OANDA Market Insights podcast (episode 35)

OANDA Senior Market Analyst Craig Erlam review the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Global market sell off, IMF warns Italy, Chancellor optimistic on Brexit, Crude slumps on market uncertainty.

European Open – Markets pare losses into week end

Stocks pare losses as we head into the weekend

Investors look set for a day of reprieve on Friday, as futures and Asian trade overnight suggest we’re not on course for a third day of a selling frenzy.

Stock markets in Asia overnight have rebounded fairly well, with indices posting decent gains, although this does little to change the narrative of the week which has been quite brutal for investors. While everyone has been desperately trying to explain what the catalyst for the sudden and sharp sell-off was, the fact is that there is clearly underlying vulnerabilities and it didn’t take much for investors to flood for the exit.

Perhaps this is just a necessary and normal correction but the scale of the losses in such a short period of time are worrying. We may be seeing a paring of those losses heading into the weekend but that doesn’t give me any real confidence that markets won’t start next week in much the same manner as they’ve spent much of this.

Asia market update

Oil 1% higher as traders test the water following 8% decline from last week’s peak

Oil has been fully caught up in the frenzy over the last couple of days, with the sell-off possibly providing an ample opportunity for those that have profited from its more than 20% gains over the last couple of months alone, to lock in some profits. I don’t think it’s changed the view of many that oil could have further to run, rather they may see the last couple of days as being a blessing given the levels we’re now at.

Oil (WTI and Brent) Daily Charts

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Brent and WTI are around 1% higher on the day after falling around 8% from last week’s peak. Whether they can build on these gains will depend on how risk appetite holds up over the course of the day and, more importantly, on Monday once everyone has had an opportunity to absorb the events of this week and decide whether there’s any substance to the sell-off or it’s just a knee-jerk overreaction that presents opportunities.

Gold gains most in more than two years

China posts record trade surplus of $34.13 billion with the US in September

For all the talk of trade wars being easy to win, the trade data we’ve seen this morning suggests it may not be quite so straightforward. It would appear that when you throw a floating exchange rate into the mix – a sensitive issue in itself after the Treasury department found China not to be a currency manipulator, despite Trump’s constant claims to the contrary – the surplus country can be quite well shielded from tariffs while the deficit country will face quite the opposite reality.

This would appear to be particularly true when the deficit country’s economy is boiling hot and tax reforms mean the consumer has a few extra dollars in their pocket to throw around. While this trend isn’t expected to continue as the tariffs become increasingly harsh, more consumer goods are thrown into the mix and pre-emptive order flow passes, it will no doubt be infuriating Trump and pleasing those that oppose such measures.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

European open – Trump attacks Fed as markets tank

Bloodbath in Markets as Trump Points Finger at the Fed

European stocks are set to become the latest casualty in the global sell-off that has rattled markets over the last 24 hours, as investors worry about the potential for a sharper correction on the back of rising bond yields.

It’s been something of a bloodbath overnight, as investors saw what occurred in the US – despite there being no clear catalyst for such a move – and dashed for the exits as fears grow that global risks are mounting and the bill is coming due. While people are naturally pointing to the bond market to explain the sudden panic – most notably Trump who’s been laying the groundwork for blaming the Fed for the last couple of months – I wonder whether the underlying risk in the markets for some time has left market primed for a correction and investors have simply fled at the first sign of danger.

Trump was extremely quick to point the finger of blame at the central bank for raising rates too quickly, but as the CPI data is expected to show today, inflation is running above target despite its actions and the absence of more rate hikes could accelerate that. As is to be expected, Trump is not going to want to accept any responsibility himself for huge tax reforms that provided significant stimulus in an already hot economy, forcing the Fed to hike faster than they may have wanted, or for creating risk in the markets by starting a trade war with China, but that is what is playing out here.

There is the potential for this to be nothing more than a brief shock that markets quickly recover from but the proximity to the mid-term elections in the US could make it problematic for Trump if it turns into more. That more than likely explains why Trump has been laying the groundwork in recent months, in preparation for such a scenario so the seed of blame has already been planted, enabling him to quickly come out on the attack as he has.

