Trader thoughts - the long and short of it

With a full trading day under our belt to start the week, we are probably no closer at this stage to understanding the full impact and scope of the Turkey Crisis. Emerging markets came under significant pressure throughout the trading day, adding to calls that “contagion” risk remains on the cards. The South African Rand demonstrated this flightiness during the Asian session, falling by as much as 10 per cent, while in overnight moves Argentinian markets were squeezed by investors exiting that country’s capital markets. At this time, the problem can be boiled-down to the fact that there isn’t enough of an understanding of the extent of this crisis: until that can be achieved, fear will remain the predominant driver of market activity.

Turkey: The state of play in Turkey, and the policy developments that have been announced response to it, has few investors reassured that the Turkish problem will go away. Global markets have been looking for a steady hand and conciliatory tone from Turkish President Tayyip Erdogan but have been instead delivered belligerence and ambiguity. From a political point of view, the relationship between the US and Turkey looks in a state of utter disrepair, as Turkey’s administration threatens to pull away from the diplomatic relationship. The response from Turkey’s policy makers to the crisis were initially met with positivity, after they pledged to “take all necessary measures” to address the crisis; however, hope was short lived when the detail of their policies was released, with markets deeming them insufficient for the task at hand.

ASX: The ASX 200 wasn’t spared from the sell-off in global equity markets yesterday, although to the local market’s credit, the shift lower was relatively benign, with SPI futures indicating a slightly higher open today. The Australian share-market ended trade last week only just as the Turkey news hit the newswires, so there was a large degree of catch up trading to be found in the price action yesterday. The financial sector – which underpinned the ASX’s run higher last week – was perhaps the hardest hit yesterday, falling in line with global financial stocks, which have tumbled on the back of Turkey’s financial crisis. The ASX 200 now sits precariously close to a trendline support level around 6235 – which was bounced off in yesterday’s trade – that if breached indicates a potential test of levels deeper into the low 6200’s.

Wall Street: Despite still looking shielded from the direct effects of the crisis, the spike in volatility and risk aversion yesterday dragged on activity in North American share markets. The Dow Jones has fallen by 0.5 per cent, pulled down by the global sell-off in financial and industrial stocks, the benchmark S&P 500 fell 0.5 per cent, while the underlying strength in American-tech limited the Nasdaq’s losses to 0.25 per cent. The play for US investors was into Treasuries, keeping the yield on 10 Year Treasuries to 2.87 per cent, and driving the yield on short term Treasury Notes down by 5-to-7 points – indicating increased doubt amongst investors about the US Fed’s ability to hike rates 2 more times this year in the current environment.

Currencies: Currency markets have experienced the most activity in the past 24 hours, as the volatility in the beleaguered Turkish Lira has spread itself across the globe. The USD and JPY have been the largest beneficiaries of the heightened risk-off sentiment, pushing the US Dollar Index to around 96.00, and the USD/JPY to ~110.70. The EUR still appears under pressure but has managed claw back to the 1.14 handle as no additional news has broken up European exposure to the Turkey crisis, while the Pound has held steady following the weekend’s falls. The AUD/USD also clocked further losses, slipping to an 18-month low, and finding tenuous support around 0.7250, as previous support at 0.7310 transforms into a new ceiling for the Aussie currency.

Gold: Gold prices opened-up to the down side overnight, as speculative short-sellers finally pummelled the yellow metal through support at $US1207. There is sometimes confusion amongst investors about the behaviour of gold, particularly as it relates to its status as safe-haven asset. Despite the myriad of risks that has befallen financial markets in recent months, the price of gold has consistently fallen. The reason for this is that gold is a safe-haven in the event of political turmoil, inflation risk, and in times of loose and uncertain fiscal or monetary policy. As it stands, investors are flying to safety in US denominated assets, reflecting the desire for yield – which gold does not provide – and a confidence in the US economy and the Federal Reserve. Given this dynamic, gold looks vulnerable to further downside, with the next level of support to watch at $US1180.

China: Looking forward slightly to what the day ahead contains, a swathe of Chinese data jumps from the calendar as being the event to watch. The mid-monthly release of Chinese Unemployment figures, Retail Sales data, Fixed Asset Investment data, and Industrial Production data will drop at mid-day today and will give a crucial insight into the health of the Chinese economy. The last couple of days has seen the news flow move away from Chinese markets, as traders shift attention to the Turkey and emerging market crisis. China’s shares have still come under pressure over the last several days, stripping over 2 per cent in value, with the Yuan dropping toward the 6.90-mark consequent to the strong US Dollar. Though today’s data is unlikely to shift the spotlight from the Turkey crisis, keep an eye on reactions in the AUD and trade sensitive areas of the ASX following the news.