Asia market update: US-China digging in for the long haul?

When” Xi “speaks, the market listens, at least in China it does as shares in Hong Kong, and Shanghai has been moving convincingly higher after Chinese President Xi Jinping vowed “unwavering” support for the country’s private sector. But the big noise in local markets is the much anticipated personal tax cuts are a bit more free-handed than had been expected. And what investor doesn’t like the sound tax cuts!!

But with Trump suggesting he wants China to ” Feel more pain” and that trade war with China is at ” the beginning of the beginning” according to Whitehouse insiders. It certainly appears that both sides are digging in for the long haul and would certainly bring into question the planned November meeting if it even remains scheduled that is.

Newswires were reporting “Prime Minister Theresa May will tell parliament on Monday that 95% of Britain’s divorce deal has now been settled but will repeat her opposition to the European Union’s proposal for the land border with Northern Ireland. So, the Pound remains stuck in the much as May yet again rejects another EU Ireland proposal.

Desperately seeking stability

US  Markets

From sandstorms in Riyadh to headwinds in Rome, escalating risk has effectively capped the recent swell in US Treasury yields, while the combination of Federal Reserve policy tightening and increasing debt supply should keep the trapdoor from giving way. But none the less, market participants will jostle between US growth momentum and the ever-threatening and escalating geopolitical risk, that could trigger a more significant flight to safe-haven currencies and assets.

US equity markets struggled across the finish line on Friday as investors contiued to take profits after morning gains gave way when a report showed U.S. home sales fell for the sixth month in a row. US housing growth continues to disappoint on familiar themes and remains one of the few red lights and the most significant drag on the US economy.

China Markets

Although local Asia sentiment remains poor, the SHCOMP staged an impressive reversal of Friday after China rolled out a series of speakers and rule changes to stabilise markets, but the pace of reversion does suggest it was aided on by state-owned funds to add some vim.  But Chinese markets remain under pressure from every economic angle leaving more than a few investors extremely sceptical Friday’s recovery will have lasting legs.

Oil Markets 

It should be a hectic week ahead in oil markets anticipating colossal participation amidst escalating headline risk this week . Bullish sentiment is clearly under pressure as oil traders search for  the next equilibrium.

Brent crude oil probed back above the $80 per barrel on Friday after China reported record refinery throughput for September.Reuters But the critical benchmark still closed below that technically essential and psychologically significant level. ($80 per barrel)

West Texas Intermediate crude oil followed stronger performances in the Brent market, but like Brent, closed below a key level, $70 per barrel, which is a significant fail for bullish sentiment

In China, higher seasonal demand and suspected stockpiling are occurring, while similarly the US and the OECD continue building stockpiles ahead of potential supply disruptions this winter. But China demand is also surging due to Beijing ‘s enormous infrastructure projects and spends which are being used to stimulate the economy and is beefing up Oil demand.

However, concerns about demand growth slow down along with the prospect of more barrels  coming online has triggered a sizable reduction in bullish markets structures, the difference between bets on higher prices and wagers on falling priced — dropped  14 per cent to 242,855 futures and options in the week ended Oct. 16, according to the U.S. Commodity Futures Trading Commission.

But there’s a loud level of headline noise that seems to pop up like clockwork, where on the one hand views suggest OPEC can quickly cover the Iran shortfall while conspicuously well-timed documents continue to surfacing claiming that OPEC and its allies are having difficulty boosting production by 1 million bpd as it had promised in June. Sifting through the market noise will present its challenges none the less.

From various industry insider reports, Iran exports have fallen from 2.2- a million barrels per day (m b/d) in 1H’18 down to an expected 1.5-m b/d in October. Saudi Arabia has reportedly ramped production to 10.7-m b/d though. They could go to 11-m b/d and draw down 0.5-m b/d from inventories or even more if needed. (3-m b/d just boosted Saudi export capacity at Aramco’s Red Sea Yanbu terminal. Ras Tanura capacity is well above current export levels.) And Russia still has ~0.2-m b/d spare capacity to reach 11.5-m b/d.

