Markets underpricing China risk( OANDA Trading Podcast BFM Kuala Lumpur 89.9)

Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore
Stephen reckons markets are “seriously underpricing economic risk in China”.

Economists suspect the direct impact from the two sets of US tariffs aimed at Beijing could drag China’s GDP down by 0.3 percentage points in the longer run.

Stephen also shares some insights on how China can contain the adverse impact from its ongoing trade war with the US.

We also discuss the market expectation on China’s 2Q GDP that is scheduled to be out today.

BFM Radio Kuala Lumpur 89.9

Trade ,earnings ,teapots and the US dollar

Trade, earnings, teapots and the US dollar

Strong domestic growth and on-target core inflation continue to suggest the US economy is in that happy place,  but this week’s US economic data will begin to shape market expectations for Q2.

And equally significant will be Fed Chair Powell’s semi-annual monetary policy testimony before the Senate Banking (Tuesday) and House Financial Services (Wednesday) Committees. We should expect Powell testimony to reflect the minutes of the June 13 meeting broadly. But members did note the increased risk to their base economic outlook from trade wars, but since then, President Trump has tabled a review of tariffs on $200billion of additional goods from China. But of course, this escalation was widely telegraphed by the Trump administration, which suggests the FOMC trade concerns were based on the 200 billion in trade war escalation anyway.

However, the new tariffs would not be put in place before the end of August and could be even further kicked down the road as the US and China seek to a secure a lasting bilateral trade based on freer and fairer policy.

But, should the US eventually move ahead with these tariffs, China could not escalate on an even basis given China only imports roughly 130 billion annually from the US suggesting they would either need to levy higher trade tariffs on a small number of selected products or take the least attractive measure of tactically weakening the Yuan. Hence the lack of immediate response from China, as administrators will be ultra-careful not to send the wrong signal triggering another market melt in China.

One does get the sense that investors believe this latest threat from Trump will bring back both parties to the negotiating table and yield some form of compromise.

Economic Union ( EU) chiefs Jean-Claude Juncker and Donald Tusk will take their anti-Trump trade roadshow to China and Japan hoping to preserve some semblance of free trade world order. And as opposed to Trumps fire and fury style of negotiation, there’s excepted to be fewer fireworks although the EU leader will press China for free access to China markets while discussing Chinas propensity to dump cheap steel on EU markets.

But absent continued headline risk from trade war this week, desk noise should be a few decibels lower, but it will be far from a walk in the park, with the Trump-Putin still tentatively set for Monday despite Friday “coincidental” set of indictments of 12 Russian military intelligence in Mueller gate. While this isn’t great news for the US-Russian relations unless the citations reveal an actual smoking gun,  don’t expect too much to be focused on this despite the abundance of partisan political posturing.

US markets

What trade war? It is clear as a bell the US economy is on fire. Soaring business confidence and corporate tax cuts are fuelling surging company profits, but more significantly for the prolonged effect, Americans are returning to the works force end masse.

So, despite all the trade war bluster, US markets continue to grind higher, even with numerous trade headwinds. Indeed, the only thing unlucky about Friday the 13th was for equity market bears.

But earnings season is always a bit of a wildcard, and with investors hoping for a  contiued buying binges. They could be a bit disappointed given that sentiment continues to run at peak optimism, even more so, if markets start dialling in more trade war pessimism to the calculus.

Indeed, this week’s key US economic data will be so crucial in shaping investor expectations for Q2, especially around the retail sales data.

Among the companies due to report are Bank of America, Goldman Sachs, Johnson & Johnson, Morgan Stanley and Microsoft.

Oil markets

The oil market consolidated into the weekend as traders were still rehashing the myriad of developments which saw prices head sharply lower last week. The reported increase in Libyan crude oil production was perhaps the most significant fundamental eye-opener of the week, but then Russian Energy Minister Alexander Novak chimed in about a possible supply increase and then stated Russia might swap goods for Iranian oil, a move that would severely dent the impact of US sanctions.

Also, the decline in China’s crude oil imports for June raised a few eyebrows on Friday and did weigh negatively on the demand side of the equation. But given that  China crude import numbers are highly volatile, the markets tend to sidestep a one-off print. But looking under the hood, Chinas crude imports fell -12.04% month on month to 34.35 m tons last month, its lowest level since December. Reduced imports were likely due to China ordering at least five independent refineries (teapots) in Shandong to cut run rates ahead of the Shanghai Cooperation Organization (SCO) summit to be held the port city of Qingdao on June 9-10. So, it possible the teapots will gear up again on additional quotas.

Despite last week’s plethora of bearish signals Oil prices rallied towards $71.50 during Friday’s  New York session, but the rally was cut short by media headlines suggesting ” “The Trump administration is actively considering tapping into the nation’s emergency supply of crude oil as political pressure grows to rein in rising gasoline prices before the mid-term congressional elections”

While trade war rhetoric should subside this week and could be a possible plus for oil prices, with the Trump administration actively considering tapping into the nation’s Strategic Petroleum Reserve, it could weight negatively on trader’s cerebral side of the oil price equation.

