From the Floor: Turkey woes threaten EM spillover
- USDTRY gaps to within a whisker of 3.0 after ratings downgrade
- Loss of grade status to hit Turkey's funding risk medium term — Moltke-Leth
- Philippines currency also hit as Duterte scatters investors
- GBPUSD sinking again as UK CEOs look to foreign climes
- Sterling could be in for a period of prolonged weakness — Hardy
- Oil hostage to headlines as big producers gather at Algiers — Hansen
- Brent could see a race to $40/b if it breaks $45.50/b — Hansen
- Twitter storms to 21% jump but short-term reversal on cards — Garnry
By Martin O'Rourke
We've questioned the role of rating agencies before, but there is little doubt they have the potential to move markets and a downgrade of Turkish debt over the weekend has sent the lira plunging to a seven-week low against dollar.
Moody's was the axe-bearer on this occasion taking Turkey's sovereign credit rating from Baa3 to Ba1, effectively pushing the country into junk status and sending USDTRY to within a whisker of 3.00.
"The main focus of the Asian session Monday has been emerging markets after USDTRY gapped to 3.00 on the downgrade and the loss of its investment grade will increase funding costs and could see some medium-term problems," says Christoffer Moltke-Leth, speaking during Saxo's daily global morning call. "There is a weakening credit outlook and fundamental institutions and we could see some spillover into the real economy in the short to medium term."
"The Turkey issue could build into emerging markets more broadly," says John J Hardy, head of forex strategy at Saxo Bank.
It is the first review of Turkey since the attempted coup in July.
Turkey's lira hit 2.99 against dollar after the Moody's downgrade
Turkey's lira is not the only emerging-market currency feeling the heat as the Philippines peso also took a sharp fall overnight as the investor community increasingly takes fright at the downright bizarre antics of president Rodrigo Duterte.
"The macro community is scrambling to get out and we see very little liquidity as the policies of Duterte get more and more extreme," says Moltke-Leth, speaking from Saxo Bank's Singapore hub. "USDPHP went as high as 48.58 and the one-month forward yield snapped to 9.7%."
The peso was at a seven-year low against dollar and helped propel the MSCI Emerging Markets Currency Index to its biggest slide in two weeks.
USDPHP spikes as the Philippines investor community takes fright
Back on European soil, and it is the more familiar travails of sterling that once again rear their head after a KPMG survey of CEOs this weekend found 75% were considering a relocation of headquarters and/or operations out of the UK.
GBPUSD took its cue to plunge below the 1.30 line and it is that key marker that seems to have marked the new normal for sterling while we continue to hover in this twilight zone between Brexit vote and the actual implementation of Brexit itself.
"It's not a sign of confidence and the risk to capital flows is such that we are likely heading into a medium-term period of weaker sterling," says Hardy. "EURGBP is also going higher and it looks like sterling is in a heap of trouble."
Dollar meanwhile is in it's own mini-version of no-man's land as it gears up for the first US presidential debate with republican nominee Donald Trump locked seemingly in a dead heat with Democrat rival Hillary Clinton as we edge over closer to the November 8 D-day.
"We have to watch out for the reaction here," says Hardy. "We did see some dollar weakness last week after the central bank meetings but then not much follow through so we may see some kind of reversal set in depending on how markets perceive the outcome tonight."
Hardy does not anticipate much movement against euro which is "looking firm" but suggests USDJPY could once gain reverse away from the 100.0 handle after the downward move stalled.
"If we close above the 101.25/50 level, that would suggest a reversal has set in," he says.
USDJPY was at 100.90 at 0655 GMT.
A lack of follow through in USDJPY could see a
reversal depending on tonight's presidential debate
If the big oil producers meeting in Algiers is to result in anything, says Saxo Bank's head of commodities strategy Ole Hansen, then "Saudi Arabia and Iran will have to set aside their differences for a deal."
Easier said than done of course given the enmity that defines the Tehran/Riyadh relationship and that is one part of a complex equation that has Hansen favouring the downside still.
"There is room on the long side and the biggest trigger for a recovery if we were to get a deal which would provide support and that is why oil continues to be a hostage to soundbytes," he says. "The pressure is on Opec to keep markets stable after the US rig count showed a rise for the 12th out of the last 13 weeks."
"Brent crude after the selloff Friday came close to breaking the $45.50/barrel area," he says. "If we break that, we could see a technical retracement all the way down to the $40/b area."
Brent crude toying with key support at $45.50-45.00/b for a potential move to $40/b
The twitterati were all a flutter this weekend after the social-media platform jumped 21% on the back of reports that Salesforce and Alphabet were readying a bid.
"It may still be premature as bidders would like to see the turnaround progress in Q3 or Q4 earnings," says Saxo Bank's head of equities strategy Peter Garnry. "We will likely add our exposure in Twitter on a setback in today's session."
Martin O'Rourke is managing editor at Saxo Bank
Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.