Markets Yield to pressure?

Markets Yield to pressure?

Not so far today as the markets have opened predictably quiet with Tokyo and New York celebrating their holidays. USDCNH is trading unpretentiously higher but the USD, in general, remain little-changed post-NFP.  Strength in labour markets, and with wage growth picking up, it suggests the US versus the rest of the worlds 10-year interest rate differential will continue to widen out which should support the markets long USD bias all things being equal. However, in the absence of tier one US economic, outside of Thursday’s US CPI, the dollar won’t have much of in the way of strong US fundamentals data to anchor itself this week. EM focus is falling on Brazil elections where the Mexican peso will be used as a proxy to express a BRL   view.

Non-Farm Payroll

I’m always a sucker for game-changer hype around Non-Farm Payroll reports, but even although the headline disappointed, the inline AHE didn’t, matching August’s gain. And with the rates markets looking to fade any disappointment, however, bond traders took their cue from the unemployment rate dropping to 3.7 per cent to boost 10-year UST yields to a seven-year high and leaving currency traders, who are speculatively long USD, to calmly go about their pre-US long weekend housekeeping duties relatively unfazed. However,  U.S. stocks closed sharply lower as equity traders were left scrambling as surging US bond yields towered above the awe-inspiring   50-year low US  unemployment rate.

Equity Markets

Stocks could trade lower again this week as portfolio rotation out of equities into fixed income accelerates which could negatively impact global markets. Blue chips have been trading pretty badly ever since US yields breached multi-year levels of resistance last  Wednesday.  Indeed, this ongoing  carnage in the fixed income market combined with negative risk sentiment could shoot volatility through the roof  forcing markets into a defensive posture

So, with Vix in the mix, we could see equity markets struggle as investors reduce risk.

The Kavanaugh Effect 

Brett Kavanaugh, as was widely expected after Collins joined Flake as a yes Friday afternoon was appointed to the Supreme court. While this nod will have no market impact, it leaves the US no less divided ahead of what is expected to be firey and hotly contested midterm elections. After the Democrats’ red-hot all-out partisan attack on Kavanaugh last week, the Republican base has been invigorated while the tactics have backfired on the Democrats as according to IBD/TIPP poll Donald Trump’s approval ratings made a strong rebound.

China
China returns this week, and traders are keen to see how policymakers react to last weeks developments like the HSI’s sell-off triggered by the terrible China PMI prints, and the headline calamity around “Spy Chip” which put Chinese tech names under intense pressure. Indeed,  it will be interesting to see how the markets pick up the pieces.

But if ‘ Spy -Chip fears continue to pick up, the US administration will go after China tech industry with guns blazing and blacklist them from US   trade. The potential fall out from this battlefield would make the current tit for tat tariff war look like a game of axis and allies.

But the Pboc, not unexpectedly, jump started the process on Sunday by cutting the reserve requirement ratio for most commercial banks by one percentage point. The bank said would the net effect would inject Rmb750bn ($109bn) into the banking system to help spark growth to counter the adverse economic impact from US Tariffs and mainland’s deleveraging campaign but undoubtedly last weekend terrible PMI’s were a definite call to action. This monetary policy tweak is the fourth in 2018 and despite the weakening Yaun and the Feds embarking on a more aggressive rate hike tangent than expected, suggests the Pboc are putting their greatest energies behind stimulating the flagging economy as opposed to the US-China trade wars or Fed policy for that matter.

It’s not too much of a stretch to assume markets should expect more policy easing measures and increased infrastructure spending after China economy expanded at the slowest pace on record last month. The RRR cut will help but the  China economy will more monetary policy persuasion to snap its current funk.

European Markets

Late Friday the EC rejected Italy’s budget outline according to the letter sent to Fin Min Tria.

Oil Markets

There was some mild profit taking on Brent future heading in the weekend, but the benchmark closed out a very explosive week up 1.44% from a week ago. WTI held a bit steadier on the day suggesting there were some positions adjustment back into the cheaper  WTI benchmark ahead of this week’s set of US inventory numbers and closed the week out 1.5% higher than last week. Amid chatter that Saudi Arabia has replaced all of Irans lost oil.