Asia Market Update: Worst case scenarios abound

Oil traders lock in profits as sell-off takes hold

It’s not just equities that have suffered the wrath of the bond sell-off, oil bulls also appear to have been run over in the process, with Brent and WTI falling a few percent on Wednesday and extending those losses today. Oil has been scaling long-term highs in recent months and attracting a lot of attention as the US sanctions on Iran prepare to come into effect.

The sell-off on Wednesday and today has prompted some profit taking in oil markets, which should prove temporary as long as the broader sell-off doesn’t worsen too dramatically. It will be interesting to see how quickly traders look at the sell-off in oil and seize the opportunity to buy the dips in an asset that was widely seen as being very bullish only a week ago. Of course, if the recent selling is a sign of more worrying weeks and months to come then you would expect oil prices to suffer as well, particularly if the selling is preceding an anticipated slowdown in the global economy which naturally affects demand.

Pace of equities’ declines slows as Asia mulls Wall Street weakness

Bitcoin status as “gold 2.0” falters as cryptos caught up in selling

The sell-off also appears to have stretched to more exotic instruments, with bitcoin neither displaying the qualities one would expect of gold 2.0, as it has been touted as by some cryptocurrency enthusiasts, or simply escaping relatively unscathed as a new and relatively uncorrelated asset. This truly is a widespread sell-off and anything perceived as a risky asset has been in the firing line. What will be interesting is whether this will be enough to force bitcoin below $6,000 which has proven to be something of a floor for the crypto on numerous occasions this year.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

European update – GBP/USD pares gains after data

Investors remain risk averse as multiple concerns weigh

Relatively flat sessions across much of Asia and some weakness in Europe on Wednesday is taking its toll on US futures ahead of the open on Wall Street.

There are a number of worries for investors right now, from the pace of rising bond yields and the impact on investor sentiment, to Italy’s populist coalition playing a game of chicken with the European Commission, stalling Brexit negotiations and the ongoing trade conflict between the US and China. This is all taking its toll on investors and while the US may have recently scaled record highs, supported in a major way by tax reforms passed late last year and the economic fallout from them, others are not faring as well and the longer it goes on, the more it’s likely to catch up with Trump as well.

No one getting too excited despite increasingly positive Brexit reports

The UK is very much in the spotlight this morning, following reports that progress has been made on the Irish border. While traders are yet to get too excited about the prospect of significant progress despite the fact that we are now a week away from the EU summit, at which leaders had previously hoped to have a deal in place to sign off on. It’s been a long time since this was seen as a realistic target but time is running out and at the next summit in November, the pressure will be significantly higher to have an agreement in place or no deal Brexit is going to become increasingly likely.

It does seem over the last 24 hours that reports have been becoming more positive, which has been reflected in the currency but we’re yet to hear anything of substance and fatigue may be setting in from all of the vague and at times, unfounded, claims that’s keep filtering out. There does seem to be something more to the more recent comments but traders are being patient, for now.

European open – Brexit reports provide early lift

UK economy flat lines in August

Sterling has been paring gains since the start of the European session and the raft of UK data hasn’t done anything to put a floor under it. GDP data for August was a little disappointing as the economy didn’t grow following a bumper month in July. It would appear the consumer buzz from the unusually good summer and World Cup has worn off, which was to be expected at a time when the consumer is feeling the squeeze following a period of negative wage growth. The July data was revised higher though which offset the disappointment from the August data.

GBPUSD Daily Chart

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Other figures released alongside the GDP data were a little better with manufacturing and industrial production data exceeding expectations on the month, while numbers for July were also revised higher. Unfortunately, accounting for such a small portion of the economy, this failed to get traders too excited and instead we just saw a collective shrug of the shoulders. As has been the case for some time, politics is driving markets right now and the data just doesn’t have the sway it once did.

Pound extends gains on Brexit noise

Oil slightly lower as Hurricane Michael upgraded

Oil markets remain a particular point of interest having recently risen to 2014 levels and threatening to go higher. It has lost some of its spark over the last week as traders lock in some profits but we’re not yet seeing much appetite for lower prices. With Iranian sanctions coming next month and Hurricane Michael – following its upgrade to category four – threatening some near-term output in the US, the bulls may still feel pretty confident.