According to industry reports, Canada’s crude production was ~4.6-m b/d in August, with Jan-Aug growing ~280-k b/d y/y, even with Syncrude upgrader problems, which has since recovered. Oversupply and US refinery maintenance have put WCS and Syncrude into a massive   discount WTI  pipeline bottlenecks meaning more and more WSC needs to be shipped by rail with new longer-term rail shipping contracts agreeing to at ~$20/bbl to the USGC

And with Trump’s acknowledging that Saudi Arabia’s findings behind the Khashoggi death were credible, this could offer more opportunity for the US administration to pressure the kingdom to tap its spare capacity resources before the Iran sanctions take effect in November. So, there will be an intense focus on the Saudi Royal family’s relations with the Whitehouse this week, while US Congress will face increasing pressures to block all arms sales and deliveries. All the while  global business leaders continue to shun “Davos in the Desert.”

US-Saudi relationships are vital to maintaining peace in the middle east and must continue, however, the Khashoggi case will give the US leverage and which will likely cause Saudi Arabia to increase oil production if possible. But you know this is not going to leave the headlines anytime soon as most everyone considers the official Saudi explanation as a complete fabrication.

While the supply-demand equilibrium remains fragile, the anticipated impact from Iran sanctions is diminishing as prompt Brent remains in good short-term supply despite growing uncertainty about supply disruptions continue to build down the road.

Gold Markets

Investor sentiment is much-improved from even a week ago on increased portfolio hedges against more sustained equity market drawdown which over the short term,  should give rise to haven demand and boost Gold prices.

But China has rolled out some rule changes to stabilise markets. And while the longer-term effects from these changes amount to little more than putting a band-aid on a broken leg, the generally usually work and have some influence over the short term. Since  China equities are deep in oversold territory, there is lots of room for a bounce in local markets which has clipped momentum in Gold markets as even headlines around Brexit, and the Italian budget was more positive heading into the weekend. heading into the weekend although most traders remain a bit cynical on those fronts

While the upcoming US election will offer up many challenges on US political risk front and support Gold, ultimately however past Nov 6 USD and Fed hiking cycle are likely back in the driver’s seat for bullion pricing. While mainly priced in, the USD could strengthen ahead of December rate as higher US interest rates and a stronger USD could discourage gold investors from pushing the envelope higher unless of course, the equity market rout continues.

Currency Markets

From sandstorms in Riyadh to headwinds in Rome, escalating risk has effectively capped the recent swell in the US in Treasury yields, while the combination of Federal Reserve policy tightening and increasing debt supply should keep the bottom from giving way. But none the less we will bond, and currency traders are left to jostle between US growth momentum and tightening global risk, that should trigger a more significant flight to safe-haven currencies and assets.

Last weeks FOMC minutes reaffirmed the Fed’s hawkish lean and should keep the dollar supported. Markets remain in pins and needles of the Italy budget and Brexit stalemate, but with equity markets volatility on the rise, traders will continue to assess China policy adjustments on Friday to see if the moves will have a sticky effect.

Traders will soon factor in US midterm elections where the tail risk clearly, is a Democratic sweep. Mind you; its anyone’s guess just how economically active GOP tax cuts will be in 2019 while facing a massively ballooning debt. But it is while is more clear-cut that  a Blue Wave tsunami would dent market sentiment and likely push the dollar lower

The Euro

So far ECB policymakers have remained somewhat mute on Brexit, but one would think this divorce will not play out pretty for either the EU or UK economies which might influence ECB policy guidance. But EURUSD is back above 1.1500, reflecting quietening in alarm bells over equities & Italy. Moody’s finally cut Italy’s ratings to Baa3 as expected. Italy’s banks are vulnerable because of the high proportion of the country’s bonds they own, but this was widely expected so no major surprise.

