EQUITIES RECOVER AS LIRA STABILIZES; BITCOIN FALLS BELOW $6,000

After a rough start to the week, Asian stocks seem to have found some support as the Turkish Lira steadied below 7 per dollar. Japan’s Nikkei 225 rose 1.8% with all sectors in green territory as the Yen gave up some of yesterday’s gains. Australia’s ASX 200 and the Korean KOSPI also edged higher but gains were limited. However, China’s major indices and the Hang Seng failed to join the rally as poor economic data weighed on sentiment. 

Fixed asset investment in China grew at its slowest pace ever, despite authorities announcing several measures to stimulate the economy through fiscal and monetary policies. Meanwhile, industrial production and retail sales also came below forecast in a clear sign that growth in the world’s second largest economy is cooling.

Investors are becoming increasingly worried about how the Turkish crisis would spread into other markets after yesterday’s EM currencies and equities selloff. So far, we think the risk of contagion is limited and yesterday’s selloff was due more to a risk-off mood than a fundamental reason. However, economies with large current account deficits such as India, Argentina and South Africa will come under increased economic pressure as the Fed continues to tighten monetary policy.

Gold below $1,200

Many investors were surprised by the gold selloff yesterday which fell below $1,200 for the first time since March 2017. Gold is perceived to be the safest haven in times of turmoil, so why not this time? The precious metal has been in a downtrend trajectory since mid-April and has lost 12% from previous 2018 highs as the Dollar managed to strengthen against all EM currencies.

Gold has been showing a very close correlation with EM currencies, especially the Chinese Yuan. This is mainly because emerging markets are the biggest consumers of physical gold, particularly China and India. The further these currencies drop, the less purchase power consumers have; as long as investors believe we won’t see a crisis similar to 2008, the Dollar and the Yen will continue to be the safest plays.  However, the moment investors believe that the situation will get out of control and the global economy will fall into a deep recession, gold’s luster will return.

Cryptocurrencies also suffered steep losses

Cryptocurrency bulls also suffered a steep selloff yesterday with Bitcoin falling below $6,000 for the first time since late June. The blame for this falls on the SEC as the U.S. regulator delayed a decision to create the first Bitcoin ETF. 

If an ETF doesn’t see the light in the coming weeks expect to see a further selloff, as it suggests regulators will continue to fight against bringing cryptocurrencies into the mainstream. A break below $5,770 will intensify selling pressure as it’s the only major support still standing.