Trade ,earnings ,teapots and the US dollar

Trade, earnings, teapots and the US dollar

Strong domestic growth and on-target core inflation continue to suggest the US economy is in that happy place,  but this week’s US economic data will begin to shape market expectations for Q2.

And equally significant will be Fed Chair Powell’s semi-annual monetary policy testimony before the Senate Banking (Tuesday) and House Financial Services (Wednesday) Committees. We should expect Powell testimony to reflect the minutes of the June 13 meeting broadly. But members did note the increased risk to their base economic outlook from trade wars, but since then, President Trump has tabled a review of tariffs on $200billion of additional goods from China. But of course, this escalation was widely telegraphed by the Trump administration, which suggests the FOMC trade concerns were based on the 200 billion in trade war escalation anyway.

However, the new tariffs would not be put in place before the end of August and could be even further kicked down the road as the US and China seek to a secure a lasting bilateral trade based on freer and fairer policy.

But, should the US eventually move ahead with these tariffs, China could not escalate on an even basis given China only imports roughly 130 billion annually from the US suggesting they would either need to levy higher trade tariffs on a small number of selected products or take the least attractive measure of tactically weakening the Yuan. Hence the lack of immediate response from China, as administrators will be ultra-careful not to send the wrong signal triggering another market melt in China.

One does get the sense that investors believe this latest threat from Trump will bring back both parties to the negotiating table and yield some form of compromise.

Economic Union ( EU) chiefs Jean-Claude Juncker and Donald Tusk will take their anti-Trump trade roadshow to China and Japan hoping to preserve some semblance of free trade world order. And as opposed to Trumps fire and fury style of negotiation, there’s excepted to be fewer fireworks although the EU leader will press China for free access to China markets while discussing Chinas propensity to dump cheap steel on EU markets.

But absent continued headline risk from trade war this week, desk noise should be a few decibels lower, but it will be far from a walk in the park, with the Trump-Putin still tentatively set for Monday despite Friday “coincidental” set of indictments of 12 Russian military intelligence in Mueller gate. While this isn’t great news for the US-Russian relations unless the citations reveal an actual smoking gun,  don’t expect too much to be focused on this despite the abundance of partisan political posturing.

US markets

What trade war? It is clear as a bell the US economy is on fire. Soaring business confidence and corporate tax cuts are fuelling surging company profits, but more significantly for the prolonged effect, Americans are returning to the works force end masse.

So, despite all the trade war bluster, US markets continue to grind higher, even with numerous trade headwinds. Indeed, the only thing unlucky about Friday the 13th was for equity market bears.

But earnings season is always a bit of a wildcard, and with investors hoping for a  contiued buying binges. They could be a bit disappointed given that sentiment continues to run at peak optimism, even more so, if markets start dialling in more trade war pessimism to the calculus.

Indeed, this week’s key US economic data will be so crucial in shaping investor expectations for Q2, especially around the retail sales data.

Among the companies due to report are Bank of America, Goldman Sachs, Johnson & Johnson, Morgan Stanley and Microsoft.

Oil markets

The oil market consolidated into the weekend as traders were still rehashing the myriad of developments which saw prices head sharply lower last week. The reported increase in Libyan crude oil production was perhaps the most significant fundamental eye-opener of the week, but then Russian Energy Minister Alexander Novak chimed in about a possible supply increase and then stated Russia might swap goods for Iranian oil, a move that would severely dent the impact of US sanctions.

Also, the decline in China’s crude oil imports for June raised a few eyebrows on Friday and did weigh negatively on the demand side of the equation. But given that  China crude import numbers are highly volatile, the markets tend to sidestep a one-off print. But looking under the hood, Chinas crude imports fell -12.04% month on month to 34.35 m tons last month, its lowest level since December. Reduced imports were likely due to China ordering at least five independent refineries (teapots) in Shandong to cut run rates ahead of the Shanghai Cooperation Organization (SCO) summit to be held the port city of Qingdao on June 9-10. So, it possible the teapots will gear up again on additional quotas.

Despite last week’s plethora of bearish signals Oil prices rallied towards $71.50 during Friday’s  New York session, but the rally was cut short by media headlines suggesting ” “The Trump administration is actively considering tapping into the nation’s emergency supply of crude oil as political pressure grows to rein in rising gasoline prices before the mid-term congressional elections”

While trade war rhetoric should subside this week and could be a possible plus for oil prices, with the Trump administration actively considering tapping into the nation’s Strategic Petroleum Reserve, it could weight negatively on trader’s cerebral side of the oil price equation.