The Canadian Dollar

The CAD miss on CPI has overwhelmed whatever remnants of bullishness I had in the CAD. The shocking miss on the CPI has shattered my confidence on next week’s BoC. Given there are no significant data releases between now and the BoC meeting, its time to stop being so unabashedly bullish on the loonie.

Australian Dollar
There were around $A10B of Australian government bonds redemption on October 21 and given much better yields away, unless so governed to buy Australian Bonds, most of those maturing investments likely funnelled into US or other much higher yielding bonds. Thus, the AUD is holding up well despite a lot of selling pressure last week and could outperform this week provided China volatility continues to ease after mainland regulators policy tweaks on Friday.
Been avoiding trading AUD vs the USD like the plague but given shifting sentiment on BoC policy next week, the long AUDCAD trade could see some appeal early this week.

On the energy front, multiple news sources have confirmed that Australia’s colossal and much delayed Ichthys liquefied natural gas (LNG) plant has started shipments in recent weeks. But comes at a favourable time and could offer some much-needed respite to Australia’s dwindling heavy sweet crude oil production.

The Malaysian Ringgit

It still feels like risk off but with a less weak Yuan and the monetary policy easing story in China playing out well on the SHCOMP. While the mainland equity recovery was positive on the surface, other regional bourses barley blinked as the China market reversal was little more than it a short covering.

In what could best be described as hope for the best but prepare for the worst. Malaysia slashed its economic growth targets and deserted its plans to balance its budget by 2020, not exactly a ringing endorsement for the financial in Malaysia. And with capital gains taxes and other consumption taxes on the horizon, it’s not to difficult to figure out why Malaysia equity markets remain under pressure.

The combination of macro risk off as well as on-shore danger around the upcoming budget will keep the Ringgit trading defensively.

The leak on oil prices notwithstanding, regional risk sentiment remains ever so fragile as any sliver of optimism from US earnings gave way to that reality that trade tension and geopolitical unrest continues to gurgle. There were around $A10B of Australian government bonds redemption on October 21 and given much better yields away, unless so governed to buy Australian Bonds, most of those maturing investments likely funnelled into US or other much higher yielding bonds. Thus, the AUD is holding up well despite a lot of selling pressure last week and could outperform this week provided China volatility continues to ease after mainland regulators policy tweaks on Friday.
Been avoiding trading AUD vs the USD like the plague but given shifting sentiment on BoC policy next week, the long AUDCAD trade could see some appeal early this week.

Oil stockpiles weigh on sentiment

Oil is poised for a second weekly drop after a larger-than-expected gain in American crude stockpiles eclipsed tensions between the U.S. and Saudi Arabia over the disappearance of a prominent critic of the kingdom.

Futures in New York headed for a 3.4 percent loss this week as government data showed U.S. inventories grew by more than double what analysts had forecast. Prices were little changed on Friday after President Donald Trump said it “certainly looks” like missing journalist Jamal Khashoggi is dead and warned of “very severe” consequences for the killing.

Also in oil markets, the front-month contract traded below the following month’s settlement in New York, flipping into negative territory this week in a condition known as contango. That signals oil traders are turning less optimistic on the near-term direction of the market.

CME Charts Via Bloomberg

The U.S. inventories data “was a complete shocker, sending oil markets spiralling lower,” said Stephen Innes, Singapore-based head of trading for the Asia Pacific at Oanda Corp. “Price action and discovery suggests traders are no longer concerned about how high prices will go but rather how quickly they will fall. As for today, at least, the bid on dip mentality has run for cover.”

Crude’s rally has staggered since hitting a four-year high earlier this month as the growth in U.S. inventories for a fourth week added to concerns over the lingering trade war between America and China. In the midst of mounting tensions surrounding Saudi Arabia, data showed the world’s largest oil exporter boosted crude output in August as it sticks to its OPEC pledge to pump more.

