Rethinking it

Rethinking it

Risk sentiment stabilised primarily on the back of reports that the Treasury Department will NOT recommend China be labelled a currency manipulator along with headlines that Trump and Xi will meet on trade seems to be enough reason for the equity sell-off to cool. But indeed never has so much been riding on the contributions of so few. 

Once again market sentiment is being driven by rhetoric from US administration and Trump himself who has been quick to point fingers at just about anyone and everyone. Whether its the Fed has gone crazy, OPEC is causing an oil spike, China at fault for trade tension and declaring his policies are hurting China.  But from my chair, the message is loud and clear,  all designed to stir his support base into a frenzy ahead of the November midterms.

It ain’t over till it’s over

Initially, the market was interpreting higher US rates as a signal to deleverage given that most of the economic expansion was assisted by QE, both in the US and globally. So draining the punch bowl and tightening rates were weighing on sentiment. Ok, we get that! But gradually moving interest rates higher in themselves are not necessarily a bad thing for markets especially coming off historically low rates. Most market participants have never traded a rate hike cycle, and for some of the dinosaurs, it appears they have forgotten what rate hike cycle is. When in fact it’s the moment the Feds shift toward a dovish defensive stance after a period of tightening is the time to worry! Presumably, the Federal Reserve Board tightens when the economy is on hot, and the eases when it’s not.

Maybe and just maybe investors are waking up to the fact that much of this market frothiness is a result of financial engineering aided by the intravenous drip of seemingly endless supplies of cheap money. The result could very end up being a stock market built on a leveraged House of Cards which is about to topple after the US tax cuts have run there course. Indeed, credulousness may be giving way to the facts on the ground.

The possible Fed implication

If the equity markets continue to fall into December, the Fed will most certainly consider pausing raising interest rates. You can imagine what type of signal that will suggest to investors who in the face of soaring equity valuations, escalating global trade tensions and divergence in the whole growth narrative especially now that their fingers are glued to the sell button after last weeks carnage. And while the bar is exceedingly high for the Fed to pause in December, it’s not as high this morning as it was a week ago!

Oil Markets

WTI prices have shot higher at the NYMEX futures open after Saudi Arabia warned Sunday it would respond to any “threats” against it as its stock market plunged following President Donald Trump’s warning of “severe punishment” over the disappearance of Washington Post contributor Jamal Khashoggi.

Given that oil supply is Saudia Arabia ‘s” ace in the hole” The Kingdom has motioned it could use oil supply as leverage against any sanctions.  Another geopolitical hotspot for the US administration to navigate but this one extremely testy given that President Trump has been pressuring Saudi to up supply to counter the US-led Iran oil sanction

Despite oil prices making a fast retreat last week and e global growth downgrades at this week IMF in Bali.  The spare production capacity argument should continue to support oil over the short term. The IEA pegged spare capacity at around 2 million barrels per day. But the markets know these reserves have never been tested raising the questing how much spare capacity can be brought online immediately But in the meantime until additional supplies are made available, that crimp in supply should be enough to support OIl prices until proven otherwise.

Oil Bears came out of hibernation last week even despite falls in Libya’s crude output. But price actions were driven primarily by an Oct. 8 report from the IMF, in which it downgraded global economic growth forecasts for 2018 and 2019 to 3.7 per cent per annum, from 3.9 per cent, which would consequently lower oil demand. Then pandemonium was unleashed across global markets as the worldwide stock markets tanked triggering an exit from riskier assets.  And while the  S &P stabilised well and continued to roll with the punches, but Oil markets were so eager to snap back. Oil prices initially struggled to follow the equity market lead, after the International Energy Agency monthly Market Report adjusted demand lower by 110,000 bpd for both 2018 and 2019, reported an increase of 100,000 bpd in September OPEC production while pointing out OECD data suggest oil stocks are at the highest level since February. While advising the markets are adequate supplies which again highlights uncertainty of supply once the US sanctions on Iran take effect. Lordy Lordy, it’s a noise market

Despite managing to eek out a win on the day, Brent was lagging WTI on Friday highlighting the lack of fundamental deficit in the oil market, with the International Energy Agency monthly Oil Market Report demand lower and terming supplies “adequate for now”.And  WTI could still be drawing support from Hurricane Micheal induced outages.

Drillers added eight oil rigs in the week to Oct. 12  according to Baker Hughes. Mainly attributed to the November 1 Plains All American Pipeline Project which is set to start flowing on Nov 1 and should ease pipeline bottlenecks that have lower crude prices in the Permian Basin. The Sunrise Pipeline has a reported capacity of about 500,000 barrels per day.

