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

Safe haven currencies fact or fiction ?

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 24, 2018 – September 30, 2018. Featuring Stephen Innes Head of Trading Asia Pacific at OANDA 

It has been a roller-coaster ride for the global financial markets this year. Rising trade tensions, greater geopolitical risks, slowing growth and higher interest rates are all coming together to make it an even more challenging year for investors.

The unravelling Turkish lira crisis saw the currency plunge 17% in August. From January to August, the lira lost 44% of its value, making it the worst performing currency in the world so far this year. This has put financial markets on edge and the contagion is spreading to other emerging-market currencies

There is a growing view that there has been a shift in the perception of what constitutes safe-haven currencies as the traditional ones are no longer as compelling. A case in point is when the Dow Jones Industrial Average and the S&P 500 recorded one of their sharpest dives since 2011 in February, the US dollar did not see the kind of activity that it used to.

Stephen Innes, head of trading for Asia-Pacific at currency solution provider Oanda, is of the view that traditional go-to currencies such as the yen and Swiss franc have lost some of their appeal. “We saw an escalation in regional tensions during the Korean peninsula crisis last year, which was a big deal for investors initially. When the rockets started firing, the markets immediately went to the yen, which traditionally has been a safe haven,” he says.

“They do this simply because of the proximity of Korea to Japan and the fact that there is strength in the yen. It is the typical go-to trade when risk aversion happens. Japanese traders are so prominent internationally that they too want to defend any heightened risk aversion and bring funds back home,” he adds.

“However, what we have seen lately is that this energy has somewhat weakened, in the sense that safe-haven currencies no longer have the same appeal they used to, perhaps because the political tensions occurring right now seem to have a very short shelf life. They can dissolve very quickly. So, when traders start to see risk aversion, they start buying risk-averse assets instead (such as US bonds), and that is supporting the overall markets.

“We have seen many crises over the last few years and traders are taking the view of, ‘Okay, we have seen that before. What’s next?’”

When traders and investors buy into risk aversion, they bypass the need to park their money in safe-haven currencies, says Innes. “Typical safe havens have lost their lustre. Take gold, which used to have a huge safe-haven appeal. But now, investors do not seem to care that much,” he adds.

“This seems to be the case with safe-haven currencies. Investors are quite comfortable parking their money in the US dollar now because of the rising interest rates and US equity markets do not seem to want to stop moving up.”

The Swiss franc — long considered a safe haven currency — has gone through upheavals of its own. In 2015, the Swiss National Bank shocked financial markets when it removed its currency peg to the euro.

The panic reaction to the “Frankenshock” saw the Swiss currency surge 30% against the euro and sent stocks plunging. So far this year, even with the rising trade war tensions, analysts observe that the Swiss franc has weakened against the euro.

Innes points out that currencies such as the Swiss franc, euro and pound sterling are not performing as they did in the past. “While I think the Swiss franc has some safe-haven appeal due to its neutrality in Europe, the appeal has diminished as markets are still suffering due to the fallout from the Swiss National Bank crisis. Confidence has been impacted.”

Stephen Innes, head of trading for Asia-Pacific at currency solution provider Oanda, says it has become more challenging to hedge financial risks with traditional safe havens not reacting the way they once did. “We have seen safe havens perform quite well in the past when risk escalates. But now, it gets to the point where it would only be a knee-jerk reaction and then the problem dissipates. Sometimes investors can get caught in these knee-jerk reactions when they move into these safe havens while traders are sitting at the bottom, waiting to taking advantage of the depressed levels,” he adds.

“Provided that the US economy is going to be robust, the markets are pretty comfortable buying risk at any juncture, even political or a big escalation in tensions in the Middle East or another escalation in the Korean peninsula. If there is a sell-off in the markets, I think investors — knowing that this will probably be part of the global growth in the next few years — are still willing to buy, even in risky markets. I think investors have deeper pockets these days, whereas the Asian economies are nowhere nearly as risky as they were 10 years ago.”

That is why typical riskier currencies still have appeal in the markets when they are wobbly, says Innes. There are no huge sell-offs like before and this translates into less of a need to retreat to safe havens for institutional investors.

“Markets and investors tend not to be panicky now. As the US economy is doing so well, what investors are willing to do is continue adding US dollars when there is risk,” he says.

“Investors are now ready to see the light at the end of the tunnel and actively re-engage local economies again, realising that we are not going to have another Asian financial crisis. The economies are sturdier and the currencies are a lot better.”

He adds that investors are looking for opportunities to re-engage riskier assets such as those in emerging markets, like China. “Investors are set to re-engage with the likes of Malaysian stocks and Asian markets. These are so-called riskier markets, but there is still a lot of appetite and anticipation that Asian markets will continue to grow.