Bloomberg

Oil prices headed for a weekly loss

SINGAPORE — Oil prices nudged higher on Friday on signs of surging demand in China, the world’s second-biggest oil user, though prices are set to fall for a second week amid concerns of the ongoing Sino-U.S. trade war is limiting overall economic activity.

Brent crude oil futures were trading at $79.51 per barrel at 0521 GMT, up 22 cents, or 0.3 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures were up 19 cents, or 0.3 percent, at $68.84 a barrel.

For the week, Brent crude was 1.1 percent lower while WTI futures were down 3.5 percent, putting both on track for a second consecutive weekly decline.

U.S. crude stocks last week climbed 6.5 million barrels, the fourth straight weekly build, almost triple the amount analysts had forecast, the U.S. Energy Information Administration said on Wednesday. [EIA/S]

“EIA Weekly Petroleum Status Report was a complete shocker sending Oil markets spiralling lower amidst some concerning development for oil bulls,” said Stephen Innes, head of trading APAC at OANDA in Singapore.

NY Times via Reuters

Asia Market update : China data

TGIF

China GDP

The markets continue to shudder as political turbulence ferments, key tier one China data was just released which will offer little solace to risk sentiment as the GDP is 0.1% lower than what was expected by markets. Well, it doesn’t come as much of a surprise Chinas economy is losing steam, but there are worrying sings beyond the tariff effect that are more concerning. Specifically, that on year on year basis industrial output came in significantly lower. But it’s Friday after yet another tumultuous week, and frankly, I doubt anyone has a serious axe to grind at this point other than squaring positions into the weekend.

The Yuan
USDCNY fixed at 6.9387 today, +112 pips from last fixing and -22 pips from the previous closing at 6.9409 on 16:30 Beijing time and way lower than expectations sending the Yuan bears back their cage today. The fixes remain ambiguous and perhaps so my design to keep the market speculators in check that are looking for any signal to push USDCNH to 7

The Malaysian Ringgit

I what could best be described as hope for the best but prepare for the worst. Malaysia slashed its economic growth targets and deserted its plans to balance its budget by 2020, not exactly a ringing endorsement for the financial in Malaysia. And with capital gains taxes and other consumption taxes on the horizon, it’s not to difficult to figure out why Malaysia equity markets remain under pressure.

The leak on oil prices notwithstanding, regional risk sentiment remains ever so fragile as any sliver of optimism from US earnings gave way to that reality that trade tension and geopolitical unrest continues to gurgle.

Between the more hawkish FOMC minutes and the markets finding little comfort in US Treasury FX report, it’s a nasty combination for Asia investors. But things could get worse as the Yuan depreciation train could be arriving at the station anytime soon suggesting regional currency will undoubtedly remain a hostage to the Yuan’s underlying movement which could be a very a disruptive force for local sentiment.

But the fear of capital control slinking its way into BNM policy intensifies the risk of more foreign capital outflows. This possible policy shift is a very significant development and should be closely monitored.

Expect the Ringgit to trade with a negative bias against lower oil prices.

Global markets are enveloped in a classic case of risk aversion.

Global markets are enveloped in a classic case of risk aversion.

Global markets are enveloped in a classic case of risk aversion with all the main risk off hallmarks showing up in virtually every corner of the market. The S&P is down below the 200d moving average, FX carry is very wobbly, and  US 10y yields have corrected lower. Taking their cue from Asia markets North American traders read negatively into the USTR’s focus on China rather than the fact the report didn’t step on anyone’s tail. But the painfully raw price action from BTP-Bund spreads widening to a five-year high  triggered the latest  freefall  as risk assets virtually melted across the board

This week’s US earning inspired equity markets rebound is but a fleeting memory and has given way to the  lurking reality of bubbling trade-tension, geopolitical unrest, Italy risk and a hawkish fed narrative.

I guess when the Charmian of the world most powerful Central Bank views the US economy in the context of ‘remarkably positive outlook’ it’s probably not a great idea to assume the FOMC will walk back any hawkish interpretation.

