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

Dollar gains pause, but probably not for long

Wednesday October 10: Five things the markets are talking about

U.S treasury yields are largely stable, after declining from their seven-year high print yesterday.

Euro equities are on the back foot after Asia stocks managed to break a multi losing session.

Elsewhere, the ‘big’ dollar has stalled temporarily after U.S President Trump said the Fed should not raise interest rates as fast. However, Trump’s plea is unlikely to alter the broader theme of dollar gains in the short-term.

Dollar ‘bulls’ have yet to have a clear understanding of what the top is for the Fed cycle, and until the Trump administration changes its tune on China and trade, investors will continue to support the USD against emerging markets and pro-growth currencies.

For the dollar ‘bear’s’ next month’s midterm elections have the potential to derail dollar demand, especially where the loss of the House by the GoP would curtail most hopes for fresh fiscal stimulus. However, a month is a long time in politics.

Despite the U.S bond rout easing a tad, +$230B of new U.S debt is coming to the market this week, which should put pressure on dealers to back up yields.

U.S producer and consumer price data is also due in the next two-days and it too will determine where yields go from here.

1. Stocks mixed results

In Japan, the Nikkei edged a tad higher overnight as investors picked up defensive stocks on the dips, while index-heavyweight SoftBank dived on news it was to buy a majority stake in U.S shared office space provider WeWork. The Nikkei share average ended +0.2% higher, while the broader Topix was also up +0.2%.

Down-under, Aussie stocks rallied after its worst 48-hours in six-months. The ASX 200 closed +0.1% higher as the health-care sector rebounded +1.5%, reversing some of yesterday’s -3.9% losses, the biggest drop in seven-years. In S. Korea, the Kospi stock index closed down -1.12% overnight, hitting its lowest close in 18-months after the IMF cut its growth forecast for the country.

In China, stocks were mixed after the close overnight, as gains in utilities and communications led shares higher while losses in the energy sector led shares lower. At the close, the Shanghai composite rallied +0.18%.

In Hong Kong, stocks closed marginally higher earlier this morning, with investors remaining nervous about volatility in the U.S and a weak yuan. The Hang Seng Index edged up +0.08%.

In Europe, regional bourses continue their bearish tone with declines across the board. Sino-U.S trade concerns, coupled with Italian budget and U.K Brexit commentary continue to weigh on markets.

U.S stocks are set to open in the ‘red’ (-0.1%).

Indices: Stoxx600 -0.4% at 371.5, FTSE -0.1% at 7227, DAX -0.6% at 11904, CAC-40 -0.7% at 5283, IBEX-35 -0.6% at 9203, FTSE MIB -0.2% at 20023, SMI 0% at 8960, S&P 500 Futures -0.1%

2. Oil dips as IMF cuts growth outlook; eyes on hurricane

Oil prices have eased a tad after the IMF yesterday lowered its global growth forecasts. Nevertheless, markets are well supported on pullbacks as Hurricane Michael, a category 4, moves toward Florida causing the shutdown of nearly +40% of U.S Gulf of Mexico crude production.

Brent crude is down -20c at +$84.80 a barrel, after a +1.3% gain on yesterday. U.S light crude is down -15c at +$74.81.

Also providing an underlying bid is data showing crude exports from Iran, OPEC’s third-largest producer, are declining before the imposition of new U.S sanctions next month.

According to tanker data, Iran’s crude exports fell further in the first week of October, as buyers sought alternatives ahead of U.S sanctions that are to take effect on Nov. 4. Iran exported +1.1M bpd of crude in the first week of October, down from at least +2.5M bpd in April – before President Trump imposed sanctions.

Yesterday, the IMF cut its global economic growth forecasts for 2018 and 2019, raising concerns that demand for oil may also slump.

Ahead of the U.S open, gold is holding steady in a narrow range overnight, as the ‘big’ dollar pulls back from its seven-week high – support remains strong for the dollar on the back of a strong U.S. economy and expectations of steady interest rate hikes by the Fed. Spot gold is little changed at +$1,189.35 an ounce, moving largely within a +$4 range. U.S. gold futures have rallied +0.1% to +$1,192.60 an ounce.

3. Sovereign yields dip, including Italy’s BTP’s

Italian BTP yields have eased a tad this morning after Italy’s Economy Minister Giovanni Tria confirmed budget forecasts and said that he expected collaboration with the E.U over the budget.

After hitting multi-year highs yesterday, Italian government bond yields fell -2 bps along the curve – the two-year BTP yield fell to +1.70%. The spread of Italy’s 10-year BTP’s over Germany’s has widened +10 bps to +3.026%.

Yesterday, President Trump repeated his displeasure with higher short-term interest rates set by the Fed. Trump believes U.S inflation remains “in check,” which does not warrant a tighter monetary policy, especially at the Fed’s current pace.

The yield on U.S 10’s has eased -1 bps to +3.21%. In Germany, the 10-year Bund yield has decreased -1 bps to +0.54%, while in the U.K, the 10-year Gilt yield has backed up less than +1 bps to +1.719%.

4. Dollar takes a breather

The pound (£1.3160 +0.10%) has advanced to a four-month high against the EUR and a two-week high against the dollar, on signs of momentum in the Brexit negotiations. According to the Times, a group of between 30 and 40 Labour members of parliament will defy Jeremy Corbyn and endorse a less hard-line proposal to prevent a ‘no-deal’ exit from the E.U.

Note: Both the U.K and E.U are said to have made progress in Brexit negotiations over Irish backstop.