“There is going to be wealth creation [in this space]. What is going to happen ultimately is that people will get wealthier. And as they do so, their appetite for more expensive products will grow. This adds to the underlying economic fundamentals [of a country] on the base level. That is why people are maintaining a bullish attitude despite the fact that trade tensions could escalate.”

However, if there is a meltdown in the global equity markets, the flows will go back into traditional safe havens such as the yen because ultimately, that big shake in the markets will still result in investors trying to find a safe hiding place, says Innes. “That is when traditional safe havens will come back to the fore again. Right now, that is not happening,” he adds.

“We are not seeing negativity in the equity markets, especially with the economic policies put together by the Trump administration, like tax breaks for large corporates which, in theory, should bump up corporate profits over the next couple of quarters. So, investors still feel comfortable buying into the US markets.”

Cover Story Edge Markets Malaysia

Risk sentiment is shifting and headline-driven

Tuesday Oct 2: Five things the markets are talking about

Capital markets are in a sombre mood as a number of reasons for caution come to the fore.

Brexit rhetoric and the Italian government’s fiscal plans top the agenda, followed closely by trade deals and tariffs and political drama in Washington.

Amid the risk-off mood the ‘big’ dollar again has found support against G10 pairs. Euro stocks and U.S futures are currently following Asian declines, as Treasuries and bund prices advance.

The EUR (€1.1517) remains under pressure for a fifth consecutive day, pressured by remarks from Italy’s Deputy PM Luigi Di Maio that they will not change its budget deficit targets despite pressure from Brussels and its E.U partners.

Elsewhere, the pound (£1.2960) succumbs to Brexit rhetoric at the Conservative Party annual conference.

On tap: Fed Chair Powell is due to speak (12:45 pm EDT) about the outlook for employment and inflation at the National Association for Business Economics Annual Meeting, in Boston. Audience questions expected.

1. Stocks mostly see ‘red’

Asian equity markets traded generally lower as China remains on holiday, with Japan being the exception.

In Japan, the Nikkei edged up to a fresh 27-year high overnight, building on recent strength thanks to upbeat earnings hopes, mostly on the back of a weaker yen. The Nikkei share average ended +0.1% higher, while the broader Topix was up +0.3%.

Down-under, Aussie shares closed at their lowest in more than three-months overnight as financial stocks extended losses following a Royal Commission interim report on the sector. The S&P/ASX 200 index fell -0.8%, after dropping -0.6% on Monday. In S. Korea, stocks saw their worst day in nearly two-months on heightened U.S-China tensions. The Kospi fell -1.25%, marking its biggest percentage loss since August 13.

In Hong Kong, stocks also fell overnight on signs of weakness in China’s manufacturing sector. Resuming trade after a public holiday yesterday, the benchmark Hang Seng Index was down -1.64%.

In Europe, regional bourses open down across the board with Italy at the fore, as concerns over Italian finances keeps risk sentiment depressed. Four year high Brent prices are supporting energy stocks. The financial sector remains the worst performer.

U.S stocks are set to open in the ‘red’ (-0.4%).

Indices: Stoxx50 -1.2% at 3,374, FTSE -1.1% at 7,447, DAX -1.0% at 12,220, CAC-40 -1.1% at 5,449, IBEX-35 -1.2% at 9,297, FTSE MIB -1.4% at 20,324, SMI -0.7% at 9,060, S&P 500 Futures -0.4%

2. U.S oil hits four-year peak ahead of sanctions on Iran, gold higher

Earlier this morning, U.S oil prices hit their highest level since November 2014, while Brent crude trades atop of yesterday’s four-year high print, as markets prepare for tighter supply once U.S sanctions against Iran begin to hit in November.

U.S West Texas Intermediate (WTI) crude futures are at +$75.90 a barrel – WTI has rallied +18% since mid-August, while Brent crude oil futures are at +$85.28 per barrel, up +30c, or +0.4%, from Monday’s close. Brent has risen by more than +20% from its lows in August.

Market sentiment also got a boost from yesterday’s announcement of a “new” trilateral pact between the U.S, Mexico and Canada (USMCA), saving a +$1.2T a year open-trade zone that had been on the verge of collapse.

Iran’s oil industry, which at its most recent peak this year, supplied +3% of the world’s almost +100M barrels of daily consumption. U.S sanctions are set to start on Nov. 4.

Ahead of the U.S open, gold prices have found some support as risk appetite wanes, one day after getting a boost from the USMCA deal. Spot gold is up +0.5% at +$1,193.80, after declining about -0.3% in yesterday’s session. U.S gold futures are +0.5% higher at +$1,197.60 an ounce.

3. BTP/Bund yield gap at its widest in five-years

The Italian/German 10-year bond yield spread trades atop of its five-year highs as eurozone officials warned of a return to crisis days and an Italian lawmaker said most of Italy’s problems would be solved if it returned to its own currency.

