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

A potholed encumbered landscape

Market sentiment: risky business

US politics is back in forefront Tuesday adding more spice, and another air of unpredictability to the mix as markets contiued their tenuous voyage through a potholed encumbered landscape dealing with the fragile US-China relations book ended by Italy and Brexit developments providing more ambiguity. And if you add the IMF slashing global growth forecast to the fray, although this news was leaked and widely expected, its no wonder investors have a high degree of misgivings.

Politics back in the fray: odd timing 

On the political front, Nikki Haley’s resignation has come as a bit of a shock which sent the USD temporarily lower as markets saw her as a voice of reason within the US administration where it sometimes appears gut feel or twitter tirades drives foreign policy. Of course, something is very very odd about this significant departure ahead of US midterms, which has some pointing to her as the “senior administration official” who penned the op-ed New York Times article. So there we have it the first crack leading up to the contentious US midterm election, in what is likely to be a plethora of fissures to navigate.

Speaking for cracks, closer to home in two of the world’s hottest property markets. Bloomberg Reports There have been protests by homebuyers in China after developers discounted apartments during holiday sales last week, while CLSA says banks in Hong Kong are cutting valuations, threatening to fuel a downward spiral in prices.

US Bond Markets: valuations vs sentiment

On the US bond market front, word from the futures “pits ” is there’s enormous momentum building that could move the yield thermometers higher by at least another ten basis points in 10Y UST’s. But 10y and 30y yields retraced overnight as traders bought back shorts, but multi-year levels of significance remain broken. There are two school’s of thought on the current bond market carnage. The first is traders are thinking it’s a matter of time before inflation kicks in and secondly primary bond dealers have little appetite owning inventory due to the glut of debt issues coming to market this week. But when it comes to trading, the truth usually lies somewhere in the middle. None the less this will keep the equity valuations vs sentiment debate front and centre.

Oil Markets: headline bluster 

Oil markets shook off the weekend stories about waivers on Iranian sanctions, and the widely expect lower global growth forecast from the IMF. But on the waivers front, these were never unconditional and contingent on  100 %  0 Iran import compliant by a specific time horizon.

Hurricane Michael is also helping a bit as gulf production gets shut in for a few days as the storm is expected to hit landfall near on the Florida panhandle as a Category 3 storm.

Yesterday’s Iran export data according to tanker reports were viewed supportive, it’s not that surprising given that global refineries have been pulling back on Iran imports while sourcing out other supplies. Perhaps India  being the exception to that rule. But none the less in a bullish environment trader will trade the headline moment. While Iran’s Oil Minister Bijan Zanganeh on Monday was calling out a Saudi claim that the kingdom could replace Iran’s crude exports “nonsense.” as little more than self-serving bluster to push prices higher much to the disdain of President Trump.

Oil market remains overly bullish on the dwindling spare capacity argument, but not too unexpectedly the level of OPEC and US oil boisterousness will continue to swamp markets as we near the Nov 4 sanction. Leaving oil trader stuck separating the wheat from the chaff. We should expect resident trump calling for lower prices, even if prices fall while the market remains rife with contradictory spare capacity signals.

IEA executive director Fatih Birol took to Bloomberg TV yesterday suggesting markets are entering the ” red zone” suggesting prices are peaking at the most  opportunistic time given waning global growth narrative

But this brings us full circle to this week’s US inventory reports, while the markets were not overly sensitive to last weeks increases, given the focus is shifting to a more buoyant near-term supply narrative, there will be heightened market focus which could temper any upside ambitions. But regardless bullish sentiment does suggest the market will continue to probe higher on any oil price positive headlines gently.

Gold Market: song remains the same 

The market remains neck deep in oversold territory none the less; the stronger dollar keeps the complex on offer although gold has been holding the $1185 level so far. But which higher US Interests rates were influencing a stronger USD, it is hard to see the upside for gold or silver without a more significant correction in equities developing which could then create some haven buying. Gold trader remains on S&P index watch looking for any considerable buckling in equities investor sentiment.

Currency Markets: another day another dollar 

ITV is reporting progress made in the Irish border Brexit backstop, and Olly Robbins has made significant progress in talks with EU’s Barnier which has provided a mild boost to both the Euro and Pound in early Asia trade. But we’ve been down this road how many times before ??