Gold Markets

The precious space continues to hold critical support at $1,240, but the gold complex remains under pressure. US equity markets continue to trade well triggering few if any defensive allocations into Gold as ETF flows have remained muted lately. With sluggish demand for precious metals and the USD on solid footing, gold prices will stay pressured lower for the foreseeable future as gold has wholly lost its glittering appeal in this enduringly bullish equity and USD environment.

Currency Markets

JPY
Massive move in USDJPY last week which caught everyone flat-footed given the volumes turned and the breadth of the movement. The break above the yearly highs does suggest this move has more ways to run although during Friday trade flows were much more balanced perhaps reflecting the softer Michigan Sentiment index and the negative US political fallout for Mueller gate escalations. USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine spot will trade if an intense wave of risk on kicks in or trade war fizzles out.
Only a week ago we were lamenting on how UDJPY was the low beta range trade so what the heck changed. For one, equity markets are surging, 2 year US yields are moving higher, but that only paints a corner of the picture.

1) There is the fair value argument that USDJPY is undervalued supported by interest rate differentials

2) Trade war fears are good for the US dollar because it could shrink the trade deficit when they become competitive enough. Primarily, if the Trump administration puts the automobile tariff in practice, it will exert a fatal blow to Japan’s economy and an already weakening trade balance, which will act as a JPY negative eventually.

3) Japanese institutional investors are increasingly looking outward for investment particularly in the US. And as well are not hedging full returns. The how the notion of Japanese investors repatriating when global risk rises are diminishing.

4) The old FOMO as traders move from what’s not to what’s hot. But arguably this position is under-owned with many structural risks off long JPY still in play, so a push into the 113 could trigger a significant extension of the current rally as more risk off hedged unwind, and more traders become believers.

MYR and the knock-on effects of the Yuan

The perfect storm of negatives saw the USDMYR predictably take out the 4.05 level on Friday trade. Despite the KLCI trading in the green while tracking local burses higher as risk sentiment recovered on Friday, the local currency unit didn’t fare so well. Despite the obvious political overhang from IMDB investigations and political and fiscal uncertainty weighing negatively for the Ringgit. The USD started to reassert itself, and when coupled with increasingly bearish signals from the oil patch, the market was prone to a selloff. But even worse when the $Asia shows sings of recovering, the Ringgit continues to lag the moves.

In addition, the RMB complex continues to set the pace of play in regional currency markets and besides the daily risk YO-YO on equity markets taking its toll on regional sentiment, with the Pboc weighing possible policy options around mainlands economic slowdown, this uncertainty is having a negative knock-on effect in local currency markets.  Uncertainty around policy, trade and retaliation will keep the riks reward needle skewed negatively for the Yuan near-term.

APAC Tuesday Morning Market Update ( OANDA Trading Podcast 938NOW Singapore )

We’re tracking the market movements with Oanda Asia-Pacific Head of Trading Stephen Innes. We explore Brexit developments, Asian economic numbers as well as whether trade fears have eased.

938NOW Singapore

 

Trade war -will cooler heads prevail ?( OANDA Trading Podcast with BFM Radio KL )

Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore

On July 6, the US imposed a 25% import tariff on US$34 billion worth of Chinese goods. China has since retaliated, and accused the US of igniting ‘the largest trade war in economic history’. Stephen comments on how trade tensions are affecting market sentiment, versus the economic fundamentals of the world’s two largest economies.

 

BFM Radio Kuala Lumpur

Fed Rhetoric to Dictate Dollar Direction

Friday February 23: Five things the markets are talking about

Ahead of the U.S open, Euro equities are struggling for direction after a positive Asian session as the market debates the outlook for central banks ‘normalizing’ their policies.

Euro bonds have gained along with Treasuries, while the dollar steadies after yesterday’s drop.

With no U.S data on the docket today, the market will shift its attention towards a plethora of Fed speakers doing the rounds.

First up will be New York Fed Chief, William Dudley, who kicks off proceedings at 10:00 am EDT as he addresses the “Monetary Policy Forum” in Chicago.

Note: Dudley is making his final rounds of appearances before his retirement.

Appearing at the same conference shall be Boston Fed President Rosengren, who is one of the Fed’s more “dovish” members, but who is not a “voter” this year.

Ms. Mester, the President of the Cleveland Fed, will be speaking at the same conference this afternoon at 1:00 PM EDT. She is a “voter” this year and a “hawk.”

Finally, Mr. Williams, the President of the San Francisco Fed, a “voter” on the FOMC this year and generally considered a “moderate,” will be speaking to a group on the west coast on the economy and monetary policy at 03:40 pm EDT.

1. Stocks gain in thin trading

In Japan, stocks rallied in light trade as receding fears of more aggressive U.S interest rate hikes boosted sentiment. The benchmark Nikkei ended +0.7% higher. For the week, it was up +0.8%.The broader Topix gained +0.8%.