As Italian bond yields surged +11-20 bps, the yield premium investors demand to hold Italian paper over German debt shot higher. The BTP/Bund 10-year bond yield gap has widened out to +302 bps.

Note: Bunds remain exposed to opposing forces, with safe-haven runs triggered by Italy jitters pushing German yields lower, but expectations of rate raises by the ECB next year is pointing to higher Bund yields.

The yield on U.S 10’s has decreased -2 bps to +3.06%. In Germany, the 10-year Bund yield has decreased -3 bps to +0.44%, the lowest in almost three weeks, while Italy’s 10-year yield has gained +12 bps to +3.421%, the highest in more than four-years.

4. Pound under pressure

As the market waits for PM May’s new Brexit draft proposal on the Irish border, uncertainties continue to threaten sterling (£1.2966) and this morning’s weaker construction PMI survey has caused it to fall further. Sterling fell to a three-week low of £1.2957, from 1.2987 beforehand, after data showed construction PMI fell to 52.1 in September from 52.9 in August, signalling “the weakest upturn in output for six-months.”

The EUR (€1.1517) continues to decline falling over -0.4% against the U.S dollar and -0.6% against the Yen (€130.98) on Italian Budget uncertainty.

Down-under, AUD/USD (A$0.7173 down -0.77%) has retraced earlier gains after the Reserve Bank of Australia (RBA) left rates on hold (see below), while the NZD/USD has declined after yesterday’s NZIER Business Confidence (-30 vs. -20) fell to the lowest level in nine-years.

5. RBA rate statement

It was as expected from the Reserve Bank of Australia (RBA), leaving the key policy rate at record lows (+1.5%) and traders with the impression that the RBA plans to remain sidelined for some time.

Nevertheless, Governor Lowes’s big concerns remain low wage growth and higher debt levels – a potential combo that could dissuade consumer spending and in turn ‘slows’ the country’s economy.

However, global expansion and recent domestic growth are positives and the RBA continues to expect GDP growth of more than +3% through 2019 and for the unemployment to drift down towards +5% over time.

Forex heatmap

USD is still very data-dependent , so it will be tricky to trade

For any follow-up, I’m contactable  on Reuters Messenger, via the BBG terminal or my mobile numbers

USD is still very data-dependent, so it will be tricky to trade

US Rates 

The markets are pricing in a higher probability of the terminal rate over 3.5%, signalling a convincingly hawkish view from last week FOMC. Chair Powell’s language around a healthy economy while emphasising data dependency suggests the Fed will continue to hike well into the restrictive territory or at least until the data weakens. It appears Powell is not a big fan of FOMC  forward guidance and sees interest rate condition too loose. But when considering labour market tightness, which should eventually drive inflation higher, the markets are far too sceptical and now reversing out some of that pessimism as the Fed’s appear on course to raise quarterly interest rates for the foreseeable future.

Currency Markets
G-10 focus on CAD, EUR and JPY  

The USD is still very data-dependent so even with a hawkish nod from the Fed the US  Dollar will be tricky to trade.

Bloomberg is reporting U.S. and Canadian negotiators are close to a deal on NAFTA and there’s optimism it will be reached by the Sunday deadline — an outcome that would avoid an impasse that imperils $500 billion in annual trade, people familiar with the talks said.

There’s renewed urgency to nail down a new North American Free Trade Agreement that could be published by Sunday, so Mexican President Enrique Pena Nieto can sign it before he leaves office, the people said. The U.S. and Mexico reached their agreement in August, triggering talks between the U.S. and Canada, which are being held around the clock this weekend. (Bloomberg)


My View: steveinnes123

What’s interesting about this latest twist, is that The U.S. trade representative was expected to post text online this weekend that will lay out more of what Mexico has agreed to so far in NAFTA2. But the text was supposed to exclude details about Canada. Since the version was never posted online, could US trade representatives be holding it back, so they can post one for a trilateral agreement which includes a Canada provision? A lot of smoke signals on this call, and where there’s smoke there’s usually fire.

The Canadian Dollar

The implication for the Canadian dollar is enormous. Given the stellar GDP print last week, a data-dependent BoC governor Poloz, and skyrocketing oil prices, 1.28’s would seem like a lock. But with commodity Bloc of currencies expected to receive a fillip from rising hard and soft commodity prices, perhaps there is even more juice to be squeezed out if the Canadian dollar.

Mind you. I still find any deal on the eve of the Quebec, October 1, a bit of a stretch given the Liberal political fallout ( provincial and federal)from any concessions around the dairy industry, as the bulk of Canada’s Milk industry is based in Quebec. The most recent IPSOS poll shows the provincial Liberals and Coalition Avenir Quebec in a dead heat. Quebec produces about 50 per cent of Canada’s dairy, and its agricultural sector is roughly the size of Ontario’s automotive industry. None the less the market remains on  NAFTA watch.