Chinese  Yaun

Vols look stable this morning after China reiterated they have no intention to use the RMB as a weapon in the trade war. But history does tell us Pboc policy remains very fluid, so there remains outsized focus on the RMB complex. But traders remain buyers on the dip.

Australian Dollar

The Aussie has pushed above the fundamental .7100 level as Westpac consumer confidence index came in better than expected. Lots of shorts still in play so Aussie bears have been a bit hesitant to re-engage but given the heightened focus US-China relations, which are not looking too cheery at this stage after President Trump threated to derail his meeting will Xi at G-20 in November. So sellers will be layered between the .7125-.7150 levels which should temper any upside ambitions.

Malaysian Ringgit 
Markets are pivoting to the budget and based on yesterday news the government is looking to shore up deficits by selling off assets and possibly looking at new taxes. Markets don’t like taxes but love when a government addresses deficiencies. For today Oil prices remain supportive, while local banker CIMB suggest bond markets are now in a better position due to governments fiscal prudence would ensure Malaysia debt rating.

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

Noisy Markets

Noisy Markets

The headline noise has been deafening and showing few signs of abating. In Asia focus will be squarely on equity sentiment even more with the Yuan under pressure as US/China tensions are set to escalate this week. US Secretary of State Michael Pompeo cited “fundamental disagreement” with China’s foreign minister after meetings, while a senior Treasury official suggested that the US is concerned about the recent depreciation in China’s currency and is monitoring developments. This should provide enough noise to wake the dead. But I think the real focus will fall on how US Treasuries Yields carry through in the context of the broader risk environment. But the market remains understandably brittle with US/China tension in the fore, EU stress over the budget and fiscal targets; and soaring US treasury yields that have caught the market complete flatfooted and have forced a repricing of the markets overly pessimistic view of Fed policy for 2019 through 2020.

However, Treasury markets reopen on Tuesday and after a tumultuous start to the month, it’s not going to get much more comfortable for bond investors as there is a significant amount of supply this week: USD230bn of Treasuries will be up for auction. Give the sizable number of bonds on sale, its unlikely bond trader had the stomach to go into this week’s auction owning to much inventory, so this too could have contributed to the recent Treasury sell-off

Asia Equity Markets

Equity markets have been trading poorly since US yields breached multi-year levels of resistance last Wednesday and continue to do so despite stimulus efforts by the Pboc, as China returned from its Golden Week holiday and played catch up to last week’s global equity weakness.  The massive near-term tail risk is that traders are back on US-China watch. A possible train wreck on the negotiation front could completely derail global markets. We should not underestimate the potentially destabilizing effect from a weaker Yuan will have on regional markets if not global markets. Indeed a path no one wants to go down.

Oil markets

Oil initially traded heavy by the prospect of the US potentially permitting waivers to countries who are seeking to continue the purchase of Iranian crude after the November 4 deadline.

But looking at last weeks data net longs in both crude benchmarks were slashed as investors’ confidence sagged not to untypically after printing multi-year highs as last weeks Inventory reports, and the ratification of NAFTA suggest supply-side risks dropped slightly.

Investors were clearly in profit-taking mode, and with the US potentially permitting waivers to countries who are seeking to continue the purchase of Iranian crude after the November 4 compounded by Saudi Arabia repeatedly stating that they had indeed boosted their output to offset the loss of Iranian barrels. They provided more than sufficient inputs to trigger a sell-off especially when the market was leaning in that direction.

However, prices reversed in the morning NY session after Canada’s biggest oil refinery, Saint John, was hit by an explosion and fire early Monday. The refinery processes about 300k barrels per day.

Traders remain on hurricane watch as some O & G platform in the Gulf of Mexico have shuttered as Tropical Storm Michael, which is expected to morph into a category 2 or 3 hurricane rips through the Gulf and will smash into the Florida panhandle midweek. Gulf oil insiders are reporting that 19% of Gulf oil production and about 11% of the natural-gas output have gone offline.