Based on the dwindling spare capacity argument, the Oil rally is far from over. But the most significant issues is that no one seems to be able to pin down precisely how much OPEC spare capacity is. The state department, who is on the intervention warpath and quick to accuse OPEC of sitting on 1.4 million barrels daily(MB/d). But oil analysts quoted over the weekend “This is the lowest level of spare capacity in the global system relative to demand that I’ve ever seen. Spare capacity is moving to a precariously low point.”  Jeffries. Frankly, OPEC’s spare capacity issue has been the oil markets biggest mystery for some time with most of that debate falling around mega-producer Saudi Arabia. But assuming additional capacity comes in at 2.5 MB/d as supported by the recent  International Energy Agency data, the problem is that the capacity is quickly declining due to Asia’s insatiable demand.

Saudi Arabia claims it could produce 12. MB/d  if it opened all the spigots. However, that claim has never been given the once over as the highest all-time level for Saudi output, according to OPEC report was just over 10.7 MB/d in 2016, only before the Saudi-Russia led mega OPEC cartel orchestrated push to raise oil prices via supply cuts.

But as the spare capacity debate rages on, so will focus on critical near-term demand indicators after the Energy Information Administration reported a considerable build in U.S. commercial oil inventories last week.

Some headwinds to greet markets this morning.

Reports over the weekend suggest the Trump administration will provide Iran waivers. But these wavier are not unconditional and  are predicated on the countries weening off Iran crude 100 % compliant

Baker Hughes rig counts are down -2 as pipeline bottlenecks arrest supplies from the Permian Basin. But the bottlenecks don’t play out favourably for WTI given the pipeline constraints could lead to more significant inventory builds in Cushing, pressuring WTI lower and widening the Brent /WTI spread.

Finance ministers and central bankers head to Indonesia for the International Monetary Fund’s annual meeting, and officials have been dropping hints about trimming global growth forecast for the first time in two years.

Of course, the US economy keeps on ticking, but global synchronised growth has faded and should at some point provide a drag on oil demand. Higher oil prices will eventually lessen demand, but the multiplier effect from a weaker EM currency profile has a more significant impact. Most of the words rise in current as well as projected oil demand comes from EM countries, not from mature economies like the US and Europe where consumption is relatively stable.

Overcrowded trade and the ” porthole effect.”

The markets are still looking higher based on the dwindling global spare capacity narrative and by no means is this rally over. But as any futures trader will tell you, it can it can be hard for logic to prevail over emotion at times. The market is saturated with oil bulls, and in these grossly overbought conditions, it doesn’t take much to tip the apple cart. There’s nothing worse than that feeling realising that the excellent Oil position you have built, is similarly owned by everyone else in the markets. Knowing it would take little more than one bearish OPEC headline causing some prominent position to flinch, it could trigger an avalanche of traders running for the exits. It’s incredible how quickly prices can plummet when everyone’s running for the same door.

In  oil markets, traders refer to this as the ” porthole effect ” (I wish I knew who coined the phrase as I would attribute) Basically it’s unclear if the boat is sinking or not by looking out of the “porthole”, but if one person tried to escape from the “porthole” a free for all would ensue.

Gold Markets 

There remains a lot of risk in the markets, and there is a noticeably sick feeling in  US equity markets which should support prices.  But last weeks  Treasury sell-off will undoubtedly motive gold bears so unless equity market spiral entirely out of control gold could track lower.

Currency Markets

I have been harping to no end about how tricky it could be to trade the US dollar over the next few weeks given that it’s a complete data dependent trade. Well, it hasn’t been that crafty at all as US yields are leading the way so far. However, this week the US economic data docket looks relatively sparse outside of Thursday key US CPI print. But, given the level of political noise in the market,  in the absence of a busy slate of Tier one US economic data, there’s not much to keep the markets tethered to strong US fundamentals so that the US  dollar could remain prone to external factors particularly from China and Italy. However,  there are more FOMC tea leaves to read this week as a plethora of Fed members takes the stage to offer up their forecast for future policy. But after hearing  Powell last week, and with Bostic even sounding less dovish than usual on Friday, I don’t think this week’s Fedspeak will offer too much of a protest to discourage the US Treasury sell-off, but shouldn’t move the dial significantly.

The Chinese Yuan 

The Pboc’s  RRR could jump-start the greenback on Monday as this policy measure, although widely expected by traders,  should fuel additional easing talks and put more pressure on the RMB complex.

China’s foreign-currency holdings fell in September, as heightened trade tensions with the U.S. saw the USD safe haven appeal accelerated. However, the weakening Yaun could trigger waves of capital outflows leaving the Pboc with little choice to intervene to stem the tide

The Australian Dollar 

How the US/China tensions unfold will be a primary focus this week, given how quickly relationship has fallen off the rails during the past week or two markets are getting very worried about the negative knock-on impact to Aussie dollar which is the primary G-10 currency to express China risk. This week RRR is a bit of a saw off for the Aussie. On the one hand, the weaker Yuan by proxy should feed negatively in the Aussie, but the stimulatory effects could benefit hard commodity prices and lend support to the Aussie

The Malaysian Ringgit

Higher US Treasury yields are dominating sentiment based on the markets hawkish FOMC view and weighing in EM currencies.