Oil COT report 

The Commitment of Traders data, HEDGE FUND net position changes in the week to Oct 9:
Brent -6mn
WTI -37mn

Gold Markets

The precious complex is trading of the intersession highs as one would expect after the larges jump in years. In reflection, the move was a combination of a haven and full short covering. But this would leave the current landscape extremely shaky if both stocks and US rates markets recovered significantly in the days ahead. But with geopolitical noise ratcheting higher in Saudi Arabia

Currency Markets 

EURO
Given all these tectonic shift in market sentiment, currency markets have this air of unpredictability about them, not more so then the EURO as its completely unclear if Friday’s move was confirmation of the downtrend or nothing more than weekend position squaring. Talking to my circle of G-10 traders this morning I get the feeling that more are coming to a conclusion ahead of the US midterms and wobble equity markets, the USD is there for the taking. After the market’s reaction to Nikki Halley resignation when the USD sold off, its probably a sign of things to come as the pendulum swings between the GOP keeping or losing control of Congress

Japanese  Yen

Kuroda and company have been floating trial balloons the IMF conference in an attempt to gauge market sentiment and prepare currency traders for the inevitable rate hike. The BoJ   desperately wants to help Japan’s  banking sector and improve the monetary transmission mechanism channels to allow the banks to raise the cost of borrowing, after a decade of struggling

The Malaysian Ringgit 

Traders are awaiting US Treasury Department’s currency report on Monday/ Tuesday, where it rumored they won’t classify China as a currency manipulator which could avert an EM Asia currency meltdown and would forestall an escalation of the U.S.-China trade war. Oil prices look supportive in early trade but the overhang from fiscal concerns around the upcoming budget should temper any strengthening in the local note.

The IMF Bash in Bali

IMF Managing Director Christine Lagarde doubled down on the messaging.

“Our message was very clear: de-escalate the tensions,” she told Bloomberg Television in an interview, about US-China tensions. But with no hints of a resolution or fixed purpose for that matter, the parties are no closer than they were before the soiree.

 

 

Next week’s spotlight falls on the USD and the RMB complex.

Well, that was dramatic, but some significant levels on equity markets held on a closing basis, while the DXY rallied into the close. But in the end, it was all about cleaning the slate while living to fight another day.

Next week spotlight falls on the USD and the RMB complex, and following the likely publishing of the much talked about US Treasury FX report, it’s going to be another packed week on the economic front for these currencies.

China a Currency Manipulator: Yes or No

Whit the odds at 50-50 chance that the US will go so far as to outright name China a “manipulator.”, For no other reason than the usual chorus of mixed signals from the US administration, with the worrywarts leading the way. White House Economic Advisor Kudlow opined on CNBC that China’s response to US requests is “unsatisfactory.” In contrast, Treasury Secretary Mnuchin said he’d had a “very productive” conversation with the PBoC but expressed his concerns about “the weakness in the currency.”

It all suggested that, while siding with no currency manipulator camp, the uncertainty around the report warranted at minimum a passive reduction in specific currency exposure, especially when risk off lead  to unwinds last week  of critical consensus short positions where  the “funders” tended to outperform And at maximum, cleaning the slate entirely including trimming AUD shorts and USDCNH longs.

Last week the EUR, JPY and CHF all went bid against the USD as equities took a plunge and the rally accelerated when Trump reminded everyone that no one is safe from the wrath of Trump, even his nominated Fed Chairman Jay Powell.

Europe Risk

In Europe, there will be more political intrigue. Italy will present it budget draft to the EU, keeping in mind the EU Commission already said last week in a letter to the Italian government that its latest fiscal plans point to “a significant deviation” from the path recommended for Italy by the EU Council. And headline risk is massive as the UK and EU are due to discuss Brexit at the EU Summit. But flying under the radar is the first major electoral test for any new government – this vote is in Bavaria. on Sunday

Oil Market 

Headwinds remain.

The S &P stabilised well and continued to roll with the punches, but Oil markets were not so eager to snap back. Oil prices were struggling to follow the equity market lead, after the International Energy Agency monthly Market Report adjusted demand lower by 110,000 bpd for both 2018 and 2019, reported an increase of 100,000 bpd in September OPEC production while pointing out OECD data suggests oil stocks are at the highest level since February. While advising that markets are adequately supplied,  which again highlights uncertainty over supply once the US sanctions on Iran take effect. Lordy Lordy, it’s a noisy market.

Reuters

Drillers added eight oil rigs in the week to Oct. 12 according to Baker Hughes. This is ahead of the Plains All American Pipeline Project which is set to start flowing on Nov 1 and should ease pipeline bottlenecks that have lower crude prices in the Permian Basin. The Sunrise Pipeline has a reported capacity of about 500,000 barrels per day.