The IMF’s warnings on global growth on Tuesday may also have weighed a little but broadly speaking, I think few were surprised at the lower revisions given the environment we currently find ourselves in.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

European open – Brexit reports provide early liif

Robbins and Barnier make progress on Irish border

A relatively mixed session in Asia overnight has provided little direction for Europe markets ahead of the open on Tuesday, although it would appear investors haven’t been short of news flow to get their teeth into.

Reports overnight that “meaningful progress” has been made between Theresa May’s chief negotiator Olly Robbins and EU Brexit negotiator Michel Barnier – much to the annoyance of UK Brexit negotiator Dominic Raab I imagine – helped the pound hang on to earlier gains as we enter into a real crunch period for exit talks. Naturally, the report lacked any useful detail but that is something we can hopefully hear more about in the coming hours or days, if this is in fact true which isn’t always the case.

GBPUSD Daily Chart

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Sterling traders – who have been very sensitive to any Brexit-related speculation – were surprisingly unmoved by the reports which emerged late in the evening, although this may simply reflect to constant flow of news we’ve been getting and that this represented more of the message we had been seeing spill out throughout the day. Still, it’s rare cause for optimism, although there’s clearly still some way to go.

Pound extends gains on Brexit noise

Tria seeks to calm investors but stands by budget

Italy has emerged as a greater cause for concern for Europe recently, with the populist coalition of the eurosceptic right and left seizing the first opportunity to collide with Brussels only to find that it is in fact investors that represent a greater risk to their budget plans. Yields on Italian debt have spiked recently after the government proposed widening its fiscal deficit in order to stand by its election promises, something that has drawn criticism from both the European Commission and investors due to both the impact on its already huge debt levels and it’s unrealistic assumptions that risk it missing targets.

Italy’s Finance Minister Giovanni Tria has attempted to take a more calm approach in light of rising yields – very different to the hostility shown by his colleagues to both Brussels and the markets – in an attempt to ease some of the pressure on Italian debt but this is failing to calm fears. Tria stood by the need to spend more and generate more growth but urged calmer discussions with Brussels. Taking on Brussels, providing overly optimistic forecasts and attempting to fuel euroscepticism in the country isn’t the best way for the government to keep investors on side, much to the annoyance of the most vocal anti-establishment figures in government.

OANDA Trading podcast : CNH and IDR insights with MONEYFM 89.3

Dollar softens as Trump once again attacks Fed hikes

The dollar has been given some reprieve after US President Donald Trump gave his two cents on the central bank – not for the first time – claiming once again that he’s not too pleased with the pace at which they’re tightening. Trump has taken it upon himself to regularly chime in on the decisions of the independent central bank, something a President would typically refrain from doing so as to avoid blurring the lines between the two.

US Dollar Index Daily Chart

Source – Thomson Reuters Eikon

Some see this as a desire on his part to have more control over interest rates – which may be true – but I think it’s much more simple than that, a force working against him is an annoyance and he’s laying the groundwork early to direct the finger of blame at when the economy stumbles and markets slip.

Oil pares gains as IMF lowers growth forecasts

The latest IMF forecasts could be taking some of the spark out of the oil rally in the near term, with lower growth naturally weighing on demand. Oil continues to be well supported though as Iranian sanctions prepare to come into force, taking significant supply out of the market, while Hurricane Michael in the US is expected to provide some additional near-term supply disruptions.

Brent and WTI Crude Daily Charts

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Oil falls to $83 as Iran sanctions near

Oil dropped to around $83 a barrel on Monday, pressured by expectations that some Iranian oil exports will keep flowing after the U.S. re-imposes sanctions, easing a strain on supplies.

Two companies in India, a big buyer of Iranian oil, have ordered barrels in November, India’s oil minister said on Monday. The Trump administration is considering waivers on sanctions, a U.S. government official said on Friday.

Reuters

Oil drops 1 pct on US Iran waiver talk

Brent crude oil prices fell by more than 1 percent on Monday after Washington said it may grant waivers to sanctions against Iran’s oil exports next month, and as Saudi Arabia was said to be replacing any potential shortfall from Iran.

