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.

For the USD , it’s all about this week’s CPI.

For the USD, it’s all about this week’s CPI.

Markets dismissed the opening salvo of the  US -Sino trade war as dated news.

However, after another Goldilocks NFP,  US stock markets traded positively in the green while the US dollar bears begrudgingly came out of hibernation after US  bond market yields knee-jerked lower.

The NFP report showed the US economy continues to add jobs at a robust pace (+213k). There was a 0.2pp rise in the participation rate to 62.9%, with the expansion in the labour force helping lift the unemployment rate to 4.0%. AHE were softer than expected at 0.2% m/m (consensus: 0.3% m/m). An undershoot in hourly earnings with the participation rate moving higher suggests there is still more room in the labour market to go before wage pressure passes through to the data. But none the less,  it does keep the Fed on track and shouldn’t alter too much from that perspective. But the  tepid US wage growth  inflationary data does lend tentative support to the fresh recovery in EM and G10 high-beta currencies versus  the USD

However, for the USD to get back on track and reverse this negative momentum, it’s all about this week’s US CPI print. With the big dollar apparently in retreat, the Greenback will need a shot in the arm with inflationary “pick me up juice” to reverse this nascent sell-off

Trade war
The market will be incredibly focused on Fed chatter this week as downside risks from tariffs were discussed by Fed officials as indicated on the Jun  13 FOMC meeting minutes released last week. Currently, the duties on $34 billion of Chinese goods, remain primarily at the Walmart level as far as escalation runs and will have limited economic impact, However, should the Administration follow through with the threat of a $200 billion + duties on  Chinese goods,  indeed this would have some negative implication for both the US and global growth prospects.

Remember that while Powell recognised the dangers of escalating trade war in his Sintra comments last month, but he was insistent the Fed would need to assess incoming data. Early warning signs usually come from sentiment surveys and if we recall it was China and EU sentiment indexes that had led investors into the tank in those key markets. So, traders will key on this week’s University of Michigan consumer sentiment index to see if there are any signs that consumer sentiment is starting to fray from trade war fears.

Oil Market

Of course, Oil traders are wholly perplexed by President Trumps demands to cut off 2.4 million barrels of Iranian oil while admonishing OPEC to keep prices stable if not have them go down! But it’s the White House’s zero-tolerance policy to Iran which is supporting oil markets given the fragile state of global supplies as spare oil capacity hovers near zero. In this scenario, of  supply reality versus wishful thinking, there is only one direction for the oil price to move, and that is higher over time

Oil benchmarks went in opposite directions Friday afternoon, with WTI running higher and Brent trading lower as fears of the escalating U.S.-Chinese trade war and increased production by Saudi Arabia, and Russia bumped against supply disruptions from Venezuela and Libya as well as the sanctions on Iran.

There has been some interesting discussion over a note issued by Sanford C. Bernstein & Co. suggesting the lack of reinvestment in oil production could lead to a price spike.“Investors who had egged on management teams to reign in capex and returned cash will lament the underinvestment in the industry,”, And that falling behind the production curve in favour of paying out shareholder dividends runs the risk of prices spiralling much higher in the future.

Baker Hughes reported an increase of 5 in the number of active oil rigs in the United States matching the June high water mark.

Gold Market

For the better part of June and early July, US dollar strength and the dollar-bullish outlook continued to weigh on gold as stronger than expected US data and a hawkish Fed weighted gold prices down like an anchor.
Buyers of physical in Asia have been few and far between despite the pullback, as local currencies have been taking it on the chin due to the stronger USD. But the Goldilocks NFP print which could deliver a softer US dollar profile this week, suggests opportunistic investors may return which should support gold prices. After all, in this highly political and geopolitically charged environment, gold remains a very suitable component in any diversified portfolio.

China Market

While China response to the US administration trade policy is keeping the headline tickers working overtime, growth remains mainland’s biggest priority hence the markets will be extremely focused on this week’s China tier one economic data dump which will provide some exacting signpost for evaluating Chinas economy. While US-Sino Trade will continue to dominate the headline ticker tape, this week’s critical set of growth data will be a massive test for local markets. Frankly, by all metrics, growth in China remains more than adequate, but a subpar reading and Main Street might eventually take notice and realise all is not well in China.

