 24th. (NOTE : one or two people who might know have suggested that an Erdogan victory is not quite the absolutely the cast-iron, guaranteed certainty in a sham election that we suggested it was yesterday. We'll defer to their superior knowledge .... and just say that the re-election of the current President is "highly likely".
N. KOREA, US , CHINA AND BEYOND : What can we say about President Trump's cancellation of his meeting with Kim Jong Un ? It shouldn't be a surprise that the US can't come to terms with the N. Korean regime, although we have to say that the constant comparison of the situation with that of Libya made by US officials cannot have helped one bit. It does mean however that the US has walked away from one nuclear agreement (Iran) and dashed hopes of another in a matter of a few weeks. That's a little troubling whatever the rights and wrongs. Similarly, fears of a full-on, global trade war are boiling up again after the US threat to slap significantly higher tariffs on imported automotive products. This is a much, much bigger deal than the proposed aluminium and steel tariffs. Nobody should say that the US doesn't have the right to examine differing policies between nations on this kind of thing, and this may well be just a bargaining ploy, particularly in NAFTA negotiations with Mexico and Canada -- Trump-watchers can detect a modus operandi first laid out in the president's book "The Art of the Deal". But to suggest that such a move is warranted on National Security grounds is frankly a little ludicrous, and is plainly just a tactic to avoid breaking WTO rules. Moreover, it further antagonises the US' "allies" at a time when Mr Trump is already picking fights with their "enemies", and further threatens the world order that the US itself created.
Anyway, from a markets point of view the point is this : the RISK-OFF environment has returned -- the world is a dangerous place. That means that some traditional safe-havens are back in fashion. Remember how US 10yr yields breaking through 3.00% signalled a move to 3.50% or even 4.00% ? They were trading at 3.11 just a week ago, and yet as we write they are trading at 2.96%. US Government paper is the ultimate bolt-hole when people are scared, forcing prices up and yields down. It's the same with the Jap Yen and the Swissie, and even Gold has staged a recovery back up through $1300 (last $1305).
AND LASTLY.... OIL (see "Oil producers to review global output cap" , The Financial Times) : Without any shadow of a doubt, the historic deal between OPEC and Moscow that took 1.8bn barrels a day out of production has been a success. With Brent crude having traded above $80 per barrel this week, how could you argue otherwise ? Mind you, there have been some other factors in the climb, the implosion of poor Venezuela's production and the threat of Mr Trump's renewed sanctions against Iran to name but two. But even for producers, upwardly spiralling oil prices are not necessarily a good thing. They can damage global GDP growth, which will affect future demand. They can promote an overheated market that results in destabilisation and excess supply. And they can encourage shale oil producers who, the traditional producers fear, have the potential to take prices much lower in the future.
So instead of discussing how long the deal to cut back production will be extended for, as we did just the other day it seems, the talk is now of "relaxing the deal". We're not there yet, but the next OPEC meeting in Vienna on June 22nd now assumes even greater importance. There is one obvious problem with planning to keep a lid on prices in today's world, however, and of course we're back to the Trump / Iran sanctions thing. Mr Trump's got a plan for that too, apparently. He's primed Saudi Arabia, Iran's great adversary and suddenly a great mate of the president, to lead its allies in making up for any shortfalls in supply . Oh, what tangled webs ......