U.S dollar boosted by higher Treasury yields

Tuesday July 24: Five things the markets are talking about

Overnight, Euro bourses along with U.S equity futures have edged a tad higher on the back of a plethora of positive corporate earnings boosting investor sentiment.

Also, China’s determination to support the world’s second largest economy has helped to support various risk assets in the Asia session overnight. Is there another cut to its reserve-requirement ratios (RRR) coming? China needs to shore up economic growth in the face of an actual trade war.

In FX, the EUR (€1.1695) is little changed, supported by German data showing that they have so far resisted worries over disruption to trade. In China, the People’s Bank of China (PBoC) guided the Yuan to new 12-month lows.

U.S Treasuries have backed up a tad along with Euro sovereign bonds.

Elsewhere, crude oil prices trade atop of its recent lows, while gold prices are steady.

On tap: As the week continues, more corporate earnings come on line, while the ECB’s monetary policy will be the markets focus on Thursday. On Friday, Trump and his economic team are increasingly convinced the GDP numbers will be strong – he expects Q2 GDP to rise to as much as +4.8%!

1. Stocks see the light

Shares in Asia rallied on news China will increase spending on infrastructure among other measures to bolster growth.

In Japan, the Nikkei share average bounced overnight, reducing Monday’s losses as the yen’s (¥111.23) rally stalled exporters. The Nikkei ended the day up +0.51%. The index had fallen -1.3% the previous session as the yen soared outright. The broader Topix rallied +0.47%.

Down-under, Aussie shares rallied on Tuesday as firmer commodity prices supported material stocks, while financials followed its Wall Street peers. The S&P/ASX 200 index rose +0.6% at the close of trade. The benchmark fell -0.9% on Monday. In S. Korea, the Kospi stock index rose overnight, up +0.48%, in line with its Asian peers, while the won tumbled ahead of Friday’s U.S advanced GDP growth.

Note: South Korea’s Kospi has experienced the weakest H1 in five-years – down -5.7%.

In China, government bond yields and equities rallied overnight after authorities promised to pursue a more ‘vigorous’ fiscal policy, in an effort to support growth amid rising economic headwinds. The blue-chip CSI300 index rose +0.9% while the Shanghai Composite Index ended up +1.1%. In Hong Kong, the Hang Sang index rose +1.44%, while the China Enterprises Index gained +0.5%.

In Europe, regional indices trade higher across the board, supported by generally strong manufacturing PMI data and upbeat earnings from European names.

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

Indices: Stoxx600 +0.9% at 388.2, FTSE +0.7% at 7710, DAX +1.4% at 12718, CAC-40 +0.9% at 5424, IBEX-35 +0.7% at 9794, FTSE MIB +1.1% at 21,893, SMI +0.4% at 8992, S&P 500 Futures +0.2%

2. Oil is steady as U.S/Iran row balances trade worries, gold lower

Oil prices remain little changed as rising tension between the U.S and Iran highlight potential risks to supply, while escalating trade disputes raised the prospect of slower economic growth and perhaps weaker energy demand.

Brent crude oil is unchanged at +$73.06 a barrel, while U.S light crude is up +15c at +$68.04.

Note: Both benchmarks have fallen this month as crude supplies from Russia, Saudi Arabia and other members of the OPEC have increased and unscheduled production losses have eased.

To date, market sentiment remains driven by geopolitical worries in the Middle East or that Trump’s trade dispute with G7 economies could dampen global growth.

Note: Iran, OPEC’s third-largest producer is pumping +3.75M bpd, has come under increasing U.S pressure, with President Trump pushing countries to cut all imports of Iranian oil from November.

Ahead of the U.S open, gold prices have edged down overnight on a firmer dollar and a rise in U.S Treasury yields and as the markets reaction to the dispute between the U.S and Iran remains somewhat muted. Spot gold is down -0.3% at +$1,220.27 an ounce, while U.S gold futures for August delivery are -0.4% lower at +$1,220.20 an ounce.