PBoC
Many confusing signals to deal with but none more so than why the PBoC waited so long on the currency front before verbal intervention which has left just enough uncertainty in the air over what their actual motivation was. With some arguing that policy choices are going to be robust and will have the effect of intentionally causing the currency to weaken.  However, authorities have made clear their intent on domestic monetary settings, and this would suggest that growth and not trade war will be the determining factor in policy decisions

Indeed, there is Big Trouble in Big China as authorities continue to grapple with pulling back stimulus created by a state-run banking machine which operated with wanton disregard for risk management. Add in the prospects of an economic slowdown, escalating trade wars all wrapped in a shrinking population, and it does suggest Main Street is missing the bigger picture. China risk continues to be underpriced from my chair indicating at a minimum; the Yuan will resume trending lower as  the mainland administrators  continue to deleverage  China, keeping in mind in a wobbly China scenario, CNH should move more than CNY (which is fixed)

Asia market 
There have been massive portfolio outflows from Asia that have resulted in markets tumbling to fire sale levels (SHCOMP -20% on the year). The big dollar – which triggered a lot of the recent round of EM troubles – seems to be consolidating but, there is a lot to be still much to be worried about as the US is not easing its aggressive trade posturing. But this extended period of capital outflows in ASEAN markets does suggest this was more than event-driven risk but more of a structural shift. Whether this shift was all about the strength of the US dollar and risk around China, or more likely a combination for both,  this week tier one China data will go along way to confirm this view.

Malaysia market 

The first round of US tariffs has come into effect with little fanfare. But this contained reaction has given a boost to local risk assets led by the SHCOMP trading 2.5 % higher w. USD ASIA along with the broader G-10 complex in general, traded lower into the weekend as the Goldilocks NFP has given a boost to the nascent EM Asia rally and the USDMYR was no exceptions piggybacking regional risk.

But MYR bonds are trading very neutral into weekend due to the NFP influence,  but activity should pick up today ahead of the MPC on on on the 11th which could read neutral to dovish and given support to local bonds. However a  more dovish MPC USDMYR trading defensively next week again, but the currency pairs will be hard pressed to take out the 4.05 level given the significant ( USD) dollar could be on the retreat after Friday tepid US wage growth-inflation .. And with OIL prices poised to move higher, the Ringgit should get some support from the commodity sector.

On the MPC front,  economic growth will slow to 5.5 per cent this year from 5.9 per cent, while inflation will cool to 2.5 per cent from 3.9 per cent, which will give new Governor Nor Shamsiah Mohd Yunus cause to pause. But for fear of triggering more outflows and denting the local capital market appeal due to to the resulting weaker Ringgit, the BNM will likely refrain from being overtly dovish. With very little priced into rate hike expectations, the market has done most the BNM repricing with Bloomberg data showing the market implied policy rate for one year’s time has declined to 3.28 per cent from 3.41 per cent in May, so why rock the boat.

Currency Market

NZD: The metals complex has recovered from the worst of the sell-off for now and has seen something of a relief rally in AUD & NZD.But given the antipodean position in the global supply chain, they will be the first pairs to buckle on a further escalation of trade war rhetoric.

EUR: The Euro has seen a decent relief rally from the low 1.15 handle, and after last week when some ECB members advocated a sooner rather than later rate hike and a Goldilocks NFP print we could see some more EUR short covering. But it does feel like we are entering the summer doldrums on currency markets as desks are more apt to cover what orders need to be hedged and little else.

JPY: This remains a painfully dull range trades, and levels are clear with the downside at 109.90 and topside resistance in the 111.20

24 hours of reconciliation

24 hours of reconciliation
It took all of 24 hours for the results of the rationality test to kick in after traders took time to the read the minutes from Wednesday. Not a heck of a lot has changed in the Feds view. The minutes were far more balanced than the equity market sell-off suggested. The discussions about their inflation target being symmetric indicate that the Feds are less concerned about the updraft from inflationary pressures than current market pricing. Overall there were few if any significant hawkish shift and traders have started to nimbly re-engage the US dollar downside not waiting until Powell’s key Humphrey Hawkins testimony which should clear up more than a few policy concerns.