Gold Markets

The current landscape remains exceptionally shaky if both stocks and US rates markets continue to recover significantly in the days ahead. As well there a plethora of tier one US economic data out next week, and given strength in the recent run of US economic data it has anchored the USD to fundamentals where the dollar has shown a tendency to appreciate. Without a significant break of the critical $1225 level its far to early to jump on the bullish gold bandwagon.

China Trade Data

Speaking of China data, I’m still perplexed why North American markets analysts were so enamoured about Beijing’s export data. Sure, it was surprisingly hardy versus market expectation, but it was impossible to factor in with any high degree accuracy ,the front-loading impact, which was more than evident to the local Singapore traders who were buying the USDCNH dip. Local’s tend to focus on electrical machinery exports which are Chinas biggest export, and given the surge in that sector, the data was not all that significant as exporters were fulfilling longer-term commitment before implementation of the latest tariffs on US$200 billion in Chinese exports. Even the so-called ‘ hoarding effect” on the commodity imports components was evident given the newly announced 10 % trade tariffs in mid-September impacted the data.

Friday’s relief rally in full swing

Friday October 12: Five things the markets are talking about

Volatility, in particular, for equities, has notched aggressively higher this week, now that sovereign bond yields are beginning to price out cheap money.

Stronger than expected U.S economic data and weak European underlying inflation in key countries is being blamed as the specific trigger for this week’s ‘bearish’ bout.

However, Chinese trade data released earlier this morning showed better-than-expected growth in Chinese exports has, at least temporarily, helped ease investor concerns about the damage to China’s economy from U.S tariffs and other trade friction.

China’s trade surplus with the U.S widened to a record +$34.1B in September as exports to the American market rose by +13% y/y, despite a worsening tariff war.

Global equities have staged a robust recovery; the ‘big’ dollar trades steady, U.S Treasury yields back up and crude oil prices recover while still heading for the biggest weekly drop in three-months.

Nevertheless, a gradual Fed rate increase remains the order of the day, especially after yesterday’s muted U.S CPI data – the market is pricing in a +25 bps move in December.

Since the Fed’s last meeting in September all data has been in line with the Fed’s depiction of an economy in which low unemployment will be coupled with inflation running near +2% for the foreseeable future.

1. Stocks sell off ends in Asia

Chinese stocks, among the biggest losers in a global market selloff this week, rallied overnight, as investors reassessed the impact of the Sino-U.S trade spat on the country’s economy and its markets.

In Japan, the Nikkei ended higher on Friday as investors took heart from gains in Chinese equities on upbeat export data, which generated buying in manufacturers exposed to China. The Nikkei share average gained +0.5%. On Thursday, the index slid -3.9% and for the week the index was down -4.6%, its biggest weekly drop since March. The broader Topix traded flat.

Down-under, Australia’s ASX 200 lagged most of Asia Pacific overnight as the heavily weighted energy and financial sector held the index back. It ended +0.2% higher, but fell -4.7% for the week. In S. Korea, its stock market rebounded from one of its biggest drops in seven-years. The Kospi rallied +1.5%, its first gain this month. The index fell -4.7% for the week.

In China, the main stock indexes bounced higher overnight after suffering massive losses this week, as investors went bargain hunting on the back of stronger Chinese exports data. At the close, the Shanghai Composite index was +0.9% higher, after touching near four-year lows yesterday. The index was down -7.6% for the week, its worst weekly performance in eight months. The blue-chip CSI300 index closed +1.49% higher.

In Europe, regional indices trade higher across the board rebounding from multi-month lows following a rebound in U.S index futures and Asian Indices.

U.S stocks are set to open deep in the ‘black’ (+0.8%).

2. Oil rebounds, but pares gains on adequate supply, gold lower

Oil has rallied overnight; rebounding after two-days of heavy declines, though prices pared gains after an IEA report deemed supply adequate and the outlook for demand weakening.

Brent crude has rallied +76c to +$81.02 a barrel, having dropped by -3.4% yesterday. U.S crude (WTI) has added +71c to +$71.68.

Note: Brent is still on course for a -3.7% decline this week, the biggest weekly fall in about four-months.

Oil found support from data showing that China’s daily crude imports last month hit their highest in four-months and from a rebound in equities.

Gains were pared, after a monthly report by the IEA said the oil market looked “adequately supplied for now” after a big rise in production and trimmed its forecasts for world oil demand growth this year and next. “This is due to a weaker economic outlook, trade concerns, higher oil prices and a revision to Chinese data,” said the IEA.