3. Sovereign yields continue to back up

The Nikkei has suggested that politics could be a factor at the BoJ upcoming July 31 policy decision. It suggests that political considerations could pressure the central bank to take action at the July meeting, as a policy decision at the September meeting could influence the LDP leadership elections.

It also notes that Japan has regional elections in April 2019, while in October of 2019 the consumption tax is expected to rise to +10% from +8% – consensus believes the further you look out the ‘curve’ the more difficult it will be to make changes to policy.

In Canada, sovereign bond prices fell yesterday after positive economic data weakened the markets demand for the safety of government debt. Yields on the 10-year Treasury note were recently at +2.22% after it was reported that Canadian wholesale trade rose +1.2% m/m in May.

Note: Last Friday saw better than expected Canadian data – annual inflation had reached a new six-year high, boosting market expectations for another rate increase from the BoC this year.

Elsewhere, the yield on U.S 10-year notes have gained +1 bps to +2.96%, the highest in almost six-weeks. In Germany, the 10-year Bund yield rallied +1 bps to +0.42%, the highest in almost five-weeks. In the U.K, the 10-year Gilt yield climbed +3 bps to +1.298%, the highest in two-weeks.

4. China fixes yuan at fresh one-year low

Overnight, the U.S. dollar has regained some strength, boosted by rallying Treasury yields.

Elsewhere, Chinese officials guided the yuan -0.4% weaker outright, fixing the Chinese currency at a fresh one-year low. The PBoC set the dollar’s midpoint for daily trading at ¥6.7891, compared with ¥6.7593 Monday. The ‘mighty’ dollar ended onshore trading yesterday at ¥6.7834.

EUR/USD (€1.1685) has reversed some of its initial losses in the Euro session as the major PMI manufacturing data beat expectations. The Euro upside has been limited in the belief that the ECB is on hold regardless of any incoming data.

USD/JPY (¥111.23) is holding above the psychological ¥111 handle as the market debates the prospect of a possible tweaking the BoJ’s policy on July 31.

GBP/USD (£1.3109) trades atop of its recent lows as BoE member, Anthony Broadbent, stated that he was not sure if whether he would vote for rate hike next month.

5. German growth strongest since February

July data saw a further pick-up in the rate of growth of Germany’s private sector economy from a 20-month low in May to a five-month high, driven by a stronger increase in manufacturing output.

The IHS Markit Flash Germany Composite Output Index rose to 55.2 in July from 54.8 in June, to signal a second successive monthly acceleration in the rate of growth in private sector business activity.

Digging deeper, new order growth also gathered pace, while private firms continued to add staff and price pressures intensified.

Note: By sector, services business activity increased at a solid rate that was little changed from June, while manufacturing output growth was the fastest since April.

Forex heatmap

Trade and currency wars a market threat

Monday July 23: Five things the markets are talking about

A new week starts with equities under pressure as capital markets digest warnings from G20 finance ministers about the impact of protectionism on growth – “risks to the world economy have increased.”

Also raising concerns is the Sino-U.S trade war is now spilling over into currency markets with President Trump rhetoric supporting the U.S administration preference for lower U.S dollar interest rates and a weaker currency.

Elsewhere, the yen (¥111.00) has found support while JGB’s slid on speculation about Bank of Japan’s (BoJ) stimulus. Crude prices trade a tad softer amid concern the escalating trade rows will destabilize energy demand.

On tap: an E.U Trade Commission is due to arrive stateside this week for trade talks. Expect some tough questions, demands and their own list of retaliatory measures in response to proposed U.S tariffs. The highlight of the week should be Thursday’s European Central Bank (ECB) monetary policy meeting.

1. Stocks start the week under pressure

Japan’s Nikkei fell to a ten-day low overnight, with exporters under pressure by the yen’s (¥111.00) rally and by market speculation that the Bank of Japan (BoJ) could wind back its exchange-traded fund purchases. The Nikkei ended the day down -1.33%.

Note: The market is speculating that the BoJ could debate changes in its monetary policy at its upcoming meeting, with potential tweaks to its interest rate targets and stock-buying techniques on the table.

