The Dow is up over 100 points and the Turkish Lira is up 5%, rallying away from the dreaded 7.00 Maginot Line of global doom… and judging by the notes and business media narrative this morning, it’s time to “dive right back in, the water’s warm.”
You may be able to sense out skepticism and as former fund manager and FX trader Richard Breslow notes, it’s “mind-boggling” how fast market participants jump back to the narrative du jour, no matter how obvious reality (lurking right behind the corner) really is.
Having a market narrative is a necessary thing. How else would you answer the question, “What’s going on?” But it can also be dangerous. There is a big difference between saying things are bouncing, pausing or, even, traders are having a bit of a rethink and declaring that the excitement is all over and it is carry as usual. We don’t know that, even if it turns out to be true. And, unless you are willing to stipulate that everything we said yesterday about dollar-funding risk and current-account deficits was off-base, it’s not helpful.
What we have learned from this latest emerging market episode is that in this nascent transitioning period from ultra-low global rates to just low ones, policy mistakes get magnified. With the medicine required to set things right difficult and painful to swallow. Made all the worse with liquidity conditions being permanently impaired. And the prospect of higher rates is unlikely to go away unless something bad happens to cause central banks to panic. Something to consider as we try to argue anew that what happens in Turkey, stays in Turkey.
And it is making a remarkable leap of faith in the resiliency of global assets that this morning, we went from debating whether 1,000 basis points of rate rises or capital controls would be required to stem the immediate panic to asserting that locals drove the currency 5% higher by “taking profit.”
Lest you think correlation matrices can cleverly decide at a moment’s notice what matters and what doesn’t, while the lira rallied, the U.S. Treasury curve bear flattened as, I am told, the market began repricing the Fed rate hike path higher again. And doing so on big volume for Eurodollar futures. Think about it. Isn’t it higher funding costs that was what we were all talking about? S&P 500 futures also got in on the game.
Markets all over the world may rally if the American being held is released. I bet I hear from no one that this represents a second chance to lighten positions. But you will have to listen to lots of people tell you they thought USD/TRY looked toppy over 7. Never mind that was the level that was going to tip over the whole apple cart.
It’s mind-boggling that 5% one way or another doesn’t answer the questions about where things stand with Turkey. And the knock-on effects for the rand or ruble are pretty much just that. So while the U.S. curve puts back in a rate path assumption that most likely shouldn’t have changed as much as it did last Friday, I can’t help but wonder why EUR/CHF is hanging out around 1.13 and peripheral spreads in Europe are still way up here….
And what it means that the data out of China last night was so mediocre, right across the board.
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