The Euro

The Italian budget aside, since EU inspired political wobbles do tend to have a very short half-life effect on Euro sentiment,  higher US interest rate expectation amidst the backdrop of divergence between the Fed and the ECB, even more so after the tepid Eurozone inflation print on Friday, will underpin US dollar sentiment. The eurozone economic recovery is so uneven that the EURUSD could move lower for no other reason that the robust US economic story. Traders will probably look to re-engage EURUSD shorts on upticks.

The Japanese Yen

If the NKY and US 10 y yields continue to track higher, there is no reason the markets shouldn’t take out 114 this week. However, counter to my original thoughts that the USDJPY was an under-owned position, the latest CFTC data is painting a decidedly different picture as Yen shorts are at the highest level since early March. However, these derivative positions could have different paths of dependency than strictly the USD. So with US interest rates set to rise for the foreseeable future albeit with caveats that the US economy doesn’t go into the tank,  Regardless, with US interest rates set to rise for the foreseeable future albeit with caveats that the US economy doesn’t go into the tank, USDJPY should move higher.

The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent.  While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.

Asia EM 

Malaysian Ringgit

The two primary competing narratives, surging Oil Prices vs higher US interest rates should see the MYR trading with a neutral to negative bias this week. The fact that there has been limited positive follow through from skyrocketing oil prices suggests investors remain incredibly nervous about the rising US dollar and higher US interest rates. Mind you my views up until last weeks FOMC was swinging like a pendulum on the Ringgit, but with Chair Powell making headway for Fed hawkishness, in contrast with a neutral to dovish BNM bias, my MYR  lean is shifting negative over the short term.

Non-Farm Payroll already in focus

Little more than a week after the FOMC, Friday’s US Non-Farm Payrolls take on the tremendous importance for near-term USD momentum as a critical focus will fall on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates. Indeed, this week will probably go out with another sonic boom!

US Equity Markets: higher US interest rates should eventually factor.

US equity markets remain on solid footing supported by the impervious tech sector. For the time being US stock markets are showing incredible reliance in the face of higher interest rates and a possible escalation in the US-China trade war, as markets remain buoyed by the robust domestic economy. But at some point, the disconnect between the US and the rest of the world economies will flow through the asynchronous global growth feedback loop. But when you start factoring in higher US interest rates and the Feds dogged determination to drain the punch bowl, we could be nearing that turning point as the markets have been living on cheap borrowed money for some time. Eventually, higher US interest rates will become a significant negative factor.

China Markets: Manufacturing PMI wobbles 

Not surprisingly China’s official factory barometer decelerated more than expected in September, while the index for services and construction unexpectedly picked up.

The manufacturing PMI registered a disappointing 50.8 in September versus 51.3 in August, lower than Bloomberg survey median estimate of 51.2, but remains marginally above contraction. But the non-manufacturing PMI picked up to 54.9, versus 54.2 in August, so a bit of saw off, even more so when you factor that China is de-emphasising exports in favour of domestic demand.

While tariffs are causing some fraying at the brick and mortar level, China continues to support the demand side of the equation so while the manufacturing PMI is weak, the decline is not entirely uncontrollable.

Oil Markets

Brent crude finished the quarter most spectacularly as the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refinery was cutting back on purchases.

As reported by Reuters Singapore on Friday:

“China’s Sinopec Corp is halving loadings of crude oil from Iran this month, as the state refiner comes under intense pressure from Washington to comply with a U.S. ban on Iranian oil from November, said people with knowledge of the matter.”


Show me the barrels 

So, given the  evolving China refinery narrative, until sizable supply is offered up by OPEC, ultimately traders will continue to push the envelope even more so with rampant speculation running amok  that US$ 100 per barrel  Brent is not just an oil pipe dream

So, what’s the next bullish catalyst?

Over the weekend U.S. President Donald Trump called Saudi Arabia’s King Salman, and they discussed efforts being made to maintain supplies for the market, stability and global economic growth, state news agency SPA reported late on Saturday.

But let’s make no mistake, higher oil prices bring tears of joy to oil producer including those in Texas and Oklahoma. And while Saudi Arabia continues to make concessionary overtones, but the real question is even if they wanted to bend to President Trumps wishes, how much spare capacity does the Kingdom have?   We’re going to find that out very soon as approximately 1.5 million barrels of Iranian oil is effectively going offline on November 4. If the market senses that Saudi Arabia capacity is tapped out at 10.5 million barrels per day, despite their fabled bottomless well, oil prices will rocket higher with the flashy $ 100 per barrel price tag indeed a reasonable sounding target.