Ahead of the open, gold prices are under pressure as global equities rally, but the ‘yellow’ metal trades within striking distance of its 10-week high print in yesterday’s session. Spot gold is down -0.4% at +$1,218.86 an ounce, after rallying +2.5%yesterday, as this weeks equity rout sent investors rushing to safe-havens. U.S gold futures are down -0.4% at +$1,222.30 an ounce.

3. Yields back up on relief

Eurozone government bond markets show signs of relief as equity markets rebound. The 10-year Bund yield is trading +2.3 bps higher at +0.54%, pulling the yields of other core and semi-core issuers higher.

Note: Bunds yields are down from five-month highs reached earlier this week at +0.58%.

Eurozone periphery government bond yields trade lower, indicating a lower level of concern, at least for the day. Italy’s 10-year BTP yield is trading -4.5 bps lower at +3.53%.

Note: Italian 10-year bond yields rose to five-year highs earlier this week on tension between Rome and the E.U over Italy’s expansionary budget plans.

Elsewhere, the yield on 10-year Treasuries has backed up +3 bps to +3.18%, the biggest advance in a week. In the U.K, the 10-year Gilt yield has gained +2 bps to +1.694%. In Japan’s 10-year JGB yield has climbed less than +1 bps to +0.15%.

4. Dollar stable, EM pairs rally

USD initially tested multi-week lows as a weak Wall Street soured its recent bullish sentiment. Nevertheless, the greenback is off its worst levels as the equity sell-off has eased.

After jumping to an 11-day high of €1.1611 overnight, the dollar has stabilized and EUR/USD trades slightly higher, last by +0.1% at €1.1593. However, expect Italian fiscal risks and the direction of U.S yields to continue to drive the EUR/USD.

Emerging-market currencies are having another good day after weathering the global equity selloff this week. The South African rand is up +1.1% at $14.483, and the Mexican peso has gained +1.5% at $18.8718. The Turkish lira has paired some of its gains, but its trading +2% at $5.9451 – up +5% on the week.

The PBoC set yuan at weakest level since March 2017, a day after U.S Treasury staff advised Secretary Steven Mnuchin that China was not manipulating its the exchange rate. The midpoint for the dollar was ¥6.9120.

GBP/USD (£1.3215) is trading within striking distance of its three-week highs on hope for a Brexit agreement at the upcoming E.U leader summit next week. There is speculation that PM May is close to an agreement, but obstacles remain, as she requires the DUP Party ally and rebel Tory members support.

5. Eurozone factory output rebounds

Data this morning showed that industrial production in the eurozone rebounded strongly in August, as surges in Italy and the Netherlands offset weakness in Germany to suggest economic growth across the currency bloc continues at a modest pace.

The E.U’s statistics agency said industrial production was +1% higher in August than in July, and up +0.9% on year. The market was looking for a monthly gain of just +0.2%.

It was the first rise in production since May, following two straight months of decline.

Today’s healthy rebound will likely reassure the ECB that the economy is on course to grow more slowly this year than last, but still at a rate that will lead to new jobs being created, thereby pushing wages and inflation higher.

Note: The IMF trimmed its eurozone growth forecast for this year to +2% from +2.2%, noticeably downgrading its growth projection for Germany to +1.9% from +2.2%.

Forex heatmap

Asia market update

Oil update
After hitting a massive speedbump over the past 48 hours or so, Oil investors are dipping their toes back into the no less certain waters as risk has tentatively stabilised. But prices remain very firm even after DOE reported a larger-than-expected build suggesting a bit of discount in the numbers as refinery maintenance work continued to limit demand. Regardless it’s hard to sugar coat this week’s inventory report, and tumultuous week, traders are more apt to pare rather than increase risk. So, in the absence of significant headlines, we could see consolidating into the week, but with oil prices holding firm above$ 80.00, the bulls haven’t completely lost the plot just yet

Excellent trade data from China for September.
The trade balance has come at USD31.7bn versus 19.2bn expected. Exports are substantial at 14.5% YoY versus 8.2% expected, and imports have done well coming at 14.3% versus 15.3% expected. but I wouldn’t get too excited as dealers will buy this dip below 6.90 based on today fix view

Risk

There’s a semblance of sanity returning to the markets, but we are no nearer a significant recovery, but the Politico article which stated the internal report to Treasury Secretary Steven Mnuchin did not recommend that Beijing is labelled a currency manipulator has eased tension although we are not out of the weeds just yet. On the flipside, the Pboc continues to offer up confusing smoke signals as its yet another day when USDCNY and USDCNH see a big move higher. Mixed messages are confusing the landscape as again today we got another higher than expect fix which is greenlighting CNH bears to jump into the position with more belief after last night sell-off. And with the unpredictable nature of commander and chief, Donald Trump does raise the level of uncertainty; there is nothing inevitable about an escalation of his long-standing China is currency manipulator themes.