While the US markets have been somewhat insulated from China equity market meltdowns this year, that strong historical correlation that “when China sneezes the rest of the world catches the flu” is starting to take hold. But things could get worse as the Yuan depreciation train could be arriving at the station anytime soon. Indeed, USDCNH warrants a high degree of attention as the test of the vaunted seven level looks increasingly inevitable as based on current price action more CNY/CNH depreciation is in the tea leaves.

And for good measure, not that I’m overly superstitious, but for the Chinese, number 7 can also be considered an unlucky number since the 7th month (July) is a “ghost month” and homophonous with death.

Yuan

Are markets prepared for the destabilising effects of a rapidly weakening Yuan as we draw ever so ominously near another leg of RMB depreciation?

In the wake of a few dubious Yuan fixings of late, the Pboc are indicating a more lenient stance towards RMB depreciation.

The CFETS index has broken the 2017 low of 92, which may suggest more CFETS depreciation is necessary given further tariff threats, but the lack of capital inflow is what telling which is naturally weighing on support for the RMB, all of which is suggesting the depreciation train is nearing the station.

Oil Markets

EIA Weekly Petroleum Status Report was a complete shocker sending Oil markets spiralling lower amidst some concerning development for Oil bulls.

With risk sentiment going into the tank and investors rehearsing worst-case scenarios around the asynchronous global growth sinkhole. Compounded by China contagion fears, there was hardly a bid to be found in New York markets. This significant price action and discovery suggests traders are no longer concerned about how high price will go but rather how quickly they will fall, as for today at least the bid on dip mentality has run for cover.

With any notion that  Riyadh would cut output and push oil prices higher a distant memory, Tanker Trackers data showing that Iran’s oil exports in the first two weeks of October were 10% higher than September averages compounded by massive worldwide inventory builds as the so-called ‘ hoarding effect” intensifies  Not to mention increasing chatter that Saudi Arabia will increase production. What appeared to be a ” sure-fire bet” for supply shortfalls when Iranian oil exports drop significantly in November, it’s has morphed into a bit of a white-knuckler of a trade.

On the bright side, however, since I remain unabashedly bullish on oil markets. So, after an 11 % fall and subsequent shake out in a mere two week, positions are much cleaner, and the fear of getting caught up in the crowded trade mentally heading for the exits has receded considerably. So it could be time to step back up to the plate. You know the old saying, no pain no gain!

Gold Markets

Gold prices are for the time being are held back by the stronger USD. But the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst still make gold appeal a favourable tail hedge against these escalations. Despite the FOMC minutes cementing the Feds rate hike view, the US midterm elections to pose a significant headwind for both the USD and US equity markets as such Gold should remain a favourable hedge over the short term.

Currency Markets

Nothing else matters but the RMB (Rinse and Repeat yesterday currency view)

Chinese authorities are a lot more sensitive about the RMB on a trade-weighted basis rather than on a bilateral basis against the United States, and with the markets trading at the bottom end of the CFETS basket range, there will be more focus on the basket after two specifically odd fixes towards the end of last week. So, the debate rages if last week is a signal for a shift in policy. If authorities decide to let this CFETS level go, it will open a massive can of worms that should see USDCNH rocket higher and will have a positive knock-on effect for the USD.

Regardless of which direction the USDCNH moves the RMB will remain at the epicentre of currency markets and will drive the near-term direction of the dollar.

So, for local ASEAN currencies, I suspect they too will be held hostage to the RMB moves.

The Euro 

The Euro is worth noting as  EURUSD was dragged down on broader USD sentiment, but events of its own made it worse. Troubling Italian news hit one hour into the London close causing a calamitous meltdown in EU risk

Media

Join me on Channel News Asia this morning at 7:30 AM SGT to review last nights price action Channel News Asia

Daily Markets Broadcast 2018-10-18

Daily Markets Broadcast

 

2018-10-18

Wall Street lower as US yields rise post-FOMC minutes

US indices consolidated the previous day’s strong gains with a mild retracement. Minutes of the last FOMC minutes showed a hawkish bias, which pushed US yields back up and put pressure on stocks. Weaker oil prices also pressured energy counters. The UK100 index is still plagued with Brexit stalemate.