Rising Italian bond yields continue to provide some resistance for the EUR (€1.1482), but major falls are not in the cards as long as the ‘single’ unit’s existence is not threatened, and as long as the ECB indicates ‘whatever it takes’ promise is in place.

The USD/JPY (¥113.19) is a tad higher as the yen snapped a four-day winning streak as some safe-haven flows retreated as U.S Treasury rates stabilized.

5. U.K economy picked up in the summer

Data this morning showed that U.K economic growth picked up over the summer, supported by stronger retail sales and house building in response to warmer-than-usual weather.

According to the ONS, economic output in the three-months through August was +0.7% higher than in the three-months through May, equivalent to annualized growth of +2.8%.

However, there were signs that the U.K economy was losing traction towards the end of the period, with output flat in August compared with July.

According to the ONS, “the economy continued to rebound strongly after a weak spring with retail, food and drink production and house building all performing particularly well during the hot summer months.”

Note: The BoE indicated it would follow its two rate rises with a number of further moves over the coming years if the economy continues grow at around its current rate. However, expect the Brexit strategy to determine monetary policy, at least in the short-term.

Other data showed that the U.K’s trade deficit widened in August as its goods deficit deepened to -£11.2B from -£10.4B in July, while its manufacturing output was -0.2% lower in August than in July, a second straight month of decline.

Forex heatmap

Another ominous Yuan fix?

The Yuan
Another ominous signal from this mornings Yuan fix has sent Yuan bears into action. While the counters cyclical mechanism pegged the fix lower than yesterday close, we’re still trading at year highs suggesting the central bank is in no rush to stem the weakening tide. However, this does run contrary to statements from the bank overnight that they will not use the Yuan as a tool in a trade war, but as history reminds us, the Pboc remains very fluid when it comes currency policy.

OANDA Trading podcast: CNH and IDR insights with MONEYFM 89.3

Equity market reaction

The local equity markets, along with global equity index futures markets are not reacting well to traders pushing the Yuan envelope, USDCNH higher. Market continue to underprice the destabilising effect of a weaker Yuan will have on global equity markets.

 

Gold Market
While keeping a close eye on equity sentiment, gold traders gently buying gold in the event the latest markets developments could trigger and downwards spiral on global equities. While I don’t believe this is a significant enough trigger at this stage, but when compounded with the potholed encumbered landscape, it’s worth keeping an eye on

Oil Markets

Batten down the hatches Hurricane Micheal is intensifying, adding some support to prompt contracts

Japanese Yen
Price action can be very deceiving, a ten-pip range in USDJPY but given the heightened level of discussions around Yen and BoJ this morning, something is going to give.

Japan’s economy is alive kicking by any measure but today’s over the top machine orders data that printed 6.8%MoM versus -3.9% expected and the YoY number rose by 12.6% versus 1.8% is a stunner by any stretch of the imagination prompting the Cabinet Office upgraded its assessment of machinery orders, saying they are in recovery.

The markets are still positioning for to a 115-year-end target of USDJPY, but the economic revival along with the weaker Yen of late does suggest the BoJ does have some wiggle room to tack to a more hawkish target.

Australian Dollar
Not to unexpectedly the Australian dollar ran into a wave of interbank offers and has traded off intersession highs.

Will the bond market bloodbath resume?

Tuesday October 9: five things the markets are talking about

The first day back in a holiday-shortened trading week again sees U.S Treasury yields creeping higher, trading atop of their seven-year high yields. This aggressive backing up of sovereign yields this month is again putting pressure on risk assets.

However, overnight, equities traded mixed, with Asian bourses and U.S futures on the back foot, while Euro stocks have been able to move higher.

Yesterday saw the biggest one-day sell off in three-months of China stocks despite the People’s Bank of China (PBoC) cutting its RRR for the third time this year. Their easing actions have again put pressure on the yuan, which is sure to annoy Washington.

The IMF has cuts world 2018 and 2019 GDP forecast by -0.2% to +3.7%. It’s the first cut in two-years as the risk of balance has shifted to the downside due to escalating trade conflicts and tighter financial conditions.

On tap: The U.S Treasury is auctioning +$230B worth of debt this week. On Friday, the IMF and World Bank will hold meetings in Bali, with the world’s finance chiefs.

1. Stocks mixed results

Global risk aversion has put the yen (¥113.17) in demand, which is hurting Japanese stocks. Overnight, the Nikkei fell to a three-week low after stocks of firms with exposure to China weakened on worries about its economy while chip equipment makers tumbled, tracking weakness in U.S tech firms’ overnight. The Nikkei share average ended -1.3% lower, while the broader Topix dropped -1.8%.

Down-under, Aussie shares have also extended their sharp declines from Monday overnight; trading atop of their four-month lows, on investor concerns over growth outlook for the country’s largest trading partner China hurt sentiment. The S&P/ASX 200 index fell -1% at the close of trade, after losing -1.4% yesterday. In S. Korea, the Kospi was closed for a holiday.

In China, stocks rebounded overnight from Monday’s steep losses as authorities took further steps to support the economy and contain the effects of an escalating trade war with the U.S. The Shanghai Composite index closed +0.2% higher, while the blue-chip CSI300 index was up +0.3%. In Hong Kong, the Hang Seng closed down –o.1%.

Note: Dealers attribute yesterday’s steep losses in China to investors playing catch-up after a weeklong holiday, during which a sharp sell off in global bond markets had dragged down equity markets.

In Europe, regional bourses are trading mixed in quiet trading thus far.