This market is exhausted from all after the most significant sell-off in global equities since Feb. Its large shake out the landscape remains no less uncertain and while the current narrative is likely to rage on until Novembers G20 summit at least, prudence suggesting keeping one’s powder dry on the recovering Friday and live to fight another day after yesterday most unpleasant experiences.

Gold Comes Alive In Biggest Jump Since ‘16 After Equities Roiled Bloomberg

Gold gains most in more than two years

Daily Markets Broadcast 2018-10-12

Not quite Goldilocks

Not quite Goldilocks

Not to state the apparent but markets are finding themselves in a total state of discombobulation as we mercifully head towards the weekend. There have been multiple train wrecks over the past 24 hours, and the continuous wall of worry around US yields and US-China tension still weighs on equity sentiment.

Goldilocks? Yes and No

Not quite the Goldilocks narrative that we are so accustomed to after a weaker than expected inflation print (CPI) as those three bears are not so good-natured or harmless and are forever prowling looking for the opportunity to drive risk lower. The more moderate inflation prints only provided a modicum of repose and far from the antacid “plop- plop fizz-fizz ” oh what a relief it is, the market so desperately needed. Wall Street recorded its second day of steep declines. But there is one positive, however, as the overnight session came to a gruelling finale, New York traders could finally catch their breath. !!

However, some of my colleagues are suggesting EM FX rallied in response to the CPI data – implying that at least for some, the read on the data did that confirm markets are in the so-called Goldilocks zone where the US economy is – not too hot or cold, and just right. But I think the improving EM sentiment has more to do with the RMB complex.

Chinese Yuan
USDCNH sprung a leak through 6.88 overnight triggered by a Politico article which stated the internal report to Treasury Secretary Steven Mnuchin did not recommend that Beijing is labelled a currency manipulator and continued to place China on a monitoring list.

But adding to the momentum f China’s Ministry of Commerce issuing some comments regarding the arrest a technology spy, reports that China-US trade talks will resume and chatter that Xi and Trump will indeed be meeting at the G-20 sidelines next month. Trump is willing to meet with Chinese President Xi, but Beijing needs to show openness to compromise.

The moves lower on USDCNH have eased some anxiety, especially for EM Asia FX that that had been building in worst case scenarios that China could let the Yuan fall. But even more significantly for global markets is that the US Treasury Department’s staff has advised Secretary Steven Mnuchin that China isn’t manipulating the yuan as the Trump administration prepares to issue a closely watched report on foreign currencies, according to two people familiar with the matter. So, if Trump and Munichin accept these finding at face value, which the market agrees with, it could avert an EM Asia currency meltdown and would forestall an escalation of the U.S.-China trade war.

Positioning was heavy long USDCNH in Asia yesterday, and a cascade of stops losses have triggered on the move lower. At least this should offer a glint of relief for Asian capital markets.

USD Asia was under intense focus overnight Overall FX interbank volumes were approximately 45% higher across spot G10 & EM, as the upshot of US CPI, CNH headlines and continued cross-asset volatility and vital focal points USDJPY, EURJPY USDCNH and HKD experienced a two-fold increase in trading volumes. But none the less US-China relations remain to be the focal point for markets. There is some nervousness about the US Treasury Currency Report due to be released the week, but sentiment has thankfully improved for regional investors.

A Bullish Glint?
The overnight chatter does suggest that at a minimum there will be a softer tone on the currency manipulator theme, although the unpredictable nature of commander and chief Donald Trump does raise the level of uncertainty, and there could be more risk-reduction into the weekend as investors position more defensively. But this does offer a significant window of opportunity for the not so meek of heart.

Oil Markets
In the near term, crude oil traders will likely focus on global equity markets looking for any signs stability to conceivably mount a recovery for the current headwinds.

But oil markets are indeed going through an inflexion point of their own. OPEC’s Monthly Oil Market Report has followed the DOE Short-Term Energy Outlook reporting supplementary non-OPEC production growth, with a 200,000 bpd increase from a month ago which lessens demand for OPEC barrels.

The oil markets are sagging as more bullish bets performed a ” cut and run ” after Energy Information Administration showed Crude inventories rose by 6 million barrels in the week to Oct. 5, as analysts again wholly missed the dartboard expecting a build 2.6 million barrels. The EIA data came in lower than the eye-watering API build but its still a larger-than-expected increase for last week as refinery runs continue to fall due to seasonal maintenance work as another increase in Cushing WTI NYMEX delivery hub just added to the negativity.