Gold Markets

The precious space continues to hold critical support at $1,240, but the gold complex remains under pressure. US equity markets continue to trade well triggering few if any defensive allocations into Gold as ETF flows have remained muted lately. With sluggish demand for precious metals and the USD on solid footing, gold prices will stay pressured lower for the foreseeable future as gold has wholly lost its glittering appeal in this enduringly bullish equity and USD environment.

Currency Markets

JPY
Massive move in USDJPY last week which caught everyone flat-footed given the volumes turned and the breadth of the movement. The break above the yearly highs does suggest this move has more ways to run although during Friday trade flows were much more balanced perhaps reflecting the softer Michigan Sentiment index and the negative US political fallout for Mueller gate escalations. USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine spot will trade if an intense wave of risk on kicks in or trade war fizzles out.
Only a week ago we were lamenting on how UDJPY was the low beta range trade so what the heck changed. For one, equity markets are surging, 2 year US yields are moving higher, but that only paints a corner of the picture.

1) There is the fair value argument that USDJPY is undervalued supported by interest rate differentials

2) Trade war fears are good for the US dollar because it could shrink the trade deficit when they become competitive enough. Primarily, if the Trump administration puts the automobile tariff in practice, it will exert a fatal blow to Japan’s economy and an already weakening trade balance, which will act as a JPY negative eventually.

3) Japanese institutional investors are increasingly looking outward for investment particularly in the US. And as well are not hedging full returns. The how the notion of Japanese investors repatriating when global risk rises are diminishing.

4) The old FOMO as traders move from what’s not to what’s hot. But arguably this position is under-owned with many structural risks off long JPY still in play, so a push into the 113 could trigger a significant extension of the current rally as more risk off hedged unwind, and more traders become believers.

MYR and the knock-on effects of the Yuan

The perfect storm of negatives saw the USDMYR predictably take out the 4.05 level on Friday trade. Despite the KLCI trading in the green while tracking local burses higher as risk sentiment recovered on Friday, the local currency unit didn’t fare so well. Despite the obvious political overhang from IMDB investigations and political and fiscal uncertainty weighing negatively for the Ringgit. The USD started to reassert itself, and when coupled with increasingly bearish signals from the oil patch, the market was prone to a selloff. But even worse when the $Asia shows sings of recovering, the Ringgit continues to lag the moves.

In addition, the RMB complex continues to set the pace of play in regional currency markets and besides the daily risk YO-YO on equity markets taking its toll on regional sentiment, with the Pboc weighing possible policy options around mainlands economic slowdown, this uncertainty is having a negative knock-on effect in local currency markets.  Uncertainty around policy, trade and retaliation will keep the riks reward needle skewed negatively for the Yuan near-term.

Kuwait Could Reach Emerging Market Status

Kuwait has long been nicknamed the Sleeping Giant of the Gulf, and it is not exactly intended as a compliment. Kuwait is considered one of the least interesting of the Mideast regional economies and has done little to attract foreign investment. But that reputation might be set for a change.

Kuwait’s stock market is being considered for a bump-up to emerging markets status by major index providers, and that would be a significant reclassification within the world of investors. Index funds tracking emerging markets benchmarks, and active fund assets benchmarked against emerging markets indexes, are far larger in size and popularity than frontier markets portfolios.


West Texas Intermediate graph

There are 30 exchange-traded funds tracking EM benchmarks, and the three largest ETFs tracking the MSCI and FTSE emerging markets indexes have roughly $135 billion in assets between them. There are two frontier market ETFs with a total asset base of roughly $600 million. Kuwait is the largest country weight in the MSCI and FTSE frontier markets index, at over 21 percent and 19 percent, respectively.

In June, MSCI said it would place the MSCI Kuwait Index under review for a potential reclassification from frontier markets to emerging markets status in 2019. Rival index provider FTSE Russell hasn’t classified Kuwait historically, but starting September of this year, it will be classified as a secondary emerging market — it also has an advanced emerging market group.

via CNBC

Oil Ends Week Lower on End of Supply Disruptions

Oil prices were set for a second straight week of decline on Friday after Libyan ports reopened and on the view that Iran might still export some crude despite U.S. sanctions.