The external environment isn’t at all amicable for EM Asia currencies, higher  US rates, tepid growth outside of the US markets, and the escalation of US-China tensions it’s near impossible to hold even the slightest of bullish conviction. Demand for MYR has been tepid at best  With the upcoming budget in focus; it puts a lot of pressure on the Malaysia government to deliver a fiscally prudent measure. While terms of trade do remain favourably due to oil prices, slow domestic growth could be a real negative for the MYR as it could trigger a dovish response from the BNM.

Outsized negative sentiment in IDR and INR is feed through the basket, but the biggest concern is a faster pace of interest rate hikes in the US.

NFP – what to expect

Friday October 5: Five things the market is talking about

The granddaddy of economic indicators – U.S non-farm payrolls (NFP) for September – will be released later this morning (8:30 am EDT) along with the Canadian jobs report.

Today’s U.S number is ‘big,’ especially with this week’s aggressive backing up of the U.S yield curve. The sell-off in Treasuries, in part, has been justified by U.S data supporting the strength of their economy and the markets future inflation fears.

This morning’s payrolls headline print, coupled with wage growth numbers, will provide substance to what investors should expect, from an interest rate perspective in particular. Does the Fed’s dot-plot line up neatly or will the Fed push its benchmark past the neutral level?

Consensus is looking for a September headline print of +185K new jobs and an unemployment rate to ease another one-tenth to +3.8%. However, expect dealers to look beyond the headline and focus intently on the increase in average hourly earnings.

The August wage growth print at +2.9% was the largest y/y gain in nearly a decade. If September’s number comes in even stronger, will justify some dealers fears that inflation pressures are building, maybe faster than originally perceived.

Current expectations for wage growth m/m are +0.3%, which would equate to approximately +2.8% y/y.

1. Stocks mixed reactions ahead of payrolls

Euro equities are struggling for traction after the Asian session ended the week with a further sell-off overnight as the region’s tech companies were battered by concerns about their U.S business.

In Japan, the Nikkei fell to its lowest close in a fortnight, tracking Wall Street’s slide yesterday as rising U.S Treasury yields have reduced the attraction of most stocks except financial ones. The Nikkei share average ended -0.8%, while the broader Topix dropped -0.5%.

Down-under, Aussie shares edged higher on Friday, supported by gains from the financial sector, which managed to advance for a second session. The S&P/ASX 200 index closed +0.2% higher. The benchmark is off -0.4% for the week. In S. Korea, Kospi stock index also ended lower this morning (-0.31%) on fears of foreign fund outflows after U.S yields surged to a new seven-year high.

Note: China’s financial markets are closed for the National Day holiday and will resume trade on Oct. 8.

In Hong Kong, stocks fell for a fourth consecutive session, dragged by a selloff in tech stocks on fears that these companies will be the latest casualties in the Sino-U.S trade war. The Hang Seng Index was down -0.42%.

In Europe, regional bourses trade lower across the board, pressured by rising sovereign yields. Investors will take their cue from this mornings N. American employment reports.

U.S stocks are set to open in the ‘red’ (-0.2%).

Indices: Stoxx600 -0.7% at 377.2, FTSE -0.8% at 7359, DAX -0.8% at 12142, CAC-40 -0.5% at 5385, IBEX-35 -0.5% at 9264, FTSE MIB -0.9% at 20438, SMI -0.5% at 9053, S&P 500 Futures -0.2%

2. Oil prices rise on Iran sanctions, gold little changed

Oil prices trade atop of their four-year highs this morning as traders predict a tighter market due to U.S sanctions on Iran’s crude exports.

Brent crude oil is up +10c a barrel at +$84.68. Yesterday, Brent fell by -$1.34 a barrel or -1.6% – the contract is on course for a gain of +2.5% on the week. U.S light crude is up +30c at +$74.63, a gain of +2% on the week.

The market remains very ‘bullish’ with speculators gunning for $100 a barrel on fears that the U.S demands for an Iran oil embargo will create a significant supply shortfall.

Both benchmarks retreated yesterday following a rise in U.S oil indicated that they would raise output, however, pullbacks have been aggressively bought.

