Closing the week in the red is never good. Always feels like there is more bad news to come next week. I hope you all were able to capitalize on your trades earlier in the week and keep the gains today. The fundamentals will always trump the technical, so keeping abreast of the latest market concerns or excitements is a key to not stepping on landmines or buying the dips in a trend.
President Erdogan came out today to tell the world that interest rates will come down and that he won’t allow the Turkish people to be trampled by high rates.
What the above chart shows is the market's view of how well Erdogan is doing by interfering with the central bank. Currencies don’t necessarily collapse because of economic data. They collapse when the people with money lose faith in the leader’s ability to manage the economy. It is the lack of faith that leads to a flight to safety and in this case, it is the US dollar.
But the Gold/Turkish Lira etc. all look the same. Anything is better than the Lira at this point because no one has faith in Erdogan's leadership. If he defaults on his meddling and allows the central bank to raise interest rates by 500 bps, regardless of what that would do to the people of Turkey, the markets may return to the Lira, but I don’t see that happening any time soon.
The rest of the markets that we follow are still looking risk-off as we come to the end of the trading week. The EU Medical Agency names the new COVID strain as “Variant of Concern”, so I guess Delta wasn’t as bad as we thought. The US markets are closing early and at the London close, there was a bit of a bounce as traders took profits on their short positions. We may see a flush lower or we could just stay at these levels considering it is the very thin volume from now until Mondays open.
The yen, Swiss franc, and US bonds caught a bid today, though the 5000-year store of wealth and inflation hedge a.k.a. gold, did not fare as well as the other safe havens. TLT the ETF that tracks the US long bond could be about to break higher out of this consolidation pattern. If that happens the long end of the yield curve will come down further and invert the yield curves even more. If the risk of this new covid-19 variant intensifies, we could be back to stimulus and emergency measures, so rate hikes, etc. will be pulled from the table and the short end of the curves will start to come down.
The USDJPY which had been tracking the short end yields higher came tumbling down today into a daily demand zone. We have broken some internal structure, so I am going to wait now and see if the 114.00 offers resistance at the next time of asking. If we flush through and take out the swing low from the beginning of November, there is a higher probability that we go a lot lower, a lot faster. The pandemic news will be the guide to that trade.
Whilst the markets were closed yesterday the VIX opened today a lot higher and is currently at elevated levels last seen in May and September. The higher VIX has been a major indicator that the trading ranges were going to expand, and we saw that across all the equities and risk markets.
The S&P500, Nasdaq, and Dow Jones Industrial Average are swimming in a sea of red that was created by every other index and bourse during the previous Asia-Pac and London session. The biggest loser was the French CAC40 which closed -4.75% down, with the DAX down -4.15%. Belgium has recorded the first case of the new variant from South Africa, so I am assuming Europe is on high alert now.
The US dollar index shows the extent that which the greenback has dropped today, but this type of move is generally unwound relatively quickly. If there is a continuation lower at the start of next week, something is really a miss, and we should start looking for reversal patterns in the crosses.
Brent hasn’t made it to the liquidity pool at the double bottom that I highlighted this morning and the drop in the US dollar will have softened the decline of the energy markets a little today. If there are to be mass lockdowns and restrictions of global movement this will be bad news for oil, and we should look for lower prices for longer. OPEC+ would have so far played a blinder by not bowing down to the requests made by the USA for more output. Though I am sure even they would rather have higher prices and greater demand than cutting supply at this stage.