West Texas Intermediate graph

Brent crude LCOc1 was down 10 cents at $74.35 per barrel by 1308 GMT, having fallen earlier by 1.3 percent. It was heading for a weekly fall of around 3 percent.

U.S. benchmark West Texas Intermediate crude CLc1 was up 10 cents at $70.43, and was on course for a weekly decline of around 4 percent.

Oil approached $80 in late June and early July due to Libyan and Venezuelan supply disruptions and fears the United States would press all buyers of Iranian oil to cut imports to zero from November.

But prices weakened in recent days as OPEC member Libya reopened its ports in the east and U.S. Secretary of State Mike Pompeo said Washington would consider granting waivers to some of Iran’s crude buyers.

via Reuters

The sky hasn’t fallen just yet

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US coupled with a slightly firmer RMB scrim. “Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood all this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. And one can only imagine what levels the S&P would be trading if trade war fizzled out.

Equities shrug off trade tariff tensions

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

There was little movement on Powell interview on Marketplace but here are the full transcripts.

Chairperson Powell’s Marketplace interview

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause /pause for thought about holding long positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Markets

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine where spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia
Strong demand on the platform for long USDAsia is consistent with the general market views.

Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all-time interday  low and has now plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW.After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play

A tenuous and unstable state of affairs

A tenuous and unstable state of affairs

The prospects of another round of US tariffs directed at China have resurrected fears that the trade skirmish between Washington and Beijing could escalate with some investors now fearing a full-blown global trade war could be a reality. But the most damning signal is that dialogue between the two superpowers is pretty much non-existent, and with a diplomatic solution appearing more unlikely as the days go by, markets will remain on the defensive.

But with about seven weeks before the new tariffs kick in, if there is a will there could be a way. However, with no senior-level discussion scheduled on the near-term horizon, markets will likely remain in a very tenuous and unstable state of affairs until officials get back at the negotiating tables.

As for woeful Wednesday, Trade war headlines continued to exact a full court press on stocks, oil and EM FX. But the day also provided an unexpected turn of events on USDJPY which bucked conventional risk off wisdom and surged higher as US Treasury yields moved north, but with USDCNH adjusting convincingly higher, the USDJPY now appears trending in sympathy with the broader $/ASIA basket. Indeed, Japanese investors are not in the repatriating haven mood but may be increasingly looking toward the US markets as their essential investment vehicle which could support USDJPY even in a risk-off environment.

Oil markets
An extremely active session in commodities overnight with Crude prices spilling lower across the board as USD200bn of additional tariffs on Chinese goods took its toll.  While Oil prices are following the risk-off move but adding more fuel to the fire was Presidents Trump’s comments on Germany’s energy policy which he is suggesting is being ” held captive by Russia”. Also weighing on prices was the lifting of the force majeure at Ras Lanuf, Es Sider, Hariga and Zueitina suggesting that Libyan exports from its eastern ports will quickly resume to previous levels and this report has exerted pressure on bullish sentiment overnight. But the .6% rally in the USD is also weighing on commodity sectors

West Texas Intermediate crude oil moved lower in sympathy with a weaker Brent market on  even after the DOE reported a much larger-than-expected draw , but with imports falling by 1.6 million barrels per day but the decline in imports could be writing off due to July 4th holiday hangover and the deluge in the Texas coast due to heavy rains. But still not a particularly bullish signal.

Metals Markets
The metals complex is getting hammered with copper plummeting to one-year lows. Of course, trade tensions are harmful to the base metal complex, but the fear that an escalating trade war will severely dent global growth assumptions is inflating the sell-off. Predictably the Aussie dollar is taking it on the chin given it precarious position in the base metal supply chain into China.

Gold Markets

In the Gold sector, there has been nary a haven bid to be found as the surging USD has driven gold lower and within an eyeshot of the critical 1240 level. But with a broader equity sell-off failing to materialise in US markets, there has been a real scarcity of defensive allocations into Gold overnight.

Currency Markets
What’s hot what’s not? Well, I’m glad I reminded myself that trade wars are good for the USD while holding an unwavering conviction that USDCNH has no place to run but higher on any escalation.