 

US30USD Daily Chart

Source: Oanda fxTrade

  • The US30 eased off from one-week highs as FOMC minutes showed Fed officials were considering the need to push rates above the perceived long-run neutral level
  • The index stalled ahead of the 55-day moving average at 25,968. Support points are possible at the 100-day moving average (25,476) and 200-day average at 25,142
  • Yesterday’s release of housing starts data showed the sector is lagging behind, despite robust growth and higher wages, due to rising mortgage rates. Today sees October’s Philadelphia Fed index released, which is expected to ease back to 20.0 from 22.9

 

DE30EUR Daily Chart

Source: Oanda fxTrade

  • The Germany30 index snapped a three-day rising streak yesterday, closing lower after touching the highest in a week
  • The index remains below the 55-day moving average at 12,238. This average has capped prices on a closing basis since end-August
  • Euro-zone Sep CPI data came in as expected. Today we see Germany’s wholesale prices, which are expected to rise 0.4% m/m

 

UK100GBP Daily Chart

Source: Oanda fxTrade

  • The UK100 index closed lower for the first time in four days yesterday, weighed down by Brexit stalemate and unable to benefit from softer CPI numbers
  • The u-turn came near the 23.6% Fibonacci retracement level of the Sep27 to Oct11 decline. The 55-day moving average is at 7,428
  • Retail sales data for Sep is due today, seen falling 0.4% m/m after a 0.3% gain in Aug. This probably ties in with the softer CPI numbers yesterday. An above-forecast number could give the index a boost

 

Asia market update: a busy session is unfolding

The Yuan

USD bullish sentiment post FOMC minutes outweighs Treasury to report the CNH playbook remains intact and should not provide any is a significant short-term relief for local EM currencies. High US bond yields and a rebounding US dollar continue to pose substantial headwinds.

The Yuan fix came in at 6.9275 vs 6.9235 but +30 higher than market estimates. Given the focus on all things Yuan, it has triggered a call to action for Yuan bears who have promptly paid the USDCNH market above 6.935 level during the opening salvo. The higher fix combined with no bounce in China risk sentiment post US Treasury FX Report does provide some ammunition for CNH traders to push the USDCNH envelope higher. Expect the near-term battle line to get drawn between the critical USDCNH 6.94-95 level.

Regional equities market

Taking their lead from an unsettled close in US equity markets, local markets are trading with a negative bias as risk aversion continues reverberating across ASEAN bourses. President gone postal, escalating US-China tensions and a stronger USD will pose considerable headwinds to local equity markets. Unlike yesterday rally where participation was relatively light, early volumes are looking robust suggesting investors continue to probe markets downside where more significant tail risk remains.

Australia jobs report

AUD jobs data far from a game changer +5K offset by fall in participation but UE rate still decent so confident on the margin. But given the volatile nature of this report, the data will carry a limited impact on RBA policy. With US-China tension staying on the boil AUDUSD markets remain better offered than bid.

Malaysian Ringgit and Oil prices

Oil prices are leaking lower; the Malaysian Ringgit should underperform at the margin today or at minimum trade with a defensive posture. We do not see any discernable bounce in local risk sentiment as the markets prepare for capital gains and consumption taxes.

Bank of Korea 

The Bank of Korea leaves 7-day Repo rate unchanged at 1.50, but we wait in vain to see if this is indeed a hawkish hold. But USDKRW has moved back above the 1130 level as fast money speculators pile in after the BoK decision to hold rates. We wait to see if the central bank will provide an evident signal for a hike in the next 1-2 months. The press conference begins at 10:45 SG time.

