LCG: Ugly global politics weigh on risk sentiment. Euro down to $1.0905 on big interbank selling

27 september 2019

In the US, the drama around Donald Trump’s impeachment went a step further after a whistle-blower, who apparently is a CIA officer, filed a complaint claiming that Trump tried to conceal his conversation with the Ukrainian President, and set the stage for Trump’s impeachment inquiry. 

US equity futures closed Thursday’s session in the red, as futures edged lower in Asia. The US 10-year yield consolidated a touch below the 1.70% level.

Across the Pacific, Hong Kong is boiling. Tomorrow is the fifth anniversary of 2014 umbrella protests in Hong Kong. It is also the 17th week of the anti-China protests that started as an opposition to the government’s extradition law and gained traction to cover more demands including sky-high housing prices and income equity. Forthcoming, October 1st is the 70th anniversary of the Chinese Communist Party and the celebrations are expected to add more fuel to the fire over the coming days. Hence, investors continue decreasing their exposure to Hong Kong stocks before the weekly closing bell. Hang Seng is down by 0.30%.

News that the US may not extend a waiver to allow companies to do business with the Chinese tech giant Huawei Technologies is the cherry on top. There is a certain optimism that US and Chinese officials may seal at least a partial trade deal in October, but the negotiations remain on a slippery ground; even China’s commitment to buy big amounts of US farm products may not lead to a comprehensive trade deal.

The market’s destiny is at Donald Trump’s fingertips. A single tweet from Donald Trump could send equities rallying, as it could shatter the market sentiment. And Trump’s next move is anybody’s guess.

Shanghai’s Composite treaded water, while stocks in Shenzhen gained 1.16%.

Nikkei (-1.24%) and Topix (-1.76%) followed up on US session losses, as the Japanese yen gained on risk-off demand. The consumer price inflation in Tokyo eased more than analysts expected in September, strengthening the case for additional monetary stimulus at the Bank of Japan’s (BoJ) next meeting.

Australian stocks ticked higher however, on prospects of a further rate cut from the Reserve Bank of Australia (RBA) at next week’s monetary policy meeting.

The US dollar gained against most G10 currencies. The US dollar index advanced past the 99-handle.

Euro dives to 1.0905 on large interbank selling

The euro shortly dived to 1.0905 on the back of a decent interbank selling ahead of large put option expiry at 1.0900 due September 30. The end-of-month, end-of-quarter purchases in yen versus the euro adds an additional downside pressure on the single currency. Large put option expiry at 1.10 is expected to maintain a decent downside pressure on euro before the weekly closing bell. The euro sell-off could accelerate on large stop orders below the 1.09 mark.

Cheap pound attracts capital to FTSE, utilities rally

In the UK, Parliament’s resumption only escalated the political tensions among British lawmakers. There hasn’t been an inch progress in Brexit discussions, as the clock ticks louder to the October 17th summit with the European leaders. The best the UK could do is to divert a no-deal Brexit by the October 31st deadline. Despite a legislation that outlaws a no-deal Brexit to happen by next month, there is a certain anxiety that Boris Johnson could find loopholes in the legislation to go around the law and deliver a no-deal Brexit anyway – which would be a real disaster for the pound sterling.

The pound feels the pinch of a chaotic Parliament and British MPs’ inability to find an agreement among themselves regarding an utterly complicated divorce from the EU. Cable slipped below the critical 1.2348-support, the 38.2% Fibonacci retracement on September rebound, and stepped in the bearish consolidation zone. The pound sell-off could extend toward the 1.2272 (50% retracement) and 1.2198 (major 61.8% retracement).

Cheaper pound attracts capital to Britain’s blue chips. The negative correlation between the FTSE and the pound rises as the pound slips.

The FTSE closed Thursday’s session 0.84% stronger. All sectors gained; utilities rallied 2.37% as Citi turned bullish on British utility stocks and upgraded Centrica, United Utilities and Pennon from neutral to buy pointing at a waning nationalization threat on falling likelihood of a Labour majority in the likely scenario of a snap election.

FTSE futures (+0.15%) hint at a positive start in London

Elsewhere, oil markets are preparing to close the week 5% lower on the back of higher US stockpiles and at a faster-than-expected recovery in Saudi Aramco’s production plants following the recent drone attacks. Middle East tensions are diluted in a pool of political shenanigans, including Trump’s impeachment. As a result, WTI crude eyes a further decline toward the $55 a barrel, as Brent crude could extend losses toward the $60 mark.

Opening calls

FTSE to open 10 points higher at 7361   

DAX to open flat at 12289