Down-under, Australia’s S&P/ASX 200 closed +0.8% higher to cap its best week since Oct. In S. Korea, the Kospi had its best day since Oct. 10 rising +1.5%.

In Hong Kong, stocks rose overnight, capping a holiday-shortened trading week, as main indexes managed to recover much of the damage done during the recent rout. The Hang Seng index rose +1.0%, while the China Enterprises Index gained +1.7%.

In China, shares extended their rebound overnight, on sign’s that the Chinese government is once again supporting the stock market. The blue-chip CSI300 index ended up +0.5%, while the Shanghai Composite Index gained +0.6% in a holiday-shortened week. Both indexes have rebounded over +7% from a low print on Feb. 9.

Note: One of China’s largest insurance companies, Anbang Insurance Group, was seized as it violated laws and regulations that could seriously endanger the solvency of the company.

In Europe, regional indices trade mixed this morning with strength in the Italian MIB offset by weakness in the Spanish Ibex and FTSE.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx600 flat at 380.4, FTSE -0.2% at 7238, DAX +0.1% at 12470, CAC-40 flat at 5310, IBEX-35 -0.2% at 9858, FTSE MIB +0.4% at 22541, SMI -0.6% at 8917, S&P 500 Futures +0.3%

2. Crude oil prices rally, gold little changed

Crude oil prices remain better bid and range bound following the release of this week’s EIA inventory report, which showed a somewhat surprising decline in crude oil inventories on the order of -2.3m barrels compared to the average increase of +3.4m barrels in the previous five-years.

U.S oil production last week was steady at +10.27m bpd, a record level, while crude exports jumped to more than +2m bpd, close to a record +2.1m hit in October.

Crude bulls are beginning to ask if the “bull” rally could fade away as the U.S. oil production undermines the OPEC production cut commitments.

Note: The decline in crude inventories was particularly acute in Cushing. U.S oil refineries averaged approximately +15.8m bpd during the week ending February 16 or about -330k fewer bpd than last week previous.

Ahead of the U.S open, gold prices are little changed, but the ‘yellow metal’ remains on track for its sharpest weekly drop in nearly three-months. Spot gold is down -0.1% at +$1,329.16 an ounce.

Note: Prices gained +0.6% Thursday, their biggest one-day percentage rise since Feb. 14. The precious metal remains on track for its biggest weekly fall since the week ended Dec. 8, 2017.

3. Sovereign yields fall

Capital markets remains somewhat sceptical that the recent streak of data on wage growth, consumer prices and producer prices points to a rapid acceleration in inflation on either side of the Atlantic.

Data this morning from the Eurozone showed that consumer price growth slowed slightly last month (see below), but the core-measure edged a tad higher for the first time in months.

The ten-year U.S yield has eased, but remains atop of their 2014 high print, while those on German bunds dropped to the lowest since early January.

The yield on 10-year Treasuries decreased -2 bps to +2.90%. In Germany, the 10-year Bund yield has fallen -2 bps to +0.70%, the lowest in four weeks. In the U.K, the 10-year Gilt yield has declined -2 bps to +1.546%. In Japan, 10-year JGB’s yield has dipped less than -1 bps to +0.05%, the lowest in more than seven-weeks.

4. Dollar on the back foot

The U.S dollar is modestly weaker as the market is apparently ready to accept as a given that the Fed shall move at least three times this year to tighten monetary policy and to raise the overnight fed funds rate. The only question is whether the Fed shall move for a fourth time and by how much?

For the ‘single’ unit, it’s not only next weekend’s Italian general election (Mar 4) that poses a risk to the EUR (€1.2313), but also Sunday week is the same date that Germany’s SPD party members will vote on the proposed CDU/SPD coalition. The market is currently pricing in a +40-50% chance of a rejection, a result that could see Chancellor Angela Merkel step down.

Elsewhere, the pound (£1.3950) has edged a tad higher after U.K’s PM Theresa May won the backing of her divided Brexit “war cabinet” to ask for an ambitious trade deal with the E.U.

The SEK (€10.0388) is a tad softer outright as the market felt that the Riksbank Feb minutes this morning were on the softer side with concerns lingering over inflation and the exchange rate given the recent negative surprise with Jan CPI data.

5. Eurozone Jan CPI unrevised, but still a distance from target

Eurostat said consumer prices in the 19 countries sharing the ‘single unit’ fell -0.9% m/m in January for a +1.3% y/y increase.

Ex-food and energy, or core-inflation, fell -1.3% m/m and rallied +1.2% y/y, accelerating from +1.1% in the previous three months.

An even broader measure of core inflation, which in addition excludes alcohol and tobacco prices, also increased to +1.0% y/y in January from +0.9% in the previous three-months.