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

Indices: Stoxx600 0% at 372, FTSE +0.1% at 7238, DAX -0.1% at 11938, CAC-40 0% at 5301, IBEX-35 +0.3% at 9232, FTSE MIB +0.3% at 19900, SMI -0.2% at 8951, S&P 500 Futures -0.3%

2. Oil prices rise as Iranian crude exports fall, gold higher

Oil prices remain better bid, as further evidence emerges that crude exports from Iran, OPEC’s third-largest producer, are declining before the imposition of new U.S sanctions. Also providing price support is a slow hurricane in the Gulf of Mexico.

Brent crude is up +55c at +$84.46 a barrel, after having fallen as low as +$82.66 yesterday. Brent hit a four-year high of +$86.74 last week. U.S light crude (WTI) is up +45c at +$74.74.

According to tanker data and an industry source, Iran’s crude exports fell further in the first week of October, as buyers sought alternatives ahead of U.S sanctions that are to take effect on Nov. 4.

Iran exported +1.1M bpd of crude in the first week of October, down from at least +2.5M bpd in April – before President Trump imposed sanctions.

Saudi Arabia, the biggest producer in the OPEC, said last week it would increase crude output next month to +10.7M bpd, a record. The market will wait to see if they follow through.

Meanwhile, oil companies operating in the Gulf of Mexico have closed -20% of oil production as Hurricane Michael moves toward the eastern Gulf States including Florida.

Ahead of the U.S open, gold prices are better bid on risk aversion amid concerns over a potential slowdown in China’s economic growth. Spot gold is up +0.2% at +$1,189.58 an ounce.

Note: Yesterday, it fell -1.2%, its biggest one-day percentage fall since the middle of August, and also touched a more than one-week low of +$1,183.19.

3. Sovereign yields on the move

On the weekend, China cut its Required Reserve Ration (RRR) for major banks by -100 bps to +14.50% to prevent the country’s credit conditions from getting too ‘tight.’ The PBoC’s easing bias highlights their policy divergence with the Fed.

The impact from Sino-U.S trade tensions is to become more noticeable in coming quarters, so an easing bias in monetary policy, coupled with an expansionary fiscal policy is expected to support China’s economy. The PBoC stated that it would continue with “prudent and neutral” monetary policy. Will investors buy into Beijing’s policy-easing measures or do they require more market-orientated reforms?

In Italy, BTP yields have backed up to new highs after Economy Minister Giovanni Tria addressed the parliament on the government’s budget plans. He called for a “constructive discussion with Brussels over the budget” and said Italy’s “structural deficit will recover once GDP and employment returns to pre-crisis levels.”

Italy’s five-year bond yield rose to +3.042%, its highest level in almost five-years, while 10-year bond yields hit a new 5-year high at +3.63%.

Elsewhere, the yield on 10-year Treasuries has advanced +2 bps to +3.25%, hitting the highest in more than seven-years with its fifth consecutive advance.

Note: The U.S treasury is to auction +$230B worth of debt this week.

In Germany, the 10-year Bund yield has climbed +3 bps to +0.56%, while in the U.K, the 10-year Gilt yield has increased +4 bps to +1.714%.

4. Dollar supported by yields

The USD is maintaining its firm tone across the G10 currency pairs as U.S Treasuries are still holding last week’s gains in yields.

Rising Italian bond yields continue to weaken the EUR (€1.1460), but major falls are not in the cards as long as the ‘single’ unit’s existence is not threatened, and as long as the ECB indicates ‘whatever it takes’ promise is in place. EUR/USD is last down -0.25% at €1.1460 even though 10-year Italian yields reach +3.628%, just shy of yesterday’s 2018 high of +3.631%

China’s effort to support its decelerating economy continues to heap pressure on the yuan. The yuan weakened beyond ¥6.93 this week, coming within striking distance of its lowest level in nearly two-years, after China moved over the weekend to free more funds for domestic banks. The currency briefly recovered to around ¥6.91 earlier this morning.

5. German exports slipped in August

Data this morning showed that German exports slipped for the second-straight month in August, which may suggest that, the Sino-U.S trade conflict are dampening demand for goods.

According to the Federal Statistical Office, the total exports of goods fell -0.1% in August from the month before, while imports of goods dropped -2.7% in the period.

Note: German exports stumbled in August despite a weaker EUR. The EUR traded around $1.14 in mid-August compared with levels around $1.25 in early February.

Germany’s adjusted trade surplus stood at €18.3B in August, undershooting a consensus forecast of €19.0B and a surplus of €21.3B in August last year.

Forex heatmap

OANDA Trading podcast Oct 8 with BFM 89.9 Kuala Lumpur ,VIX in the mix

Stephen Innes, Head of Trading in the Asia Pacific, OANDA, Singapore discusses China’s central bank has reduced the required reserve ratio for the fourth time this year, as Chinese markets are set to return after a week-long holiday.

Stephen also shares his take on Treasury yields and oil prices, both rising of late.

BFM 89.9

Markets Yield to pressure?

Markets Yield to pressure?

Not so far today as the markets have opened predictably quiet with Tokyo and New York celebrating their holidays. USDCNH is trading unpretentiously higher but the USD, in general, remain little-changed post-NFP.  Strength in labour markets, and with wage growth picking up, it suggests the US versus the rest of the worlds 10-year interest rate differential will continue to widen out which should support the markets long USD bias all things being equal. However, in the absence of tier one US economic, outside of Thursday’s US CPI, the dollar won’t have much of in the way of strong US fundamentals data to anchor itself this week. EM focus is falling on Brazil elections where the Mexican peso will be used as a proxy to express a BRL   view.