Gold

Gold continues to find a bid in early trade as local traders are a much better seller or risk. But with the dollar breaking below the critical 1.1500 EURUSD level near-term bullish sentiment will be tempered but given equity weakness gold is looking increasingly attractive as a defensive hedge.

Risk Aversion Lingers

Risk Aversion Lingers

It was a shaky day for US equities, but the broader indexes did manage to claw back from the depths of despair but still ended the day slightly lower only 24 hours after the most substantial gains in 6 months and reminding us just how fragile investor confidence is.

Risk aversion continues to permeant across global markets. While Oil prices were leaking everywhere (blame inventories), industrial metals also trade on a soft note. While there isn’t one reason, but there’s a sense of foreboding in the air. that the next US equity correction could be the ” big one.”

President has gone  postal 

But I’m looking no further than the President ratcheting up the rhetoric by ” going postal ” on China. Indeed US-China tensions are back on the radar, particularly with NYT suggesting Trump’s next target will be China’s cheap postage services. But the headlines aren’t much better in Europe which is intensifying investor jitters. There is zero expectation for a Brexit divorce agreement coming out of EU Summit while Italy budget is widely expected to be rejected by the EU. Late NY headlines from Reuters say that EU leaders are dropping plans to hold a November 17-18 summit for now – they are ready to meet again “if and when” the EU’s chief negotiation reports that decisive progress has been made in negotiations. An amicable Breixt divorce has certainly taken another significant hit.

The Greenback 

The USD rallied Wednesday, reflecting two forces: unwind of the prior two sessions of US weakness as USD haven flow picked up, and FOMC minutes which confirmed the Feds would continue to normalise rates for the foreseeable future.  This was the tail risk going into the minutes as some market participants thought the FOMC would walk back some of the markets more hawkish interpretation of Jay Powell post rate hike presser.

US Treasury FX Report 

Though released a little later than expected, the US Treasury’s semi-annual report on currencies was mainly in line with what was leaked to the press late last week: once again, no trading partner was named a currency manipulator. Moreover, the same countries – China, Japan, Korea, India, Germany, and Switzerland – were on the Treasury’s monitoring list.

Though China was not explicitly named this time, this report however materially escalated its language against China – in four significant ways.

1) The executive summary focuses on China’s history of unfair trade practices
2) China had their section while everyone else was grouped into another
3) The Treasury will review the RMB in 6 months
4) But the one major caveat is, and something the markets were suspecting all along. ” “as a further measure, this Administration will add and retain on the Monitoring List any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act”.

The report comes out in line with market expectation and gives the markets another six months of breathing room. Hopefully, US-China can make some headways on the trade front. But giving China their section in the report suggests that the US Administration is ready for more punitive response China should discussions between Trump and Xi fail to yield results at next months G20

I guess we can breathe, at least for now, a temporary sigh of relief as we await the President who no doubt chime in on the US Treasury findings.

Oil Markets

A sizable shocker into this week more definitive EIA Weekly Petroleum Status Report which has sent Oil markets spiralling lower  amidst some concerning development for Oil bulls

The DOE data for last week significantly more bearish than Tuesday’s American Petroleum Institute report, with crude stocks increasing 6.5 million barrels per day. This is particularly dispiriting on two fronts: (1) markets had positioned for last weeks bumper inventory report to retrace (2) API on Tuesday suggested we would see a draw.

However, Petroleum prices were testing the downside in London and early New York before the inventory data even after a Tuesday report from the American Petroleum Institute. The de-escalation in US-Saudi tension suggested the market was very prone to a downside correction on any inventory build.

So, for today at least it could be a case of how low prices will go rather than how high.

But given the Iran sanctions and uncertainty around the spare capacity debate $80 Brent should provide solid support, but oil bulls have considerably less breathing room than they had yesterday.