CNH: Yes, this 200 billion is a significant escalation in the trade war between China and the US, and yes, the RMB complex should remain to be the epicentre of currency trade where the visible big-picture developments should see a bullish skew for the USD. And while it’s entirely possible the Feds may enter the equation at some point denting the $’s appeal, we’re nowhere near meltdown level just yet, suggesting there is more juice to be squeezed on the long USD RMB complex.

JPY: it will be tough for traders to change gears from depending on the risk aversion signals to the reality of shifting Japanese inventor behaviour which may be looking outbound for yield. It might be time to start viewing USDJPY strategy through a different lens.

MYR: The BNM held a very even tone at yesterday’s MPC favouring policy continuity. A very sharp move by a Central Bank veteran knowing full well that keeping policy measures at hand for possible darker days ahead makes perfect sense especially with no real reason to signal a dovish shift at this stage.

But more aggressive trade war fears are coming home to haunt as the fear that an escalating trade war will severely dent global growth assumptions and trigger a commodity market rout. Oil markets are not immune to this calculus, and the sudden drop in oil prices overnight is weighing on the MYR sentiment.

But equally concerning, is the lunge higher in USDCNH which should continue to exert pressure across regional currencies.

I’m always looking for a silver lining in the Ringgit cloud, but everything is looking ever so tarnished today suggesting we could press higher as regional sentiment wanes.

Gold struggles as global trade tensions escalate

Gold has posted considerable losses in the Wednesday session. In North American trade, the spot price for one ounce of gold is $1246.24, down 0.74% on the day. On the release front, inflation reports narrowly beat their estimates. Core PPI was unchanged at 0.3%, beating the forecast of 0.2%. PPI dropped from 0.5% to 0.3%, above the estimate of 0.2%. On Thursday, the U.S releases key consumer spending reports as well as unemployment claims.

The markets remain nervous about the worsening global trade war, particularly between the United States and China. After the two economic giants imposed tariffs on each other of some $30 billion, the Trump administration has raised the ante, threatening to hit China with further tariffs on $200 billion worth of Chinese goods. China cannot retaliate in kind, since it does not import that amount of goods from the U.S. Still, the Chinese can take steps which will make it more difficult for U.S companies to do business in China. President Trump’s presence at the NATO summit will not bolster investor confidence, as Trump has lashed out at Germany and other NATO members for not paying their fair share in defense spending.

Gold is sensitive to interest rate moves and investors and traders continue to look for clues about the Federal Reserve’s monetary plans. The Fed is expected to continue raising rates in the second half of 2018, but it remains unclear if the Fed will raise rates once or twice. The highly-anticipated FOMC minutes did not shed any light on this question and had little effect on gold prices. Fed policymakers remain bullish over the strong U.S economy, but remain concerned about developments abroad. These include growing trade tensions with U.S trading partners, as well as political and economic developments in Europe. The markets are circling the September policy meeting for the next rate hike, with the CME Group setting the odds of a quarter-point hike at 84%.

  Investors turn risk-averse on tariff war escalation

  ( Update 1) When the going gets tough, the tough get going

XAU/USD Fundamentals

  • 8:30 US Core PPI. Estimate 0.2%. Actual 0.3%
  • 8:30 US PPI. Estimate 0.2%. Actual 0.3%
  • 10:00 US Final Wholesale Inventories. Estimate 0.5%. Actual 0.6%
  • 10:30 US Crude Oil Inventories. Estimate -4.1M. Actual -12.6M
  • 12:30 US FOMC Member Rafael Bostic Speaks
  • 13:01 US 10-year Bond Auction
  • 16:30 US FOMC Member John Williams Speaks
  • 19:01 British RICS House Price Balance. Estimate -3%

Thursday (July 12)

  • 4:30 BoE Credit Conditions Survey
  • 8:30 US CPI. Estimate 0.2%
  • 8:30 US Core CPI. Estimate 0.2%
  • 8:30 US Unemployment Claims. Estimate 226K

*All release times are DST

*Key events are in bold

 

XAU/USD for Wednesday, July 11, 2018

XAU/USD July 11 at 12:25 DST

Open: 1255.71 High: 1256.99 Low: 1246.09 Close: 1246.24

 

XAU/USD Technical

S3 S2 S1 R1 R2 R3
1204 1220 1236 1260 1285 1307

XAU/USD edged lower in the Asian session. The pair showed little movement in European trade and has posted losses in North American trade

  • 1236 is providing support
  • 1260 is the next resistance line
  • Current range: 1236 to 1260