Forex heatmap

Yield-o-Mania

Yield-o-Mania

Global yields ratcheted higher after a stronger than expected jump on Germany’s PPI which bolsters the hotter than expected comprehensive inflation narrative. But it was the jump in US 2-year note yields that provided the extra boost to the US dollar as shorter-dated tenors provides investors with better goalposts for determining how the market is viewing Fed sentiment

However, the lukewarm demand for two-year notes at auction and with supply concerns expected to weigh heavy on investor bond appetite this week, we could see the dollar back under pressure. Of course, traders are erring on the side of caution ahead of the release of the FOMC Jan 30-31 minutes and given the short dollar bus had reached standing room only portions, the short-term pause in this year’s grand dollar sell-off was not too unexpected.
US stock markets

US equity markets fell overnight on the back of higher US Treasury yields which are providing investors with more income than dividends on the S&P 500 Index. While the prospect of higher interest rates will keep investors on edge, it’s not like we’re returning to double-digit levels or the Fed is moving its terminal rate.So even the uptick in ten-year yields to 3 % or even 3.25 % is unlikely to kill the equity market rally as the benefits from fiscal stimulus should continue to feed through the markets. Investors are banking on much higher returns from equities than bonds again in 2018.

Oil markets

Amid OPEC supply compliance, WTI markets are focusing on dwindling inflow of Crude from Canada to Cushing due to limited accommodation on the Keystone pipeline.The disruption is providing a fillip to WTI prices while the stronger dollar has Brent prices falling and narrowing the WTI-Brent spread. Also, WTI is getting a boost from rising exports attributed to better infrastructure connecting the Permian Basin to the Gulf Coast. But of course, we are tapering expectation on WTI rally as the USD continues to find firmer footing.

Gold markets

A tough week for the Gold market so far as the dollar has rebounded and US Bond yields have jumped higher ahead of the FOMC minutes. Traders are hedging for a possible shift in guidance given the uptick in inflation, so this presents a significant market tail risk which could cause traders to reprice rate hike expectations in 2019 aggressively higher. A quicker and steeper slope of interest rate normalisation offers the most prominent near-term threat to gold prices as this outcome will send the USD surging.
G-10

The Euro

The lack of demand for EUR Monday certainly opened the door, and predictably on the first sign of abject news, we dipped to the low 1.23’s after the German ZEW survey plunged. The market is forever a discounting mechanism and given the extremely disappointing price action from the long perspective; it triggered one-way position squaring ahead of the FOMC minutes. And while the bullish EUR narrative continues to resonate, both bearish and bullish views will be inevitably challenged with Italian elections, January NFP and an ECB meeting due over the next few weeks so near-term convictions could turn neutral and tarnish the EUR appeal

The Japanese Yen

The USDJPY should be the best game in town this week especially if traders interpret the FOMC minute’s  colour as bold. However, the risks are balanced entering the FOMC minutes as the recent uptick in volatility could have as much bearing on Fed policy decision as the subtle rise in inflation

But until the market takes out the significant 108.15 level I continue to view the current move as little more than a pre FOMC meeting squeeze driven by yields and positioning and believe there will be substantial resistance between 107.50-108 levels.
The Australian Dollar

Pre-data comments. Given the RBA has been very vocal on wage growth as the missing piece of the economic puzzle, today’s Wage Price Index will attract an unusual amount of focus. Unfortunately, everyone is looking at this trade so the news reading algorithms will likely get there well ahead of everyone on a surprise uptick.

The Malaysian Ringgit

Riskier currencies are trading on poor footing given the firmer dollar and negative global equity sentiment. And of course, we can not overlook higher US yields which are driving opinions this week. This package of coincidences does not make a very conducive environment for regional risk.

Higher Yields Pushing Dollar Up

Tuesday February 20: Five-things the markets are talking about

Overnight, global stock indexes have declined along with U.S futures, while the ‘big’ dollar has rallied a tad as U.S Treasury yields back up towards their four-year highs.

No central bank meetings are scheduled for this week although minutes from the latest FOMC (Wed) and the ECB meetings (Thurs.) will be published.

Note: Given the forthcoming March FOMC meeting (March 20 -21) when markets expect another +25 bps increase, dealers will be looking for signs that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC’s views on inflation have evolved.

In the U.K, there will be two major releases – the labor market report (Wed) and the second estimate of Q4 GDP (Thurs.) Elsewhere, Canada will post December retail sales (Thurs.) and consumer prices for January (Fri).

With little to no economic U.S data on tap, the markets focus now turns to the U.S Treasury department, which opens its auction floodgates beginning with today’s record supply of +$151B of three- and six- month bills (Total new debt supply is +$258B this week).

The U.S debt sales should provide a better market understanding of how steep yields can back up in the short-term.

Note: Fed policy makers speaking this week include NY Fed President Dudley and Atlanta Fed President Bostic and Cleveland Fed President Mester is among speakers at the U.S Monetary Policy Forum in NY.

1. Global stocks see ‘red’

Asian equities took their cue from Monday’s European bourse direction as U.S stocks and Treasuries took a break for the Presidents’ Day holiday.

In Japan, the Nikkei fell -1%, surrendering some of its early-week rise thanks to weakness in its electronics and banking sectors. Selling came despite a slip in the yen outright (¥107.10). The Topix fell -0.7%.

Down-under, the Aussie’s S&P/ASX 200 ended flat. In S. Korea, the Kospi fell -1.1%, dragged lower by index heavyweight Samsung Electronics, which dropped another -2% after falling -1.3% on Monday.

