Weekly Market Focus 29 August 2018 CONTENTS Asset class review... 2 Forex... 3 Views from the trading floor... 5 Calendars... 6 Contacts... 7 Disclaimer... 8 Follow us on LinkedIn H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 1
ASSET CLASS REVIEW Turkey Inflation is accelerating in Turkey, and the annual rate has now climbed above 15%. The central bank nevertheless left the key rate unchanged at 17.75%, although most market participants were expecting a rate hike of at least a full percentage point. Although the central bank said in its statement that rate hikes are possible if the data call for this, the question is whether the data have not been calling this for quite some time now. Meanwhile, the lira continues to plummet and is falling to new record lows. One euro is now worth roughly 6 lira, which is nearly twice as much as only one year ago. President Erdogan was sworn in and presented his government, which has been reduced from 21 to 16 ministers. The state of emergency that had been in effect for two years was lifted. It remains to be seen whether and to what extent this will actually change things for opposition groups. Relations with the USA are becoming increasingly tense. After Ankara continued with its plans to purchase Russian air-defence systems, the USA suspended the sale of F-35 fighter jets to Turkey until further notice. At the same time, President Trump threatened economic sanctions if Turkey does not immediately release an American pastor accused of participating in the failed coup attempt two years ago. Russia Russia s economic growth slowed in June compared with May. While some retailers and hotels enjoyed solid growth due to the World Cup, developments were less rosy in construction, agriculture, and industry. The purchasing managers index unexpectedly posted a slight decline, putting it just under the 50- point mark that separates growth from contraction. The government lowered its growth forecast for 2019, as a result of an increase in value added tax (from 18% to 20%) scheduled to go into effect next year. The expected added revenues in an equivalent amount of roughly USD 9.5 billion have been earmarked to finance President Putin s plans for modernising the economy and expanding infrastructure, along with other measures. Meanwhile, opponents of a normalisation of relations are mobilising in the USA following the first summit between the Russian and US presidents. A group of influential Republican and Democratic Senators introduced a new bill targeting Russia that proposes the stiffest sanctions ever imposed. Along with the accusations that have already been levied in connection with previous sanctions, arguments are also being made based on future events for the first time. Supporters of the bill claim that the current sanctions have failed to stop Russia from meddling in the upcoming US midterm elections in November. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 2
FOREX EUR USD Things could look differently in the euro zone though. The ECB is only beginning to end its unconventional monetary policy. If the ECB really is aiming for a meaningful normalisation of interest rates this supports an attractive risk-reward profile for the euro. At its June meeting things had still looked differently in view of the large scope the ECB s forward guidance left as regards the timing for the first rate hike. However, from the market s point of view increasing signs of rising wage pressure which should then be reflected in the underlying price pressure have increased the likelihood that the ECB might normalise interest rates more quickly than expected after all. As it is decisive for individual market participants not to miss the moment when all the others consider the likelihood of a more aggressive ECB to be sufficiently high to buy the euro, small changes in the market environment can be sufficient to cause a EUR rally. The euro was able to catch up significantly over the past few days. Despite the fact that numerous positive news items should be supporting the dollar: the stock market is booming, consumer confidence is approaching the peaks recorded at the start of the millennium and today s revision of Q2 GDP data is likely to confirm strong growth of around 4% annualised. Even the Fed has provided positive news as with Richard Clarida an expert was confirmed by the Senate as Vice Chair of the Fed. He is generally viewed as being competent and is expected to support Fed chair Jerome Powell s path of gradual rate hikes. Nonetheless the dollar was unable to appreciate recently with the exception of the days of the lira crisis when it was in demand as a safe haven. Why is that? Repeatedly there are references to the risk of an inversion of the yield curve which many see as the harbinger of a recession, as was the case in 2000 and 2006/07. In the view the current inversion is not necessarily the sign of a recession which signals that due to the risk of the economy cooling rate cuts are expected medium to long term. Instead, it is the result of the current monetary policy: the unusually inert inflation momentum and the uncertainty about the level of neutral interest rates means that the long end of the curve remains low despite rate hikes - roughly at the level where the Fed sees neutral interest rates. But even if the flat rate curve does not signal a recession, it does mean that the dollar will become less attractive medium-term, as there will not be much more than what is priced in for the short end. TRY ZAR The TRY crisis has not yet been overcome. Following the quiet holidays last week the lira continued its decline again yesterday. Statements by Finance Minister and Presidential son-in-law Berat Albayrak, that he sees no big risks for the Turkish economy and the financial system, give market participants little hope that necessary reforms will be tackled in a timely manner. Accordingly, fears on the market about how the currency turbulence in mid-august will be reflected in the upcoming data are increasing. The inflation data for August is due for publication next Monday. It will show how urgently monetary policy needs to react. It is very