Further levels in both directions:

  • Below: 1236, 1220, 1204
  • Above: 1260, 1285, 1307 and 1322

When the going gets tough, the tough get going

When the going gets tough, the tough get going

U.S. stocks are trading off their intraday highs late in the NY session weighed down by financials profit-taking ahead of the deluge of bank earnings reports on Friday, robust US economic data had temporarily overshadowed fears over global trade disputes. That was until a late NY session headline suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter. But a list is a list and not an actual tariff, so lots to be ironed on this one. But regardless, it will put the  markets back on the defensive for the time being

Until that point, the market was indeed embracing the raft of outstanding US economic data, and despite the apparent downside risks from an escalating trade war the fact investors continue to plough cash into equities, that was a central dictating market theme. And given the likelihood of a strong earnings season, and at one point investors were heard yelling down Wall Street “what trade war”?? Indeed, when the going gets tough, the tough get going. That was until the latest headline when much of the tough slogging was quickly unwound in minutes as the SPX shed 100 points in the flash of an eye reminding investors we are in tricky markets, and nothing can be taken for granted.

The currency markets, however, are a different kettle of fish where the market risk is relatively light with Forex traders doing little more than rotating from what currency pair is hot from what is not. In other words, chasing the fear of missing out seems to be a common theme among G-10 trades after a considerable volume of USD long positions have been culled over the past few weeks, especially against the EUR and AUD. There is a reason why risk is so low in currency land; it’s the real fear of getting sideswiped by trade war headline risk.

Oil Markets

Oil prices continue to gain on yet more production outages with Brent briefly breaching the $ 80 per barrel high water mark as strikes by workers in Norway and Gabon added to global production outages.

Without question, supply risk continues to dominate trader psyche and after the API reported another massive draw traders are now positioning for another sizeable drop in today’s EIA weekly report.

ON the bigger picture, the markets continue to access the intermediate-term supply impact as the Nov. 4 US-imposed deadline for allies to halt Iranian imports moves nearer. All the while the Libyan disruptions continue to run on.

At the end of the day, supply concerns and more disruptions  continue to skew bullish for oil prices

Gold Markets

After a brief peak above 1265 Gold prices resumed its downward path as global stock markets trade well. However Gold prices pulled came off session lows on NATO concerns as the EU countries are worried about possible side agreement between Putin and Trump which could profoundly weaken the alliance. Also, the latest tariff headlines suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter should keep a bid under the market. Gold dips remain attractive especially for investors knowing that gold should be an essential part of any diversified portfolio, especially in these highly charged political times.

Currency Markets

With this morning’s tariff headline risk, I need to remind myself that the trade war is good for the dollar, as the US has the upper hand in negotiations and whichever way this issue gets resolved it’s likely to be positive for the US current account.

GBP: Cable remains the land of the brave requiring a sharp eye and quick trigger given the plethora of Brexit headline risk. But indeed, in this muddied UK political landscape it does suggest the endgame will be the UK  never leaves the EU, and in this scenario, the Pound is ” cheap as chips”. When the UK political malaise subsides, Sterling  will be the shining star of the market

JPY: The USD did look poised to break out topside given the fading of trade rhetoric and a real risk-on environment developing. US equities have held up remarkably well as the bull market keeps marching her despite the reams of negative news thrown at the benchmarks. Long USDJPY is entirely under-owned as risk-off trades are still prevalent vs the JPY, and on a break of 111.50-75 levels, dealers will be forced into a risk on trade. But as usual, nothing ever works out as planned so we may have to re-explore this scenario later once we iron our fact from fiction over the latest US trade escalation headline.

MYR: It was an up and down day for the Ringgit which was in high demand and dare I say outperformed early on Bond related inflows as investors position for dovish pause for the BNM. The MGS curve was in firm demand particularly the attractive long end yields which are usually the domain for real money investors and pension funds. Indeed, last weeks Bond market awakening was the real deal!!

As for the BNM policy decision, we anticipate no actual shift in rates, Nor Shamsiah is a BNM veteran, and it would suggest policy continuity, but the markets will be more focused on forwarding guidance. Given the political and fiscal struggles ahead, I think it’s easy to assume this will not be a hawkish pause.

Oil prices continue to flourish and should push higher given the bullish supply skews which should go a long way in supporting the government coffers.