The Middle East powder keg 

The Middle East  smouldering embers are set to ignite again as the New York Times reported that the US is evacuating its consulate in Southern Iraq because of attacks in recent weeks by militias supported by the Iranian government.“Iran should understand that the United States will respond promptly and appropriately to any such attacks,” Mr Pompeo said in the statement

The New York Times

At a minimum, this could derail any of those thoughts Tehran had of circumventing US sanctions by making side deals to supply oil to Europe. At maximum, further escalations by Iranian backed militias could see the US administration foreign policy hawks take flight. And don’t take John Bolton’s comments at the UN general assembly as an idle threat, ”  If you cross us, our allies, or our partners; if you harm our citizens; if you continue to lie, cheat, and deceive, yes, there will indeed be hell to pay.” Bolton is foreign policy hawk #1 and is all business when to comes to beating war drums,  even more so when  Any signs of growing unrest Iran is the target. Political noise in the middle east is usually positive for oil prices.

Gold Markets

A reality check as spot gold sold off very aggressively as the US dollar started to reassert itself on Friday. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling head over heels, the $1190 trap door gave way and selling intensified as stop losses triggered, and short-term leveraged players raced to get downside exposure. However, the sub $1190 move was retraced heading into the weekend as the traders realised they were neck deep in oversold territory and frankly, they ( we) needed the weekend to reflect on what just happened!!

It could be a make or break week for golds near-term ambitions, and the story will likely unfold at Friday’s  US Non-Farm Payrolls release.

Gold has been a seller’s market for some time, but with $1190 level yielding, we’re now firmly in the gold bear zone and as such with the USD dollar likely to strengthen on the back of widening interest rates differentials, selling activity could intensify with speculators likely to target the August low when the yellow metal hit $1160 before rebounding.



Please Join me on Bloomberg TV live from the Singapore Studio at 7:10 AM SGT Monday, Oct 1, discussing my views on the  RBA, Brexit and splashed with a bit of Brent and a sprinkled with  Iron Ore flakes.

  Bloomberg TV Asia

Later in the day, join  me on my weekly  France 24 TV European open spot  at 12:15 PM SGT discussing how Asia markets are faring today

 France 24 TV

OANDA Market Insights podcast (episode 33)

OANDA Senior Market Analyst Alfonso Esparza reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: US Fed hike s rate, Italians stocks plunge, oil set to spike.

An incredible end to Q3 could be an even bumpier ride   in Q4

An incredible end to Q3 could be an even bumpier ride   in Q4

Well, that was an astonishing end to  Q3 as we herald in what is certainly shaping up to be a bumpy ride in the markets for  Q4. While the eerily familiar themes will continue to dominate, US-China trade, NAFTA, Brexit and Italian budget which will confront traders at every twist and turn. But as US lawmakers rush to make final preparations ahead of what is shaping up to be a fierce midterm election run, headline risks will abound.

China markets will shutter for the Golden Week Holidays during the first week of the month. But focus is in PMI data none the less.

Not an overly busy docket next week, but on the data front, the granddaddy of them all, Non-Farm Payroll,  will be released next Friday and as usual the primary focus is on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates.  Recall in August wage growth accelerated the fastest since June 2009, an if the average hourly wages prints north of .4 % expectation, and given the USD has gained the upper hand again,  it could drive a stake through dollar bears hearts. Indeed a make or break report for USD’s near-term momentum.

On the Central Bank front, the RBA will announce there interest rate decision but absent inflation suggests the RBA’s half glass full approach to monetary policy continues but as usual there will be more focus on the policy statement.

Local EM traders will focus on the RBI rate decision. Given the RBI recent defend the Rupee at all cost stance, its widely expected the RBI will match the latest Fed hike.

Local eyes are on Singapore PMI data as the market is positioned for a rebound after last month manufacturing forecast fell to the lowest level since June 2017 as exports plummeted.

Oil Markets
Everyone is telling me my views are far too unabashedly bullish, but from my seat until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, its hard not to be blatantly bullish.

Brent crude oil finished the quarter in a spectacular note on Friday as concern over the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refiner was cutting back on purchases. WTI prices followed Brent higher.

Gold Markets
After falling to a fresh one-month low water mark as the USD was bullying around the Euro. Gold bounced off the intraday lows.But frankly, the Gold market is so oversold that we should expect consolidation to set in before the next leg lower. We’re in the domain of the Gold Bears who have August $1160 lows in their crosshairs.

Same view as Friday morning Singapore open note: 
A reality check as spot gold is selling off today as the USD continues to strengthen. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling overnight, the $1190 trap door gave way as Gold has fallen to $1183 just ahead of the COMEX end of NY break. Besides with the final reading of second-quarter GDP holding at 4.2%Thursday, its reinforced the Fed rate hike outlook for 2019. Gold has been a seller’s market for some time, but with $1190 yielding, bearish activity could intensify with short-term speculators likely to target the August low when the yellow metal hit $1160 before rebounding.