Ahead of the U.S open, gold prices are little changed as the market remains cautious after U.S Treasury yields hit seven year high yesterday and on expectations that a strong U.S payrolls report could boost the Fed case for a tighter monetary policy. Spot gold has inched down -0.1% to +$1,197.64 an ounce, while U.S gold futures are flat at $1,201.3 an ounce.

3. Reserve Bank of India (RBI) surprises

The RBI kept its policy steady in a surprise hold this morning, but changes its stance from “neutral” to “calibrated” tightening.

The central bank left the Reverse Repo Rate (RRR) unchanged at +6.25% (not expected) and the Cash Reserve Ratio (CRR) at +4.00% (as expected).

It’s the first pause in three-decisions in the current tightening cycle. Governor Patel is to keep a ‘close vigil’ on inflation outlook for the coming months, as the outlook is clouded with several uncertainties. He indicated that the benefits of a weaker INR currency would become somewhat muted from a slowdown in global trade and escalating tariff war.

INR stays near record lows as the ‘big’ dollar hit a fresh record high of $74.05 vs. $73.65 before the statement.

The euro area bond market is heading for its worst week in five-months, with fears about tighter central bank monetary policy and strong U.S economic data will push borrowing costs to new highs.

Germany’s 10-year Bund yield has gained +2 bps to +0.55%. In the U.K, the 10-year Gilt yield has climbed +3 bps to +1.697%, the highest in almost three-years. While further anti-E.U. rhetoric by Italy’s Deputy PM Salvini is again pushing BTP yields higher. Italy’s 10-year yield has jumped +3 bps to +3.363%.

4. Dollar remains strong ahead of payrolls

The ‘big’ dollar is maintaining a firm tone, trading atop of its three-month high, against G10 currency pairs ahead of this morning’s NFP print.

EUR/USD (€1.1497) remains within striking distance of this week’s low outright. Italian anti-E.U rhetoric coupled disappointing Italian draft budget details is again providing EUR ‘bears’ with further ammo.

GBP/USD (£1.3034) is holding above the psychological £1.30 handle as EU Brexit negotiators were said to believe that an agreement with Britain was ‘very close.’

USD/JPY (¥113.88) remained below the ¥114 level after testing above it earlier in the week due to higher U.S Treasury rates.

4. German factory orders

Data this morning showed that factory orders in Germany rose strongly in August after two months of declines, boosted by strong foreign demand from outside the eurozone.
Orders, seasonally adjusted, rose +2% m/m. That follows a -0.9% drop in July and a -3.9% drop in June.

Note: Orders are still down -2.1% on the year, however, current data would suggest solid German growth has appeared in H2, 2018.

Digging deeper, domestic orders dropped -2.9% in August, but that was offset by a +5.8% rise in foreign orders.

Foreign orders from countries using the EUR dropped -2.2%, but those from non-eurozone countries rose +11.1%.

Forex heatmap

China’s Spy’s, election meddling and NFP to keep traders busy

China’s Spy’s, election meddling and NFP to keep traders busy

The market has that distinct odour of risk off. It’s incredible just how quickly sentiment has shifted in a mere 24 hours. There were nascent signs of asset rotation in Asia markets yesterday when the US fixed income yields ripped higher. And prospects of Feds draining the punch bowl at a quicker rate has investors reconsidering their bullish lean with US equities trading at record highs.

In response to tech led equity sell-off the US yields have backed off, so I surmise US equities are now driving the sentiment bus as volatility is getting bid up with the VIX trading above 15 overnight. But worrying headlines around China/US relations seem to have triggered caution in other markets. More so after Fed governor Kevin Warsh went into hyperbolic overdrive to suggest US-China relations are worse today than they were in the Nixon’s era. But I think market concerns have more to do with all the noise about China trying to sabotage the US midterm elections have US investors temporarily spooked. Knowing that if the White house does prove that China is meddling in the US midterm elections, we can assume a heavy-handed response on the trade front, and US tech companies that have extensive trade relations with China would be at high risk of falling prey to an escalating trade war.

Not to mention accusations of  China employing microchips to infiltrate and spy on major US companies has sent more jitters through markets Bloomberg

Elsewhere, commodities are trading horribly as Oil markets have convincingly backed off this week high water marks. And looking at some of the carnage a broader sector of assets, Im reminded that “nothing in this universe, including the universe, lasts forever.”

I think its a combination of factors leading to this turnaround, notwithstanding the latest rip in the US, fixed income yields sending negative cross-currents. While this week’s Fed speak does paint an exceedingly rosy picture of the US economy, the prospect of higher inflation and the Fed responding with even quicker and steeper rate hikes, historically faster than expected Fed rate hikes have posed a considerable negative for equity markets.