Gold remains subdued, US job report misses mark

Gold has posted small gains in the Tuesday session. In North American trade, the spot price for one ounce of gold is $1255.58, up 0.18% on the day. On the release front, JOLTS Jobs Openings fell to 6.64 million, well below the estimate of 6.88 million. On Wednesday, the focus will be on consumer inflation reports. Core CPI and CPI are both expected to drop by 0.2%.

Gold is sensitive to interest rate moves and investors and traders continue to look for clues about the Federal Reserve’s monetary plans. The Fed is expected to continue raising rates in the second half of 2018, but it remains unclear if the Fed will raise rates once or twice. The highly-anticipated FOMC minutes did not shed any light on this question and had little effect on gold prices. The minutes were somewhat dovish in tone, as policymakers gave a thumbs-up to the strong U.S economy, but expressed concern about developments abroad. These include growing trade tensions with U.S trading partners, as well as political and economic developments in Europe. The minutes also reiterated the Fed’s support for a “gradual” raise in interest rates. The markets are circling the September policy meeting for the next rate hike, with the CME Group setting the odds of a quarter-point hike at 80%.

U.S employment data was a mix on Friday, as job growth remained above the 200-thousand level, but wage growth faltered. Nonfarm payrolls dropped to 213 thousand, but this beat the estimate of 195 thousand. Average Hourly Earnings edged lower to 0.2%, shy of the estimate of 0.3%. There was a surprise as the unemployment rate climbed to 4.0%, above the forecast of 3.8%. The data demonstrates that the U.S labor market remains strong, and the economy continues to perform well. The markets remain bullish on U.S growth, despite uncertainty in Europe and elsewhere, as well as the growing threat of an all-out trade war between the U.S and China.

  Commodities Weekly: Gold saved by dollar’s retracement

  All is quiet on the western trade war front

 

XAU/USD Fundamentals

Tuesday (July 10)

  • 10:00 US JOLTS Job Openings. Estimate 6.88M. Actual 6.64M

Wednesday (July 11)

  • 8:30 US Core PPI. Estimate 0.2%
  • 8:30 US PPI. Estimate 0.2%
  • 10:00 US Final Wholesale Inventories. Estimate 0.5%
  • 10:30 US Crude Oil Inventories
  • 12:30 US FOMC Member Rafael Bostic Speaks
  • 13:01 US 10-year Bond Auction
  • 16:30 US FOMC Member John Williams Speaks

*All release times are DST

*Key events are in bold

 

XAU/USD for Tuesday, July 10, 2018

XAU/USD July 10 at 12:15 DST

Open: 1257.88 High: 1260.45 Low: 1247.42 Close: 1255.58

 

XAU/USD Technical

S3 S2 S1 R1 R2 R3
1204 1220 1236 1260 1285 1307

XAU/USD showed little movement in the Asian session. The pair recorded considerable losses in European trade and has recovered most of these gains in the North American session

  • 1236 is providing support
  • 1260 was tested earlier in resistance
  • Current range: 1236 to 1260

Further levels in both directions:

  • Below: 1236, 1220, 1204
  • Above: 1260, 1285, 1307 and 1322

Commodities Weekly: Gold saved by dollar’s retracement

Overall, the first salvos in the US-China trade war has undermined confidence in the metals space, with traditional safe-haven assets struggling for traction as other havens offer better returns. The energy sector has been driven higher by supply concerns, while the agricultural sector remains broadly under pressure.

Precious metals

Gold had been at the mercy of the US dollar’s firmness during the second half of June, struggling to maintain its label as a safe haven in times of trouble. The precious metal slumped almost 5.5% vs the dollar from its recent peak on June 13 to the near-term low on July 3. The rebound so far has taken the metal to the 38.2% Fibonacci level of the drop and is now consolidating at 1,257.513.

Gold Daily Chart

Source: Oanda fxTrade

Latest data from Chicago’s Commitment of Traders report, with the snapshot taken as of July 3, shows that managed money accounts were net sellers of 1,230 gold contracts from a week prior and short positions exceeding long positions by 1,254 contracts.

Silver has also tracked hold’s progress to some degree during the period. The sell-off in the second half of June saw a bullish divergence pattern unfolding on the stochastics momentum indicator, which suggested a near-term base could be forming. Sure enough, we have seen the rebound unfolding this month and the next resistance point can be found at the 55-DMA, currently at 16.4320.