While St Johns and Gulf supply disruptions will provide a near-term fillip to prompt WTI, however, based on the dwindling global spare capacity narrative this rally could continue. And we don’t have to look much further than China ‘s policy efforts to bolster that view. Over the medium to long-term, it’s not too much of a stretch to assume more policy easing measures and increased infrastructure spending after China economy expanded at the slowest pace on record last month. So, for oil markets and commodities in general, the positive effects of China’s monetary and fiscal ambition could be significant.

But this brings us full circle to this week’s US inventory reports, while the markets were not overly sensitive to last weeks increases, given the focus is shifting to a more buoyant near-term supply narrative, there will be highted market fucus.

Gold Markets

The markets again found themselves neck deep on oversold territory and with more chatter this morning about central bank purchases, the market is mulling. However, we’re still looking for confirmation on that Central Bank storyline. Update later but please call for any comments.

Currencies

Japanese Yen

With US yields providing a modicum of support but the sagging global equity markets have all but drained the life out the USDJPY battery. JPY traders were getting antsy as the 114 level was an immovable force given the sour equity market sentiment. When you start factoring in the negative implication of a move to 3.5-3.75 in UST’s its difficult to make a positive case for equity valuations. But the prospect of US-China discussion likely to deteriorate further in coming weeks, the 113.50 support gave way like a hot knife through butter,and with the markets on risk alert mode, no one is overly eager to get back on the USDJPY bullish bus.

Malaysian Ringgit 

China and US Treasuries remain the primary focus for EM FX, and with US-China negotiation going nowhere, we should see more upside pressure on the regional currencies.

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

A tempest in a cappuccino cup or mama mia, here we go again?

A tempest in a cappuccino cup or mama mia, here we go again?

The Italian headlines didn’t precisely toggle  the “risk on”  sentiment switch

The markets realize anything can happen in the next six weeks notwithstanding the fact 2 % is still a monster of a deficit and two years is an eternity when it comes to being budget compliant. Deficits tend to take on a life of their own and drag out if not move higher. Given the emotional nature of Italian politics, there will be lots of political manoeuvring ahead of the final decision, so the market will probably be less keen to extrapolate too much out of today’s headline. Indeed, curb your enthusiasm but do tune in the headlines in Europe.

Euro jumps as Italy revises budget plans

Oil prices
Brent remains firm despite consolidating recent gains as the market rebalance positions based on a further decline in Iranian crude oil production versus the September increases in overall OPEC supply and Russian record output. But Oil bulls are sitting tight and are looking for a catalyst to take over the top and clear a path for the assault on $100

The Russia output number 11.36 million barrels per day is indeed an eye-catcher. It looks like we could be setting up for a battle of the Oil producing colossal giants to determine the new heavyweight champion of the oil patch, Russia vs the USA. This contest could make for some exciting banter through 2019 no doubt.

Rupee and Oil
There is some concern a weaker INR could weigh on India’s oil demand. But as we move towards the USDINR 74, it could be catastrophically destabilising for India capital markets as India would have increased problems servicing their US dollar-denominated debt. While the direct currency impact of a weaker INR to Oil demand remains debatable, what’s not, is a possible capital market meltdown in India that will undoubtedly hurt oil demand. The RBI intervened today but with oil prices poised to move higher but likely a day late and a dollar short.

Asia markets
Investors are on pins and needles digesting Italy, India warships, and of course China trade war. It’s challenging to have a bullish conviction while navigating the myriad of challenges.

US markets rescue global risk sentiment yet again.

US Markets 

It seems we can rely on the US markets to bail out souring Global risk sentiment again and again.  But the question should be, how long can we expect this to continue.

Almost like clockwork, The Dow Jones Industrial Average hit a record high on Tuesday feeding of investors optimism around global trade as the USMCA framework does remove at least one massive tariff related risk from the global financial market. I wouldn’t’ go as far as saying the markets are any less worried about China trade issues, however, but investors are breathing on a big sigh of relief that a significant barrier to global free trade has fallen. And indeed, just as significantly it allows the US administration to now focus exclusively on its escalating economic dispute with China.

Oil Markets 

Oil traders came up for air ahead of today API inventory report and while analysing production data for September, including Russian output that increased 150,000 bpd last month to a record 11.36 million barrels per day.

However, prices remain near four-year highs supported by the plethora of bullish narratives, Iran sanctions, Saudi Arabi capacity concerns and China refinery Iranian compliance.