Non-Farm Payroll

I’m always a sucker for game-changer hype around Non-Farm Payroll reports, but even although the headline disappointed, the inline AHE didn’t, matching August’s gain. And with the rates markets looking to fade any disappointment, however, bond traders took their cue from the unemployment rate dropping to 3.7 per cent to boost 10-year UST yields to a seven-year high and leaving currency traders, who are speculatively long USD, to calmly go about their pre-US long weekend housekeeping duties relatively unfazed. However,  U.S. stocks closed sharply lower as equity traders were left scrambling as surging US bond yields towered above the awe-inspiring   50-year low US  unemployment rate.

Equity Markets

Stocks could trade lower again this week as portfolio rotation out of equities into fixed income accelerates which could negatively impact global markets. Blue chips have been trading pretty badly ever since US yields breached multi-year levels of resistance last  Wednesday.  Indeed, this ongoing  carnage in the fixed income market combined with negative risk sentiment could shoot volatility through the roof  forcing markets into a defensive posture

So, with Vix in the mix, we could see equity markets struggle as investors reduce risk.

The Kavanaugh Effect 

Brett Kavanaugh, as was widely expected after Collins joined Flake as a yes Friday afternoon was appointed to the Supreme court. While this nod will have no market impact, it leaves the US no less divided ahead of what is expected to be firey and hotly contested midterm elections. After the Democrats’ red-hot all-out partisan attack on Kavanaugh last week, the Republican base has been invigorated while the tactics have backfired on the Democrats as according to IBD/TIPP poll Donald Trump’s approval ratings made a strong rebound.

China
China returns this week, and traders are keen to see how policymakers react to last weeks developments like the HSI’s sell-off triggered by the terrible China PMI prints, and the headline calamity around “Spy Chip” which put Chinese tech names under intense pressure. Indeed,  it will be interesting to see how the markets pick up the pieces.

But if ‘ Spy -Chip fears continue to pick up, the US administration will go after China tech industry with guns blazing and blacklist them from US   trade. The potential fall out from this battlefield would make the current tit for tat tariff war look like a game of axis and allies.

But the Pboc, not unexpectedly, jump started the process on Sunday by cutting the reserve requirement ratio for most commercial banks by one percentage point. The bank said would the net effect would inject Rmb750bn ($109bn) into the banking system to help spark growth to counter the adverse economic impact from US Tariffs and mainland’s deleveraging campaign but undoubtedly last weekend terrible PMI’s were a definite call to action. This monetary policy tweak is the fourth in 2018 and despite the weakening Yaun and the Feds embarking on a more aggressive rate hike tangent than expected, suggests the Pboc are putting their greatest energies behind stimulating the flagging economy as opposed to the US-China trade wars or Fed policy for that matter.

It’s not too much of a stretch to assume markets should expect more policy easing measures and increased infrastructure spending after China economy expanded at the slowest pace on record last month. The RRR cut will help but the  China economy will more monetary policy persuasion to snap its current funk.

European Markets

Late Friday the EC rejected Italy’s budget outline according to the letter sent to Fin Min Tria.

Oil Markets

There was some mild profit taking on Brent future heading in the weekend, but the benchmark closed out a very explosive week up 1.44% from a week ago. WTI held a bit steadier on the day suggesting there were some positions adjustment back into the cheaper  WTI benchmark ahead of this week’s set of US inventory numbers and closed the week out 1.5% higher than last week. Amid chatter that Saudi Arabia has replaced all of Irans lost oil.

Based on the dwindling spare capacity argument, the Oil rally is far from over. But the most significant issues is that no one seems to be able to pin down precisely how much OPEC spare capacity is. The state department, who is on the intervention warpath and quick to accuse OPEC of sitting on 1.4 million barrels daily(MB/d). But oil analysts quoted over the weekend “This is the lowest level of spare capacity in the global system relative to demand that I’ve ever seen. Spare capacity is moving to a precariously low point.”  Jeffries. Frankly, OPEC’s spare capacity issue has been the oil markets biggest mystery for some time with most of that debate falling around mega-producer Saudi Arabia. But assuming additional capacity comes in at 2.5 MB/d as supported by the recent  International Energy Agency data, the problem is that the capacity is quickly declining due to Asia’s insatiable demand.

Saudi Arabia claims it could produce 12. MB/d  if it opened all the spigots. However, that claim has never been given the once over as the highest all-time level for Saudi output, according to OPEC report was just over 10.7 MB/d in 2016, only before the Saudi-Russia led mega OPEC cartel orchestrated push to raise oil prices via supply cuts.

But as the spare capacity debate rages on, so will focus on critical near-term demand indicators after the Energy Information Administration reported a considerable build in U.S. commercial oil inventories last week.

Some headwinds to greet markets this morning.

Reports over the weekend suggest the Trump administration will provide Iran waivers. But these wavier are not unconditional and  are predicated on the countries weening off Iran crude 100 % compliant

Baker Hughes rig counts are down -2 as pipeline bottlenecks arrest supplies from the Permian Basin. But the bottlenecks don’t play out favourably for WTI given the pipeline constraints could lead to more significant inventory builds in Cushing, pressuring WTI lower and widening the Brent /WTI spread.

Finance ministers and central bankers head to Indonesia for the International Monetary Fund’s annual meeting, and officials have been dropping hints about trimming global growth forecast for the first time in two years.