I don’t necessarily view higher US interest rates, especially at these historically low levels as a good enough cause and effect to torpedo longer-term bullish equity sentiment. But if it is proven to be a false flag, and China is indeed proved to be meddling in US election interests, it will trigger a swift and uncompromising reprisal from the hawks in the US administration and would sound the alarm bells across global markets.

Day in day out these markets are full of intrigues, and frankly, we have President Trump to thank or blame, depending on what side of the Vol tracks you’re riding. But indeed, it does look like a bumpy ride for Q4.

OANDA’s Innes sees a bumpy ride for Q4 Bloomberg TV

Oil markets

From any fundamental perspective, it should not have been a strong week for oil prices after a massive DOE US inventory builds, Oklahoma, crude stocks rose about 1.7 million barrels from Sept. 28 to Tuesday while factoring the Reuters article that suggested Saudi -Russia le OPEC mega cartel will add more barrels to offset Iranian shortcomings.

Traders were so overly focused on Iran sanctions negatively affecting physical supply along with ambiguity around Saudi Arabia spare production capacity; that clearly, traders were blind to the facts this week and are now going through a bit of a reality check ahead of the weekend.

But the decline in US equities and waning risk sentiment also factored into the sell-off

Oil markets remain in the bull zone. But with a lot of the short-term speculator froth running for the exits, there a tendency for longer-term players to revert to low ball bids knowing the markets will come to them. But the Brent $ 84.50-75 support channel remains very well bid, and it would take a break of $84 in my view to suggest that last nights price action was anything other than profit taking after this week’s huge move higher.

Gold Markets

In the absence of any convincing, clear-cut catalyst the markets have been in consolidation mode. Cleary the markets are attaching a whole lot of significance to tonight’s NFP print as the markets have remained rangebound as trader know the outcome of tonight’s data can significantly shape the market’s rate hike expectations and the near-term outlook for the USD. So indeed, there a lot riding on tonight employment data. Failing any USD surprises, expect current tight ranges to persist ahead of tonight’s data print

Currency Markets
EM FX traded weakly. However, US yields are stabilising lower, and EUR is surprisingly resilient.

G-10

But we are in for a very unsettled 20 + hours as currency traders table if full jockeying for position ahead of the payrolls data for NFP, evaluating and trading the NFP correctly while factoring in the expected waves of positions squaring ahead of the US long weekend.

Japanese Yen
Dollar-Yen traded lower as US bond yields fell while markets continued to debate JGB’s and the inevitable BOJ policy shift as a Reuters article was making the rounds in London. Reuters

But everyone was quietly cutting long USDJPY in Tokyo markets earlier in the day when intense focus fell on JGB’s that we’re moving to the .15 area after the BoJ last intervened at .147

Markets are long USDJPY, so position squaring ahead of tonight NFP also contributed. Key levels remain 113.50 and 114.50

The Canadian Dollar

Mired in the stronger USD but with double trouble on the payroll front as both Canada and US are release on Friday, CAD traders have pared back bullish bets considerably. With the BoC rate hike firmly entrenched in markets views, CAD traders are looking for a spark to upend those nasty Canadian dollar perma bears on Bay street.
EM Asia currencies

The external environment isn’t at all amicable for IDR -INR -PHP, the weakest links in EM Asia currency chain Higher US rates, tepid growth outside of the US markets, soaring Oil prices compounded by concerns over the impact of US-China trade tensions it’s near impossible to hold even the slightest of bullish conviction.

Indian Rupee

But again, its back to the unconventional Well for India’s government to stem the INR deep depreciation.  Livemint

While offering up a barter and deferred promissory notes are being considered as an option to reduce India’s reliance on the USD for trade and oil purchase.

ON first China could charge a decent premium on the INR-CNY currency trade agreement to make this fly.

But buying oil from Iran or Venezuela could trigger negative reprisal from the US especially for those companies that were holding off in the hope of winning sanction waivers for the USD. India’s refineries have been busy bees loading up on Ironing oil ahead of Nov 4 sanctions, and traditional USD banking settlement channels will be blocked. Reuters

The Malaysian Ringgit

Demand for MYR has been tepid at best but yesterday warning shot across the bow from the world bank has dented sentiment even more after downgrading growth forecast. With the upcoming budget in focus, it puts a lot of pressure on the Malaysia government to deliver a fiscally prudent measure. While terms of trade do remain favourably due to oil prices waning growth could be a real negative for the MYR as it could trigger a dovish response from the BNM.