The Feds will raise interest rates in March on the back of two strong inflation prints post-January meeting, but the market remains comfortably parked in the three rate hike camp for 2018.
This new Fed Chair will be as data dependent as his predecessor so, in reality, no one knows for sure what the Feds will do other than hike somewhere between two and four times in 2018.

Bond Markets

The bond markets continue to trade from a bear market bias, and this is unlikely to change anytime soon given the burdening supply issues which are compounded as the Feds delicately and gingerly pull back on QE largess.

Stock Markets
US equity market rebounded as concerns over rising US interest rates abate. If you were confused by Wednesday 50 pips downside adventure on the S&P post-FOMC minutes, you were not alone. However, until the dust is settled on the Fed policy debate, we should expect more back and forth ahead of Jerome Powells Humphrey Hawkins testimony.
Oil markets

Oil market bid was boosted by DoE inventories which saw a draw of -1.616 million barrels which far better than consensus and more profound than the -.9mn print by the API. While the market continues to communicate concern over rising levels of shale production, this bullish inventory data coupled with a slightly softer USD profile, it’s easy to see why oil prices are finding fresh session highs going into the NY close.
Gold Markets

Gold continues to act as less of a haven hedge and more as a proxy for USD sentiment. Given the greenback is trading within a restricted range as the stage is getting prepared for new Chair Jerome Powell, gold will remain supported by the $ 1324-25 levels given the markets ubiquitous bias to sell the USD.  But the topside should also stay in check as most traders will opt to only aggressively re-engage in  USD downside after Powell clears the policy airwaves in his Humphrey Hawkins testimony.

The Japanese Yen

No need to jump the gun, today’s CPI data will be a crucial driver in JPY sentiment. Post data comments to follow.

The Euro
Fact of fiction, the Euro remains a point of contention, but topside conviction remains low ahead of the Italian election compounded by softer EU economic data.

The Malaysian Ringgit 

The USDMYR landscape is a bit muddled, and this air of uncertainty could extend, more so if opinion on the soft dollar narrative become less reliable. Rising US interest rates and the markets growing sensitivity to local economic data presents some near-term challenges for the Ringgit. Ultimately we believe that US rates are in the process of topping but until we get a definitive signal from the New Fed chair, hopefully, next week, we should expect offshore flows to remain light in the short run.

None the less the Ringgit is getting support from higher oil prices and given we are far removed from the USDJMYR 4.0 danger zone, longer-term investors should continue to look for opportunistic levels to re-engage long MYR posting

The Chinese Yaun

Markets in China return from a week-long holiday only to discover the US has initiated another anti-dumping probe.. This time for rubber bands. Certainly sounds more bark than the bit, but non the less trade war discussion is picking up.

Continue to favour a constructive view on the Yuan given the markets negative USD bias. But he RMB complex will most certainly benefit from expected bond inflows which should accelerate as we move through 2018.

Yield-o-Mania

Yield-o-Mania

Global yields ratcheted higher after a stronger than expected jump on Germany’s PPI which bolsters the hotter than expected comprehensive inflation narrative. But it was the jump in US 2-year note yields that provided the extra boost to the US dollar as shorter-dated tenors provides investors with better goalposts for determining how the market is viewing Fed sentiment

However, the lukewarm demand for two-year notes at auction and with supply concerns expected to weigh heavy on investor bond appetite this week, we could see the dollar back under pressure. Of course, traders are erring on the side of caution ahead of the release of the FOMC Jan 30-31 minutes and given the short dollar bus had reached standing room only portions, the short-term pause in this year’s grand dollar sell-off was not too unexpected.
US stock markets

US equity markets fell overnight on the back of higher US Treasury yields which are providing investors with more income than dividends on the S&P 500 Index. While the prospect of higher interest rates will keep investors on edge, it’s not like we’re returning to double-digit levels or the Fed is moving its terminal rate.So even the uptick in ten-year yields to 3 % or even 3.25 % is unlikely to kill the equity market rally as the benefits from fiscal stimulus should continue to feed through the markets. Investors are banking on much higher returns from equities than bonds again in 2018.