In Hong Kong, the Hang Seng Index pared an early slide, down -0.2%, on its first full day of trading in nearly a week. The main benchmark in Singapore fell -0.2%; while Indian’s Sensex was last up +0.4%.

Note: With Chinese and Taiwanese markets still closed for the Lunar New Year holiday, investors should be cautioned against reading too much into recent price action due to thin volumes.

In Europe, indices trade mostly higher across the board following the weakness seen yesterday, with the FTSE under performing being weighed on by HSBC and BHP Billiton following results.

U.S stocks are set to open in the ‘red’ (-0.8%).

Indices: Stoxx600 flat at 378.3, FTSE -0.5% at 7213, DAX -0.1% at 12373, CAC-40 flat at 5257, IBEX-35 +0.2% at 9829, FTSE MIB +0.1% at 22582 , SMI flat at 8907, S&P 500 Futures -0.8%

2. Oil markets mixed, Brent and WTI move in opposite directions

U.S crude prices are still carrying momentum from Friday’s gains due to yesterday’s President Day’s holiday while international Brent prices have eased.

U.S West Texas Intermediate (WTI) crude futures are at +$62.31 a barrel, up +63c, or +1% from Friday’s close. Ongoing supply reductions from Canada to the U.S due to pipeline reductions are supporting WTI prices.

Brent crude has eased on the back of a dip in Asian stocks and a stronger dollar. Brent crude futures are at +$65.54 per barrel, down -13c, or -0.2% from yesterday’s close.

Note: Oil markets remain well supported due to supply restraint by the OPEC. Yesterday, OPEC Secretary-General Barkindo said the organization registered a +133% compliance with agreed output reduction targets in January.

However, soaring U.S production is threatening to erode OPEC’s efforts. Last week, the amount of U.S oilrigs drilling for new production rose for a fourth consecutive week to +798.

Ahead of the U.S open, gold prices have slid for a third consecutive session as the ‘mighty’ buck rebounds from its three-year lows, while the market waits Wednesday’s Fed minutes for clues on the outlook for U.S interest rates. Spot gold is down -0.2% at +$1,343.22 an ounce.

3. Sovereign yields trade atop record highs

This is a huge week for bond investors, as the U.S Treasury prepares to sell +$258B worth of new debt, starting with today’s record sale of +$151B of three- and six- month bills. These debt sales should provide a better understanding of how steep U.S yields could back up in the short-term.

After building up a record “short” position in U.S 2-year futures and historically large short positions across other maturities, higher volatility this month has seen a sharp reduction in these record shorts over the past week.

The biggest reversal was in two-year product – net short positions were slashed by +76,772 contracts to -133,986.

The U.S 10-year is now at +2.92% ahead of the first trading day this week after yesterday’s holiday.

In Japan, BoJ Governor Kuroda did not discuss monetary policy during an appearance in parliament. Speculation has been swirling about the possibility the BoJ might scale back its stimulus since they reduced their purchases of JGB’s last month.

Down-under, the Reserve Bank of Australia (RBA) reiterated in its minutes of this month’s policy meeting that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase.

4. Dollar gains against most G7 pairs

Ahead of the U.S open, the U.S dollar has seen some steady gains outright versus G7 currency pairs, aside from sterling. The gains are reflective of U.S yields pushing a tad higher.

Sterling has jumped from its overnight low of £1.3934, to again trade north of the psychological £1.4000 handle on news that the European Parliament is putting a document together outlining its desire for an “association agreement” with post-Brexit Britain. This is a break from the position of the chief E.U negotiator Barnier and could allow Britain to retain “privileged” access to the single market.

5. German ZEW Survey moves off from record highs

Germany’s ZEW Indicator of Economic Sentiment recorded a decrease of 2.6 points this month and currently stands at 17.8 points.

The indicator remains slightly below the long-term average of 23.7 points. The assessment of the current economic situation in Germany decreased by 2.9 points, with the corresponding indicator currently standing at 92.3 points.

Comments from ZEW President Wambach: “The latest survey results continue to show a positive outlook for the German economy. The assessment of the current economic situation is still on a very high level and the economy is expected to improve in the coming six months. Economic growth in Germany is substantially driven by the very good development of both the global economy and private consumption. Inflation expectations for Germany and the Eurozone have also started to increase.”

Forex heatmap

Dollar Dives on Confidence, No Support from Fundamentals

Thursday February 15: Five things the markets are talking about

U.S bond yields have backed after an unexpected rise in U.S consumer inflation to its fastest pace in a year – the core’s +1.8% y/y print yesterday was higher than expected, but still below the Fed’s +2% target – making it more likely the Fed will raise interest rates three or more times this year. But, higher U.S rates have not been able to make the U.S dollar more attractive.

The dollar remains under pressure, building on yesterday’s slide in the Euro session, as the market seems to be losing confidence in the long-run state of the U.S economy.

