‘Oh, My God’: Full Week Ahead Preview

The knee-jerk in USDJPY right out of the gate on Sunday evening probably says a little something about the extent to which it’s helpful to have a 48-hour shock absorber when it comes to helping markets cope with something like an escalation in an overseas conflict.

Obviously that’s still below Friday’s London/New York session high and it could well be faded quickly, but the point is, there’s a certain utility in waiting until markets are closed on a Friday evening to announce things that have the potential to spook traders.

Although the “one-time shot” characterization of the airstrikes on Assad’s chemical weapons facilities looks like it’s going to be welcomed by markets, there’s more to not like about this situation than there is to like, that’s for sure. For one thing, tensions between Moscow and the West flared further over the weekend, with the Kremlin decrying the attacks and watching as the U.N. Security Council rejected a Russian resolution that would have condemned the airstrikes.

 

Notably, UN Ambo Nikki Haley said Sunday that Mnuchin is all set to announce new sanctions tomorrow on Russia that “go directly to any sort of companies that were dealing with equipment” related to Assad’s chemical weapons. “Everyone is going to feel it at this point,” she warned.

Of course Russia was already “feeling it” last week after the latest U.S. sanctions threw the ruble for a loop and crashed Russian equities. Things would calm down later in the week after Mnuchin ruled out sanctioning Russian government debt (for the time being), but the damage was clear:

Meanwhile, folks will be watching the Turkish lira as well ahead of a key April 25 central bank decision that’s expected to bring some relief for a currency that’s at the mercy of Erdogan and his “unorthodox” approach to rates, FX and the economy (and by “unorthodox”, I mean completely ass backward).

For their part, Citi says the risk-reward of staying short the lira ahead of the CBT might not be great. They’re also suggesting the ruble’s near-term trials and tribulations may be over. “We feel that the scope for continued RUB underperformance on the Russia-specific factor of sanctions has diminished somewhat,” the bank wrote late last week in a note, before saying that, as far as the lira goes, “positioning [is] extremely short relative to the EMFX norm,” and given that, “we don’t like the risk reward to continue being short the highest yielding, highly-sold, worst performing (with the RUB) EM currency in the face of a CBT that is determined to prevent additional TRY weakness.”

Commerzbank says there’s “a chance that CBT will hike rates soon and that will then keep USD/TRY stable at around 4.00 levels to year-end.”

Here’s Barclays with their take on the ruble and the lira:

The growing Russia-Western tension is also raising risks for regional countries, such as for Turkey, which maintains closer ties with Russia but has more patchy relations with NATO allies.

There are a few channels through which developments in Russia and the Middle East could potentially lead to broader re-risking. First, EM sentiment would be negatively affected if the US were to extend sanctions to include Russia sovereign debt. We think this risk cannot be completely discounted, given that this option was considered by Congress in August 2017 and given the increased scrutiny on Russia currently. In our view, the sharp repricing of Russian government bonds [last] week reflects such concerns. While sanctions on Russia sovereign debt would ultimately lead to country weights adjustments in EM bond indices, with the reallocation benefiting other EM markets, the immediate effect on other EM markets would likely be negative if investor redemptions from EM bond funds accelerate due to concerns of fund losses.

You’ll of course want to watch crude as the geopolitical backdrop remains fraught. Prices hit fresh three-year highs last week. It was the best week for WTI since July:

This comes as the Saudis are said to be aiming for $80/bbl Brent and as BofAML writes in a new piece, the ruble’s collapse is bullish for prices. To wit:

Under a floating exchange rate regime, Russia has a strong incentive to increase oil exports to maximize market share. Meanwhile, under a fixed exchange rate regime and a large government budget deficit, Saudi Arabia has a strong incentive to allow oil prices to rise as much as possible. This diverging national interest presented a major hurdle to a renewed cooperation agreement in June. However, the collapse in the ruble now gives Russia one very good reason to deepen its ongoing cooperation with OPEC.

And then there’s the Iran wild card. For those interested, we talked at length about that on Friday in “For Markets, Geopolitics Grabs Center Stage — Who’s Excited?!”

On the off chance all of this calms down, markets may find the time to focus on some data. We’ll get retail sales in the U.S., which will be watched closely in light of last month’s rather egregious miss.

“We estimate core retail sales (ex-autos, gasoline, and building materials) rose at a solid 0.6% pace in March, reflecting the arrival of previously delayed tax refunds (and the continued positive impulse from tax reform),” Goldman predicts, before suggesting that we’re due a good one following a series of “weak reports.”

There are a number of Fed speakers on deck as well, although one certainly imagines they’ll be drowned out by the inevitable cacophony of geopolitical shrieking and “Oh my God” moments at 1600 Penn. Here’s how one West Wing staffer described the state of affairs inside the White House in an interview with WaPo:

It’s just like everybody wakes up every morning and does whatever is right in front of them. Oh, my God, Trump Tower is on fire. Oh, my God, they raided Michael Cohen’s office. Oh, my God, we’re going to bomb Syria. Whatever is there is what people respond to, and there is no proactive strategic thinking.

Trump’s Sunday “covfefe” re: “Slippery James” and “Wild Bill” probably didn’t do much to allay those type of internal concerns.

Shinzo Abe will be in the U.S. this week, which should be fun. Clearly, the discussion will center on trade (TPP, perhaps) and North Korea. As BNP notes, you should also “watch any approval ratings for Abe, as headwinds continue to blow against the prime minister,” – the Moritomo scandal steadfastly refuses to go away. Hopefully we’ll get some more fun photo ops with Abe and Trump like this classic:

Or the koi pond:

Or, our personal favorite, the “Donald and Shinzo make alliance even greater” hats:

It’s a BoC week and they’ll be on hold. As for the loonie, Barclays thinks it’s likely to benefit from several tailwinds. “CAD could remain well supported by oil in the near term,” the bank’s FX team wrote over the weekend, adding that “sentiment around NAFTA remains positive, despite no formal announcement of progress and the still unresolved contentious topics.”

We’ll also get inflation in the U.K. and CPI in Japan.

It goes without saying that all of this could take a backseat to domestic politics in the event the Michael Cohen saga continues to bode ill for the President or if Trump should decide to move against Rosenstein, although that seems unlikely at least while Abe is in town (too much golfing to get done).

*********