Down-under, Aussie shares fell on President Trump’s threat to impose tariffs on all Chinese imports. The S&P/ASX 200 index declined -0.9% at the close of trade. The benchmark gained +0.4% on Friday. In S. Korea, it was a similar story. The Kospi fell about -1% overnight following Trump’s comments about tariff’s and the currency last week.

In China, stocks rallied on Monday, aided by strength in financials and industrial stocks, but a slump in healthcare shares capped the broader gains. The blue-chip CSI300 index rose +0.9% while the Shanghai Composite Index ended up +1.1%.

In Hong Kong, it was a similar story. Stocks rose slightly overnight, as declines in tech and consumer shares were offset by strength in financials. The Hang Seng index rose +0.1%, while the China Enterprises Index gained +0.5%.

In Europe, regional bourses are trading mostly lower across the board, following a mixed session in Asia. The Italian FTSE MIB is in focus following weakness in shares of Fiat and Ferrari after the stepping down of its CEO Sergio Marchionne due to health.

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

Indices: Stoxx600 -0.1% at 385.1, FTSE -0.4% at 7651, DAX -0.1% at 12549, CAC-40 -0.3% at 5382, IBEX-35 +0.2% at 9743, FTSE MIB -0.1% at 21,775, SMI -0.5% at 8947, S&P 500 Futures -0.1%

2. Oil steady after G20 warns of risks to growth, gold higher

Oil prices have stabilized as worries over production losses were outweighed by concerns that trade disputes would reduce economic growth and hit global energy demand.

Benchmark Brent crude oil is up +15c at +$73.22 a barrel, while U.S light crude is unchanged at +$68.26.

G20 Finance ministers over the weekend called for more dialogue to prevent trade and geopolitical tensions from hurting growth as “downside risks over the short and medium term have increased.”

Note: Baker Hughes data on Friday showed that U.S energy companies last week cut the number of oil rigs by the most since March following recent declines in oil prices. Drillers cut five oilrigs in the week to July 20, bringing the count down to 858.

Ahead of the U.S open, gold prices are steady atop of a one-week high as the dollar eased to a two week low after President Trump criticised the Fed’s interest rate tightening policy. Spot gold holds steady at +$1,231 an ounce. U.S gold futures for August delivery are nearly unchanged at +$1,231 an ounce.

3. Japan yields in focus

JGB’s have sold-off along the curve on reports late Friday that the BoJ might consider changes to interest rate targets. The market is speculating that the BoJ might be willing to let 10-year JGB yields (+0%) rise to some degree including a possible hike of the target level. Overnight, JGB 2-, 10- and 30-year yields were higher (+1.8, +4.5, and +8.0 bps respectively).

BoJ officials said to be looking for ways to keep stimulus program sustainable while reducing the harm it causes to markets and bank profits.

Note: The BoJ stepped in to buy unlimited bonds at a fixed rate of +0.11%, to cap the move.

On tap for this week: The ECB monetary policy meeting is on Thursday, no policy stance expected, but the market is looking for clarification on their first potential rate hike.

Elsewhere, the yield on 10-year Treasuries gained less +1 bps to +2.90%, the highest in more than a month, while in the U.K; the 10-year Gilt yield advanced +1 bps to +1.232%.

4. Dollar under pressure from Trump rhetoric

The ‘mighty’ USD maintains its softer tone after President Trump criticized the Fed for raising interest rates and suggested the USD was too strong.

Aside from currency Twitter rants, the markets focus this week will be on the ECB rate decision and press conference on Thursday. Consensus is ‘not’ anticipating any policy change in the short to medium term, however, the markets will be on the lookout for any clarification on the first potential rate hike. The EUR/USD is still flipping alternately between moves towards €1.16 and over €1.17 in response to news on the trade row, given the lack of clear direction.

GBP (£1.3124) continues to remain vulnerable to “headline risk,” but consensus believes a lot of negativity seems to be already priced. With parliament in recess, sterling has the potential to stage a modest retracement from its current area.