Oil markets

Amid OPEC supply compliance, WTI markets are focusing on dwindling inflow of Crude from Canada to Cushing due to limited accommodation on the Keystone pipeline.The disruption is providing a fillip to WTI prices while the stronger dollar has Brent prices falling and narrowing the WTI-Brent spread. Also, WTI is getting a boost from rising exports attributed to better infrastructure connecting the Permian Basin to the Gulf Coast. But of course, we are tapering expectation on WTI rally as the USD continues to find firmer footing.

Gold markets

A tough week for the Gold market so far as the dollar has rebounded and US Bond yields have jumped higher ahead of the FOMC minutes. Traders are hedging for a possible shift in guidance given the uptick in inflation, so this presents a significant market tail risk which could cause traders to reprice rate hike expectations in 2019 aggressively higher. A quicker and steeper slope of interest rate normalisation offers the most prominent near-term threat to gold prices as this outcome will send the USD surging.
G-10

The Euro

The lack of demand for EUR Monday certainly opened the door, and predictably on the first sign of abject news, we dipped to the low 1.23’s after the German ZEW survey plunged. The market is forever a discounting mechanism and given the extremely disappointing price action from the long perspective; it triggered one-way position squaring ahead of the FOMC minutes. And while the bullish EUR narrative continues to resonate, both bearish and bullish views will be inevitably challenged with Italian elections, January NFP and an ECB meeting due over the next few weeks so near-term convictions could turn neutral and tarnish the EUR appeal

The Japanese Yen

The USDJPY should be the best game in town this week especially if traders interpret the FOMC minute’s  colour as bold. However, the risks are balanced entering the FOMC minutes as the recent uptick in volatility could have as much bearing on Fed policy decision as the subtle rise in inflation

But until the market takes out the significant 108.15 level I continue to view the current move as little more than a pre FOMC meeting squeeze driven by yields and positioning and believe there will be substantial resistance between 107.50-108 levels.
The Australian Dollar

Pre-data comments. Given the RBA has been very vocal on wage growth as the missing piece of the economic puzzle, today’s Wage Price Index will attract an unusual amount of focus. Unfortunately, everyone is looking at this trade so the news reading algorithms will likely get there well ahead of everyone on a surprise uptick.

The Malaysian Ringgit

Riskier currencies are trading on poor footing given the firmer dollar and negative global equity sentiment. And of course, we can not overlook higher US yields which are driving opinions this week. This package of coincidences does not make a very conducive environment for regional risk.

Intermezzo

Intermezzo
It was a predictable snoozefest in FX overnight as global holiday sessions crimped activity. And adding to the void, there was scant data during European hours which severely nipped action as traders had few if any fundamental guideposts.

But the markets interlude included the usual holiday- liquidity induced mystery move as the dollar went bid at the NY open. But the step was humble and little more than an attempt to trigger some stops in low liquidity market conditions. But all near-term support levels held and the move and quickly retracted as there was no news to support the quickstep sell-off. Chalk it up to the ghosts of presidents past.

Currency markets have remained relatively muted with few if any headlines to sink one’s teeth into but as the markets pivot to Fed speak and the FOMC minutes this week, “deficit mania” is sounding a few decibels lower this morning.But none the less, ongoing concerns about swelling deficit’s and the Feds sequence of interest rate normalisation should be the markets key focus this week and the primary drivers of near-term volatility.
Oil Markets

Oil prices have started the week on a positive note.With risk aversion abating, equity markets have remained guardedly positive. Also, an escalation of middle east tensions on the back of Israeli Prime Minister Benjamin Netanyahu beating the war drums by suggesting that Isreal could act against Iran alone has nudged prices higher. Predictably this warmongering has put the region on a state of readiness fearing a head to head incident and boosted oil prices due to the fear of sizable supply disruptions. Of course, when Isreal comes into the equation it could spark contagion across a region

Also, convincing signals from OPEC and their partners to extend production cuts continues to resonate with investors.

