E Markets: Fruit Flies

Markets are going bananas again. The syntactic ambiguity of the moment shouldn’t be lost as computer algorithms mix badly with geopolitical news. Volatility has rebounded despite the modest hope from US markets yesterday. The main story overnight happened just at the close yesterday – Apple cut its sales forecasts for 1Q due to slowing iPhone sales in China – there are other fruits to consider overnight that matter. Stocks had an immediately negative reaction with a “flash crash” in USD/JPY and other safe-havens bid up accordingly. China economic fears remain central to trading so far with Danish shipper Maersk shutting its container factory there. The Chinese countered some of the gloom over their economy by landing a probe on the darkside of the moon– moving up the race for space dominance in 2019. The threats yesterday from North Korea on changing the approach to denuclearization matter to China/US relations as well – and the disappearance of a North Korean diplomat in Italy makes it a European affair as well. The problem with using USD/JPY as the guide to trading other markets is liquidity. Japan is on holiday, the BOJ isn’t going to act on FX unless asked and the debt situation of Japan make safe-haven status less meaningful. 

The USD maybe the other side of the trade to consider today with the US government shutdown far from over, with Fed hikes for 2019 all but priced out and with the rest of the world looking like a value play, the USD is the barometer with 95.90 opening up the risk for 91.50 again. A weaker USD is the Trump and perhaps Powell dream as it will help bring some punch back to the US economy.

Question for the Day: Is it USD/JPY or CNY/JPY that matters the most for trading? Economic weakness globally is the fear driving markets and the data overnight doesn’t do much to alleviate this emotion even as the Swiss and Spanish news is better, the ECB M3 and UK construction PMI generally support those stories and even Turkish inflation eases to 20%. So if economic fundamentals don’t work, what really is driving markets? US/China relations –with trade talks, geopolitical pressures from Taiwan to North Korea, the ongoing Canadian detainment and G5 technology issues, and the militarization of the South China Sea – all that matters in the fruit punch for investors. The role of Japan in this mess is important to consider as they are the spice from BOJ policy with QE and ZIRP as far as any analyst can predict.  

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