5. G20 communiqué

In their final communiqué yesterday from their meeting in Argentina, finance ministers and central bankers from the G20 economies said, “Heightened trade and geopolitical tensions pose an increased risk to global growth” and called for greater dialogue.

“Global growth remains robust and unemployment is at a decade low. However, growth has become less synchronised recently, and downside risks over the sort and medium term have increased,” said the communiqué.

Forex heatmap

Dollar Rally Ends With Trump Monetary Policy and Currency War Comments

The USD fell against major pairs on Friday after US President Donald Trump tweeted that China and the EU manipulate their currency. Trade war escalation has reached a second phase at a time when American politics are having an identity crisis with the ongoing Russian interference during the 2016 elections. Steven Mnuchin will head to Buenos Aires to take part in the finance ministers G20 meeting with trade and monetary policies sure to be a topic of discussion. The European Central Bank (ECB) will announce its main refinancing rate on Thursday, July 26 at 7:45 am EDT with little expectations of a change. ECB President Mario Draghi will host a press conference at 8:30 am EDT with the market focused on his comments for insights into the monetary policy of the central bank.

  • US President worried about Fed’s monetary policy triggers currency war
  • European Central Bank meeting anticipated to be a quiet affair
  • Canadian inflation and retail sales beat expectations

EUR Rises Ahead of ECB as Currency War Concerns Rise

The EUR/USD gained 0.28 percent in the last week. The single currency is trading at 1.1717 after a volatile week is over. The EUR rose 0.73 percent on Friday as Trump’s comments on currency manipulation hit the newswires. The US dollar had fallen on Thursday after President Trump criticized the U.S. Federal Reserve for raising rates and eroding the competitiveness of American products.



In an interview with CNBC the US President said he was not thrilled with the path of interest rates, although he did mention that he would let them do what they feel is best. Earlier in the week Fed Chair Powell testified before the Senate Banking Committee and the House Financial Services Committee side-stepping any comments on trade spats.

The U.S. Federal Reserve has hiked two times already in 2018 leaving the benchmark rate at 175 to 200 basis points. The CME FedWatch tool shows a 86.9 percent chance of a September rate hike and 53.9 percent of a follow up in December. Both sets of probabilities where higher on Wednesday before Trump’s comments were released.

The economic calendar will not feature a large number of North American indicators with the main standout being the release of the first estimate of the US GDP data on Friday, July 27. Analysts forecast a rise of 4.1 percent and could serve as an antidote to Trump’s tweets. The European Central Bank (ECB) will feature on Thursday, but there is little expectation that new guidance will be provided after the June monetary policy meeting.

Loonie Higher on Strong Retail Sales and Inflation Data

The Canadian dollar rose on Friday after the release of retail sales and inflation data. The USD/CAD DROPPED 0.05 percent on a weekly basis. The currency pair is trading at 1.3146 after Canadian retail sales surprised with a 2 percent rise to a seven month high boosted by auto and gasoline sales on Friday. Inflation rose 2.5 on an annual basis in June also impacted by higher gasoline prices. The economic indicators validate the decision of the Bank of Canada (BoC) earlier this month to hike rates by 25 basis points and could further pressure the central bank to lift rates higher despite growing geopolitical headwinds.


Canadian dollar weekly graph July 16, 2018

The US dollar has been on a downward trend since President Trump issued some sharp criticism on the U.S. Federal Reserve monetary policy. The comments took the market by surprise as talking about the currency is not usually the job of the President, but rather the Treasury Secretary. The statements will most likely be discussed as the G20 meeting in Buenos Aires kicks off.

The US President continued to tweet about the unfair strength of the greenback which responded by falling more than 1 percent against the Canadian dollar.

Oil prices recovered from losses earlier in the week but West Texas Intermediate will finish below $70 after concerns about the increase in supply outstripping rising demand.

The GBP/USD dropped 0.76 percent in the last five days. The currency pari is trading at 1.3133 with political headwinds keeping the pound under pressure. The confusing Brexit strategy from the UK government could end up costing Prime Minister May her job as she scrambles to call an early summer recess to avoid challenge to her leadership.