With supply worries now gripping markets after this bearish EIA report, supply-side anguish has slinked into the equation as oil traders remain on the defence. Indeed, it’s hard to sugar coat this week’s inventory data, but for perpetual bulls like my self, if risk stabilises around improving US-China tension, there are some very cheap entry points on offer. And given positions are much cleaner after the latest ” Porthole” effect, there should be good support near and around $80 prompt Brent.

Gold Markets
This global market tumult was the opportunity that gold Bulls had been waiting for since last Wednesday when nascent sings of and impending equity market meltdown started to ferment as both US -Yields and US-China trade tensions were creating some significant headwinds. As the playbook suggested Gold markets finally showed some of life, but it took an absolute pummeling on equity markets to trigger demand as market lolloped towards critical l $1200 level. But on the break, buying accelerated as near-term stop-loss triggers came into play once the 50-day moving average gave way. But it was the softer than expected CPI print and with risk aversion remaining front and centre, it provided the catalyst to test the significant resistance level at $1225.

Currency Markets

Granted there’s always that initial shock factor when the Presidents preaches Tumpanomics especially when his views challenge the world’s most powerful central bank. But these types of outlandish remarks tend to have few lasting effects from my seat.

The Euro

The EURUSD has been driven by USD sentiment more than EUR itself. Both of Italy’s houses of parliament have voted in favour of the government’s fiscal outline, so it is only a matter of time before it goes to the EU. Political uncertainty and Italian politics that usually runs at a heightened emotional state, there enough uncertainty around this Budget that should keep the Euro lower view attractive.

The Malaysia Ringgit

Weaker oil prices will be offset by lower USDCNH. However, traders remain incredibly defensive on the MYR due to the escalating budget noise. While the could be some topside USD reprieve, the next big hurdle for regional currencies is the US Treasury report regarding currency manipulation on Monday as everyone is focusing on the US treasury view about China.

Asia Market Update :Worst case scenarios abound

Local traders remain the huge sellers of risk but are now pricing in worst case scenarios 
*Japan Securities Clearing Corporation (JSCC): Emergency margin call triggered for Index Futures trading
*South Korea closely monitoring markets

Oil Update

Brent crude continues moving sharply lower on today triggered by the deeper sell-off on global equities on concerns rising interest rates could severely derail global economic growth. But more specifically DOE monthly Short-Term Energy Outlook revised non-OPEC supply higher for 2019, which is leading more support to the supply side of the equations.

So with prospects of lower demand and additional supply in 2019, there has been no place to go but lower as bullish bets are heading for the exits with nary a substantial bid in sight.

Now if we get a bearish surprise in tomorrows DOE weekly status report, selling will intensify two folds. With tail risk mounting, bullish sentiment has evaporated quickly.

Equity update

Equity markets were pulverised today as investors remain in full out retreat and even the most pessimistic of equity bears are still in shock by the sheer magnitude of the move. This meltdown isn’t just a mild case of the sniffles suggesting the latest sneeze from the US equity market could morph into a global markets pandemic.

#Fedgonecrazy

Presidents Trump’s scathing and ramped up attack on the Fed has the dollar bulls retreating as even the hint of policial interference on monetary policy is unsettling also if it doesn’t lead to the Feds to taking their foot off the gas. But if these higher US rates are trigger more than risk aversion and this move turns into the next significant correction, it could give the FOMC some pause of a cause.

Yuan

Speaking of worse case scenarios

USDCNY fixed at 6.9098 today, +26 pips from last fixing and -96 pips from the previous closing at 6.9194 on 16:30 Beijing time as the counter-cyclical mechanism takes effect, but higher than everyone expected. So, another dubious fixing. Traders aren’t reading much ambiguity in today setting which is little more than a call to action for Yuan bear. The Pboc appears to be in little rush to steam the weakening tide.  Despite the apparent risk from capital outflows and more equity liquidations.

The Yuan has such a far-reaching influence on regional markets but even more so as the markets are becoming very suspicious of Pboc currency policy that in the face of being declared a currency manipulator, they could discard the YCC and let the currency go (weaker)

It’s potentially destabilising for global markets as it could trigger colossal liquidation in China equities and will trigger capital outflows.

The tail risk if they did for shock value, even as a temporary retaliation to the US Treasury accusations. Eventually, they would need to intervene.