Currencies to keep an eye on next week

The Euro

EUR continues to leak lower as Italy’s government has shattered the budget and challenged the EU’s mandate. BTPs have driven a good chunk of the move lower. The Euro was holding on the 1.1600 handles by a thread, but the less -than -vigorous Eurozone September Core CPI came in lower than expected at 0.9%YoY (1.1% estimated, 1.0% prior) which sprung the 1.1600 trap door triggering a wave of stop losses as that fundamental and psychological level ceded.

Indeed, music to EURO bears ears as the ECB will be in no mood to signal a quicker pace of interest normalisation anytime soon. And with the Fed laying their cards on the table and guiding the markets to a December rate hike. While markets pulled off the intraday lows, the keep it simple pragmatic approach to this trade suggests the dollar remains in favour as US growth and positive USD differentials will stay supportive.

The Japanese Yen

For all the right macro reason spot USDJPY is looking to break higher, and if the NKY and US 10 y yields continue to track higher, there is no reason the markets shouldn’t take out 114 next week given the dollar is completely under-owned vs the JPY.

There are some chunky structural long EURJPY and a lot of underlying derivatives that add up to the same view but have different path dependency.
These positions are clearly at risk during this Italy induced panic as we leak near yet another psychological support level EURJPY 131. But the market pressure points are probably more towards EURJPY 130 level, so we could assume these positions will remain safe with USDJPY marching higher.

The British Pound
Its a mess and the markets are fraying beyond the fringe as signs of stress related to a potential No-Deal Brexit remains a significant possibility. Unfortunately, vols in GBP have rallied significantly of late, so buying the downside insurance to protect against a Hard Brexit fallout is rather expensive.

Cable is stuck in a broader range still getting knocked around by various Brexit headlines. It’s impossible to filter out the political nose so best to remain cautious on GBP as it’s tough to predict next rate move. There were a few hawkish tidbits from  Haldane and Ramsden this week albeit with caveats that the Brexit outcome is a smooth one.

The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent over the next few weeks. While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.

The Canadian Dollar

Canadian GDP was a beat at 2.4%YoY vs 2.2% forecast, showing a healthy bounce back in July after June weakness. It suggests upside risk to Q3 growth. And with BoC Poloz sounding very neutral and data dependent, CAD was able to hold onto gains. But ultimately CAD upside will be capped until trade talks between the US and Canada progress meaningfully. But 1.2700 on a NAFTA 2 signing looks possible given surging oil prices and a higher chance for a BoC rate hike on the GDP beat.

Lessons Learned

The big lesson learned last week was analysing the knee jerk reaction to Wednesday FOMC meeting which caused a rally across the US yield curve and temporarily weakened the US only for the move to be reversed out when the Fed chair Powell explained that both policy and financial conditions are still accommodative. Mind you, given the time zone difference in Singapore, all this happened while I slept and without knowing all the facts my initial knee jerk reaction, which I incorrectly elaborated in my morning note by castigating the FOMC for verbal gymnastics, could not have been further from the truth. In reflection, Jay Powell is a breath of fresh air, and by removing accommodative, he’s signalling that forward guidance should be removed as rates move toward normal, and that dot plot projections should be taken with a grain of salt as FOMC policy will be dependant on incoming data.

Media: Please Join me on Bloomberg TV live from the Singapore Studio at 7:10 AM SGT Monday, Oct 1, discussing my views on the  RBA, Brexit and splashed with  Brent and a sprinkled with  Iron Ore flakes.   Bloomberg TV Asia

Strong Dollar Awaits Jobs Report to Validate Further Fed Hikes

The US dollar is mixed against major pairs on Friday. The dollar gained against the JPY, EUR, GBP and CHF but depreciated against the commodity pairs (CAD, AUD and NZD).

Fundamental data in the US supported the dollar: the Fed delivered its anticipated third rate hike of 2018, the final GDP for the second quarter was 4.2 percent. Fed Chair Powell’s speech and press conference after the FOMC was a big factor in the rise of the dollar after the market had already priced in the 25 basis points lift to interest rates. Mr Powell will speak next week on Tuesday, October 2nd on the topic of employment and inflation. This will officially kick off jobs week in the US.

The main event will be the release of the biggest economic indicator on Friday, October 5 at 8:30 am when the U.S. non farm payrolls (NFP) is published.

