Focus on Jackson Hole and EM: European session today (24.08.2018)

The event of the day is going to be today's speech from Jerome Powell at Jackson Hole at 17:00 Sofia time. The markets will be watching for a potential response to President Trump's criticism, a commentary of international tensions and potential hints for confirmation of two rate rises by the end of 2018. Yesterday, after a multiple-day decline, the dollar rallied against all major currency pairs. EUR/USD was unable to return above 1,16. GBP/USD fell sharply. Powell's speech is certainly unnerving both dollar bulls and bears. The fundamentals, however, are strongly supportive of the dollar.

The pressure on emerging markets remained significant. As we described yesterday, we see positive signs that HKMA might devalue the HKD due to the strong dollar and weak Asian economy: Hong Kong real estate prices could fall 15% in 12 months. The divergence between economic reality and monetary policy is pressuring the HKD.

Meanwhile, China and the U.S. announced that, as most expected, they have made no progress in their bilateral trade talks.

After the U.S. announced additional sanctions on Russia, the ruble reached two-year lows: more detail here.

The pressure on other emerging markets is also significant: President Trump has drawn his attention to the proposed land reform in South Africa. With the USD/ZAR currently around 14.5, we expect the pair to test the 14.9-15 level in the coming weeks.

In Australia, Michael Turnbull was fired. The new PM will be Scott Morrison. on the news, the AUD/USD rose to 0.728 in a strong upwards movement. Read more on the AUD's fundamentals here.

The focus in Europe remains the dollar: from its pressure on Russia and Turkey, to its effects on export prices of China and the EU, every world market is directly linked to USD.

This year the value of the Turkish lira fell 37%, most of which occurred in a few turbulent weeks. Bloomberg warns that more volatility may yet materialize in the lira. Using options, Bloomberg measured the volatility that investors expect to materialize in the future (implied volatility).

The chart above shows options expirations against the implied volatility for options on the lira. The implied volatility reached a peak of 86% on the 13th of August. The implied volatility for next week is 47%. By the end of the year it is 28%.

In Great Britain the Office for National Statistics announced that the number of EU immigrants into the UK is declining as the Brexit deadline is approaching. This means that the goal of Brexit to limit immigration from the EU is working. Its intended effects, however, may not be what the British government intends. As Germany and Sweden show, immigration into the countries resulted in higher wages and standard of living in the two countries. For the island-nation, the risks of Brexit begin to acquire a definite shape: less labor, higher prices and lack of medications. These factors put the pressure on Theresa May to avoid a "no deal" Brexit.

Meanwhile, there is already speculation as to who will replace Mario Draghi when his term expires in the middle of 2019. The most likely choice is Jens Weidmann, the current president of the Bundesbank. Analysts expect him to be a much more hawkish ECB president than Draghi.

European business

News from the European business world are mostly positive. RyanAir reached a consensus with its pilots, which means that the company can resume operations.

Not so positive are the news coming from two other airlines: Air France and British Airways. The two companies complied with Trump's threats and announced that will no longer be doing business in Iran, joining other European companies like Total and Siemens AG.

Technical picture: Air France (AF-FR)

We will be watching AF-FR for a continuation of the short-term upwards trend: we expect a correction (due to DeMarker signal) to 8.50 euro: this corresponds to previous peaks and Fibonacci 61,8%. At that level we will look for signals for a long position. The fundamentals of the company remain mostly favorable, though we expect criticism from Macron and the EU for its exit from Iranian markets.

Technical picture: Deutsche Bank AG (DBK-GR)

The company announced its acquisition of fintech company Modo, solidifying its strategy of refreshing the company with innovations and younger employees. The company has been in a persistent downtrend from 2015, which has put it (and Commerzbank) at risk of falling out of the DAX30 index.

We will be watching the market's reaction the the news of the acquisition. With the DeMarker pointing upwards from oversold levels, we expect a test of the support at the 100-day MA. If the price remains above the 100-day MA, we will consider opening a long position in the German financial giant.

Source: Bloomberg Finance L.P.

Chart: Used with permission of Bloomberg Finance L.P.

Image: pixabay.com

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