However, instead of using reserves they could sell US treasuries to raise dollars to sell back to the currency markets(USDCNH) creating a nasty feedback look that will trigger broader-based US bond markets sell-off and more equity collapse

High hopes give way to steeper slopes

High hopes give way to steeper slopes

The markets are fraught with peril as the focus not too unexpectedly remains on US equity and bond markets. And while there is not one plausible explanation for the latest equity tumult, the horrible intersection of risk aversion due escalating US-China tensions and rising US rates has spooked out investors overnight triggering abroad selloff which took the S&P 500 to the lowest level since February. Technology stocks took a big hit today, recording their worst today since August 2011 the “fear gauge ” VIX rose above 20 for the first time since April which triggered more than just a wave of profit taking; investors were genuinely panicked. All of which has investors cowering trying to determine if this is a case of risk aversion of the beginning of a massive correction.

But cheap money has been the rocket fuel for equities as investors piled in the past two years given that it was the only game in town to get a decent yield. But the more aggressive Fed rate-hike schedule has brought the gravy train to an end sooner than expected. But the real question facing investors is just how far is the Fed prepared to go.?

Investors have become used to and perhaps over complacent from FOMC’s in the past that approached rate hikes cautiously. So, the markets are still going through the reality check with Jay Powell at the helm who has unambiguously signalled a significant policy change was afoot. And it’s not too much of a stretch to think he could be borrowing a page or two from Allan Greenspan when the Feds raised the Fed funds rates aggressively higher from 2004-2006 during the last cycle.

And despite the US yields correcting lower on a combination of risk aversion and foreign demand kicking in buying these very juicy yields post-auction, the equity carnage accelerated as investors continue to aggressively deleverage equity positions as high hopes give way to steeper slopes.

But China concerns ahead of the US Treasury report on FX are likely aggravating sentiment as this could trigger a worsening of global trade outlook. But let’s not forget tonight’s CPI report. From a pure fundamental trader perspective, given the hawkish tail risk from a higher inflation print has also weighed down sentiment.

Oil markets

Oil prices were weighted down most of the NY session by the sharp stock market sell-off. However, prices were primarily driven by the uncertainty concerning the real impact of US sanctions on Iranian oil supply, which continues to seesaw. While rising output concerns from the likes of Saudi Arabia and Russia, contiued to weigh. As well, given traders tend to” sell the landfall ” scenario, and with the surprising intensity of Hurricane Michael, it will likely have negative short-term ramification for petrol demand across the US Southeast if not further up the coast, suggesting yet more inventory builds. So, the market has swung aggressively from the Supply to the Demand side of the equation especially with the IMF global growth downgrades fresh in the memory banks.

But then sentiment completely buckled when the American Petroleum Institute (API) reported a significant build of 9.75 million barrels of United States crude oil inventories for the week ending October 5, which was colossally bigger than analysts expected. While builds at the Cushing, Oklahoma delivery point for NYMEX WTI crude stocks increased 2.2 million barrels per day.

According to Reuters sources Saudi Arabia is set to deliver an extra 4 million barrels of its oil to India in November in what looks to be an aggressive move by Saudi move to replace the loss of Iranian barrels due to the U.S. sanctions and ease the suffering of one of the worlds biggest oil consumers.

Gold markets 

Gold prices ignored the .2% rise in US PPI, but hedgers were stepping back into the fray as US equity markets were tanking. But the moves were tempered by high US yields.

Currency Markets

While the Tech-heavy NASDAQ bore the brunt of the selling, the S&P500 which is more correlated to currency markets broke through some substantial support level, suggesting the move could run much more profound.

Japanese Yen

USDJPY came off sharply with the risk-aversion sentiment permeating throughout the London afternoon/NY morning amid massive USD selling for the second day in a row. There was plenty of USD selling following the double whammy of Nikki Haley’s surprise resignation and President Trump weighing in on Fed policy, and with the markets leaning lower on USDJPY due to focus on a possible BoJ shift, the trap door sprung on an aggressive break of 113.

The Chinese Yuan

Trader continues to test the 6.93 USDCNH level as increasing chatter about the 7 level intensifies. But it would be folly to move in front of the US Treasury’s Currency Report is due by Monday, October 15 where there’s a consensus building that the US Treasury will classify China  as a currency manipulator

The Euro

There’s enough risk weighing down the EURO to sink a battleship, but the single unit has caught a reprieve from broad-based USD selling rather than any significant shift in EU sentiment. Which makes it a prime target for a beat on tonight’s CPI

The Malaysian Ringgit

The Ringgit could face additional pressure from negative risk sentiment and lower oil prices. The upcoming budget has triggered another unwanted wave of uncertainty, especially around new taxes. Markets hate tax increases even if they are necessary to balance the budget.

OANDA Trading Podcast Market Update (11 Oct 2018) 938NOW

Stephen Innes head of trading Asia discusses his view on last night’s US  equity meltdown

Canada: Building permits, August 2018

Canadian municipalities issued $8.1 billion worth of building permits in August, up 0.4% from July. Strength in the non-residential sector drove the increase, while the residential sector declined for the third consecutive month.