The Bank of England (BoE) held rates unchanged in June, but there were three dissenters. The economic data could support an August rate hike by the central bank, but the question now is will MPC vote for higher rates holding to its mandate, but with a high possibility that Brexit negotiations once again threaten the growth of the UK economy and the reverse action is needed. The market still believes in an August rate hike, but the GBP will continue under pressure from political uncertainty at home and abroad.

Market events to watch this week:

Tuesday, July 24
9:30pm AUD CPI q/q
Wednesday, July 25
10:30am USD Crude Oil Inventories
Thursday, July 26
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
Friday, July 27
8:30am USD Advance GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Fed Powell advances the dollar

Wednesday July 18: Five things the markets are talking about

U.S assets get another leg up from rookie Fed Chair Jerome Powell who again expressed optimism over the U.S’s economic growth and stable inflation, telling Congress yesterday that domestic data should keep the central bank on track to raise “gradually” short-term interest rates. However, as per usual, there was a disclaimer – it was too soon to say if trade disputes might interfere with his plans.

To date, the Fed has refrained from commenting on trade policy, saying it is outside of their remit, yet Powell did caution that “open economies have fared better than closed ones.”

Elsewhere, commodity prices continue their decent, dragged down mostly by crude prices, which are off another -1% on a surprise U.S. crude stockpile report, while the ‘big’ dollar is outperforming its G10 currency pairs, with many EM currency pairs trading atop their multi-year lows outright.

In fixed income, Treasury yields have backed up along with most European bonds. Global equities have had a mixed overnight session.

On tap: Fed Chair Powell will testify for a second day on the hill today (10:00 am EDT).

1. Stocks mixed results

In Japan, the Nikkei share average advanced to a one-month high overnight as exporters – in particular, the auto sector – found support after the dollar hit a six-month high against the yen (¥113.04). The Nikkei gained +0.4%, as too did the broader Topix.

Down-under, Aussie stocks rallied after four consecutive session losses in the past six sessions, supported by one of the country’s biggest companies by market cap. The S&P/ASX 200 rallied +0.7% as BHP Billiton jumped +3.3% following an upbeat production update. In S. Korea, stocks slid to session lows in some heavy trading. After jumping as much as +0.9% on the open, the Kospi finished down -0.3%, recording its third-straight drop.

In Hong Kong and China, stocks came under renewed pressure from a weaker yuan, which has reduced appetite. In Hong Kong, the Hang Seng index fell -0.2%, while the China Enterprises Index lost -0.1%, while in China, the blue-chip CSI300 index fell -0.5%, while the Shanghai Composite Index lost -0.4%.

Note: Overnight, China’s yuan hit a two-week low outright, breaching the key ¥6.700 level – a rising dollar raises concerns of further capital outflows.

In Europe, regional bourses have opened slightly lower and are trading sideways. The financial sector remains the best performer in muted volatility, while tech stocks are underperforming.

U.S stocks are set to open ‘flat.’

Indices: Stoxx50 -0.2% at 3,446, FTSE +0.1% at 7,608, DAX flat at 12,562, CAC-40 flat at 5,412; IBEX-35 flat at 9,714, FTSE MIB +0.4% at 21,906, SMI -0.4% at 8,812, S&P 500 Futures flat.

2. Oil prices fall on rise in U.S stocks, gold lower

Oil prices again have come under renewed pressure after yesterday’s data reveal a rise in U.S crude inventories last week, defying markets expectations for a “big drop,” while concerns about weak demand again have resurfaced.

Brent crude oil is down -60c at +$71.56 a barrel – the benchmark hit a three-month low yesterday – while U.S light crude is down -50c at +$67.58, not far off Tuesday’s one-month low of $+67.03 per barrel.

Expect today’s price action to largely depend on what the EIA release comes in at. Yesterday’s API data showed an unexpected rise of more than +600K barrels in national crude inventories. For today, the market is forecasting a decline of -3.6M barrels in U.S crude stocks for the week through July 13 (10:30 am EDT).

