EUR 8.46 For Business Accounts Only

The Morning Track action

- The Morning Track – Action? by Bob Savage
http://trackresearch.com/articles/the-morning-track-action/

This is supposed to be the week of false calm, where price action remains subdued despite the underlying fears of worsening trade tariffs leading to a global slowdown in growth and leading to weaker animal spirits in risk markets. The price action overnight tells another story.
Commodities and Foreign Exchange are grabbing the headlines for investors today, with GBP trading at 10-month lows, thanks to weak retail sales that take away BOE August rate hike certainty; with EM FX in focus again as INR trades near historic lows trading 69.006 today, with CNY weaker again, trading 12-month lows, as the PBOC leans dovish. China saw $10.7 billion cross-border capital outflows in June as the yuan has depreciated. The drops of oil prices and metals (particularly those around autos) have continued to technical break points overnight. The movements of Commodities FX maybe the reality but the drivers are the key for understanding what it means for other markets and the bigger picture.
• First there is trade – the US threats to China continue and EU is on deck. Trump ahead of talks next week threatened “tremendous retribution.” This leads to weaker Platinum prices, lower metals in general. It also hit the CNY which trades over its previous 6.73 highs to 6.7845 so far.
• Second there is policy confusion - Japan saw the BOJ cut its buying of longer term bonds and the JPY rallied (perhaps more because of risk-appetites and safe-haven purchases), but the bond markets didn’t react, in fact yields in the long-end fell. PM Abe’s likelihood of winning leadership of the ruling LDP for the third term is increasing, reinforcing view that BOJ Governor Kuroda’s monetary stimulus will be prolonged. Expectations drive markets and FOMC Powell testimony made clear the Fed will be hiking again in September and likely December. This drives the USD higher across the board. US 10Y rates are back to 2.89% and look to 2.95% as the next big level.
• Third there is politics – as the UK May wins on Brexit seem pyrrhic. The EU prepares for “no deal Brexit.” The US mid-term elections are back in focus given the Trump/Russia headlines leading to more Republican Party divisions.
• Fourth there is fear – There is still the greed of missing out on the upside for stocks at the peak of earnings season, but there is fear that the policy of Powell and Trump lead to mistakes and recession. The added tail is that good things like North Korea denuclearization has stalled. Trump said there is “no rush” to deal with Kim-Jong Un.
This puts the modest drops in equities in Europe and in US futures at risk for a larger move should the price action continue to matter in FX and commodities. The barometer of risk-on and off has usually been the JPY but today, the break of 1.16 EUR opens a larger picture for trouble in Europe as it wraps around politics, trade, rates and other fears.