Silver Daily Chart

Source: Oanda fxTrade

The gold/silver (Mint) ratio seems to have built a near-term base mid-June and has since rallied to test the 55-DMA at 78.4841. It is also oscillating around the 200-DMA at the moment during its consolidation period.

Platinum is staging a modest recovery from its near-5 month downtrend after the metal traded below the 800 mark at the start of the month, the first time since December 2008. The 55-DMA continues to cap to the upside while the July 3 low of 798.365 should hold in the near-term.

Palladium is trading near the middle of its recent 3-month range. It is currently retracing the uptrend started at the beginning of 2016 and has so far managed a correction as deep as 21%. Palladium is currently trading at 954.853.

Base metals

Copper has fallen just over 6% so far this month to touch its lowest level since July last year. The base metal is testing the 100-week moving average, which has held on a closing basis since November 2016. However, investors are keeping an eye on labour negotiations at BHP Billiton’s Escondida mine in Chile, the largest in the world. The current contract expires at the end of this month and any signs that negotiations become protracted and an agreement may not be reached could have implications for copper supply and result in higher prices.

Energy

Natural Gas continues to struggle to gain traction after the hefty slump in February this year. As we are in the midst of the summer months in the northern hemisphere, pressure should remain on gas with near-term support found at the 100-DMA at 2.7914.

Latest data from the US Energy Information Administration (EIA) storage change released last Friday showed an increase of 78 billion cubic feet, higher than the estimate of 75 billion and up from the previous week’s 66 billion. Stocks were 717 billion cubic feet less than this time last year.

Crude oil prices have been edging higher since the OPEC meeting last month amid supply concerns and steady demand. Brent prices received an additional boost following news today that oil workers in Norway are scheduling a strike later today after recent wage talks failed. Coupled with supply issues from Libya after oil port closures, Iran heading toward US sanctions, and ongoing issues with Venezuela, the path oil least resistance for oil prices still appears to be higher. West Texas prices scaled $75 p/barrel last week, while the 100-month moving average is at 74.6907. West Texas CFD is now trading at 74.094 and the Brent/WTI spread is about 4.3 pips.

Brent/WTI Spread Chart

Source: Oanda fxTrade

Agriculturals

Sugar continues to feel the pressure of rising global stockpiles amid surging production in Asia, and slowing demand. Money managers added more than 30,000 contracts to short positions, according to the latest CFTC data as of July 3. As with any crop, the weather could play a significant role and the second half of the year could see concerns about another El Nino weather pattern in Asia emerging. That could be the only hope for bulls. Sugar is now at 0.11165

Corn is attempting to recoup some of June’s heavy losses, and having a tough time of it. This despite a June 29 report from the US Department of Agriculture that showed total acreage for corn and soybeans down 1% from a year ago.

With Soybeans a target for China import tariffs in retaliation for the Trump administration’s actions, soybeans are struggling to bounce strongly off recent 9-1/2 year lows. Friday’s low of 8.334 should provide near-term support while the June 25 high of 8.961 will be the next resistance point.

Wheat broke a three-day rising streak on Monday and has continued the retracement today. Daily momentum has turned bearish, suggesting the fall has a bit further to g

Trade war -will cooler heads prevail ?

All is quiet on the western trade war front

All is quiet on the western trade war front

For a change,  all is quiet on the western trade war front as the drop in aggressive US tariff posturing and the nonfarm payroll after effects have propelled US equity market to the third consecutive day of substantial gains. While traders sit tight awaiting the next US trade salvo, but for the time being robust US economic data is offsetting concerns about rising trade tensions. In addition to the strong payrolls report, Federal Reserve Board data showed that consumer borrowing picked up in May with total consumer credit increasing $24.6 billion to a seasonally adjusted $3.9 trillion, up 7.6%. Indeed, this incredibly strong pace of credit growth points to a resilient US consumer while continuing to highlight an extremely robust US economy despite growing trade concerns.

But markets remain deceptively tricky and could be even more so as we enter the US dog days of summer.