  • US manufacturing and service PMIs could signal growth slowdown
  • UK leading indicators expected to remain flat
  • US NFP report to show economy added 190,000 jobs

Euro Hit by Political Turmoil and Inflation Softness

The EUR/USD lost 0.26 percent on Friday. The single currency is trading at 1.1610 and accumulated 1.16 percent in losses during the week. A higher than predicted Italian budget for 2019 at 2.4 percent and softer core inflation in the eurozone put downward pressure on the currency.

European stock markets were hit by the news as political turmoil once again threatens the European Union.

The other shoe dropped when inflation slowed down in the Eurozone in the same week that the U.S. Federal Reserve hiked rates and was optimistic about economic growth in the US.

The monetary policy divergence between the Fed and other major central banks was clear this week as fundamentals back the US policy makers, while questions remain on how effective other policy makers around the world have been.

Loonie Rises as GDP Data Validates October Rate Hike

The Canadian dollar rose on Friday after the monthly gross domestic product (GDP) beat the forecast with a 0.2 percent gain. The loonie is up almost 1 percent on the final day of the trading week. The currency is still showing a weekly loss against the greenback as NAFTA uncertainty and the U.S. Federal Reserve rate announcement put downward pressure.

The rise today comes with higher expectations of a Canadian interest rate lift in October. The Bank of Canada (BoC) held rates in September ahead of a highly anticipated Fed rate hike in September that came to pass. The US central bank has forecasted another rate hike in 2018 and 2 or 3 more next year as part of its economic projections published Wednesday.

usdcad Canadian dollar graph, September 28, 2018

BoC Governor Stephen Poloz spoke on Thursday addressing the rising inflation and Friday’s GDP data point puts a rate hike firmly on the table in the short term.

NAFTA negotiations have not made big inroads as the US met with Canada with the goal of turning two bilateral agreements into a trilateral one.

With a considerable amount of work still to be done in bridging the gap between US and Canada, the US-Mexico agreement will be published tonight with a possibility of leaving the door open for Canada to join.

It is that possibility that has kept the loonie gaining despite the NAFTA train moving without Canada.

Crude Surges as Supply Concerns Push Prices to 4 Year Highs

Oil prices surged on Friday as supply concerns took crude to four year highs. The news that China is cutting back on Iranian oil purchases triggered a rally where Brent and WTI had a 1.40 percent one-day gain. Brent is on track to a 5.34 percent gain during the week with WTI clocking in at 3.66 percent.

The US sanctions against Iran don’t kick into effect until November, but the harsh penalties threatened against those who do have made Iranian crude purchases drop.

West Texas Intermediate graph

China’s Sinopec Corp is slashing its loadings in half to avoid the wrath of Washington. In August Sinopec planned to offer Tehran a lifeline by circumventing the sanctions as it reduced US oil purchases due to the rising trade turmoil between the US and China.

The decision by the Chinese state owned energy company will deal a huge blow to Iran as China is its biggest customer.

West Texas Intermediate graph

The shortfall from Iranian crude sales does not have a short term solution after US Energy Secretary Rick Perry said earlier this week that the US would not tap into its emergency crude reserves to bring prices down.

US President Donald Trump had implied during his UN General Assembly speech that unless the OPEC increase production levels America’s would utilize its position as the largest energy producer in the world.

Gold Gains But US Dollar to Limit Recovery

Gold rose 0.67 percent on Friday but the strength of the US dollar after the U.S. Federal Reserve lifted interest rates this week proved to be too much for the yellow metal that will end up losing 0.49 percent on a weekly basis.

The Fed raised the benchmark rate by 25 basis points and the futures market is pricing in a 78.5 percent probability of a lift in December. Gold traders will look ahead at next week’s manufacturing and service PMIs for more guidance as the US economy continues to grow. Friday’s U.S. non farm payrolls (NFP) will be the final test of the yellow metal.

The US is expected to add 190,000 jobs with average hourly earning rising 0.3 percent. Higher inflation expectations validate the Fed’s forecasts and the market is pricing in a rate hike in December and follow ups in 2019.

Market events to watch this week:

Monday, October 1
4:30am GBP Manufacturing PMI
10:00am USD ISM Manufacturing PMI
Tuesday, October 2
12:30am AUD Cash Rate
12:30am AUD RBA Rate Statement
4:30am GBP Construction PMI
12:45pm USD Fed Chair Powell Speaks
Wednesday, October 3
4:30am GBP Services PMI
8:15am USD ADP Non-Farm Employment Change
10:00am USD ISM Non-Manufacturing PMI
10:30am USD Crude Oil Inventories
Thursday, October 4
9:30pm AUD Retail Sales m/m
Friday, October 5
8:30am CAD Employment Change
8:30am CAD Trade Balance
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change

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

U.S Q2 GDP growth unrevised

U.S. economic growth accelerated in the second quarter at its fastest pace in nearly four years as previously estimated, putting the economy on track to hit the Trump administration’s goal of 3 percent annual growth.