The Dollar Index is down -0.5% and poised to log another three-year low if the decline persists as we head to U.S session open.

Without any new positive U.S demand or supply shocks that could change the landscape for the country’s economy, it’s easy to see the weak dollar story persisting.

For the dollar to rise with Treasury yields, which it has not been doing this year, there needs to be a return in relative confidence over the medium-term U.S.

Also yesterday, January retail sales fell unexpectedly in their biggest drop in 11- months, declining -0.3%, raising new concerns about the U.S economy as a weaker sale print will lead to lower expectations for Q1 GDP growth.

1. Stocks edge higher

The global stock rally is marching ahead as investors take in stride a jump in sovereign yields.

In Japan, the Nikkei posted a solid rise despite a stronger yen (¥106.31). The index ended up +1.5% overnight, after tumbling to a four-month low on Wednesday. The broader Topix advanced +1.0%.

Down-under, Australia’s S&P/ASX 200 rebounded +1.2% as the stock index’s energy component rallied +2.4% to reverse some of this month’s decline.

In a shortened session ahead of the Lunar New Year holiday, Hong Kong’s Hang Seng Index jumped +2%. Its rise of +5.4% this week has erased +50% of last week’s decline, its biggest fall in a decade.

Note: China, South Korea, Taiwan, Vietnam markets were all closed.

In Europe, regional indices continue their ascent higher, tracking another positive session in Asia and on Wall Street yesterday. The French CAC is +1% higher following earnings from a host of Index components. The Swiss SMI is underperforming after Nestle reported mixed results.

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

Indices: Stoxx600 +0.9% at 378.0, FTSE +0.7% at 7264, DAX +0.9% at 12455, CAC-40 +1.6% at 5248, IBEX-35 +1.3% at 9808, FTSE MIB +1.1% at 22687, SMI +0.2% at 8924, S&P 500 Futures +0.8%

2. Oil rises on Saudi commitment to withhold output, gold higher

Oil prices have rallied +1% overnight to extend their gains from yesterday’s session, lifted by a weak dollar and Saudi comments that it would rather see an undersupplied market than end a deal with OPEC.

Brent crude futures are at +$64.99 a barrel, up +63c, or +1%, extending Wednesday’s +2.6% climb. U.S West Texas Intermediate (WTI) crude futures are up +83c, or +1.4%, from Wednesday’s close at +$61.43 a barrel, adding to its +2.4% gain.

Oil markets have got a push from comments by Saudi Arabia, voicing support for output cuts backed by OPEC and other producers including Russia since 2017 in an effort to tighten the market and prop up prices.

OPEC Secretary General Barkindo said that preliminary data for January points to high compliance of cuts by producers.

Ahead of the U.S open, gold prices have edged a tad higher as the dollar weakens and investors’ bank on the precious metal as a hedge against inflation. Spot gold is up +0.3% at +$1,354.34 an ounce and is heading for a fourth consecutive session of gains.

3. Sovereign yields rise

The yield on U.S 10-year Treasuries is nudging closer to +3%, continuing its steady advance from last year’s low of +2.01% in September.

Following this weeks U.S inflation data, and the potential implications that it has for the pace of Fed rate increases this year, the market will be closely scrutinize speeches later today by ECB policy makers to see whether the recent market turmoil will convince them to ease off plans to taper their bond purchases.

Note: Fed-fund futures show a +21% chance of at least four interest-rate increases by year-end, compared with +17% earlier this week.

In Germany, the 10-year Bund yield has gained +1 bps to +0.77%, the highest in more than two years on the biggest gain in a week.

4. Dollar dives again

The USD remains on the defensive despite higher U.S yields –the currency is usually highly correlated to short-term rates. Market seems to be reacting to concerns over weak U.S policies and/or diverging central bank policies as both the BoJ and ECB could begin tightening monetary policy.

The EUR/USD (€1.2467) probed the upper end this week’s and year range as the pair re-tested the €1.25 handle. Sterling (£1.4042) is a tad higher initially aided by reports that the E.U Commission was looking to ease the Brexit transition conditions. However, the E.U later refuted the reports. The pound is also finding support not only from the dollar’s weakness, but also a perceived higher probability that the current U.K government will serve its full five-year term.

USD/JPY (¥106.69) continues to trade atop of its 15-month lows as the pair probed below ¥106.20 overnight. Japan’s Finance Minister Aso comments that the yen’s strength is not abrupt enough to require intervention supported the yen’s rally.

In cryptocurrencies, bitcoin (BTC) is moving back toward $10,000, up +6% on the day at +$9,840 – the price had slumped some -70% in the past six weeks.

5. Crisis in the Northern Ireland

U.K PM Theresa May is facing a political crisis in Northern Ireland as the DUP, who are part of the government’s coalition, have stated there was “no prospect” of a power sharing deal and suggested a return to direct rule.

This crisis threatens to throw the Good Friday agreement into jeopardy and would be a significant blow to P.M May’s authority as she attempts to agree to a crucial Brexit deal over the Irish border.