Gold Markets

Gold prices slid lower overnight on a drop in volatility and a slightly stronger dollar. Selling pressure emerged after USD speculative buyers emerged along with some position short covering ahead of the plethora of critical Fed speak and of course the FOMC minutes. But given the late-January Fed meeting was primarily interpreted as Hawkish; the bar is high for the minutes to sound an even more Hawkish note,  but they will still attract the lions share of attention.

Given that the sun seldom shines on a capital hill along with escalating middle east tension, on the first sign of a dollar downdraft gold with ratchet higher.

G-10

The Japanese Yen

Markets are focusing on Friday’s crucial Japan CPI print, and with all the recent chatter about the BoJ extending YCC in perpetuity given the stronger Yen, short-term traders are paring back bearish dollar bets. And with a relative sense of calm in overall volatility,  dollar bears are taking an interlude in holiday thinned-trading conditions

The Euro

Very little buying interest yesterday after Friday’s sell-off so given the lack of demand the Euro could fall to low 1.23  on even minor unexpected hic-up on news flow given thin liquidity conditions. But dips should look attractive for long-term players.

The Malaysian Ringgit

Very quiet trading session to start the week with local trader biding time until the FOMC minutes release. In the meantime, the broader USD sentiment will dictate the pace of play for regional currencies and imparticular the USDJPY which is moving towards 107 which is mildly negative for the MYR

On a favourable note, Oil prices remain robust on the escalation of middle east tension and production cut compliance among OPEC members which should provide support for the MYR.

Hawks coming home to roost

Hawks coming home to roost

Equity markets were trounced on the back of Global yields parading to multi-year highs Thursday. Indeed, it was less dovish Fed speak that continued to be the driver, and the BoE provided a hawkish bounty for good measure.

The ruckus in the bond pits these days appears hell-bent on marching towards 3 % 10Year UST yields much quicker than anyone had suspected which suggest equity markets will come under the hammer for some time to come. Yields are becoming the real storyline as a combination of tighter monetary policy and the US burdening deficit leading to more supply, suggests we have crossed a 2.75 % 10Y UST bridge of no return, and the ride could get bumpier for equity investors.

The issue is not so much the 3% level but rather the pace that Bond yields have been rising in the US that is sending the markets into disarray. The rapidity of the moves has caught the markets by surprise, and we are going through the predictable panicked repricing of most asset classes.

Oil Markets

Crude prices continued to tank overnight as the commodity complex has suffered dearly due to the uptick in market volatility. But the toxic combination of rising US output and a stronger US dollar has nullified OPEC production cut momentum.

With the markets factoring in US crude production to continue hitting new record highs through 2018, the supply dynamics suggest a move below $ 60 WTI is in the offing.
Gold Markets
Gold toppled to a five-week low after the Bank of England whispered a sooner and more substantial rate rises after revising their growth and inflation forecast. The quicker than expected shift on Central Bank Monetary Policy outlooks coupled with the rapid increase in US bond yields continues to dampen investor sentiment. However, Gold prices quickly recovered as the equity market drawdowns continue to attract risk off hedges while the Syria Standoff with Turkey is offering support on the geopolitical front.
Currency Markets

The Australian Dollar

The rise in US bond yields has toppled the Aussie dollar and dented risk sentiment as global equity market continues to tumble.

Market volatility is weighing negatively on commodities, add in a dose of dovish RBA rhetoric, and therein lies the heart of the Aussie dollar woes.

Also, the Aussie was trampled on when USDCNH shot up from 6.3050 to 6.3750 as it seems that China is opening up more channels for outflows to slow RMB appreciation. (See below)

The Aussie dollar tends not to flourish in these types of markets.
The $ Bull in the China Shop: Chinese Yuan

The dollar bull was let loose in the China shop yesterday as a confluence of events had trader paring back short US dollar risk from the morning fix.

The fix came in a bit higher than expected which usually causes a bit of a move higher but, it was the article in China Economic Daily that was creating the most noise as the report urges corporates to enhance FX risk management. (Nudge Nudge)
China has also resumed its Qualified Domestic Limited Partnership plan after a two-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments. While it does not have a massive Foreign Exchange flow impact,  and  more symbolic than anything else,  it is none the less suggestive that the Pboc is less sensitive to capital outflow

Given that positions were skewed short US dollar, the confluence of events had traders covering positions aggressively knowing that liquidity will be sure to dry up the closer we get to Lunar New Year.