No stopping the US dollar runaway train at the moment

No stopping the US dollar runaway train at the moment

US Markets 

The US dollar is on a rampage as awe-inspiring beat on both the ADP and ISM services index combined with very supportive  Fed speak sent the US dollar soaring.

Just another risk on the day for US market’s despite US bond yields surging. But look no further than the  September ISM non-manufacturing report which massively surprised to the upside, confirming that the US economy is indeed  ” firing on all cylinders “.  And triggering hugely bullish signal for both the  USD and a myriad of other US assets like  US equities with the S&P rising to fresh session highs and   US bond yields touching multi-year high water marks with the 10-year UST holding just above 3.16 %. To put things in perspective, the ISM just printed a 21-year high beating consensus expectation 61.6 vs 58!

Doubtlessly, nothing more bullish than the Dow printing record highs as US  interest rates hit multi-year peaks. !!

No, if and or buts investors remain unambiguously bullish on the S&P 500. And with positive signs gradually showing up for the Shanghai Composite and the  Nikkei, Asia equities, while still pulling up the rear, should make leaps and bounds this quarter even more if US-China resolves their trade issues. But at this stage, it looks like US markets don’t give a toss about China trade.

Oil Markets 

The DOE data for last week showed a much more significant than expected 8.0 million barrels per day build in US commercial crude which generally suggests that oil prices should tumble. Given the market is doing the exact opposite with Brent touching $86 per barrel, it indicates the markets remain singularly focused on Iran sanction and the questionableness of OPEC’s amplitude to increase production quickly enough to offset any Iran supply loss. In other words, the market is focusing on spare production capacity and the US sanctions effectively drying up the physical markets.

So if you were waiting for a bullish catalyst; when OIL markets rally after a significant and highly unexpected DOE inventory build, price action can’t be any more telling than that. Absolutely, the stage is set for a test of Brent $90 per barrel which should provide clear sailing to the opulent $100 per barrel mark

All this on top of the other big news of the day from Riyadh that indeed Saudi Arabia and Russia will boost its output in October and November.Reuters

However, after dissecting the article, it was merely an affirmation of something that we had suspected all along, but now its confirmed that Saudi Arabia and Russia are working closely together in coordinating their response to the oil market.  The headline confirms Saudi Arabia and Russia sideline discussion at a St. Petersburg conference back on May 25, subsequently ratified by OPEC

And yes, Saudi Arabia and Russia are both supplying additions barrels, but I genuinely believe both parties are as equally price sensitive as they are about making concessionary overtones. So, if the markets remain fluid and accept the additional barrels at or near current levels, triggering tears of joy to all oil producers, including those in Texas and Oklahoma Indeed the Saudi -Russia led mega oil cartel will be more than happy to add supply.

“The Russians and the Saudis agreed to add barrels to the market quietly with a view not to look like they are acting on Trump’s order to pump more,”

One quote in the article, however, reminded me of one of my long-held theories that we are on the cusp of a new axis of oil price control that would involve the wolds three mega-producers Saudi Arabia -Russia and the US. While I still think this locus of control will happen eventually, although the US inclusion will likely ruffle some middle east feather. But frankly, without offering US Shale producers a seat at the negotiating table, any coordinated efforts to stabilise prices over the long run could be difficult without their participation.

Gold Markets

Gold prices slid lower on Wednesday, triggered by a significant beat on the ISM resulting in higher US Bond Yields and a very strong USD. But with bond traders effortlessly taking out key interest rate levels, which are falling like ninepins, it does suggest the dollar rally has much more room to run. After waffling its way through September, the greenback is starting to reassert itself supported by a significant fair wind from the US rates markets with 10-Year UST holding north of 3.15 %. It is difficult to envision gold tracking any which way but down. Yesterday’s Italy inspired safe -haven rally is starting to look more and more like a massive missed opportunity, that’s if you didn’t sell, as, on a strong NFP print, gold could flop towards the mid $1180’s in a heartbeat.

Currency Markets

It’s not only the Aussie moving down under, but so is the Euro. And with the US10 Year Yields sliding through crucial resistance level like greased lightning, the Euro is folding like a cheap suit. But it was the constructive tone from Fed chair Powell that lit a fire under the dollar after he suggested that the Fed is a long way from neutral rates. So, assuming the US data supports I guess we can count on the Fed to roll out quarterly rate hike for the foreseeable future, or at least until there’s a downturn in US data Given the moves on USDJPY, it does indicate the EURUSD could fall further as the market aims at the next critical pivot level of 1.1420.

