Still picking up the FOMC pieces and tying up a few loose ends

Still picking up the FOMC pieces and tying up a few loose ends

US markets 
Risk sentiment is buoyant this AM with US equity trading higher. The greenback advanced to a two-week high against G-10 while EM currencies are bucking that trending trading favourably despite yesterday’s Fed interest rate hike.

US Equities remain supported by Fed Chair positive view on the US economy, while the US rates underpin the dollar outlook. However, it’s the EURO which buckled when Italian budget concerns reared it’s vexed, and ugly head as political squabbling over country’s deficit targets raged while the EU budget deadline looms.

US Equities 

US equity markets were moving broadly higher through the US session with both Apple and Amazon reversing a week-long slide. Mind you; It hasn’t been a stellar week for the US markets with China pushing back trade talks, NAFTA discussion going nowhere accented with the natural paring back of risk ahead of the FOMC. But one thing that’s telling indeed is current price action, which sees investors continually coming back for more, it suggests the gushing US economy and on not trade wars, which continues to influence investor decision.

Oil Markets

While oil prices remain in bullish territory, there were a few emerging narratives that have tempered yesterdays huge Asia rally.

The DOE has pledged to deliver 11.0 million barrels  of crude oil out of the SPR during October and November to cover some operational costs.

U.S. crude production hit a record 11.1 million barrels per day in the week ending Sept. 21, according to preliminary data from the Energy Information Administration, but of course, this may be subject to revision but indeed a very chunky production number

While Libya supplies have been extremely erratic, crude oil production has reportedly reached a five-year high of 1.28 million barrels this week.

And then finally, there’s been elevated market chatter suggesting that Saudi Arabia may quietly add some supply over the next few months, While the likely loss of Iranian supply may be the dominant market theme, OPEC production may be rising.

So, it’s in this context last weeks speculative inflows have categorically focused on Saudi effective spare capacity or the lack there off and less focus on Saudis contention they will raise output, but at what point? But let’s face it there still a lot of guesswork in play, as there typically is in the boisterous oil markets.

So in the meantime,  dips remain incredibly well supported as Iran sanction continues to underpin sentiment but as we’ve seen countless times in many cross-asset markets, once investors set sights on a glitzy target like 100 dollars per barrel. More often than not, caution is thrown to the wind as the fear of missing out takes over. Indeed, there’s a tinge of FOMO, to borrow a phrase from BTC trading, seeping into oil markets. But with Oil Fund Managers and traders alike comfortably seated in the bull camp until further notice, oil prices look poised to extend on this week’s gains.

Gold Markets

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

Currency Markets

The Euro 

When you thought it was safe to buy the post FOMC EUR dip, Italian risk rears its ugly head making it difficult to hold an absolute bullish view at current levels G-10 traders were utterly caught out as they had virtually priced all the Italian risk out of the Euro equation.

The reason why Italy warrants so much attention is because of it big quite frankly as simple as that view is we could just as easily see a leak lower after the significant 1 1660 support level gave way. However, the markets could continue to remind itself that EU politically inspired Euro sell-offs tend not to have long legs after the considerable drop, I’m not so sure Asia G-10 traders would be keen to add downside risk at current levels as the Markets remain on Italian budget standby.

Japanese Yen

Patience is a virtue these days when trading USDJPY as there have been very few express elevators up on this trade. Besides some walking back from bad post-FOMC USD short positions, but overall risk sentiment improved, and US yields have started to pick up again.
While there likely the quarter year-end dollar demand impact, but with reports of the year-end turn interest rates already getting bid up considerably this to can affect USD demand.
But ultimately this is one of these keep it simple type trades that all currency traders like, global tensions seem to be lightening up boosting risk sentiment while all things continue to point higher US interest rates.

Turkish Lira
Well, maybe Turkey won’t be on everyone’s Thanksgiving menu come November as the Lira was pardoned again after some incredible price action this week.
TRY reacted favourably post Fed as the less hawkish tone was a real boost to well oversold weakest links in the EM chain, not to mention the 20 % yield on TRY looked gorgeously attractive But local traders were spirited on by talks of a Chinese acquisition into a sizeable Turkish company which continued to resonate overnight.

EM Asia

It’s good to be pliable trading local EM Asia currencies as the narratives are forever shifting after the intense focus on Current account deficit vs Current account surplus ASEAN currencies, were now back again to discussing regional high vs low yielders. But it all adds up the same in my book.

Asia High Yielders 

It’s debatable if we’ve seen the last major sell-off in INR-IDR or PHP, as my rational logic says we have not. But one thing that is clear RBI-BI and BSP mandate to keep on tightening while implementing various synchronous control to keep currency speculators at bay, are having a short-term positive effect on market sentiment. Despite the fact they are not the big elephants in the room, which are the deficits. AS such the tail risk remain high, but as EM traders will continuously remind themselves if there’s no risk, there’s no reward.

Asia Low Yields

On the flip side, low local yields are very prone to higher US Interest rates and are extremely sensitive to global risk, which leaves us between a rock and a hard place as US rates are moving higher, but risk is improving. Ultimately higher US interest rates will give way to a burst of risk euphoria if the US and China can come to terms on a trade deal.

