Fear of contagion is flowing through financial markets into this week. We look at how political risk is impacting on safe haven flows and the dollar. How are markets reaction and what are the implications for the analysis of forex, commodities and equities?
Politics are key for financial markets now. The swathe of central bank meetings at the turn of the month have been ticked off the calendar, allowing the likes of Draghi and Powell to hit the beach (probably not together). Traders are finding that monetary policy expectations are taking a back seat. Alternatively, we find political risk factors are driving daily market moves. However, when you have mavericks like US President Trump and President Erdogan of Turkey in charge, anything could happen. Liquidity is already low and summer trading increases potential for erratic moves. Trump seems intent on picking skirmishes everywhere. Aside from the China trade dispute, the US is now reintroducing sanctions on Iran, proposing sanctions on Russia (over Novichok) and sanctioning Turkey and doubling tariffs. With political risk elevated, risk appetite falls, major bond yields are pulling lower again, the safe havens of the yen and dollar perform well and even gold has support. The moves are being exacerbated following Friday’s run on the Turkish Lira. An unconventional President Erdogan is perceived as having uncomfortable influence on the Turkish central bank whilst appointing his son-on-law as finance minister will never endear markets to him. However, asking Turks to exchange dollars, euros and (incredibly) gold for Turkish lira whilst not increasing interest rates to defend the lira, is incomprehensible. Turkish 10 year yields above 20% and the lira plummeting over 15% on Friday has contagion risks for European banks. The dollar and the yen remain the big winners.
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