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At the Edge of a Cliff

At the Edge of a Cliff

Was it the mixed data, skewed positioning or merely a lack of confidence that has the USD dollar precariously perched at the edge of the cliff.

Everyone one to a tee went all in on a dollar buying frenzy after the CPI number, but the lack of follow-through was very telling, and the quick rebound stopped out all those newly minted positions and then some. The markets sold AUD, NZD heavily at the lows and then got summarily spanked when traders started to factor in the conflicting data prints.

While the Strong CPI reading does present a hawkish risk for the Feds dot plots in March, the miss in the US retail sales data has the street scrambling to revise GDP estimates lower.The divergent data stream has escalated the market debate of critical importance, specifically is it inflation or growth that will dictate the Fed pace of interest rate normalisation?

But the bottom line for the US  dollar in my view, amidst rising inflation the prospect of increasing deficits, both trade and budget, should weigh like an anvil around  the dollar bulls neck

Equity markets

In seemingly absurd fashion, US equity investors ignored the inflationary signals and focused on weaker-than-expected US retail sales report.  There is an increasing possibility that the Powell may blink and the Feds will be more hesitant to guide monetary policy given the waning growth narrative.
Gold Markets 

Higher US inflation combined with the USD exhibiting zero correlation to higher interest rates amidst burdening duel deficits should play out favourably for Gold markets. The weaker dollar narrative is playing out most favourably across, the broader commodity space and gold demand could surge and push above this year’s highs.  Also,  the sustainability of the frothy equity market given the weak retail sales print suggest increasing gold equity hedges is a practical move.

Oil Markets 

A weaker dollar and verbal intervention from Saudi Energy minister who suggested significant oil producers would prefer tighter markets than end supply cuts too early has seen oil prices do an about-face. The Suadi signal is reasonably convincing suggesting  OPEC and their partners are committed to maintaining an absolute floor on oil prices

As indicated earlier in the week, the battle lines are forming around this key WTI 60.00 bpd as the Shale oil gusher will continue to weigh heavily on OPEC effort to blow out the worldwide glut.

However physical demand remains weak globally so traders will continue to monitor the USD /Oil price correlation and at first sign of flutter, it could signal a downdraft.
Currency Markets

Japanese Yen

With the Interest rate to FX correlation is in “Neverland”, It could be open season on USDJPY after convincingly crossing the 107 USDJPY Rubicon. If the market focuses aggressively shift to the US’s duelling deficit amid higher inflation, the dollar days are numbered in the 107’s if we factor in an expected Exporter flow panic which could be exacerbated by push Japanese investors to raise their hedge ratios on US investments fearing a further fall in the greenback.

While we should expect the usual verbal lashing from Japan’s currency officials, I suspect we are still ways off from overt intervention

The Austrailian Dollar

It’s always good to go into critical economic data with a plan B even if it’s from outer space.  Expect the unexpected and today we see  Aussie is benefiting from resurgent Commodities and US dollar weakness as the greenback is showing no correlation to higher US rates.

Malaysian Ringgit

A weaker US dollar, rebounding commodity prices have the MYR sitting well supported by yesterday’s robust GDP print adding good measure

Dollar weakness is seeping in the USDJPY and USDCNH which will provide a positive backdrop for regional currency markets, and we should expect the MYR to be one of the keys go to currencies as positions remain under positioned post-January monetary policy meeting.  Higher US interest rates are showing little obstacle for regional currency appreciation so the MYR should benefit

Not to weave a cautionary tales but liquidy is a bit thin given in regional markets given the proximity of China Lunar New Year so best to be nimble in these conditions

Will it be a Valentines Day Massacre for the Dollar?

Wednesday February 14: Five things the markets are talking about

Are financial markets justified going from a growth story to an inflation narrative?

Today’s U.S consumer price index (08:30 am) is being touted as one of the most significant economic releases in a number of years as capital markets seek to understand the recent plunges in global equities and sovereign bonds.

With investors already on edge, they are expected to renew this months convulsion on any sign that U.S inflation is exceeding expectations at a rate that may entice the Fed to quicken its plans for tightening monetary policy.

Already this month, after a stronger U.S non-farm payroll (NFP) print and wage numbers, investors have sent U.S Treasury yields aggressively higher and instigated a rout in equities that pushed them into the first correction in 18-months.

Note: Market expectations are looking for the core-CPI (ex-food and energy) to rise +1.7% in January y/y compared with the +1.8% increase in December. U.S retail sales are also out this morning and are expected to have increased for a fifth consecutive month.

A higher CPI will give the USD strength, lead to higher yields and lower equity prices, but a tepid headline print could cause more of a problem, especially with record short U.S 10-year treasury position and a market focusing on President Trump’s proposed budget and the rise in U.S twin deficits.

Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

1. Stocks mixed reaction

In Japan, the Nikkei share average dropped to a fresh four-month low overnight as investor sentiment was again sapped by worries about U.S inflation data due this morning. The Nikkei ended -0.4% lower, its lowest closing since early October. The broader Topix fell -0.8%.