Malaysian Ringgit

Unfortunately, the MYR is getting tugged in many directions resulting in little positive momentum despite improving risk sentiment and higher Oil prices. The Ringgit remains hypersensitive to higher US rates, especially considering the weak Q2 GDP and moderate inflation which will keep the BNM sidelined while the FOMC will continue to raise US interest rates. The local unit does feel trapped between a rock and a hard place. So, and until US-China trade leaves the picture, the MYR could remain weighted down.

The Chinese Yuan

Some odd uncorrelated moves in play that has many scratching their head wonder what is driving this USD demand. Suggesting this is the real corporate driven application that has traders possibly guess that Chinese corporates are increasing USD hedge as per SAFE warning back into eh summer or more simply that Chinese corporates have real US funding requirement. There seems to be no reason why there would be speculative demand but puzzling none the less. But USD trade war hedges are going to be smiling.

Picking up the pieces post FOMC

US President Trump said to suggest he is going to call China President Xi tomorrow, which should be soothing news for a lot of cross assets none more so than Chinese equity markets. Keeping an eye on this one.!

US Markets

US stocks ended the day lower as the Fed is expected to stay the dot plot course for the foreseeable future, but nothing too unusual from what usually happens to equity markets every time there is a US interest rate hike. The modest wobble suggests little more than profit taking as there is nothing in the Feds policy statement to raise a red flag about US economic growth. Investors will be sponging up these dips even more so if the US-China trade tensions de-escalate. Of course, back channels were always open, but with the President offering to reach out to XI, this is indeed a very positive sign and likely in response to China very measured approach to the US tariffs. Notably, in keeping the Yuan as stable as can be.

Oil Markets

The DOE data for last week largely confirmed the silhouette offered up by Tuesday’s American Petroleum Institute survey, with unexpected builds of 1.9 million barrels in US commercial crude stocks including 0.5 million barrels at the Cushing, Oklahoma delivery WTI hub while refinery crude runs dropped 901,0000 bpd. But one bullish surprise in the broader data set was that distillate inventories fell 2.2 million barrels last week on a drop-in refinery production.

But oil markets rebounded after Rick Perry quashed any notion of tapping SPR, suggesting that selling of strategic reserves would” have a fairly minor and short-term impact ” Frankly, using this emergency response tool as a means of controlling oil prices was a bit of a stretch, given the storied history when the SPR’s were released in the past.

History of the SPR releases

Not to mention the sale would probably end up doing little more than widening Brent -Crude spreads since the SPR sales would effectively make US oil cheaper and not necessarily the rest of the words supply.

Without sounding like a broken record, Oil prices remain in the Bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions once they take effect in November. While the US oil inventory data counts, the fact that the markets could still be underestimating the supply crunch from Iran sanction has many Oil investors running with the bulls.

Gold Markets

Gold prices fell after the US Federal Board raised interest rates despite the nonplussed initial reaction from G-10 currency traders. There was way too much hand-wringing leading up this FOMC that much of the key focal points were somehow lost in translation.

What should have been an easy exercise based on the fact US economy is firing on all cylinders suggesting the Fed’s need to stay the course on interest rates, however in the absence of inflation there is no need to nudge the yield curve higher.

But for Gold prices, the song remains the same, with no haven demand, Gold ETF inflow stagnant and no real shift in investment allocation portfolios, most Gold dealers and market speculators are left watching the US dollar for direction. Until something breaks on the big dollar look for $1190-$1210 range trade to persist

Currency Markets

My currency colleagues in NY left the office with a migraine after getting whipsawed on FOMC double talk.

Canadian dollar
Not everyone is happy on the trade war front as the Loonie has slipped CAD is slipping to 1.3038 as US President Trump makes it clear he is unhappy with Canada. Holding little back, the president was quoted *TRUMP: IF CANADA DOESN’T makes a deal with the US, WE’RE TAXING CARS.

Trade of fade? I still expect a deal to go through but with the crowded trade mentality kicking in as traders find themselves long CAD at the much lower level, there some position trimming likely on stop losses weighing on the CAD sentiment this morning.

New Zealand dollar

The birds the word, as expected the RBNZ kept everything on hold today, given minimal expectation was going into this meeting the KIWI has traded neutral. Other than the usual RBNZ OCR “gap trap” at 5 AM due to the lack of liquidity over the ” date change,” the Kiwi is trading flat so far.

Japanese Yen
There was a bit of a wobble into the NY close. Long USDJPY is a very subscribed trade, and signs the yield curve was flattening, traders were more apt to book profits towards the end of the overnight trading session. But with important support level holding firm and the FED painting a slightly rosy outlook for the US economy, it appears the markets continue to favour USDJPY higher over the short term.

Euro 
I keep looking for some Italian budget concerns that are frankly not there as the risk of a Euro collapse on the back of the Italian budget is almost entirely priced out. Back to the basics on this trade.