Also putting pressure on energy prices for the past month is Saudi Arabia and other OPEC members agreeing to increased production, while investors have also begun to worry about the impact on global economic growth and energy demand of the escalating Sino-US trade dispute.

Ahead of the U.S open, gold prices have slipped to a new 12-month low as the ‘big’ dollar firms after Fed Chairman Powell’s U.S economic outlook reinforced the markets views that the central bank is on track to “steadily” hike interest rates. Spot gold is down -0.2% at +$1,224.16 an ounce. U.S gold futures for August delivery are -0.2% lower at +$1,224.30 an ounce.

3. Sovereign yields on the move

In Europe, investor uncertainty over global growth is compressing German 10-year yields, and the hunt for yield then sees demand spill over to other debt further out the curve. The gap between German 10- and 30-year Bund yields are at its narrowest in over five-weeks at +67 bps.

In the U.S, the Fed Chair Powell indicating an “unsurprising” preference for a continued steady rise in interest rates is inevitably flattening the U.S government yield curve. The spread between the two-year and 10-year Treasury bonds is narrowing and is last at +24.7 bps.

The yield on 10-year Treasuries has climbed +1 bps to +2.87%, the highest in more than two weeks. In Germany, the 10-year Bund yield has gained less than +1 bps to +0.35%, while in the U.K; the 10-year Gilt yield has rallied less than +1 bps to +1.258%.

4. Dollar goes from strength to strength

The mighty U.S dollar is holding onto its recent gains in the aftermath of Fed chair Powell’s testimony yesterday. With the Fed chair reiterating that interest rates would continue to increase gradually again supports interest rate differentials trading strategies.

Note: Euro and U.K inflation data this morning remained underwhelming (see below).

EUR/USD is a tad softer by approx. -0.3% at €1.1622, while weaker-than-expected U.K inflation data for June sent sterling to multi-month lows against the dollar and the euro.

GBP/USD has fallen to a 10-month low of £1.3010 and EUR/GBP has rallied to a four-month high of €0.8923. Also, Brexit concerns continued to weigh upon the pound as PM May’s government again survived a recent Brexit amendment vote by a “slim” margin.

Note: U.K’s June CPI was the key focus with prospects of an August rate hike in the balance. Odds for a hike have diminished a tad, now down to +72%.

5. U.K inflation steady in June

Data this morning showed that annual inflation in the U.K. held steady last month, as summer-clothing sales offset a rise in petrol prices.

As reported from the ONS, consumer prices rose +2.4% on the year and keeps annual price-growth in excess of the Bank of England’s (BoE) +2% target.

Today’s data should keep the BoE in line to hike again next month – only politics and trade disputes could derail Governor Carney’s agenda.

Digging deeper, the data shows that prices charged by companies at the factory gate accelerated in June, gaining +3.1% on year compared with an annual rise of +3% a month earlier, in a sign that inflationary pressures are building. Raw material costs jumped +10.2% on year according to the ONS.

Note: U.K policy makers have said they expect to raise borrowing costs three or more times during the next few years to bring inflation back to their goal.

Forex heatmap

Dog Days of Summer ? (OANDA Trading Podcast Money FM 89.3)

Stephen Innes Head of Trading at OANDA APAC tells Michael Switow what oil, the RMB, gold and Netflix have in common. And the rest of the market movers

 

Money FM 89.3

 

 

Monday blues or Dog days of summer

Monday blues or Dog days of summer

Whether a case of the Monday blues, the Dog Days of summer setting in or a combination of both, markets struggled for direction despite upbeat US economic data while quarterly earnings have failed to inspire investors. And we might chalk it up to a typical summer afternoon NY trading session.

Event-wise, apart from the Tump/Putin headline which managed to supplant China-US trade headlines, there has been very little news worth to report as the markets hardly budged on the positive US retail sales print and remained in stasis during the Empire survey. And  Sterling barely blinked after UK PM May scraped through a Customs Union amendment by 305 votes to 302. However, with May yet again snatching victory from the jaws of defeat, it should provide a reasonable underpin for the Pound over the near term although this morning activity has been remarkably muted

US markets
Wall Street opened with a misfire. Investor expectations were running at peak optimism, and while banks stocks looked favourable, sentiment turned sour, as oil price worries intensified.