Of course, the US economy keeps on ticking, but global synchronised growth has faded and should at some point provide a drag on oil demand. Higher oil prices will eventually lessen demand, but the multiplier effect from a weaker EM currency profile has a more significant impact. Most of the words rise in current as well as projected oil demand comes from EM countries, not from mature economies like the US and Europe where consumption is relatively stable.

Overcrowded trade and the ” porthole effect.”

The markets are still looking higher based on the dwindling global spare capacity narrative and by no means is this rally over. But as any futures trader will tell you, it can it can be hard for logic to prevail over emotion at times. The market is saturated with oil bulls, and in these grossly overbought conditions, it doesn’t take much to tip the apple cart. There’s nothing worse than that feeling realising that the excellent Oil position you have built, is similarly owned by everyone else in the markets. Knowing it would take little more than one bearish OPEC headline causing some prominent position to flinch, it could trigger an avalanche of traders running for the exits. It’s incredible how quickly prices can plummet when everyone’s running for the same door.

In  oil markets, traders refer to this as the ” porthole effect ” (I wish I knew who coined the phrase as I would attribute) Basically it’s unclear if the boat is sinking or not by looking out of the “porthole”, but if one person tried to escape from the “porthole” a free for all would ensue.

Gold Markets 

There remains a lot of risk in the markets, and there is a noticeably sick feeling in  US equity markets which should support prices.  But last weeks  Treasury sell-off will undoubtedly motive gold bears so unless equity market spiral entirely out of control gold could track lower.

Currency Markets

I have been harping to no end about how tricky it could be to trade the US dollar over the next few weeks given that it’s a complete data dependent trade. Well, it hasn’t been that crafty at all as US yields are leading the way so far. However, this week the US economic data docket looks relatively sparse outside of Thursday key US CPI print. But, given the level of political noise in the market,  in the absence of a busy slate of Tier one US economic data, there’s not much to keep the markets tethered to strong US fundamentals so that the US  dollar could remain prone to external factors particularly from China and Italy. However,  there are more FOMC tea leaves to read this week as a plethora of Fed members takes the stage to offer up their forecast for future policy. But after hearing  Powell last week, and with Bostic even sounding less dovish than usual on Friday, I don’t think this week’s Fedspeak will offer too much of a protest to discourage the US Treasury sell-off, but shouldn’t move the dial significantly.

The Chinese Yuan 

The Pboc’s  RRR could jump-start the greenback on Monday as this policy measure, although widely expected by traders,  should fuel additional easing talks and put more pressure on the RMB complex.

China’s foreign-currency holdings fell in September, as heightened trade tensions with the U.S. saw the USD safe haven appeal accelerated. However, the weakening Yaun could trigger waves of capital outflows leaving the Pboc with little choice to intervene to stem the tide

The Australian Dollar 

How the US/China tensions unfold will be a primary focus this week, given how quickly relationship has fallen off the rails during the past week or two markets are getting very worried about the negative knock-on impact to Aussie dollar which is the primary G-10 currency to express China risk. This week RRR is a bit of a saw off for the Aussie. On the one hand, the weaker Yuan by proxy should feed negatively in the Aussie, but the stimulatory effects could benefit hard commodity prices and lend support to the Aussie

The Malaysian Ringgit

Higher US Treasury yields are dominating sentiment based on the markets hawkish FOMC view and weighing in EM currencies.

The external environment isn’t at all amicable for EM Asia currencies, higher  US rates, tepid growth outside of the US markets, and the escalation of US-China tensions it’s near impossible to hold even the slightest of bullish conviction. Demand for MYR has been tepid at best  With the upcoming budget in focus; it puts a lot of pressure on the Malaysia government to deliver a fiscally prudent measure. While terms of trade do remain favourably due to oil prices, slow domestic growth could be a real negative for the MYR as it could trigger a dovish response from the BNM.

Outsized negative sentiment in IDR and INR is feed through the basket, but the biggest concern is a faster pace of interest rate hikes in the US.

NFP – what to expect

Friday October 5: Five things the market is talking about

The granddaddy of economic indicators – U.S non-farm payrolls (NFP) for September – will be released later this morning (8:30 am EDT) along with the Canadian jobs report.

Today’s U.S number is ‘big,’ especially with this week’s aggressive backing up of the U.S yield curve. The sell-off in Treasuries, in part, has been justified by U.S data supporting the strength of their economy and the markets future inflation fears.

This morning’s payrolls headline print, coupled with wage growth numbers, will provide substance to what investors should expect, from an interest rate perspective in particular. Does the Fed’s dot-plot line up neatly or will the Fed push its benchmark past the neutral level?

Consensus is looking for a September headline print of +185K new jobs and an unemployment rate to ease another one-tenth to +3.8%. However, expect dealers to look beyond the headline and focus intently on the increase in average hourly earnings.

The August wage growth print at +2.9% was the largest y/y gain in nearly a decade. If September’s number comes in even stronger, will justify some dealers fears that inflation pressures are building, maybe faster than originally perceived.

Current expectations for wage growth m/m are +0.3%, which would equate to approximately +2.8% y/y.

1. Stocks mixed reactions ahead of payrolls

Euro equities are struggling for traction after the Asian session ended the week with a further sell-off overnight as the region’s tech companies were battered by concerns about their U.S business.

In Japan, the Nikkei fell to its lowest close in a fortnight, tracking Wall Street’s slide yesterday as rising U.S Treasury yields have reduced the attraction of most stocks except financial ones. The Nikkei share average ended -0.8%, while the broader Topix dropped -0.5%.