Gold Markets

The US dollar refuses to stay down for the count which saw gold prices fall to the bottom of recent ranges. But the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst still make gold appeal a favourable tail hedge against these escalations. Despite the FOMC minutes cementing the Feds rate hike view, the US midterm elections to pose a significant headwind for both the USD and US equity markets as such Gold should remain a favourable hedge over the short term

Currency Markets

Nothing else matters but the RMB

Chinese authorities are a lot more sensitive about the RMB on a trade-weighted basis rather than on a bilateral basis against the United States, and with the markets trading at the bottom end of the CFETS basket range, there will be more focus on the basket after two specifically odd fixes towards the end of last week. So, the debate rages if last week is a signal for a shift in policy. If authorities decide to let this CFETS level go, it will open a massive can of worms that should see USDCNH rocket higher and will have a positive knock-on effect for the USD.

Regardless of which direction the USDCNH moves the RMB will remain at the epicentre of currency markets and will drive the near-term direction of the dollar.

So, for local ASEAN currencies, I suspect they too will be held hostage to the RMB moves.

Asia market closing view: fumbling into the EU summit

Currencies 

Currency markets have been relatively quiet in Asia ahead of the US Treasury FX report an no doubt markets will be eager to view the FOMC minutes where there is a considerable risk for a hawkish lean. Even more so after the subtly hawkish warm-up ahead of tonight’s FOMC minutes delivered by San Francisco’s new President Daly which is creating some noise today but turnover light. Long USD is not my base case view given the upcoming US elections risk, but a hawkish affirmation of Fed policy in the minutes will probably send the dollar bears back to their cages for the rest of the week and provide a boost to US dollar sentiment.

Gold 

Gold prices have reversed earlier losses as the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst make gold appeal a favourable tail hedge against these escalations. But on a near-term break of the signification $ 1234-1236 zone and given the bearish Hedge Fund compositions and structures on the Comex will come under intense pressure and we could see $1250+ in a heartbeat if these established short positions show signs of buckling.

Oil prices 

Oil prices have been steady in Asia but remain primarily supported Iran sanction as traders await the final EIA weekly petroleum status report due out later in the US session.

Equities

Not too surprisingly the effervescent bounce back in Asia equity sentiment has cooled as markets fumble into the EU summit But the enormity of global risk suggest the isolated US growth theme will come to an end like synchronised global growth theme, at least until US-China trade dispute is settled. On the trade war front especially, it’s too early in the game to build up Asian equity position with that enormous weight hanging over market sentiment.  Although markets did rebound in Asia, participation an turnover was that big.

But with FANNG earings showing a solid result yesterday, US equities should hold up ok today.

US Treasury FX report 

There may be too much overconfidence due to the recent equity market meltdown, that the President will accept the US treasury decision not to call China a currency manipulator. There’s a significant tail risk if the President doesn’t recognise the US Treasury findings at face value which should see the RMB complex sell off and equity markets buckle as trade war tension by implication will rocket significantly higher.

Brexit 

While avoiding all the headline bluster as much as possible, regardless I do not think the market will adjust their Brexit view until it is an obvious done deal because it is hard to PnL fissures to due headline risk. For some, that that will keep them sidelined but for those wearing UK risk or the few brave souls considering entering the mix, it could result in one of those rare home runs in both currency and rates markets for the not so meek of heart. This is as close to a real money dream set up as you can get in today’s market

President Trump 

US President Trump is out with another headline, which is creating some financial markets waves. “My biggest threat is the Fed,” Trump said on Tuesday during an interview with FOX Business. “Because the Fed is raising rates too fast, and it’s too independent,” he complained. Of course, nothing new but this noise does tend to make market participants extremely nervous when the Presidents do question the Fed mandate while wading into waters Presidents have typically considered out of bounds, specifically the Federal Reserve Boards independence.

But in the all too familiar good cop, bad cop routine is back in play. The frequency Fed-bashing has increased in recent days. US Treasury Secretary Mnuchin has also tried to comfort market participants at times by saying Trump respects the independence of the Fed.

Asia market update: Focus on Yuan

You just know that something good is going to happen