Summary:
- Nickel prices literally explode amid sanction fears
- Turkey goes for snap elections, lira recovers from a plunge
- We take a look at situation, analyze crucial levels
Markets in April have been completely dominated by politics and it’s no different these days. Even as a trade spat between the US and China calmed down a bit, tense relations between the US and Russia in the aftermath of a chemical attack in Syria cause major disruptions on commodity markets with nickel and aluminium prices soaring. This situation has an impact on Turkey as well where president Erdogan called snap elections to reinforce his grip on power and… caused a rally on the lira.
Nickel
Nickel prices have seen a staggering 25% rally in recent days on the back of gains from recent month that took prices above $16k per tone – double the level from early 2016. Where’s the rally coming from? The first leg (post 2016 recovery) is a gradual market healing as output was adjusted downwards, demand from China (50% of global demand, mostly for stainless steel) improved and inventories gradually declined. The latest surge in prices have been caused by rumours that US sanction will hit the Russian Norilsk. The company is not only responsible for more than 10% of global output but is also the low cost producer. With the market seeing a small deficit already Norilsk would need to be replaced by high cost Chinese miners so repercussions for market prices are quite obvious.
Nickel inventories remain large but that could change very quickly if sanctions on Norilsk are levied. Source: Bloomberg
The whole point he is, if Russia is completely out of the nickel market current inventories that could be seen as still relatively large would evaporate in not much more than a year! As you can see on a the chart an inverse relationship between prices and inventories is quite large.
NICKEL price surge has gained momentum after a break and retest of the downward channel. Source: xStation5
Looking just at the chart we can see prices breaking out of a downward channel and without an obvious resistance all the way to $21850.
Turkish lira – EURTRY, USDTRY
Turkish lira has been one of the biggest losers so far this year. The prime reason iss a fear of overheating amid limited independence of the central bank (CBT failed to address rising inflation and current account deficit with higher rates under a pressure from president Erdogan). On the surface, a bold move of Erdogan to have elections 1.5 years ahead of schedule (on June 24) doesn’t look good. Let us recall that Turks narrowly accepted the new presidential regime in a controversial referendum last year and changes delete the prime minister post and make president much stronger. However, these changes take effect only after the next election… so it’s hard to see the move as anything else but gaining even more power by Erdogan. Especially amid signs that he could face competition from Meral Aksener who started the new right-wing party but elections coming that soon could pose administrative hurdles for her.
How could possibly markets like the move? There are at least 3 reasons:
- economic policy – this is the primary one. A landslide decline of the lira has been caused by somewhat reckless pursuit of economic growth despite obvious signs of overheating. Markets do hope that once a victory is sealed, Erdogan could moderate this push and allow for monetary tightening
- political uncertainty – snap elections have been rumoured so a confirmation undercuts this uncertainty – investors know what to expect
- geopolitical uncertainty – perhaps more importantly, a long campaign to elections amid a possible decline in popularity could see populist moves by Erdogan so early elections may help avoid that
Could the reversal last? The nearest support on EURTRY is at 4.84. Source: xStation5
Obviously, these are just hopes. Investors need to see signs of moderation to really trust the lira again. One of the key events will be the CBT meeting next week when interest hike could help rebuild this trust. For now, the bears have regained some control on EURTRY. Long wicks above 5.10 suggest that market did not accept these high levels and investors could take a look at a lower limit in an upward channel that could offer a support together with a local low of 4.84. The next one is at 4.72.