 

EM Asia

A tale of 2 barrels of oil 

The Indian Rupee

With  Brent test, $86 per barrel and the USD  reassert itself across G-10 the Indian Rupee got hammered overnight. This trade was the equivalent of taking candy from a baby after yesterday’s comments from the RBI who are unwilling to react to what they believe is a knee-jerk reaction on INR and Oil, and utterly unwilling to a supporting a separate USD window for Oil companies.

We knew the Rupee was going to be in for a rough ride, but the voracity of the move is what frightening But with intervention proving futile due to India’s heavy reliance on imported oil and gas the import bill is going to be eye-watering and humungous and will continue to provide ammunition for currency speculators to target the Rupee.

But deferring to the Oxford Economics matrix, In India’s case ” A 10 per cent increase in oil prices can lower the real GDP level by 0.2 per cent four quarters later”, so this oil move is going to have lingering effects.

Malaysian Ringgit 

On the other hand, the Malaysia Ringgit will be relatively insulated from the stronger dollar, and surging US yields as Malaysia pumps about 666 K barrels per day which generate a tidy some for the country and not to mention the downstream effect which is an absolute boon to Malaysia’s expansive oil and gas industry. While USDASIA will trade with a defensive posture, today the Ringgit should be viewed in a much better light than the regional peers, but demand will remain muted

Italy: risk on, risk off?

Wednesday October 3: Five things the markets are talking about

European markets have so far shrugged off losses in Asia to post gains this morning amid hopes that Italy’s budget deficit could be lowered, but concerns about the country’s debt and budget plans remain.

The EUR (€1.1573) has rallied from yesterday’s six-week lows on hopes that Italy’s draft budget plan will pledge to cut the deficit to +2% in 2021, revising the government’s initial proposal. Italian bonds have surged after four-days of selling.

At least for the time being, the lack of contagion in the rest of the eurozone bond market from the rise in Italian government bonds shows that the budget talks are still perceived as a local issue, and this despite, Italy’s +2.4% deficit plan is a significant deviation from previous commitments.

Elsewhere, U.S Treasury yields remain atop of their recent highs after Fed Chair Powell yesterday welcomed wage growth, but expressed confidence that low unemployment would not support inflation that would require aggressive tightening.

Later this morning, U.K PM Theresa May will be speaking at the Tory party’s annual conference. Expect Brexit rhetoric to affect a hypersensitive sterling.

1. Stocks mixed results

In Japan, equities came under pressure overnight as automakers fell on a sharp decline in U.S new car sales last month and while financials retreated mostly on profit taking. The Nikkei share average lost -0.7%, though it was still holding at 27-year highs. The broader Topix fell -1.2%.

Down-under, Aussie stocks rallied from strong gains in resource-related stocks overnight, helped by higher gold and metal prices, while financials ended lower despite earlier gains. The S&P/ASX 200 index rose +0.3% at the close of trade. The benchmark fell -0.8% on Tuesday.

Note: Both China and S. Korea were closed for a holiday.

In Hong Kong, stocks fell for a second consecutive day, with investors staying on the sidelines preferring to look for hints on policy direction from China. The Hang Seng Index was down -0.52%.

In Europe, regional bourses have opened higher across the board. Investor risk sentiment has improved after Italian press reports new budget plans (see below). The financial and Telecom sector are the best performers, while the material sector is underperforming. Germany is closed for a holiday.

U.S stocks are set to open in the ‘black’ (+0.2%).

Indices: Stoxx600 +0.3% at 383.2, FTSE +0.2% at 7,487, DAX closed, CAC-40 +0.2% at 5,476, IBEX-35 +0.1% at 9,314, FTSE MIB +0.3% at 20,618, SMI +0.6% at 9,145, S&P 500 Futures +0.2%

2. Oil trades atop of its four-year highs

Oil trades atop of its four-year highs this morning, supported by expectations that U.S sanctions on Iran will tighten supply and strain the ability of the Saudi’s and other producers to pump more.

Brent crude is up +38c at +$85.18 a barrel. It reached +$85.45 on Monday, its highest level since November 2014. U.S crude (WTI) is up +24c at +$75.47.

Crude exports from Iran, OPEC’s third-largest producer, are already falling as the U.S sanctions kick in on November 4 deters buyers.

A recent survey of OPEC production found Iranian output in September fell by -100K bpd, while production from the group as a whole rose by +90K bpd from August.

Note: Crude prices have roughly tripled from lows hit in January 2016 after the OPEC and Russia cut output.