EM Asia
Malaysian Ringgit

The MYR is struggling on the back of equity outflows as the Ringgit continues gravitating towards the top of the near-term range 4.12-4.15 despite Oil prices recovering. Again, volumes are very low as traders are looking for some spark

Indonesian Rupiah

The Bank Indonesia is likely to hike, but in context of consecutive trade deficits in July and August, the IDR remain in currency speculators weakest links in the chain.

Philippine Peso

The BSP will hike by 50bps, in line with consensus expectations. The BSP is likely to keep its hawkish tone even after the September rate hike to ward off inflation.

Look to Fed’s Powell for help

Wednesday September 26: Five things the markets are talking about

Global stocks are trading mixed ahead of today’s FOMC rate decision, with Asian shares closing out higher, while Euro bourses are a tad down as Italy’s budget talks continue to be a source of concern.

The Italian government has until tomorrow to outline its fiscal and economic projections ahead of a budget law discussion due to take place in October. Currently, the markets remains concerned that the government will try to pass a budget that is out of step with E.U rules.

This afternoon, the Fed is expected to raise interest rates by +25 bps to a corridor of +2% to +2.25% as it continues to roll back easy-money policies.

Market attention will focus on the forward guidance, including the new ‘dot plot’ diagram, to gain insight into the plans for 2019 and beyond.

Currently, the U.S dollar trades steady while U.S Treasury yields trade atop of their the seven-year highs reached in May.

Note: Today’s Fed decision (02:00 pm EDT) will be followed by a press conference with Chair Jerome Powell (02:30 pm EDT).

1. Stocks trade mixed ahead of Fed

In Japan, gains overnight lifted the Nikkei to an 8-months high as the index was able to overcome the impact from a number of companies’ stock prices being adjusted lower amid looming dividend payments. The index rallied +0.4%. Again helping was the U.S dollar briefly hitting a two-month high and breaching ¥113.

Down-under, the S&P/ASX 200 was able to squeeze out a slight gain and ended up +0.1% at the close. Energy stocks rose a further +0.9% as oil prices rallied, while materials gained +0.8%. But financials fell -0.6% as the initial report on an alleged industry misconduct looms and health care dropped a fresh -0.7%.

Note: South Korea’s markets were closed for a holiday.

In China, stocks rallied overnight on hopes that global index provider MSCI would consider quadrupling the weighting of Chinese big-caps in its global benchmarks. At the close, the Shanghai Composite index was up +1%, while the blue-chip CSI300 index was up +1.1%.

In Hong Kong, shares followed the region higher on receding trade war fears and high oil prices. The Hang Seng index rose +1.2%, while the China Enterprises Index gained +1.5%.

In Europe, regional bourses remain somewhat muted ahead of the Fed’s rate announcement.

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

Indices: Stoxx50 +0.1% at 3,423, FTSE flat at 7,506, DAX -0.1% at 12,362, CAC-40 +0.2% at 5,489, IBEX-35 flat at 9,492, FTSE MIB -0.1% at 21,644, SMI flat at 9,020, S&P 500 Futures +0.2%

2. Brent trades near four-year high, but U.S crude retreats

While global trade tensions remain a source of investor concern, rising oil prices are taking on a greater importance.

Despite President Trump calling for increased crude output from OPEC, crude prices have been lifted by the pending U.S sanctions on Iran in November.

Producers fear pumping more oil to compensate for lower output from Iran and Venezuela could mark a return of oversupply.

Brent crude is up +10c, or +0.1%, at +$81.87 a barrel, after gaining nearly +1% yesterday. Brent rose on Tuesday to its highest since November 2014 at +$82.55 per barrel.

U.S crude futures (WTI) are down -4c at +$72.24 a barrel. They climbed +0.3% yesterday to close at their highest level since July 11.

U.S data yesterday showed that domestic crude stockpiles unexpectedly climbed last week. API data showed that inventories rose by +2.9M barrels in the week to Sept. 21 to +400M, compared with market expectations for a decrease of -1.3M barrels.

Expect dealers to take their cue from today’s official figures on stockpiles and refinery runs from the U.S Department of Energy’s Information Administration (EIA 10:30 am EDT).

Ahead of the U.S open, gold prices are steady ahead of the Fed’s rate decision. Spot gold is little changed at +$1,200.43 per ounce. It’s been a narrow +$4 range overnight, and even tested key resistance at +$1,200. U.S. gold futures are flat at $1,204.70 an ounce.

3. Italian yields fall on budget talks

Italian bond yields continue to trade under pressure in the run-up to the presentation of Italy’s budget draft, scheduled for tomorrow. A budget deficit below +2% gap (to GDP) is expected to give further support to Italian BTP’s.

This morning, Italian government bond yields have dropped across the curve. Short-dated Italian yields have fallen -10 bps to +0.77%, while Italy’s five- and 10-year BTP yields have dropped -5-7 bps.

Elsewhere, German Bund yields remain just below highs reached yesterday. Germany’s 10-year Bund has opened at around +0.54%, down around -1 bps.