Down-under, Aussie shares edged higher on Friday, supported by gains from the financial sector, which managed to advance for a second session. The S&P/ASX 200 index closed +0.2% higher. The benchmark is off -0.4% for the week. In S. Korea, Kospi stock index also ended lower this morning (-0.31%) on fears of foreign fund outflows after U.S yields surged to a new seven-year high.

Note: China’s financial markets are closed for the National Day holiday and will resume trade on Oct. 8.

In Hong Kong, stocks fell for a fourth consecutive session, dragged by a selloff in tech stocks on fears that these companies will be the latest casualties in the Sino-U.S trade war. The Hang Seng Index was down -0.42%.

In Europe, regional bourses trade lower across the board, pressured by rising sovereign yields. Investors will take their cue from this mornings N. American employment reports.

U.S stocks are set to open in the ‘red’ (-0.2%).

Indices: Stoxx600 -0.7% at 377.2, FTSE -0.8% at 7359, DAX -0.8% at 12142, CAC-40 -0.5% at 5385, IBEX-35 -0.5% at 9264, FTSE MIB -0.9% at 20438, SMI -0.5% at 9053, S&P 500 Futures -0.2%

2. Oil prices rise on Iran sanctions, gold little changed

Oil prices trade atop of their four-year highs this morning as traders predict a tighter market due to U.S sanctions on Iran’s crude exports.

Brent crude oil is up +10c a barrel at +$84.68. Yesterday, Brent fell by -$1.34 a barrel or -1.6% – the contract is on course for a gain of +2.5% on the week. U.S light crude is up +30c at +$74.63, a gain of +2% on the week.

The market remains very ‘bullish’ with speculators gunning for $100 a barrel on fears that the U.S demands for an Iran oil embargo will create a significant supply shortfall.

Both benchmarks retreated yesterday following a rise in U.S oil indicated that they would raise output, however, pullbacks have been aggressively bought.

Ahead of the U.S open, gold prices are little changed as the market remains cautious after U.S Treasury yields hit seven year high yesterday and on expectations that a strong U.S payrolls report could boost the Fed case for a tighter monetary policy. Spot gold has inched down -0.1% to +$1,197.64 an ounce, while U.S gold futures are flat at $1,201.3 an ounce.

3. Reserve Bank of India (RBI) surprises

The RBI kept its policy steady in a surprise hold this morning, but changes its stance from “neutral” to “calibrated” tightening.

The central bank left the Reverse Repo Rate (RRR) unchanged at +6.25% (not expected) and the Cash Reserve Ratio (CRR) at +4.00% (as expected).

It’s the first pause in three-decisions in the current tightening cycle. Governor Patel is to keep a ‘close vigil’ on inflation outlook for the coming months, as the outlook is clouded with several uncertainties. He indicated that the benefits of a weaker INR currency would become somewhat muted from a slowdown in global trade and escalating tariff war.

INR stays near record lows as the ‘big’ dollar hit a fresh record high of $74.05 vs. $73.65 before the statement.

The euro area bond market is heading for its worst week in five-months, with fears about tighter central bank monetary policy and strong U.S economic data will push borrowing costs to new highs.

Germany’s 10-year Bund yield has gained +2 bps to +0.55%. In the U.K, the 10-year Gilt yield has climbed +3 bps to +1.697%, the highest in almost three-years. While further anti-E.U. rhetoric by Italy’s Deputy PM Salvini is again pushing BTP yields higher. Italy’s 10-year yield has jumped +3 bps to +3.363%.

4. Dollar remains strong ahead of payrolls

The ‘big’ dollar is maintaining a firm tone, trading atop of its three-month high, against G10 currency pairs ahead of this morning’s NFP print.

EUR/USD (€1.1497) remains within striking distance of this week’s low outright. Italian anti-E.U rhetoric coupled disappointing Italian draft budget details is again providing EUR ‘bears’ with further ammo.

GBP/USD (£1.3034) is holding above the psychological £1.30 handle as EU Brexit negotiators were said to believe that an agreement with Britain was ‘very close.’

USD/JPY (¥113.88) remained below the ¥114 level after testing above it earlier in the week due to higher U.S Treasury rates.

4. German factory orders

Data this morning showed that factory orders in Germany rose strongly in August after two months of declines, boosted by strong foreign demand from outside the eurozone.
Orders, seasonally adjusted, rose +2% m/m. That follows a -0.9% drop in July and a -3.9% drop in June.

Note: Orders are still down -2.1% on the year, however, current data would suggest solid German growth has appeared in H2, 2018.

Digging deeper, domestic orders dropped -2.9% in August, but that was offset by a +5.8% rise in foreign orders.

Foreign orders from countries using the EUR dropped -2.2%, but those from non-eurozone countries rose +11.1%.

Forex heatmap

No stopping the US dollar runaway train at the moment

No stopping the US dollar runaway train at the moment

US Markets 

The US dollar is on a rampage as awe-inspiring beat on both the ADP and ISM services index combined with very supportive  Fed speak sent the US dollar soaring.

Just another risk on the day for US market’s despite US bond yields surging. But look no further than the  September ISM non-manufacturing report which massively surprised to the upside, confirming that the US economy is indeed  ” firing on all cylinders “.  And triggering hugely bullish signal for both the  USD and a myriad of other US assets like  US equities with the S&P rising to fresh session highs and   US bond yields touching multi-year high water marks with the 10-year UST holding just above 3.16 %. To put things in perspective, the ISM just printed a 21-year high beating consensus expectation 61.6 vs 58!

