Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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TRY contagion spreads across the board
John J. Hardy
Global Head of Macro Strategy
First, some key points for today’s suddenly much higher energy markets...
The risk-off tone linked to Turkish lira is seeing contagion into all global assets – traders should tread with caution as correlations across markets tend to all head toward one in these kinds of conditions – i.e., falling interest rates, falling stocks, falling risky currencies, rising JPY, rising USD, etc.
The TRY meltdown comes with Erdogan sending all of the wrong signals and continuing to take a defiant stance – we don’t dare guess where this might lead going into the weekend if his speech coming up at 11:00 GMT today doesn’t show a shift in tone. An FT article cites the 7.1 level in USDTRY as possibly important as it could be a level at which Turkey’s banks run out of excess capital.
Other EM FX: Other EM currencies are rather offered for obvious reasons on contagion from the TRY move, though USDCNY holding the line may be contributing to more stability than one would ordinarily expect – especially in Asia, of course. All bets off on the risk of volatility if 7.00 falls in USDCNY. If the risk off selling deepens, would expect further standout weakness in BRL and ZAR, with the recent drumbeat of sanctions news also pressuring the Russian ruble further and a further weakening there a risk if key support in Brent crude around 71.00-70.00 gives way.
Data later: US CPI up later and may not get the focus it deserves, but note that the core CPI is expected to print at 2.3% year-on-year again, an area touched but not exceeded a number of times since the global financial crisis.
Chart: EURUSD
The big news within the G10 is the fresh low for the cycle in EURUSD as the pair plunged through the 1.1500 level, a very important one locally and stretching back a few years from the 2015-2016 period as well. If the break holds and risk contagion deepens, USD and JPY are likely to remain the strongest within the G10 and EURUSD could be heading toward 1.1200 if it continues to trade south of the break level. Still, traders should remain on their toes.
The G-10 rundown
USD – the US dollar and yen are competing for status as top dog among the G10 as is often the case when risk appetite takes a beating. USD posting new highs versus EUR, GBP, AUD, and NZD now.
EUR – euro pressured on the ECB expressing concern about individual EU banks’ exposures to the Turkish situation, but flow obviously picking up heavily on the breakdown through 1.1500.
JPY – the yen trying to take the initiative even against the US dollar, but not fully achieving liftoff there – obvious correlation with risk appetite picking up as recycled Japanese savings into higher yielding markets around the world typically are at risk of reversing in situations like these.
GBP – sterling managing to fight back against the single currency slightly on the spin that EU banks are more exposed to Turkey – still, the chart points higher for EURGBP if the pair remains above 0.8950 on the risk of a no-deal Brexit.
CHF – EURCHF volatility accelerating on this latest move and SNB will have its work cut out for it in intervening if EU existential risks linked to Italian and other Club Med banks pick up on exposures to Turkey. The next levels are 1.1200 and even 1.1000 – with SNB discomfort and potential to act likely picking up into the latter level.
AUD – the focus on Aussie torn away from the iron ore rally and relative strength versus a struggling kiwi and back into its traditional role as a G10 proxy for risk appetite as the overnight downdraft in risk off sees AUDUSD punished to new lows for the cycle.
CAD – USDCAD looks a real laggard relative to what is unfolding elsewhere, and if crude oil punches lower, the pair could play some catch-up in expressing USD strength. Later today we get Canada’s latest jobs and earnings numbers.
NZD – the sudden focus on AUD as AUDUSD hit new lows has provided late comers to AUDNZD longs a fresh opportunity if that pair is to remain in a rally stance after the dovish RBNZ (though the pair needs to show signs of life ahead of 1.1000 today.
SEK – SEK falling even against a weak Euro today even as the July CPI release came in as expected with core inflation at 2.2% (real rates are -2.7% in Sweden right now with a policy rate of -0.5%!). Surely we see a shift soon from the Riksbank…
NOK – headline CPI an impressive 3.0% vs. 2.6% expected, but the core CPI beat less than expected at 1.4% vs. 1.2% expected. Decent NOK bump, but further risk off could punch oil prices and act as a headwind for further upside.
Upcoming Economic Calendar Highlights (all times GMT)
• 1100 – Turkey’s President Erdogan to Speak
• 1230 – US Jul. CPI – exp. Unchanged +2.3%/2.9%
• 1230 – Canada Jul. Employment Change / Unemployment Rate
• 1230 – Canada Jul. Hourly Earnings
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