Stateside, the yield on 10-year Treasuries has fallen -1 bps to +3.09%, the largest drop in two-weeks, while in the U.K, the 10-year Gilt yield has also fallen -1 bps to +1.62%.

4. Dollar needs guidance

The ‘big’ dollar is little changed ahead of today’s Fed’s rate decision and has meant little doing for currencies in general (€1.1765, £1.3160 and ¥112.90).

While the Fed’s monetary policy tightening is likely to end next year, investors are trying to figure out if most of the dollar’s strength is behind us.

Later today, the Fed could remove the word “accommodative” from its statement, but consensus thinks this is most unlikely. Even if it does, the U.S dollar may still find it difficult to find support due to its trade and protectionist policies.

Down-under, the Kiwi (NZ$0.6655) bounced higher on an uptick in business confidence.

5. New Zealand business sentiment rallies

Data overnight showed that New Zealand business sentiment lifted this month from a decade low even as firms remained pessimistic overall.

An ANZ Bank survey showed a net +38.3% of respondents expected the Kiwi economy to deteriorate over the year ahead – a previous poll showed +50.3%, which was its lowest reading since 2008.

Last month, the Reserve Bank of New Zealand (RBNZ) said gloomy business confidence was a major risk that could result in firms holding off on investment, dragging on growth and increasing the chances of another cut in official interest rates.

Later today (05:00 pm EDT), the RBNZ is widely expected to hold rates at a record low of +1.75% and signal that it plans to hold them there for an extended period of time.

OANDA Trading Asia market wrap

Activity picked up considerably mid-morning after a sluggish start.

Currencies

Despite the FED rate hike fully baked in,  currency traders have gone through their there ceremonial jockeying for position ahead of this critical announcement given the markets outsized focus on tonight’s FOMCs. While volumes have been higher than average, most G-10 currencies have been confined to tight ranges none the less.

FOMC

While investors are treating another Fed rate hike as all but certain on Wednesday, the outlook for future policy as signalled by the dot plot and any comments from Jerome Powell will be essential to whether US bond market yield push higher. But with the US economy galloping along quite nicely, it difficult to envision a dovish lean despite investors concerns about inverted curves or fiscal policy fatigue in 2019

Asia 

Asia equity markets had traded defensively in the afternoon session giving back early morning gains where sentiment was perked when MSCI announced they’re considering increasing the weighting of China A shares. And with an FOMC main event on tap tonight, position squaring is dominating market sentiment.

Italy

However, trading desks are abuzz with the latest terminal headline that suggests Five Star Movement, one half of Italy’s emergent coalition government, is threatening to tank the country’s upcoming budget unless it gets full backing for its flagship benefits plan. Indeed, this could throw a huge monkey wrench into the works, and worth paying close attention to as the trading day progresses.

Gold

The precious complex continues to consolidate ahead of the FOMC, and in the absence of any haven appeal, most Gold dealers and market speculators are left watching the US dollar for direction. And since even the most astute G-10 traders are struggling for dollar direction, gold remains mired in no man’s land, smack dab in the middle of the well worn $1190-$1210 range.

Oil

Oil prices remain very much supported in Asian markets as most of President Trump’s overnight US headline bluster directed at OPEC was largely ignored. But, bullish bets are being held back by the larger than expected API inventory builds as the more definitive DOE Weekly Petroleum Status Report at 10:30 AM EDT on Wednesday is on tap. And while there is bearish tail risk surprise if the DOE confirms the API build; however, Oil prices remain in the Bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions, so I suspect any dips will be firmly supported.

Predictably quiet Asia session ahead of the FOMC

Its been one of those predictably quiet Asia sessions ahead of the FOMC but a few highlights none the less

MSCI
With Asia markets back in full swing today after the local holiday, finally some good news for China equities as MSCI is considering increasing the weighting of  China A shares in its global index from next year and allowing a group of smaller tech stocks in the index.

While there will be no immediate pass-through impact on the markets as the proposal is still on the table, but its a definite win for the local sentiment which has been battered mercilessly by the incessant bluster around trade war.

New Zealand

New Zealand September ANZ business confidence for September has come at -38.3 versus -50.3 prior. This is after earlier today the country posted the worst trade deficit on record at NZD1.5bn versus -925mn expected. After last weeks positive GDP print and when combined with Headline business confidence that bounced 12 points to -38 in September, it’s the highest level since May. Traders are even more confident now for a subtle hawkish shift in the RBNZ language. But I think traders remain guarded about long KIWI positioning and a move above .67 NZDUSD unlikely ahead of the FOMC which comes out 3 hours before the RBNZ.

Oil Markets

Oil markets remain well supported in Asia despite the unexpected 2.9 million barrels build in the API report. While US inventory data counts Oil prices stay in the Bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions once they take effect in November. But with worries circulating the markets could still be underestimating the supply crunch from US sanctions, oil investors remain firmly in buy the dip mode.

Decision Day : The FOMC looms

US markets

Major U.S. indexes closed mostly lower Tuesday ahead of the Federal Reserve Board rate decision, as airlines, transportation and shipping companies are feeling the squeeze from higher oil prices. But higher energy prices are stoking the inflationary fires, and that pass-through effect is pushing  US bond yields higher, which tends to lessen investors appeal for stocks.