Hedge funds cut their bullish wagers on U.S. crude in the latest week to the lowest level in nearly a year, data showed on Friday.

Further weighing on prices, Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said there was also “chatter that Saudi Arabia has replaced all of Iran’s lost oil”.

But Innes warned that limited spare production to deal with further supply disruptions meant “the capacity is quickly declining due to Asia’s insatiable demand”.

Reuters

OIL dips below Brent 84.00 on Saudi supply talk

Oil in London extended losses below $84 a barrel after Saudi Arabia said it can tap its spare production capacity immediately to offset any declines in Iranian crude exports due to American sanctions

Brent fell as much as 1.1 percent, after retreating 2.5 percent in the past two sessions. Saudi Arabia is pumping about 10.7 million barrels a day and can add another 1.3 million, the kingdom’s crown prince said in an interview. Meanwhile, the Trump administration was said to be in talks with countries that want to continue buying Iranian crude after sanctions resume Nov. 4.

Oil has eased after rallying to a four-year high above $86 a barrel in London last week. Still, traders remain concerned the Organization of Petroleum Exporting Countries and its allied producers aren’t raising output quickly enough and that they may not have the capacity to fully cover a decline in exports from the Persian Gulf state.

“OPEC’s spare capacity issue has been the oil markets biggest mystery for some time with most of that debate falling around mega-producer Saudi Arabia,” Stephen Innes, head of Asia Pacific trading at Oanda Corp. said in an emailed note. “The problem is that the capacity is quickly declining due it Asia’s insatiable demand.”

Bloomberg

OANDA Market Insights podcast (episode 34)

OANDA Senior Market Analyst Craig Erlam and Stephen Innes, Head of Trading Asia review the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Bond yields spike, US jobless rate hits 49 year low, Italy launches ambitious budget plan, India the latest EM concern, Brexit and more.

 

OANDA trading Asia market update

Asia trading update

Asia market continues to observe the Euro move lower, primarily from the sidelines as local trader keep ploughing all into the short AUD trade which offers both a proxy into China risk and a pragmatic play versus the widening  US interest rate differentials,  as the RBA sits in the realm of dovish G-10 central banks.

AUD/USD breaches 0.71 despite positive trade data

But on the EURUSD,  according to data compiled by Bloomberg, there’s a chunky 1.1450 call strike with a notational 1.5 billion expiring Oct 5 / 18, which could be a significant battle zone over the next 24 hours.

Chinese Yuan
We are starting to see and fell some regional markets consternation with USDCNH breaking above 6.90 which was previously thought to be a Pboc line in the sand, but most market participants were convinced it somewhere toward the 7.0 USDCNH, none the less its rising more than a few eyebrows from local investors. However, I’m not viewing this move as anything but the bullish dollar narrative unfolding and post FOMC. I continue to see the FOMC move restrictive territory if the data support and the terminal Fed fund rate higher, and it’s improbable that the US Treasury can make any argument for currency manipulation in this case.

The markets are looking for a possible test of 6.93-95 level as this bullish dollar narrative unfolds after the key 6.90 USDCNH gave way.

Asia Stocks
Asia stocks are not faring so well which is not so untypical when the USD dollar strengthened markedly versus Asian currencies notably vs the Yuan which is a crucial bellwether of local sentiment. But with US Treasuries busting a move higher even local bond investor is looking stateside at juicy bond yields. And while I very much in the bullish long-term camp for Asia equities, I think the resulting flights of capital via regional market rotation out of Asia into the US is just part of a natural portfolio rebalancing act on the initial wave of dollars strength and should not be construed as a significant regional risk-off bias

No central bank in the world has anywhere near the war chest the Pboc has to the right the ship. It will take some patience, but three months down the road we should start to see a shift higher in mainland economic data after the Pboc stimulus efforts.

Oil markets

I’m desperately trying not to be unabashedly bullish. But Brent remains firm and unshakable no matter what’s thrown at it. Whether a vast US inventory builds, or Saudi and Russia supply, the markets stay unwavering and singularly focused on Iran sanction and the ambiguity 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 demands.

Saudi -Russia supply and a huge US inventory build tempers Oil bulls