Down-under, the Aussie S&P/ASX 200 index fell -0.3%, following a +0.6% rise on Tuesday. In S. Korea the Kospi closed out the overnight session up +1.1%, helped by a +3% jump in Samsung.

In Hong Kong, shares rebound sharply ahead of Lunar New Year holiday. Trading will resume on Feb 20. At close of trade, the Hang Seng index was up +2.27%, while the Hang Seng China Enterprises index rose +2.14%.

In China, stocks rebounded overnight, but volumes were thin, as many traders had already left for the weeklong Lunar New Year holiday. Chinese markets will reopen on Feb. 22. At the close, the Shanghai Composite index was up + 0.46%, while the blue-chip CSI300 index was up +0.8%.

In Europe, regional indices trade higher across the board following a rebound in Wall Street yesterday and strength in U.S futures this morning.

U.S stocks are set to open in the black (+0.4%).

Indices: Stoxx600 +0.7% at 373.2, FTSE +0.7% at 7216, DAX +0.7% at 12286, CAC-40 +0.6% at 5139, IBEX-35 +0.5% at 9693, FTSE MIB +0.2% at 22071, SMI +0.9% at 8832, S&P 500 Futures -+0.4%

2. Oil dips on looming oversupply and weak U.S dollar, gold higher

Oil prices have dipped overnight, pressured by lingering oversupply including rising U.S inventories. However, the prospect of Saudi output dropping next month, economic growth hopes and a weaker U.S dollar all combined to limit losses.

Brent crude futures are at +$62.68 per barrel, down -4c. Brent was above +$70 a barrel earlier this month. U.S West Texas Intermediate crude futures are at +$59.06 a barrel, down -13c from yesterday’s close. WTI was trading above +$65 in early February.

On Wednesday, the Saudi energy ministry said that Saudi Aramco’s crude output in March would be -100k bpd below this month’s level while exports would be kept below +7m bpd.

Stateside, yesterday’s API report showed that U.S crude inventories rose by +3.9m barrels in the week to Feb. 9, to +422.4m.

Note: That is due to soaring U.S crude production, which has jumped by over +20% since mid-2016 to more than +10m bpd, surpassing that of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer.

Oil traders will take their cue from today’s EIA print (10:30 am EDT) and U.S inflation release.

Ahead of the U.S open, gold prices have rallied for a third consecutive session overnight to hit a one-week high, buoyed by a weaker U.S dollar, while the market awaits U.S inflation data for clues on the pace of future Fed rate increases. Spot gold is up +0.3% at +$1,332 an ounce.

3. Sovereign yields little changed

Earlier this morning, Sweden’s Central Bank (Riksbank) kept their repo rate unchanged at -0.5%. Deputy governor Henry Ohlsson voted to raise rates, but the central bank’s signals on inflation were more downbeat. The inflation forecast for this year was downgraded to +1.8% from +2%. The statement indicated that policy makers would start raising the rate in H2 of 2018. Policy makers stressed that was important not to raise the rate too early and was committed to stimulus to prevent inflation setbacks.

Elsewhere, fixed income seeks guidance from today’s U.S CPI release. The yield on U.S 10-year Treasuries fell less than -1 bps to +2.83%. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, while in the U.K, the 10-year Gilt yield dipped -1 bps to +1.618%. In Japan, the 10-year JGB yield decreased -1 bps to +0.07%, the lowest in more than five weeks.

4. Dollar on soft footing

The USD remains on soft footing ahead of key Jan CPI data for the U.S.

The EUR/USD is steady, trading atop of the €1.2350 area after various European GDP data highlighted better economic growth prospects (see below).

USD/JPY tested ¥106.85 overnight for 15-month lows. The pair came off its worst level to approach 107.50 just ahead of the N.Y session after Japanese officials reiterated that they had no comments on forex levels.

In S. Africa, political optimism that President Zuma would resign has sent the ZAR currency to its best level in nearly two-years outright. The South African Democratic Alliance (DA) leader Maimane (opposition) has stated that its motion to dissolve parliament was processed by Speaker. USD/ZAR is at $11.85 ahead of the open stateside.

The Swedish krona has been volatile after the Riksbank interest rate decision. The krona briefly rose soon after the announcement, but has since pared those gains EUR/SEK last trades flat on the day at €9.9163, compared with €9.8952 before the decision.

5. Euro-zone economy ends 2017 on a high note

Note: There were a number of European GDP releases in the Euro session highlighting better economic growth prospects – Germany mixed; Netherlands beat and Italy a miss.

Industry helped drive the euro-zone’s +0.6% expansion in Q4. This morning’s ‘flash’ estimate of Q4 GDP is the second release and confirms that quarterly growth slowed a tad from Q3’s +0.7% to +0.6%.

There is no breakdown until the next release; however, expenditure evidence would suggest that weaker consumer spending growth was the main driver of the slowdown, while investment expanded after Q3’s contraction and net trade again made a positive contribution to growth.

Digging deeper, industry appears to have made a stronger contribution to GDP growth than in Q3. Following the consensus-beating +0.4% monthly rise in IP in December.

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