FOMC

The market has completely priced in today’s Federal Reserve Board rate hike so that the focus will fall on the Fed’s forward guidance and Fed Chair Jay Powell’s press conference. Over the past few weeks, we’ve seen some interesting quantified arguments from traditional Fed doves suggesting the Feds will need to move off neutral to a more restrictive monetary policy. So, I expect the real focus of the meeting will be on the “neutral rate” with comments from Brainard and Evans indicating that the Fed may continue hiking into a restrictive territory.

On the flip side, elements of the markets remain policy pessimists concerned about adverse effects of the trade war and preaching fiscal fatigue as we enter mid-2019, and as such are looking for a Fed pause in 2019. As I told my Trading desk,

I’m hawkish, but only 51 % is implying I have no idea what to expect from this newly minted sitting Fed. But this red-hot US economy does suggest the Feds will continue to drain the punch bowl, but if the Chair Powell shows any support for hiking into the restrictive territory, the dollar will surge immediately.

While everything remains little more than a crystal ball hypothesis when it comes to this FOMC, but one thing we can be sure of is that Fed Chair Powell will stay as far away from politically charged topics such as China Trade and the President’s constant meddling in Fed policy.

Through the looking glass

Trump’s address to the UN was the highlight of the overnight session while not the overly market is impacting, as everyone had pretty much expected his comments to be tinged with Trump “Through the looking glass “, as predictably his most prominent ” wrath of Trump targets were China, for its trade policies; OPEC for fixing oil prices; Syria for chemical weapons; Venezuela for socialism and corruption.

Oil markets

Trump’s UN address did not sway the rally in oil prices one iota, but crude conceded a chunk of yesterday’s gains after the American Petroleum Institute reported an unexpected 2.9 million barrels increase in US crude stocks for last week. But indeed, it will be a substantial bearish surprise for the market if the more certain DOE Weekly Petroleum Status Report at 10:30 AM EDT on Wednesday confirms a similar inventory build.

But for the most part, Oil prices remain in the Bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions once they take effect in November. While the US oil inventory data counts, the fact that the markets could still be underestimating the supply crunch from Iran sanction has many Oil investors running with the bulls.

Gold Markets

The precious complex is marginally higher with gold consolidating either side of the $1200 level. But with Gold ETF inflow stagnant and no or a real shift in investment allocation portfolios, most Gold dealers and market speculators are left watching the US dollar for direction. And since even the most astute G-10 traders are struggling for dollar direction, gold remains mired in no man’s land, smack dab in the middle of the well worn $1190-$1210 range.

Currency Markets

Japanese Yen

With the 112.75-65 near-term support channel holding up overnight USDJPY looks well positioned to move higher. But everyone will be watching the wires today as the FOMC will deliver a rate hike. I’m expecting entirely no shift in forwarding guidance but listening carefully for any bullish inference on the “neutral rate” with comments from Brainard and Evans indicating that the Fed may continue hiking into a restrictive territory.

Malaysian Ringgit

Market remain focused on the FOMC where a hawkish tail risk could weigh negatively on the Ringgit. Despite surging oil prices, one glance at The US 10y is trading up at 3.10 % should be convincing enough to tread gingerly, not only in the Ringgit but EM Asia in general but expect USDASIA, and the MYR to consolidate into the FOMC.
Support comes in at 4.12 resistance 4.15

If in doubt, look to the Fed for direction

Tuesday September 25: Five things the markets are talking about

It’s a return to the drawing board for many investors who are now back online beginning their holiday shortened Asian trading week.

Euro equities are trading mixed following a “get back to basics” Asian session as investors ponder the outlook for global trade and U.S politics.

The U.S dollar continues to hang tough, while stateside, Treasury yields consolidate atop of +3.1% while crude oil trades at a four-year high.

In Europe, Italian bonds rally as the country edges closer to delivering a budget.

Topping investors’ agenda this week is today’s two-day FOMC meeting, along with the Fed’s updated forecasts and the chair’s quarterly press conference (Sep 25-26).

Note: The market is looking for a third +25 bps rate hike and is pricing in another one for December. Investors await Fed chair Powell’s views on trade and tariffs tomorrow.

1. Stocks mixed results

In Japan, the Nikkei rallied for a seventh consecutive session overnight, helped by gains in chip-related stocks that offset weakness in construction equipment manufacturers. The ‘big’ dollar trading through ¥112 also helped to support overall sentiment. The index gained +0.3% to hit its highest print in more than eight-months.

Note: Both Hong Kong and South Korea indexes were closed for holidays on Tuesday.

Down-under, Aussie stocks traded flat overnight as an escalation in Sino-U.S trade tensions hit risk sentiment, while energy stocks rallied on a firmer oil prices. The benchmark dipped -0.1% on Monday.

In China, stock fell on Tuesday in their first trading session after fresh U.S tariffs on +$200B worth of Chinese imports began yesterday. At the close, the Shanghai Composite index was down -0.58%, while the blue-chip CSI300 index was down -1%.