OPEC has so far ruled out any further production increase, beyond delivering the boost agreed in June, despite prices rallying further and more pressure from Trump.

Ahead of the U.S open, gold prices have edged a tad higher in the Euro session after gaining over +1% yesterday, supported by safe-haven demand as Italy’s budget plan sets it on course for a potential clash with the E.U. Spot gold is up +0.1% at +$1,203.31, while U.S gold futures are up +0.1% to +$1,207.06 an ounce.

3. Italian yields fall

In Europe, Italian bonds are rallying as some of the yesterday’s worries have eased on signs that Rome is open to cutting its budget deficits and debt in coming years.

Note: There are reports that the Italian deficit would fall to +2.2% of GDP in 2020 and to +2% in 2021 from the +2.4% earlier outlined.

Italian 2-year BTP yields have fallen -21 bps to +1.381%

In Germany, the 10-year Bund yields trade higher, indicating less investor appetite for safe havens amid the Italian turmoil. The 10-year Bund yield is trading +2 bps higher at +0.45%, while the 10-year BTP yield is trading -8 bps lower at +3.34%.

Elsewhere, the yield on U.S 10-year Treasuries has gained +1 bps to +3.07%.

4. TRY falls on inflation data

The Turkish lira is under pressure after data this morning showed annual Turkish inflation jumped to +24.52% in September from +17.90% in August, lifting USD/TRY to a five-day high of $6.0912.

Note: The Central Bank of the Republic of Turkey (CBRT) has been reluctant in the past to hike rates to curb inflation, especially since President Erdogan has previously expressed a preference for lower interest rates.

The EUR (€1.1565) continues to be driven by the Italian budget projections, this time going up on reports that Italy may not pencil in another 2.4% deficit-to-GDP projection for 2020 and 2021.

Sterling (£1.3004) is again trading atop of the psychological £1.30 handle. Expect the pound to remain hypersensitive to Brexit comments from PM Theresa May when she addresses party members at the Conservative party conference this morning.

5. Eurozone retail sales fall for second consecutive month

Data this morning showed Eurozone retail sales fell for a second straight month in August, which may suggest that that economic growth has yet to rebound significantly from a slowdown in H1.

Eurostat reported retail sales across the 19-countries that use the ‘single’ unit was -0.2% lower in August than in July, although +1.8% up on the same month of 2017.

Last year, a surge in exports drove eurozone economic growth, but a weakening in overseas sales has been behind a loss of momentum this year. That has left the economy more reliant on household spending to drive the expansion, and falling retail sales are a major concern.

Note: Eurostat also cut its estimate for July to -0.6%, having previously calculated that sales fell by -0.2%.

Digging deeper, the drop in sales comes despite a fall in eurozone unemployment and a pickup in wage growth. But energy prices have risen more sharply over recent months, eating into the income available to spend on other goods and services.

Forex heatmap

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

OANDA Trading : Bloomberg TV Interview : Bumpy ride for Q4 but some pockets of value ( NKY)

Bloomberg TV

The risky business of trading an interest rate view

For any follow-up, I can be reached on Reuters Messenger, via the BBG terminal or my mobile numbers

The risky business of trading an interest rate view

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 were far too sceptical and are now reversing out some of that pessimism as the Fed’s appear on course to raise quarterly interest rates for the foreseeable future.

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 refiner 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.”

Reuters

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.”  This policy hawk is all business when to comes to beating war drums,  even more so when they’re primarily directed at Iran. Any signs of growing unrest in the middle east could cause oil prices to rise.

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 trigged, 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.

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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.

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

NAFTA 
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)

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.

The Euro

The Italian budget aside, 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 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. 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.

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 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

Oil prices score for a second consecutive monthly gain

Oil futures rallied Friday on signs of tightening supplies, tallying a second monthly gain in a row, with global crude prices settling at another four-year high.

“Until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, it’s hard not to be blatantly bullish,” said Stephen Innes, head of trading at Oanda,

Prices saw a sudden, late-morning jump to intraday highs. Phil Flynn, a senior market analyst at Price Futures Group, attributed that climb to technical trading. He also said prices seemed to find support from reports that China is cutting back on Iranian oil purchases, as well as talk that the U.S. has no plans to tap its Strategic Petroleum Reserve to make up for Iranian oil barrels lost amid U.S. sanctions.

Overall, the market has been bolstered by declining Iranian crude exports ahead of U.S. economic sanctions against the Islamic Republic’s oil industry, set to take effect Nov. 4, analysts say.

Marketwatch