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From the Floor: Markets seek safety from political turmoil—#SaxoStrats

#SaxoStrats
   • Very broad-based safe-haven moves seen during Wednesday's Asian session
   • Worries about French elections, oil/Syria and North Korea the main drivers
   • Trump’s latest tweets to North Korea and N. Korean reaction add to tensions
   • Geopolitics to stay in focus Wednesday as Tillerson visits Moscow
   • Still seeing plenty of buying of protection for French election: Larsen
   • One-month EURUSD volatilities have increased dramatically, one-week down
   • Japanese stocks vulnerable to geopolitical risks and associated yen gains
   • Chinese PPI rose 7.6% y/y in March, slightly higher than expected
   • Italy yields spiking to fresh highs
   • Italy fears could dampen euro rally potential after France election: Hardy
   • Bank of Canada meets, likely to upgrade assessment of current conditions: Hardy

Saxo Strats banner
Note: From the Floor will resume after the Easter holidays on Tuesday, April 18.

By John Acher

A potent cocktail of geopolitical worries over North Korea, Syria, the oil market and the upcoming French presidential elections has triggered a widespread flight to safety across financial markets.

“Today we have seen very broad-based safe-haven moves,” says Christoffer Moltke-Leth from Saxo Bank’s Singapore hub. “Treasuries have been bid throughout our session here in Asia, and we see 10-year yields now well below 2.30%. Gold is hitting its highest level since November last year, and we are seeing USDJPY breaking 110 with ease.”

Saxo Bank's FX strategy chief John J Hardy says: “We are looking at the three-fold threat of the French elections, the oil-and-Syria situation, and North Korea. […] They are all big.”

Trump tweets

Tensions have mounted sharply in recent days on the Korean peninsula.

US president Donald Trump took to Twitter to say that North Korea was "looking for trouble" and the US would "solve the problem" with or without China’s help. And North Korean state media warned on Tuesday that it would retaliate against any aggression by the United States, possibly including with a nuclear attack on the US mainland.

Saturday marks the 105th anniversary of the birth of Kim Il-sung, the founder of North Korea and grandfather of the current leader Kim Jong-un.

“North Korea typically have military parades and other kinds of fun stuff [on that national holiday], so we’ll see if the wording continues to be sharp from North Korea, but I am sure that it will,” Moltke-Leth says.

Japan’s Nikkei led Asian stocks lower as Asian – and especially Japanese – stocks are vulnerable to the twin risks of geopolitical tensions and the associated gains in the Japanese yen, he says.

“We see USDJPY only 80 pips above the 200-day moving average, so the question is if there is enough tension to keep the bears sending the pair lower,” Moltke-Leth says.

USDJPY breaks 110 "with ease".
USDJPY
 Source: Saxo Bank

Chinese PPI rose by a solid 7.6% year-on-year in March, which was slightly higher than expected, Moltke-Leth says. “The PPI numbers are likely to be supportive for corporate earnings in China and obviously also in countries that are fighting disinflation. So the question is, in a longer-term perspective, can the upswing in China continue.”

Eurozone worries

The France-Germany spread is close to highs, but the Italy spread has also widened to new highs for the cycle, Hardy says.

German chancellor Angela Merkel has been campaigning against mutualisation of Eurozone debt in a bid to sting her political opponent, the Social Democrat Martin Schulz, who has supported pooling of debt in the past, Bloomberg reported on Wednesday.

“Without mutual debt, we have a serious EU systemic crisis again at some point down the road, unless there is a path to mutual debt or some kind of forgiveness of debt at the periphery because Italy, Greece and Portugal – their debt trajectory is unsustainable in the long run without some kind of mutualisation or debt plan,” Hardy says.

“Do Italy’s [yield] spikes to new highs have anything to do with the French election? Perhaps in part, but I think this does limit the potential amplitude of any relief rally for the euro after the election,” Hardy says.  (See also Hardy's lastest FX Update here.)

Whither Canada?

The Bank of Canada meets on Wednesday, with the Canadian dollar subject to contradictory drivers, including strong Canadian macroeconomic data, oil prices near the highs for the cycle and more Opec noise, which is CAD-supportive, but also risk-off sentiment, which is CAD-negative, which has kept USDCAD in a range, Hardy says.

“But the Canadian data has been so strong that it is hard to see how the Bank of Canada doesn’t at least upgrade its assessment of the current conditions, and that could lead to a test lower here [in USDCAD],” Hardy says.

USDCAD in the range
USDCADSource: Saxo Bank 

In the FX options space, EURUSD one-month volatilities have jumped dramatically on Eurozone jitters related to the French presidential election, once the May 7 second round was included in the coverage. The first round of voting will take place on April 23.

“We are seeing a lot of demand for one-month strikes, or any strikes really for both the first and second round of the French election,” says Saxo Bank’s Dan Larsen on the FX options desk.
“At the same time, we are seeing a lot of interest in risk reversals, so buying downside to euro puts,” Larsen says.

One-week volatilities have fallen, however, probably because the market is selling the very front end of the curve to finance the purchasing of protection for the French election, Larsen says. “We believe the front end will remain under pressure.”

USDJPY breaks 110.00 – vols higher – risk reversals higher
EURUSD volatilities
Source. Saxo Bank

In the bond markets, the volatility spike has helped drive global yields lower, US Treasury yields are trading below long-held support levels, Bund yields continue to test year lows, and the France-Germany spread has widened further on election worries, says Saxo Bank fixed-income trader Michael Boye.

Volumes in the bond markets are likely to drop off sharply with the upcoming Easter holidays, he adds.

Due to the Easter holidays, today's morning call was the Saxo strategy team's last call for this week, and the next call will take place on Tuesday, April 18.

Saxo Bank's Georgio Stoev and the CBOE Options Institute's Russell Rhoads will hold a Weekly OptionsLab webinar today at 1600 CET (1400 GMT) to review US market activity in the first quarter of 2017. (Sign up here for the webinar.)

Korean peninsula
 Tensions on the Korean peninsula are up, exacerbating 
global market fears. Image: Shutterstock


John Acher is a consulting editor at Trading Floor.

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