Then the thud that was heard up and down wall street as Netflix fell off a cliff in late trading after posting dispiriting subscriber growth last quarter. Indeed, with one of the markets key highfliers going into the tank, it could be a tough 24 hours for FANG stocks. FANGS ‘s have been the undisputed heavyweight champions of the equity world, and pretty much impervious to risk off and trade wars. But when you start looking under the hood and strip away a couple of FANG outperformers, US equity markets aren’t all that cheery. This negative Netflix result could spur more moves into to cash as investors may finally adopt a delayed sell in May and go away strategy.

Oil markets

Oil markets

Oil markets are slip sliding away under renewed selling pressure from long liquidation as bearish sentiment grows thick k with the US  actively considering tapping the Strategic Petroleum Reserve, the chatter of increased Russian oil production after Putin extends the US an olive branch to add more barrels, while the US considers waivers on Iranian sanctions. The sweeping slew of bearish signals has wholly eroded market sentiment with Brent Crude breaking bad now trading below May 2018  lows.

Also, with the market ignoring bullish indicators, specifically the latest production outage in Libya, where the 290,000 bpd Sharara oil field is reducing output due to an act of terrorism.  It calls attention to just how big of a shift market sentiment has undergone since last Wednesday’s high-volume meltdown.

Gold markets

Bearish sentiment continues to engulf the precious metal space after a break of the fundamental $ 1,240 support level overnight while breaching multi-year trendlines. Markets are becoming more e convinced about a strengthening dollar, which will unquestionably act as a most significant headwind and could continue to pressure gold lower as safe-haven demand remains muted.

In fact, the dollar slipped lower in modest price action, yet gold still fell below critical support. Ignoring even the slightest bullish indicator is an unfortunate sign and suggests we could push significantly lower when the USD moves out of its current melancholic state and starts to reassert its presence.

Currency Markets

The USD eased lower for the third consecutive day as trade war headline decreased and some of last week’s froth give way to position neutrality. But we’ve been in this back and forth momentum on the USD since the beginning of June. Whenever the USD picks up steam, everyone boards the rally bus only to get whipped sawed by a brutal correction. But as we move into the dog days of summer, expect volumes to taper but volatility to remain elevated given considerable headline risk. But overall. caution prevails

When markets turn directionless, it’s time to revert into the interest rate matrix for clarity which suggests the USD has more gas in the tank than say the EUR, JPY or the AUD.

GBP: In general, I think everyone likes GBP higher. Therefore, the crowded trade phenomena make correction even more brutal. Again, back to basics. Assuming Brexit risk remains contained (big headline risk assumption) and with the surprisingly hawkish shift from Cunliffe, the BOE’s standing dove, a rate hike in August is all but inevitable GBP should remain in favour.

JPY: Equity momentum has waned this week but increasing JPY outflows to suggest we may only be in the early stages of this move higher in USDJPY. With US yields ticking higher, the fundamental differential argument remains intact.

AUD: Shorts should continue to lead the way, China remains a significant risk despite some favourable commodity forecast based on positive what if scenarios. i.e. what if Trade war abates

MYR: There was a regional sigh of relief after China GDP matched market expectations. While of course taking the data print at face value, the markets are reading this as more or fewer things are not as bad as they could have been. But there is little to get excited about a slowing economy in my views.

With no  “risk on catalysts”, the MYR will take cues from the RMB complex as the local markets will wait for Wednesday  Malaysia CPI data. The data will be of interest given the BNM neutral stance from last week. But the market does think the zero GST effects will likely see inflation drop to the 1.7 %level which will not change markets view that BNM stays on hold for some time. Suggesting the MYR will get little support from interest rate differentials for the foreseeable future.

Also, the bearish sentiment in the oil markets continues to permeate every nook and cranny which should skew negative for MYR sentiment today.

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