Market Talk- May 23, 2018

The jittery close in US markets weighed on Asia at the opening and the lack of clarity just accelerated the uncertainty. The safe-haven bid returned for the Japanese Yen with a 1% rally taking it back to a 109 handle. The Nikkei lost along with the core, ending the day down around 1.2%. The Hang Seng and Shanghai exchanges closed around 1.5% lower having seen a decent run the past few weeks. SENSEX closed at the days low print, but their biggest concern should be the declining INR. This whole Asian price action is a show of the uncertainty that surrounds markets currently, and is intertwined with the shift in capital flow looking for safety. This is more pronounced and evident in European trading, so lets just fast forward.

Europe opened with both the Euro and GBP under-pressure and favouring the USD. However, it wasn’t just FX that suffered, but also stocks and bonds. By lunchtime both currencies had lost around -0.6%, with DAX, CAC, and IBEX all off 1.5%; with FTSE -0.75%. Although Italy took the headline, events in Turkey were also underway. The FTSE MIB was off around -2% while the Turkish BIST 100 was off a little over -1.25%; having hits its low print a couple of weeks ago, whilst the Lira is off near 20% YTD. Fixed-Income traded spreads against the periphery with Bunds, OAT’s and Gilts all bid with non-core offered. BTP’s were around 11bp wider and rumors of domestic selling. The battle is in full swing but there will be no victor, only the credibility of the ECB is on the table. The demand for US Dollars will continue to highlight the stresses mounting in the system. Foreign banks in the US will be forced to turn to the parent to bridge the financing gap as the LIBOR/OIS spread widens.

The US session although influenced initially by European markets, was always going to be about the FED minutes. The news that the Central Bank would be happy to let inflation run beyond its target acted like open doors for the stock market to run. Having seen the DOW off over 200 points in early trading, the turnaround actually produced a positive close. The industrials was the last core index to recover as NASDAQ had held-in for much of the session. This is a significant day for US markets as all key asset classes held their ground while others suffered. The DAX, CAC and FTSE MIB all lost 1.3% and with the Euro also declining, showing that the capital flow appears to be highlighted even more so.
Japan 0.04%, US 2’s closed 2.53% (-4bp), 10’s 2.99% (-7bp), 30’s 3.15% (-6bp), Bunds 0.50% (-6bp), France 0.80% (-3bp), Italy 2.39% (+7bp), Greece 4.30% (-3bp), Turkey 14.21% (-19bp), Portugal 1.92% (-1bp), Spain 1.43% (-1bp), and Gilts 1.44% (-8bp).
Afternoon buying in peripherals tightened some of the credits again for the close, but was insufficient to either the currency or stocks.