Morning Brief – Tuesday 27th

Summer Turkey

An escalation of the trade war in the first half of the fine August Bank holiday weekend gave way to calmer headlines and reprieve at the G-7 in France. Plainer sailing has greeted markets so far this morning with major pairs priced relatively in line with their Friday close. However, there were a couple of ships capsized in the chaos of the weekend.

The leader of the free world took to Twitter and showed us rather unequivocally how he felt about Sino-US Commerce:

“Our great American companies are hereby ordered to immediately start looking for an alternative to China…”

Sure, a presidential decree doesn’t have a great deal of bite when delivered from some celebrity’s personal twitter account. But the former US Apprentice star is swift with regulation and his propensity to put something on official paper accompanied by that god-awful felt tip pen scribble that he calls a signature should not be underestimated. It’s this fear that leads investors to react violently to any of Trump’s tweets that threaten stability and international order. The same thing happened this weekend and there’s three important things you need to know to make sense of today’s market: 1) the defence 2) the Lira and 3) the trend.

The defence: in immediate reaction to Trump’s tweet and the rhetoric of his inner-staff equities sold off like they were going out of fashion. An immediate 2% drop in the value of equity futures contracts confirmed traders’ concerns surrounding an escalation of the trade war. The defensive move favoured US treasuries which caused yields to fall to only an inch away from their record low during the Brexit referendum. The falling yield didn’t undermine the US Dollar this weekend and into the Monday open given its status as the underwriter of international trade and a safehaven in its own right. The most popular defensive currency trade was to buy the Japanese Yen in a flight to safety. USDJPY crossed through 1.05 once again. But the most interesting event was the flight from risk not to safety.

The lira: Turkey’s currency has had a torrid time over the past couple of years. Erdogan’s leadership has long been a target of Trumps twitter rage and investors too have been concerned about the economy and its politics and consequently its currency. This weekend the move in the Japanese Yen and flight from risk led holders of the Lira to dump it, creating yet another flash crash for the currency. The Lira came back gradually from its crash but the move confirms that the Lira is one of the pariahs of the foreign exchange market. The ability for a risk off move to create a flash crash shows us how little confidence investors have in the currency and gives us the expectation that it could continue to be fragile in the coming months – it’s always first in line to be dumped. The price of the Lira versus the Dollar declined by 12% during the market singularity. But that won’t help you if you’re not involved in the Lira.

The Trend: now this can help you navigate the rest of the trade war. Whilst market reaction was significant to the rise in tension the fall out was once again less significant than that witnessed after previous episodes. Average volatility is declining each time the trade war comes into focus meaning that price action surrounding battles in the trade war is less severe each time. Now we could say that’s just natural; a threat to trade is already priced in so when it rears its head again less happens. But it doesn’t look like that’s the case. A tariff is a direct threat to trade and, if anything, the rising volume of goods penalised by the sanctions has a compounded effect on global growth expectations so, if anything, each battle should see volatility more severe than the last event. Instead we can argue then that the market is caring less about the trade war and we could expect a smoother ride moving forward.

Discussion and Analysis by Charles Porter

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