Gross domestic product increased at a 4.2 percent annualized rate, the Commerce Department said on Thursday in its third estimate of GDP growth for the April-June quarter. That was the fastest pace since the third quarter of 2014 and unchanged from the estimate published in August.

The economy grew at a 2.2 percent pace in the January-March period. Upward revisions to spending on residential structures and on nondurable goods like gasoline was offset by a downgrade to inventory investment.

The economy expanded 3.2 percent in the first half of 2018. Growth in the second quarter was driven by the Trump administration’s $1.5 trillion tax cut package, which boosted consumer spending after it almost stalled early in the year.

There was a front-loading to soybean exports to China to beat retaliatory trade tariffs, which also powered growth. Economists had expected second-quarter GDP growth would be unrevised at a 4.2 percent pace.


New orders for capital goods unexpectedly drop in August

New orders for key U.S.-made capital goods fell in August after four straight months of strong gains, while shipments barely rose, but that will probably not change expectations of solid growth in business spending on equipment in the third quarter.

The Commerce Department said on Thursday that orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.5 percent last month, pulled down by a decline in demand for computers and electronic products.

There was also a decrease in motor vehicle orders. Data for July was revised slightly lower to show the so-called core capital goods orders increasing 1.5 percent instead of the previously reported 1.6 percent surge.

Economists polled by Reuters had forecast core capital goods orders rising 0.4 percent last month. Core capital goods orders increased 7.4 percent on a year-on-year basis.

Shipments of core capital goods edged up 0.1 percent last month after an upwardly revised 1.1 percent gain in July. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They were previously reported to have increased 1.0 percent in July.

With business confidence at multi-year highs, in part buoyed by a $1.5 trillion tax cut package, August’s surprise drop in core capital goods orders is likely to be temporary. There are, however, fears that an escalating trade war between the United States and China could hurt confidence and undercut both consumer and business spending.

Washington on Monday slapped tariffs on $200 billion worth of Chinese goods, with Beijing retaliating with duties on $60 billion worth of U.S. products. The U.S. and China had already imposed tariffs on $50 billion worth of each other’s goods.

While manufacturers have expressed concerns about the tariffs, which are contributing to bottlenecks in the supply chain, there are so far no indications that the trade tensions are having a big impact on the economy.

The Federal Reserve raised interest rates on Wednesday for the third time this year. Chairman Jerome Powell told reporters that this was “a particularly bright moment” for the economy.

Business spending on equipment has risen since the fourth quarter of 2016. It is expected to underpin economic growth in the third quarter, even as trade is expected to weigh on output.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, surged 4.5 percent in August as demand for transportation equipment jumped 13.0 percent. That followed a 1.2 percent drop in durable goods orders in July.

Orders for motor vehicles and parts fell 1.0 percent last month. Orders for civilian aircraft soared 69.1 percent last month. Boeing reported on it website that it had received 99 aircraft orders in August, up from 25 in July.


HK sees first rate hike in years

Hong Kong’s home market will face headwinds after banks in the city raised mortgage lending rates for the first time in 12 years.

HSBC was the first commercial bank to raise its prime rate in Hong Kong by 12.5 basis points to 5.125%, following a quarter-point rate hike by the US Federal Reserve overnight.

The move signaled an end to more than a decade of cheap money because Hong Kong has not seen an interest rate rise since March 2006.

The low-interest-rate environment and “hot money” coming out of China have been key forces behind a surging property market since 2008, which made Hong Kong one of the world’s most expensive cities for real estate.

“This will put an end to an era of extremely cheap lending and is set to bring volatility to the investment and property markets. It would be unrealistic to expect property prices to only go up,” Hong Kong Monetary Authority chief executive Norman Chan said in a media briefing on Thursday morning.

Financial Secretary Paul Chan said higher rates could pose a high risk to Hong Kong’s asset market.

“I urge investors to be extra cautious in their property investments, because of the higher interest rate burden, the uncertainties brought on by the US-China trade conflict, and external uncertainties related to the emerging markets,” Chan said.

In Hong Kong, many people either tied their mortgage loans to the prime rate or the Hong Kong interbank offered rate (Hibor).

The one-month Hibor, a measure of how much banks charge each other for short-term loans, added 6 basis points to 2.27%, the highest level since 2008.

As the cost of mortgages rises, it is doubtful whether the residential property will continue their seven-year rally.

The secondary market rose 16% in the last 16 months, according to Centlaine Property Agency. However, media reports said home sellers had cut their asking prices over the last few weeks, as they have become more risk-averse given the rising interest rate cycle.

Some analysts expect a 5% decline in Hong Kong’s home prices in the fourth quarter of this year.

For those homebuyers looking for a price correction, welcome to the interest rate up-cycle.

Asia Times