Inter-Market Analysis And Macro Insights For September 11, 2018

Broad financial markets have failed to show any signs of life overnight, and while it feels like this could be a pause before something much larger takes hold, it is also reflective that limited new news has catalysed investors to alter exposures.

If we have to pick a move, then the session belonged to the GBP, and while client flow was aimed at GBP/USD, the big mover was GBP/CHF, which gained 1.4%. GBP/USD has pushed nicely above the 1.30 handle and is testing a breakout of the 30 August high of $1.3043, whereupon this development I would expect $1.3102 (the low of the i-cloud) and $1.3151 (the June downtrend) to come into play. Comments from EU’s negotiator Michel Barnier have been driving GBP flows of late, and on the whole Mr Barnier’s commentary has been constructive. So his remarks at a conference in Slovenia overnight, detailing a Brexit deal could be seen within six to eight weeks is ‘realistic’ and ‘possible’ has naturally promoted GBP buying.

Of course, one’s primary job as a trader is to manage risk and to be max short GBP when the upside in GBP is potentially huge is not a position one wants to find themselves in. So, there is no doubt the speculative community is unwinding GBP shorts as we head into the October to November window and the idea that this headline risk is going to continue throwing the currency around does not sit well with many. Real money accounts are still likely fully currency hedged on UK assets, and that will not change too readily, especially as there are still so many issues that need to be resolved. Notably, the Irish border is a crucial sticking point, and getting a resolution that everyone is happy with here will take some incredibly skilled negotiation from all involved and the cynics here question if the personnel involved are up to this task.

Another market that we have seen a strong pulse is that of Italian markets. In the European equity markets, the Italian MIB was a true beacon of strength, closing up 2.3%. As a short-term trade being long MIB/short FTSE 100 has worked and even now looks like an interesting trade. The bond market is what is driving confidence though, where we can see Italian 2-year yields falling a further 17-basis points, while the Italy/German 10-year spread continues to collapse and currently resides at 250bp. Fundamentally, this is being driven by additional reassuring comments from the Italian Finance Minister Tria surrounding the 2019 budget.

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EUR/USD found buyers off the lows of $1.1526 (at 16:47aest) and into a session high of $1.1616, with price currently oscillating around the 1.16 level. The narrowing of Italian yield relative to the risk-free rate of German bunds has helped, while some have also focused on trade talks. Here, US trade representative Robert Lighthizer announced fresh EU/US trade talks slated for the end of September, intending to ‘finalise outcomes in some areas’ in November. So, more political headlines for traders to sink their teeth into, although in the near-term, EUR and rates markets will also focus on the tonights September ZEW expectations survey, which had a reasonable rebound last month, but has been in sharp decline for most of this year. More importantly, though, we have the ECB meeting on Thursday (21:45aest) and that will wrestle back attention from Italian political issues.

Aside from the mentioned developments, we see relatively lifeless trade around the traps. The S&P 500 closed +0.2%, on volume 7% below the 30-day average. The VIX index (implied volatility in the S&P 500 over the coming 30-days) fell 0.7p into 14.16% and with the S&P 500 trading an 11-points range we could argue implied vols should be closer to 11%. High yield credit was unchanged, with no real changes across the US Treasury curve, with the US 10-year closing at 2.93%.

Asia will feed on the benign move in the S&P 500, while limited moves can also be seen in commodity markets, with copper, US crude and Iron ore futures closing +0.1%, -0.3% and -0.8% respectively. The ASX 200 will open on a flat note, and while the local index closed down a mere two points yesterday, it technically took the market to eight consecutive days of losses, and one questions if we can see nine straight days – a fate it hasn’t seen since the dark days of the GFC and 2008.

Local traders will take their cues from moves in China and to an extent Japan, and there is little in the way of inspiring news flow here. Nothing has changed, and the same issues holding the buyers back of late are still in play. There is limited clarity to promote putting new money to work in the markets, especially when the event risk over the coming 24-hours is mostly tier two releases, with NAB business confidence, ZEW survey and NFIB small business confidence unlikely to shake things up too greatly. That said, from time-to-time Asia has a knack for surprising and unforeseen portfolio flows can cause an unexpected move in an otherwise lifeless market.

Written By: IG