In Asia markets, all eyes were on Xiaomi Corp IPO but the coming out party was less than a hit and didn’t exactly attract the feeding frenzy expected from high tech investors. Indeed, global high-tech investors continue to feel more comfortable investing in global stalwarts like apple as opposed to debutantes like Xiaomi who have more of an Asia centric presence. Of course, escalating trade war concerns weighed on sentiment but being the first of many prominent Chinese tech names coming to market seeking IPO in coming months, investors may have thought Xiaomi valuation a tad “toppish” in current market conditions. And are perhaps looking for more significant fire sales as more of China’s glittering tech giants swamp the IPO markets in the months ahead.

Oil Markets
Indeed, there’s a bullish undertone in the markets with the Iranian supply question expected to support and eventually push prices higher. The Brent market climbed amid ongoing concerns regarding Libyan supplies while treader weighed the bullish medium-term impact of Iran sanctions.

While WTI was under some early pressure after Syncrude Canada announced it would be restarting production from its Fort McMurray oil sands upgrader earlier than expected, but prices remained firm and started to rally after API showed another major draw of 4.50 million barrels.

Looking to Libya, the head of their state energy producer warned that output would keep falling day by day if significant ports remained closed because of clashes last month that lead to a standoff. Mustafa Sanalla, chairman of the Tripoli-based National Oil Corp, stated that “Today, production is 527,000 barrels a day, tomorrow it will be lower, and after tomorrow it will be even lower, and every day it will keep falling.” But keep in mind, current levels are less than half what the country was producing in February pre-political deadlock levels.

Even under the supposition that production from Saudi Arabia and Russia is sufficient to offset declining output from Venezuela, Libya and Iran, keeping the market in an approximate physical equilibrium, the stream of supply disruptions will continue to upset those dynamics.

Gold markets

The weaker dollar had gold bulls charging but the run of stop losses above $ 1261 cleared a path for Gold to touch $ 1265 overnight after political turmoil reared its ugly head in the UK when Boris Johnson resigned. But technically, gold has a long road to travel before breaching the more relevant technical levels around $1300 suggesting it remains ever so prone to the stronger USD. But the robust US economic data, fading of trade war rhetoric and extremely buoyant US equity markets turned golds tide overnight as “risk on ” saw gold prices fall from interday peaks and retreat before eventually finding support at around $1258 levels.

Currency Markets

In the currency market, Political unravelling in the UK has provided the best trading opportunities.

GBP: Another roller coaster ride on GBP overnight as Brexit markets got very uneasy after Boris Johnson resignation and the thought he could force a party coup which all but unwound the positively from Friday Brexit Chequers meeting. Long Sterling is arguably the G-10 most crowded trade so any Brexit hic up will likely trigger an outsized move as weaker near-term stops get triggered. But overall the long Sterling trade remains bruised but not broken.

AUD: The lack of trade drama is underpinning the AUDUSD. But the Aussie was arguably the most subscribed USD dollar long play in G-10, so players were mercilessly squeezed as ongoing China/US trade skirmishes are showing nascent signs of easing.

JPY: US yields and equities were soundlessly trended higher which have propelled USDPY to within striking distance of the 111 level. With investors running very neutral USD dollar exposure vs the JPY, short-term traders are boarding the risk- on wagon and buying USDJPY. If US equities continue to stabilise let alone move higher and US 10-year yields continue dribble north, we could eventually test the key 111.40 support line that has proved to be an impenetrable force for months.

MYR: The relief rally on the toned-down trade rhetoric continues to take hold of ASEAN markets. Risk on sentiment in US equity markets should play out positively for local bourses. Asian currencies are trading stronger aided by a sharp move lower in $RMB, robust equity performance and improved risk sentiment which is in complete contrast to last week’s markets tumult.

However, Malaysia registered another 1.65 billion in June outflow all but wiping all the reported 8 billion in fixed income flow from March 2017-2018 which tells the real tale of the election’s impact.

The next crucial focus will be the MPC on the July 11th This will be the first policy meeting chaired by the new BNM governor and with no real drive for BNM to adjust interest rate policy at this stage, however, given all the political uncertainty their remains a chance the BNM could offer up a dovish pause.

In the meantime, the MYR is benefiting from positive regional risk sentiment and rising oil prices all the while the Chinese RMB continues to unwinds last weeks trade induced tantrum.

CNH: For me its a case of know when to hold them and know when to fold them. While I think the RMB will eventually come under renewed pressure as China risk continues to wobble,  markets have read far too much into the China economic slowdown which will likely be modest at best. Still this week tier one China economic data will continue to supply food for thought.