The API inventory data has triggered a muted reaction of sorts. The American Petroleum Institute figures for the week ended September 28 included a slightly smaller 0.9 mmbls build in US commercial crude stocks, but a larger-than-expected 2.0 mmbls increase at the Cushing, Oklahoma delivery point for NYMEX WTI crude oil futures. A bit of a saw off indeed but would probably be interpreted as a touch bearish if not for the dominant bullish narrative.

NOPEC

Also given the markets are thinking that OPEC or more specifically Saudi Arabia is powerless to stop oil from hitting $100 per barrel m there has been increasing focus on NOPEC.
Reuters

It’s apparent that, next to China trade, OPEC is the president’s biggest bugbear based on his frequent criticism of the Organization of the Petroleum Exporting Countries.

US Lawmakers have already introduced a version of the “No Oil Producing and Exporting Cartels Act,” or NOPEC, in May to address what US Congress believes is OPEC price rigging.

Various iterations of the of the bill have been tabled since 2000, but both George W. Bush and Barack Obama threatened to use their veto power to halt it from becoming law given the stratic important of Saudia Arabia in maintaining peace in the middle east. However, the considerable tail risk for oil prices is that President Trump could break with this president to deflect the knock-on effect of his administration’s foreign policy, ahead of midterm elections, which has effectively resulted in higher oil prices.

Regardless, oil traders are writing this off as idle banter given Saudi Arabia strategic importance in the middle east. But just as significantly using the US judicial system as an aggressive form of market intervention, sends off horrible signals to investors, not to mention the massive US oil and gas industry.

Gold Markets

Gold prices have been aggressively rallying overnight. Rather odd that the USD is not leading this move that has triggered a significant and very convincing short squeeze. Remember that according to CFTC data GOLD speculative net positioning increased to its highest since December 2001 as prices declined for a sixth straight month in September. Accounts sold an additional 6,804 contracts in the week to September 25, according to the latest CFTC data published last Friday, bringing total net short positions to 17,648, the most since the week of December 11 2001.

Gold has moved higher overnight primarily driven by the return of safe-haven appeal, keeping Italy risks in mind. Interesting I was discussing that fact yesterday, that in the past when we were not dealing with a strong USD narrative, Gold would pop $15-20 higher in a heartbeat on EU contagion fears. Sometimes, it’s easy to be blind to the facts, especially when getting so accustomed to positioning gold off the US dollar moves. But with l tightness in Copper markets influencing the base metal complex higher. There’s likely some knock-on effect from that correlation as well; indeed, shorts are being caught out on this one, and weaker near-term stops above $1200 level are probably contributing the flow. But for a specific technical trigger, commodity traders were focusing a Gold cross currency relationship, and it was the break of Gold vs EUR 1030 that triggered the short position carnage.

Currency Markets

The Euro
Claudio Borghi is the head of the budget committee in Italy’s lower house and unsettled markets by saying Italy would have solved fiscal problems with its currency. Indeed “Italexit” concerns have triggered a massive wave of risk aversion, but one would think the EURO should be trading much lower. Sometimes trader psychology can win over logic near-term, as traders get antsy about the risk-reward of selling EURUSD below 1.1500. I think the NFP along with US market absorbing the waves of risk aversion is causing some traders to profit take on shorts. However, is we do break the 1.1500, on full blow Italy risk, all hell could break loose, and the EURUSD could easily topple to the 1.1300 handles.

The Japanese Yen
The yen is strengthening on risk aversion but comfortable holding above secondary support levels buffeted  by US interest rate differentials

The Malaysian Ringgit

Asia risk sentiment trades poorly in Asia as a toxic elixir of weaker China PMI, stronger USD and escalating geopolitical tension in the South China Sea. And factoring in the Italy risk, and slightly lower oil prices, we should expect the Ringgit to trade with a defensive posture today.

Media

Join me live from the studio on 938Now at 6:50 AM SGT  Oct 3, discussing overnight price action 938 Now Singapore

Join me live in studio on Channel News Asia at 7:30 AM SGT Oct 3 discussing  ASEAN currencies and oil prices Channel News Asia

Join me via remote  on  Sky Biz Australia  at 2:30 PM SGT Oct 3  discussing currencies and commodities  Sky Biz your money