The China trade numbers were perceived disappointing ( I have opposite view) which contributed to some currency negativity.

But from any logical perspective, it was hard to ignore the Mainland equity fire sales this week which certainly had a negative bias on currency sentiment

The Malaysian Ringgit

Negative regional currency signals abound.

The rapid repricing higher in US bond yields has taken investors by surprise. Moreover, with US yields looking to push higher, we could be in for a bit more pain before the markets find some solid footing.

Higher US yields are supporting the USD and weighing on global equity sentiment which is hurting overall regional risk appetite.

US record crude production continues to weigh negatively on oil prices.

The proximity of Chinese Lunar New year has traders paring back risk.

The market, at least for now, is hedging against the Fed potentially leaning more hawkish, which is explaining the uptick in USD, US Yields and lower equity markets.

Market Jitters Remain

Market Jitters Remain

US stocks toppled again on Wednesday in choppy and messy fashion after a dispirited US Treasury auction revived concerns about a hawkish Fed, unnerving investors already spooked after the rapid climb in US Treasuries apparently ignited a jump in the Cboe Volatility index.

A deplorable auction with meek demand pushed yields on 10-year US Treasuries to 2.84 percent, up four basis points, with traders now eyeing Monday’s a four-year high of 2.88 percent.

The market is now hedging against the Fed potentially leaning more hawkish which is explaining the uptick in USD and US yields.

There was a glimmer of hope earlier in the NY session that equities markets were finding a happy medium, but the equilibrium shattered as optimism gave way to more selling when Federal Reserve Doves see the inflationary lightbulb flicker.

Fed Evans, who dissented along with Kashkari on the December rate hike, has also embraced Kashkari’s new hawkish tone post-Friday’s earnings data. While his baseline remains a hold in rates until mid-year but with on crucial commonition: “In contrast, suppose inflation picks up more assuredly, as many expect. Then, we still could easily raise rates another three or even four times in 2018 if that were necessary. And I would support such a faster pace if the data point convincingly in this direction.”

Of course, this hawkish Fed discourse has elevated market chatter this morning centring on how the  Trump Administration could react if the USD parades higher on a more hawkish Fed. It certainly makes for exciting international intrigue  to the debate in the wake of comments from ECB member Nowotny who charged that the US Treasury is deliberately putting pressure on the USD

Oil Prices

Oil prices have been getting battered by forces beyond the nodding donkey of late. The weaker narrative has been underpinning prices, but with the market shifting to a more hawkish fed description the US dollar slide has come to a blunt halt is now weighing negatively on oil prices. Notwithstanding the unforeseen disorder in the broader financial system has seeped into the oil markets.

With Oil prices ones WTI fell abruptly after the U.S. government reported crude stockpiles rose by 1.9 million barrels. But its the deluge US production that remains the most significant menace to OPEC production cuts. The bottom line is the US crude production should keep hitting new highs throughout 2018 after reaching an all-time higher of 10.25 m barrels per day. 11’s are not that far away.

Gold Prices

Stronger US dollar and higher US Treasury yields have depressed demand for Gold overnight. And with equities souring and with prices continuing to melt away, gold markets could be susceptible to a stock market rebound.

The shifting Fed narrative that is gathering hawkish following could be the most significant thorn in the Gold Bulls side.

Currency Markets

Japanese Yen

The Yen will be traded like a puppet whose strings are manipulated by equities and fixed income price movements.

Australian Dollar

The risk-off moves from Monday’s equity plunge were enough to liquidate short USD and with continued broad de-risking assignments still being played out. I suspect the Aussie bulls with remain in time out corner until we get back above .7850 and a fraction of risk appetite returns. When you view every possible trade scenario as an ambush, probably best to tread cautiously.
The Malaysian Ringgit

The re-emergence of the Federal Reserve Board Hawks and Oil prices looking very susceptible to ramped up US shale oil production continues to weigh negatively on the MYR.

But indeed, the uptick in market volatility has tamed investors appetite, so bullish signals are far and few between