Doubtlessly, nothing more bullish than the Dow printing record highs as US  interest rates hit multi-year peaks. !!

No, if and or buts investors remain unambiguously bullish on the S&P 500. And with positive signs gradually showing up for the Shanghai Composite and the  Nikkei, Asia equities, while still pulling up the rear, should make leaps and bounds this quarter even more if US-China resolves their trade issues. But at this stage, it looks like US markets don’t give a toss about China trade.

Oil Markets 

The DOE data for last week showed a much more significant than expected 8.0 million barrels per day build in US commercial crude which generally suggests that oil prices should tumble. Given the market is doing the exact opposite with Brent touching $86 per barrel, it indicates the markets remain singularly focused on Iran sanction and the questionableness of OPEC’s amplitude to increase production quickly enough to offset any Iran supply loss. In other words, the market is focusing on spare production capacity and the US sanctions effectively drying up the physical markets.

So if you were waiting for a bullish catalyst; when OIL markets rally after a significant and highly unexpected DOE inventory build, price action can’t be any more telling than that. Absolutely, the stage is set for a test of Brent $90 per barrel which should provide clear sailing to the opulent $100 per barrel mark

All this on top of the other big news of the day from Riyadh that indeed Saudi Arabia and Russia will boost its output in October and November.Reuters

However, after dissecting the article, it was merely an affirmation of something that we had suspected all along, but now its confirmed that Saudi Arabia and Russia are working closely together in coordinating their response to the oil market.  The headline confirms Saudi Arabia and Russia sideline discussion at a St. Petersburg conference back on May 25, subsequently ratified by OPEC

And yes, Saudi Arabia and Russia are both supplying additions barrels, but I genuinely believe both parties are as equally price sensitive as they are about making concessionary overtones. So, if the markets remain fluid and accept the additional barrels at or near current levels, triggering tears of joy to all oil producers, including those in Texas and Oklahoma Indeed the Saudi -Russia led mega oil cartel will be more than happy to add supply.

“The Russians and the Saudis agreed to add barrels to the market quietly with a view not to look like they are acting on Trump’s order to pump more,”

One quote in the article, however, reminded me of one of my long-held theories that we are on the cusp of a new axis of oil price control that would involve the wolds three mega-producers Saudi Arabia -Russia and the US. While I still think this locus of control will happen eventually, although the US inclusion will likely ruffle some middle east feather. But frankly, without offering US Shale producers a seat at the negotiating table, any coordinated efforts to stabilise prices over the long run could be difficult without their participation.

Gold Markets

Gold prices slid lower on Wednesday, triggered by a significant beat on the ISM resulting in higher US Bond Yields and a very strong USD. But with bond traders effortlessly taking out key interest rate levels, which are falling like ninepins, it does suggest the dollar rally has much more room to run. After waffling its way through September, the greenback is starting to reassert itself supported by a significant fair wind from the US rates markets with 10-Year UST holding north of 3.15 %. It is difficult to envision gold tracking any which way but down. Yesterday’s Italy inspired safe -haven rally is starting to look more and more like a massive missed opportunity, that’s if you didn’t sell, as, on a strong NFP print, gold could flop towards the mid $1180’s in a heartbeat.

Currency Markets

It’s not only the Aussie moving down under, but so is the Euro. And with the US10 Year Yields sliding through crucial resistance level like greased lightning, the Euro is folding like a cheap suit. But it was the constructive tone from Fed chair Powell that lit a fire under the dollar after he suggested that the Fed is a long way from neutral rates. So, assuming the US data supports I guess we can count on the Fed to roll out quarterly rate hike for the foreseeable future, or at least until there’s a downturn in US data Given the moves on USDJPY, it does indicate the EURUSD could fall further as the market aims at the next critical pivot level of 1.1420.

 

EM Asia

A tale of 2 barrels of oil 

The Indian Rupee

With  Brent test, $86 per barrel and the USD  reassert itself across G-10 the Indian Rupee got hammered overnight. This trade was the equivalent of taking candy from a baby after yesterday’s comments from the RBI who are unwilling to react to what they believe is a knee-jerk reaction on INR and Oil, and utterly unwilling to a supporting a separate USD window for Oil companies.

We knew the Rupee was going to be in for a rough ride, but the voracity of the move is what frightening But with intervention proving futile due to India’s heavy reliance on imported oil and gas the import bill is going to be eye-watering and humungous and will continue to provide ammunition for currency speculators to target the Rupee.

But deferring to the Oxford Economics matrix, In India’s case ” A 10 per cent increase in oil prices can lower the real GDP level by 0.2 per cent four quarters later”, so this oil move is going to have lingering effects.

Malaysian Ringgit 

On the other hand, the Malaysia Ringgit will be relatively insulated from the stronger dollar, and surging US yields as Malaysia pumps about 666 K barrels per day which generate a tidy some for the country and not to mention the downstream effect which is an absolute boon to Malaysia’s expansive oil and gas industry. While USDASIA will trade with a defensive posture, today the Ringgit should be viewed in a much better light than the regional peers, but demand will remain muted

Italy: risk on, risk off?

Wednesday October 3: Five things the markets are talking about

European markets have so far shrugged off losses in Asia to post gains this morning amid hopes that Italy’s budget deficit could be lowered, but concerns about the country’s debt and budget plans remain.

The EUR (€1.1573) has rallied from yesterday’s six-week lows on hopes that Italy’s draft budget plan will pledge to cut the deficit to +2% in 2021, revising the government’s initial proposal. Italian bonds have surged after four-days of selling.