In Europe, in early trade, regional bourses are being supported by stronger commodity prices and optimism over the Italian budget.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx50 +0.3% at 3,419, FTSE +0.3% at 7,482, DAX +0.2% at 12,373, CAC-40 +0.2% at 5,486, IBEX-35 +0.4% at 9,550, FTSE MIB +0.5% at 21,450, SMI +0.3% at 8,972, S&P 500 Futures +0.1%

2. Oil hits new four-year highs as OPEC resists output rise, gold steady

Crude oil prices remain better bid after Brent hit a fresh four-year high amid looming U.S sanctions against Iran and an apparent reluctance by OPEC and Russia to raise output to offset the expected hit to supply.

With OPEC and Russia having ignored Trump’s twitter pleas to increase production, coupled with U.S sanctions to hit Iran exports in November, should again provide support for oil ‘bulls’ to seek higher price prints.

Brent crude futures are up +30c, or +0.4% from Monday’s close at +$81.69 a barrel, a level not seen since November 2014. U.S West Texas Intermediate (WTI) crude futures are at +$72.28 a barrel, up +20c or +0.3% from yesterday’s close.

The U.S from Nov. 4 will target Iran’s oil exports with sanctions, and Trump continues to put pressure on governments and companies around the world to fall in line and cut purchases from Tehran.

Ahead of the U.S open, gold prices trade steady as the market remains somewhat cautious ahead of today’s two-day U.S Fed meeting, which could offer direction on future interest rate hikes. Spot gold is little changed at +$1,199.06 an ounce. U.S gold futures are also steady at +$1,203.70 an ounce.

Note: Gold has fallen -12% since hitting a peak in April against a backdrop of trade disputes and rising U.S interest rates.

3. Italian yields’ fall on budget hopes, Bund yields rally

Italian borrowing costs rally, narrowing the gap with its German counterparts, on signs that Italy’s coalition is likely to reach a compromise over next years budget. The ruling coalition is willing to keep the budget deficit below +2% of GDP.

In contrast, Germany’s Bund yields continue to back-up, trading atop of their four-month highs, a day after ECB chief Mario Draghi pointed to a “vigorous” pick-up in underlying inflation.

In early trade, Italy’s 10-year BTP yield has fallen -9 bps to +2.86%, narrowing the spread over the benchmark German Bund yield to around +232 bps, from around +245 bps late yesterday.

In Germany, the 10-year bund yields has rallied to a four-month high at +0.54%, a day after posting their biggest one-day jump since June.

Elsewhere, the yield on 10-year Treasuries has advanced +1 bps to +3.09%, its highest yield in almost 19-weeks. In the U.K, the 10-year Gilt yield has climbed +1 bps to +1.624%, , the highest in more than seven months.

4. Bitcoin’s pullback quickens

In early trade, BTC has slid to new intraday lows, falling nearly -4% to +$6,400 in the overnight session, moving the cryptocurrency back toward this month’s lows. The BTC ‘bears’ continue to eye the +$6,000 region.

TRY has rallied +6% in the past 24-hrs to $6.1374 on reports that Turkish authorities are sending signals that an American pastor facing terrorism charges could be released next month.

EUR/USD (€1.1762) softened slightly after comments from ECB’s Praet noting that comments from Draghi yesterday were nothing new. The pair fell -30 pips to a low of €1.7133 following the comments.

Note: The ‘single unit’ found support yesterday after ECB President Draghi said there has been a relatively vigorous pick-up in inflation.

5. Swedish PM Lofven ousted in no-confidence vote

Earlier this morning, Swedish PM Stefan Lofven lost a no-confidence vote in parliament and will step down after four-years in power, but with neither major political bloc holding a majority it remained unclear who will form the next government.

Note: Voters delivered a hung parliament in the Sept. 9 election with Lofven’s center-left bloc garnering 144 seats, one more than the center-right opposition Alliance.

SEK is down -0.18% at €10.3374.

Fed and trade threats to drive markets

Monday September 24: Five things the markets are talking about

Global equities are under pressure as China called off planned trade talks with U.S, potentially triggering an escalation in the tariff war between the world’s largest economies.

Note: U.S’ tariffs on +$200B in China goods took effect at midnight, while China’s counter tariffs on +$60B of U.S goods also came into effect this morning.

Presidents Trumps’ veiled threat to OPEC to increase global crude supply was met with a tepid response over the weekend. The Saudi oil minister said that the market was adequately supplied.

The ‘big’ dollar continues to find support on pullbacks, while Treasuries trade under pressure along with Euro sovereign bonds.

Topping investors’ agenda this week is the FOMC meeting along with the Fed’s updated forecasts and the chair’s quarterly press conference (Sep 25-26). The market is looking for a third +25 bps rate hike and is pricing in another one for December. Investors await Fed chair Powell’s views on trade and tariffs.