likely that at its next regular meeting on 13th September the Turkish central bank will ignore this need to act thus cementing the continuation of the TRY crisis. However, the effects of the lira depreciation of course far exceed the price data and will soon also be reflected in the real economy. Therefore market participants should not dismiss today s trade balance data for July as pre-crisis data, as the lira had already depreciated by more than 20% against the dollar between the start of the year and the end of July. As one of the main factors affecting the current account, the trade balance will give a first impression of just how vulnerable TRY was at the end of July. This is due to the fact that foreign investors need attractive conditions to finance Turkey s current account deficit. As long as these external financing needs exist and the central bank does not offer attractive real interest rates the TRY crisis will not have been overcome a sustainable basis so that the depreciation pressure on TRY will continue. The rand was able to recover on Monday as a result of the NAFTA breakthrough and was able to defend these gains yesterday despite continued uncertainty on the subject. The short term drop of USD-ZAR towards 14.00 was caused by domestic news which stated that the legislation proposal on land expropriation had been withdrawn. However, USD-ZAR immediately jumped back again when it became clear that the subject of expropriation of land without compensation will remain on the agenda. Regardless of the legislation proposal there is currently an on-going review of clause 25 of the constitution. The clause has to be changed to facilitate expropriation without compensation. The report by the Constitutional Review Committee is still outstanding and will soon be presented to parliament. The governing ANC decided at its December party conference that the expropriation of land without compensation was part of the tools to be used in a land reform as long as the economy and agricultural production were not at risk and food security was ensured. Despite these accompanying comments the issue remains tricky as the short term reaction in USD-ZAR illustrates. In view of next year s elections this contentious topic is not going to have caused volatility in the rand for the last time. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 3
CNY US Treasury Secretary Steven Mnuchin once again revealed an interesting understanding of currency manipulation. According to a televised interview currency transparency has to be an important subject in all trade negotiations. According to Mnuchin, it has to be prevented that trade advantages gained would be lost again because a trade partner allowed their currency to depreciate. As a result the re-introduction of the counter-cyclical factor on the part of the PBoC, which pushed USD-CNY back towards 6.80 last Friday, explicitly does not constitute currency manipulation in Mnuchin s view. However, if China allows its currency to depreciate due to structural reasons or as the result of actual manipulation that constitutes manipulation. In other words: as long as the currency moves in the direction the US wants it to, there are no problems. Whether that is a suitable benchmark long term to prevent conflicts with the US remains to be seen. As far as the Chinese government s current efforts to prevent further escalation of the trade conflict with the US are concerned these comments provide further motivation to limit the upside in USD-CNY, even if in the view the appreciation pressure in USD-CNY is based on fundamental reasons rather than structural considerations or active currency manipulation. The interview clearly illustrates that the US do not support free, market-driven exchange rates but explicitly welcome exchange rate interventions to their advantage. For our expectations of a stabilisation in USD-CNY around 6.80 until year-end Mnuchin s comments therefore constitute good news, but not so for the international currency system. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 4
VIEWS FROM THE TRADING FLOOR Equity S&P rose 1.2% on the last week, with a steady volatility moving from 12.86 to 12.50. It was a general rise as there was no clear leader, the only significant moves being application software up 5.5% and alternative carriers down 6%. The focus this week will be on the GDP for Q2 released today. This is the second estimate (Preliminary) for Q2 and the consensus seems to be that GDP will be downgraded to +4.0%. You ll recall that the first (Advance) report in Q2 showed +4.1%. S&P 500: The index has broken its historical high resistance at 2873 and is now targeting 2950 (2900 being a minor resistance). Any correction should test the 2873 support. A break of this level will to the 2800 support before 2740 (the bottom of the uptrend initiated in February 2016). Eurostoxx 50: The index has bounced back from its 3340 support and is trading sideways. As long as the index will stay in the range 3310-3525 there is not much to expect. The lower part of the range is a good buying point on the long term while 3525 is take profit level. EQUITY Developed countries Total return - 1 Week SMI 0.1% Euro Stoxx 50 0.7% DAX 1.1% FTSE 100 0.4% S&P 500 1.3% Dow Jones 1.4% Nikkei 225 2.2% Developing countries Russia/Micex 1.0% India/Nifty 50 1.2% China (HK) 1.8% FIXED INCOME Developed countries 2-year Yield 10-year Yield USA 2.7% 2.9% UK 0.7% 1.5% Germany -0.6% 0.4% France -0.4% 0.7% Italy 1.2% 3.2% Spain -0.3% 1.4% Switzerland -0.8% -0.1% Developing countries 2-year Yield 10-year Yield Russia 3.8% 4.9% - Upward move - Downward move COMMODITIES Total return - 1 Week Crude Oil -0.1% Gold -1.3% H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 5
CALENDARS Economic Events Date of release Domicile Event Period Actual Estimated 29 August 2018 US 29 August 2018 US 29 August 2018 EU 29 August 2018 France GDP Annualized QoQ Personal Consumption CPI EU Harmonized YoY Consumer Spending YoY 2Q 4.1% 4.0% 2Q 3.8% 3.9% August 2.6% 2.5% July 0.2% 0.2% H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 6
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