At least for the time being, the lack of contagion in the rest of the eurozone bond market from the rise in Italian government bonds shows that the budget talks are still perceived as a local issue, and this despite, Italy’s +2.4% deficit plan is a significant deviation from previous commitments.

Elsewhere, U.S Treasury yields remain atop of their recent highs after Fed Chair Powell yesterday welcomed wage growth, but expressed confidence that low unemployment would not support inflation that would require aggressive tightening.

Later this morning, U.K PM Theresa May will be speaking at the Tory party’s annual conference. Expect Brexit rhetoric to affect a hypersensitive sterling.

1. Stocks mixed results

In Japan, equities came under pressure overnight as automakers fell on a sharp decline in U.S new car sales last month and while financials retreated mostly on profit taking. The Nikkei share average lost -0.7%, though it was still holding at 27-year highs. The broader Topix fell -1.2%.

Down-under, Aussie stocks rallied from strong gains in resource-related stocks overnight, helped by higher gold and metal prices, while financials ended lower despite earlier gains. The S&P/ASX 200 index rose +0.3% at the close of trade. The benchmark fell -0.8% on Tuesday.

Note: Both China and S. Korea were closed for a holiday.

In Hong Kong, stocks fell for a second consecutive day, with investors staying on the sidelines preferring to look for hints on policy direction from China. The Hang Seng Index was down -0.52%.

In Europe, regional bourses have opened higher across the board. Investor risk sentiment has improved after Italian press reports new budget plans (see below). The financial and Telecom sector are the best performers, while the material sector is underperforming. Germany is closed for a holiday.

U.S stocks are set to open in the ‘black’ (+0.2%).

Indices: Stoxx600 +0.3% at 383.2, FTSE +0.2% at 7,487, DAX closed, CAC-40 +0.2% at 5,476, IBEX-35 +0.1% at 9,314, FTSE MIB +0.3% at 20,618, SMI +0.6% at 9,145, S&P 500 Futures +0.2%

2. Oil trades atop of its four-year highs

Oil trades atop of its four-year highs this morning, supported by expectations that U.S sanctions on Iran will tighten supply and strain the ability of the Saudi’s and other producers to pump more.

Brent crude is up +38c at +$85.18 a barrel. It reached +$85.45 on Monday, its highest level since November 2014. U.S crude (WTI) is up +24c at +$75.47.

Crude exports from Iran, OPEC’s third-largest producer, are already falling as the U.S sanctions kick in on November 4 deters buyers.

A recent survey of OPEC production found Iranian output in September fell by -100K bpd, while production from the group as a whole rose by +90K bpd from August.

Note: Crude prices have roughly tripled from lows hit in January 2016 after the OPEC and Russia cut output.

OPEC has so far ruled out any further production increase, beyond delivering the boost agreed in June, despite prices rallying further and more pressure from Trump.

Ahead of the U.S open, gold prices have edged a tad higher in the Euro session after gaining over +1% yesterday, supported by safe-haven demand as Italy’s budget plan sets it on course for a potential clash with the E.U. Spot gold is up +0.1% at +$1,203.31, while U.S gold futures are up +0.1% to +$1,207.06 an ounce.

3. Italian yields fall

In Europe, Italian bonds are rallying as some of the yesterday’s worries have eased on signs that Rome is open to cutting its budget deficits and debt in coming years.

Note: There are reports that the Italian deficit would fall to +2.2% of GDP in 2020 and to +2% in 2021 from the +2.4% earlier outlined.

Italian 2-year BTP yields have fallen -21 bps to +1.381%

In Germany, the 10-year Bund yields trade higher, indicating less investor appetite for safe havens amid the Italian turmoil. The 10-year Bund yield is trading +2 bps higher at +0.45%, while the 10-year BTP yield is trading -8 bps lower at +3.34%.

Elsewhere, the yield on U.S 10-year Treasuries has gained +1 bps to +3.07%.

4. TRY falls on inflation data

The Turkish lira is under pressure after data this morning showed annual Turkish inflation jumped to +24.52% in September from +17.90% in August, lifting USD/TRY to a five-day high of $6.0912.

Note: The Central Bank of the Republic of Turkey (CBRT) has been reluctant in the past to hike rates to curb inflation, especially since President Erdogan has previously expressed a preference for lower interest rates.

The EUR (€1.1565) continues to be driven by the Italian budget projections, this time going up on reports that Italy may not pencil in another 2.4% deficit-to-GDP projection for 2020 and 2021.

Sterling (£1.3004) is again trading atop of the psychological £1.30 handle. Expect the pound to remain hypersensitive to Brexit comments from PM Theresa May when she addresses party members at the Conservative party conference this morning.

5. Eurozone retail sales fall for second consecutive month

Data this morning showed Eurozone retail sales fell for a second straight month in August, which may suggest that that economic growth has yet to rebound significantly from a slowdown in H1.

Eurostat reported retail sales across the 19-countries that use the ‘single’ unit was -0.2% lower in August than in July, although +1.8% up on the same month of 2017.

Last year, a surge in exports drove eurozone economic growth, but a weakening in overseas sales has been behind a loss of momentum this year. That has left the economy more reliant on household spending to drive the expansion, and falling retail sales are a major concern.

Note: Eurostat also cut its estimate for July to -0.6%, having previously calculated that sales fell by -0.2%.

Digging deeper, the drop in sales comes despite a fall in eurozone unemployment and a pickup in wage growth. But energy prices have risen more sharply over recent months, eating into the income available to spend on other goods and services.

Forex heatmap