Elsewhere, the Reserve Bank of New Zealand (RBNZ) will also meet Wednesday (Sept 26) and no rate hike is expected. The U.K posts its final estimate of Q2 GDP, while the Eurozone releases the September flash harmonized index of consumer prices (Sept 28). Also on Friday, Canada will release its monthly GDP data for July.

1. Stocks see red

Asian volumes were light and liquidity a concern as markets in China, Japan, South Korea and Taiwan were closed for holidays. Both Hong Kong and South Korea will be closed on Tuesday.

Note: Despite Japanese markets closed, Japans Economy Minister Motegi and USTR Lighthizer are expected to hold trade talks today in New York. Japan is said to considering a bilateral trade agreement with the U.S.

Down-under, Aussie stocks edged lower overnight, as lower commodities prices hit materials stocks while financials slipped on new revelations of wrongdoing in the sector revealed in a quasi-judicial inquiry. The S&P/ASX 200 index fell -0.1% at the close of trade. The benchmark rose +0.4% on Friday.

In Hong Kong, stocks plummeted after the U.S imposed fresh tariffs on an additional +$200B of Chinese imports and as Beijing cancelled planned talks between the two sides. The Hang Seng Index fell -1.62%.

In Europe, regional bourses opened in the ‘red’ and continue to trade lower. Market risk sentiment continues to be impacted over trade concerns as U.S tariffs came into effect at midnight and China cancels trade talks – consumer discretionary sector among worst performers.

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

Indices: Stoxx50 -0.3% at 3,419, FTSE -0.1% at 7,480, DAX -0.3% at 12,389, CAC-40 -0.2% at 5,481, IBEX-35 -0.5% at 9,543, FTSE MIB -0.5% at 21,427, SMI % at , S&P 500 Futures -0.2%

2. OPEC, Russia reject Trump’s call for immediate boost to oil output

Yesterday in Algiers, both OPEC and Russia ruled out any immediate, additional increase in crude output, effectively rejecting Trump’s calls for action to “cool” the market.

The recent price rally has mainly stemmed from a decline in oil exports from OPEC member Iran due to fresh U.S sanctions.

Also, according to OPEC’s projections, a strong rise in non-OPEC production could exceed global demand growth, which could eventually put pressure on prices.

Oil prices remain better bid this Monday morning as U.S. markets tighten ahead of Washington’s plan to impose new sanctions against Iran.

Brent crude futures are at +$79.74 per barrel, up by +94c, or +1.2%. U.S West Texas Intermediate (WTI) crude futures have rallied +74c, or +1.1%, to +$71.52 a barrel.

The market remains concerned about U.S inventory levels. U.S commercial crude oil inventories (EIA) are at their lowest level in three-years, and while output remains around the record of +11M bpd, recent subdued U.S drilling activity points towards a slowdown.

Gold prices have edged a tad lower this morning as the U.S dollar holds firm on news that China has cancelled trade talks with the U.S, while the market waits for this week’s FOMC meeting for guidance on future rate hikes. Spot gold is down -0.1% at +$1,198.36, after declining as much as -1.3% on Friday. U.S gold futures are little changed at +$1,201.60 an ounce.

3. HK interbank rates jump to 10-year highs after HKD surge

Some of the short-term rates banks in Hong Kong charge each other leapt to their highest levels in roughly a decade, in the first trading session after a sudden surge in the tightly controlled HKD.

Note: Speculators have been covering some significant ‘short’ HKD positions and the lack of liquidity has not helped the move.

The overnight HK interbank offered rate jumped +2% to +3.85%, it’s highest since 2007. One-month Hibor rose less sharply, but still reached nearly +2.17%. On Friday, HKD unexpectedly surged +0.42%, its biggest gain since 2003.

Note: The currency, which is pegged in a range of $7.75 to $7.85 to the U.S. dollar, was little changed at $7.8113.

Elsewhere, Italian government bond yields are backing up again this morning, again reflecting some unease among investors given this week’s deadline for the government to present its budget targets.

Note: ECB’s Mario Draghi speaks at the European Parliament later today, while on Wednesday; the Fed is expected to raise interest rates again.

Two-year Italian bond yields are up +4.5 bps on the day at +0.81%, while the ten-year yields are +3.5 bps higher at +2.87%. The gap over benchmark German Bunds yields have widened from Friday’s close at around +241 bps.

The yield on U.S 10-year Treasuries has increased +1 bps to +3.07%. In Germany, the 10-year Bund yield has rallied less than +1 bps to +0.47%, while in the U.K, the 10-year Gilt yield has climbed +1 bps to +1.563%.

4. Dollar hold firms, but G7 does find some support

GBP/USD (£1.3123) remains handcuffed to Brexit rhetoric and PM May woes. Sterling has begun Monday’s session on the front foot, reclaiming the psychological £1.31 handle after comments from U.K Brexit Minister Raab indicated that he is confident he will make progress on Brexit. There are also whispers that PM May has started contingency planning for possible snap election in November – however, Raab reiterated that “no election is planned.”