Non-residential sector: High value projects drive the increase

In the non-residential sector, $3.2 billion worth of permits were issued in August, up 8.8% from the previous month. Both the institutional (+25.8%) and commercial (+8.9%) components contributed to the gain, which was largely the result of the issuance of permits for a new hospital in Ontario and new office buildings in British Columbia.

Meanwhile, the value of industrial permits fell 5.9% in August to $677 million. This followed a 13.4% gain in July, as multiple permits were issued that month for transportation terminals and manufacturing structures in Ontario and Alberta.

Residential sector: Third consecutive month of declines for both components

Municipalities issued $5.0 billion worth of residential permits in August, down 4.4% from July and marking the third consecutive monthly decline for the sector. Five of the six provinces that posted decreases had lower intentions for both single and multi-family construction.

The value of permits for single-family dwellings was down 5.2% to $2.2 billion, maintaining the general downward trend that began in January 2018. While eight provinces posted decreases in the month, Ontario and British Columbia contributed the most to the decline.

In the multi-family dwelling component, the value of permits fell 3.8% to $2.7 billion. Despite the monthly decline, the year-to-date value was $3.5 billion higher than the same time last year. Multi-family dwellings have represented over 70% of the total units for six of eight months so far this year. There are no previous years on record where multi-units exceeded that level.

Provinces and census metropolitan areas: British Columbia reaches another record high

In August, only three provinces reported gains, led by a record high in British Columbia. The largest decline occurred in Ontario, due to lower construction intentions in the residential sector.

The value of permits in British Columbia reached a record high of $1.8 billion in August, 12.8% above the previous record set in March 2018. In the non-residential sector, the value of permits passed the $600-million mark for the first time. Large projects for office buildings in the Vancouver census metropolitan area (CMA) were largely responsible for the growth.

In the CMA of Vancouver, the value of permits rose 66.4% to $1.4 billion in August, accounting for three-quarters of the value in British Columbia. Although most of the increase came from the City of Vancouver, the City of Burnaby issued over $250 million worth of permits for apartment buildings, bringing the total to over $800 million for the year.

In Ontario, all components declined in August, except institutional buildings. The value of permits in the residential sector dropped 13.9%. This followed several strong months in the multi-family dwelling component.

At the CMA level, the value of residential permits in Ottawa fell 60.9% in August, following a 59.9% gain in July. This was due to the implementation of higher development fees in the city, as developers applied for permits ahead of August’s fee increase.

StatsCanada

U.S producer prices increase for first time in three months

U.S. producer prices rose for the first time in three months amid a surge in gauges reflecting airfares and rail-transportation costs, a Labor Department report showed Wednesday in Washington.

HIGHLIGHTS OF PRODUCER PRICES (SEPTEMBER)

  • Producer-price index rose 0.2% m/m (matching est.) after a 0.1% drop in prior month; up 2.6% y/y (est. 2.7%) after 2.8% gain
  • Excluding food and energy, core gauge rose 0.2% m/m (matching est.); up 2.5% y/y (matching est.) after 2.3%
  • PPI excluding food, energy and trade services, a measure some economists prefer because it strips out the most volatile components, rose 0.4% m/m, most since Jan.; up 2.9% y/y, same as Aug.
  • Key Takeaways

    The monthly increase in the broad index stemmed partly from a 1.8 percent rise in transportation and warehousing services, a record in data back to 2009. That reflected a 5.5 percent jump in the category of airline passenger services, also a high in figures dating to 2009, while rail transportation of freight and mail was up 1.4 percent, the most since 2012.

    Overall, services prices increased 0.3 percent while the cost of goods fell 0.1 percent, reflecting declines in both food and energy. The decrease in goods prices was the first since May 2017.

    While the figures — which highlight wholesale and other selling prices at businesses — are less prominent in investors’ minds than the consumer price index out Thursday, they illustrate how changes in input costs are feeding into inflation. PPI reports have limited usefulness in predicting the monthly CPI reports, JPMorgan Chase & Co. economists said in a recent note.

    Amid trade tariffs and retaliatory levies, inflation pressures are being closely watched, particularly for signs of how likely they filter through production pipelines and on to businesses and consumers. Benchmark Treasury yields have climbed to multi- year highs this month amid investor expectations that the Federal Reserve will continue raising interest rates to the point of eventually restricting growth.

    Other Details

  • Energy prices fell 0.8 percent from the prior month, biggest drop since March; food costs dropped 0.6 percent, same decline as prior month
  • One-third of advance in final demand services stemmed from airline passenger services, which mostly reflects airfares
  • BLOOMBERG