Well, things certainly got a little more interesting on the UK political front this week. Perhaps ‘interesting’ is underscoring it somewhat, but quite how this will all unfold from here is still extremely hard to determine. Many in the market seem to conclude that the latest developments have increased the chances of a no deal exit. Whilst that’s certainly true of course; its also true that the chances of reaching a deal or perhaps a general election have also increased too.
That probably explains the initial reaction to Johnson’s prorogation decision, when the pound got sold heavily. However, since then and as the markets better digest all the potential outcomes, the currency has actually performed quite well against a resurgent dollar. Indeed, the US currency has finally, after many times of asking, pushed through 1.1050 against the EUR as the USD index lifts back above 98.50.
The move below 1.1050 on the EURUSD this morning marks what is a fresh 2 year low for the single currency and comes right ahead of the month end close later today. As usual that month end has the potential for multiple fixing orders to impact the FX markets at the top of any hour today, with particular focus on the 1.15pm European and 4pm London Fixes.
Most especially that often comes in the form of a decent sized GBPEUR selling order, but we shall just have to see if one of those comes to fruition today.
A more positive geopolitical news backdrop on the US/China trade front yesterday helped global equity markets reboundand that has dented gold over the past 24hours with the price stalling just above $1550 yesterday. That in effect has set upan interim double top around there and that’s confirmed by the price leaking back through support at $1530, to as low as $1519.85 yesterday.
Naturally, whilst the more benign geopolitical news backdrop has impacted the metal from a risk perspective, it still has the current bond market/negative yield conundrum very much in its favour. Consequently, gold is still going to attract buyers on any price dip until something materially changes in that respect.
Elsewhere, the price of oil continued to extend to the upside yesterday with WTI closing above its 200dma (daily moving average) at $56.09, helped by some surprisingly largestateside inventory drawdowns earlier in the week. The fact that oil is rising is also a driver for the S+P to rebound too as both markets are still closely correlated.
Earlier this week the US treasury secretary, Steve Mnuchin dismissed the idea that the US was going to devalue the dollar. For sure his department must have looked at the pros and cons of doing that, not least as a result of continued pressure from the President.
Whilst it seems that pressure isn’t going to dissipate any time soon, effectively achieving devaluation without wider coordination might be very difficult. Besides it such action would not go down at all well with the multitude of overseas based US bond holders- and that’s putting it mildly!
Elsewhere Greek bonds have surged again this morning, with 10year yields dropping below 1.60%. This is all down to the easing of capital controls earlier this week which has led to huge demand for Greek debt. Now I know I said previously that you wouldn’t find me holding Greek government debt and quite honestly I haven’t changed my mind about that, but at the same time I readily concede that in the short term I have sure let an opportunity go begging. As usual hands up where necessary when it comes to admitting that.
Over and above that, the willingness of investors to pile back into Greek bonds is as good an indication as any as to just how desperate the hunt for yield truly is. Indeed, its also entirely possible that the lower the yields fall elsewhere in Europe, the greater will become the temptation to hold Greek paper- irrespective of the credit risk it seems, but in all honesty 10year Greek paper at near enough the same price as that on offer from Uncle Sam- Seriously?
Important Economic Releases/Events Due Later Today
30/08- 10.00am Eurozone August Annualized CPI Inflation Report
30/08- 1.30pm Canada Q2 and June Annualized GDP Estimates
30/08- 1.30pm US- July Core Annualized PCE Report
30/08- 2.45pm US- August Chicago Purchasing Managers Index
30/08- 3.00pm US- Final Reading of August University of Michigan
Consumer sentiment Index