The EUR (€1.1770) is again wading towards the key €1.18 handle. Consensus does not expect this week’s data or monetary policy decisions to mount a serious challenge to the ‘single unit’s recent rally. The FOMC meeting is due on Wednesday, but a +25 bps increase to +2.25% is already priced into EUR/USD. The government in Italy is expected to roll out new fiscal projections, but the 2019 budget deficit will probably be set at close to +2% of GDP, which is similar to where the deficit stands now. While eurozone inflation data later this week should provide the euro with “minor support.”

The INR continues to weaken; with the USD/INR rallying to an intraday high of $72.73. There have been rumours that Reserve Bank of India (RBI) has intervened to cap dollar gains. Trade concerns continue to weigh as China cancels trade talks with the U.S.

5. German business sentiment slipped in September

Ifo data this morning showed that German business sentiment slipped this month following a sharp rise in August, as companies slightly lowered their business outlooks.

The Ifo business climate index decreased to 103.7 from an upwardly revised 103.9 in August, but still beat forecasts. The street had been looking for a decline to 103.2.

“Despite growing uncertainty, the German economy remains robust,” said Ifo president Clemens Fuest.

In manufacturing, managers were less content with the current situation in September compared with the month before. Business expectations, however, hit their highest level since February.

“Manufacturers plan to ramp up production in the months ahead,” according to the Ifo Institute.

Forex heatmap

A Cautious FOMC?? : dovish tail risks abound

US Federal Reserve chairman Jerome Powell is expected to reaffirm his cautious approach to monetary policy this week, potentially paving the way for an extended rally in the Australian dollar.

The Aussie has battled back from below US71¢ less than two weeks ago and is now within reach of US73¢, helped by a muted market response to the latest trade tariff moves by the US and China and the return of a semblance of calm to emerging markets.

With the economic party raging, the Federal Reserve is widely expected to drain some more punch from the bowl,” TD economist Leslie Preston said, adding the central bank appears far from done: “We expect the Fed to hike four more times over the next year, placing the fed funds target at a peak level of 3.25 per cent in 2019.”

The challenge for investors, as it is for Fed policymakers, is more nuanced.

“We suspect the FOMC will signal in its statement the need for policy, moving forward, to potentially become more nimble when it comes to rate hikes compared to the current workmanlike (quarterly) pace,” Bank of Montreal deputy chief economist Michael Gregory. “This could mean longer-than-one-meeting pauses or none at all (the latter becomes easier with the advent of pressers after each meeting next year).

“In any event, we suspect the phrase: ‘The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 per cent objective over the medium term’, might be modified.

The dot plot – or the specific rate forecasts by individual policymakers – is expected to be little changed for both 2019 and 2020.

“With two US rates hikes priced into [the balance of] 2018 and in the absence of inflation, it’s almost impossible for the Fed to bump up the 2019 curve,” OANDA’s Stephen Innes said in a weekend note.

“So, the markets will end up focusing on shifts in the long ball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons,” Mr Innes said.

Australian Financial Review

By Stephen Innes Head of Trading Asia @steveinnes123

Bring on the FOMC!

EM Asia: Next weeks discussions

Please join me on Live on Monday, Sept 24  discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today

Bring on the FOMC !

FOMC 

The FOMC meeting next week has a hike fully priced in so the focus will be on the dot plots and the follow-up presser which has dollar bulls questioning their near-term positions.

The meeting will be overly scrutinised to see if there are any changes in the projections, with new Vice-chair Clarida voting for the first time. Also, Chair Powell will likely be quizzed on Fed Governor Lael Brainard view that US interest will probably need to be made more restrictive in the sense that at some point in the future if the unemployment rate remains low, policy rates should move above neutral and into the restrictive territory.

Dovish tail risk

And herein lies the dovish tail risk which has  USD Bulls erring on the side of caution. With 2 US rates hikes priced into  the rest of 2018 and in the absence of inflation, it’s almost impossible for the  Feds to bump up the 2019 curve. So, the markets will end up focusing on shifts in the longball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons. Even if the Feds prod 2020 curve higher, its unclear how much of a USD fillip that shift could deliver given that Chair Jay Powell has contiued to de-emphasise 2020 dots. Unless we get an unexpected shift in the Feds terminal policy range of 2.75-3.00%, not sure the dollar ( X -JPY) goes anywhere but trades within well-worn ranges.

What else in G-10?

AS for the rest of G10, there will be no shift from RBNZ, but in the wake of the surprisingly strong data of late especially the monster GDP beat, we could see a subtle less dovish change in guidance.

It’s not a busy calendar next week per say but dotted by US PCE and EUR sentiment surveys. Canada delivers a GDP report, but NAFTA talks will continue to overshadow data as yet another NAFTA month-end deadline looms.

Brexit Blues 

It’s back to the Brexit drawing board after EU leaders “Chequers mated “and utterly humiliated May at the Salzburg meeting which sent the Pound tumbling below the 1.3100 before finding some composure. Of course, most believe a deal in some form or another will eventually happen. But in the nub of all this Brexit bluster, UK data has been surging with both CPI and Retail Sales beating expectations, but indeed  Brexit uncertainty has overshadowed.  Next week’s UK GDP data could be another strong point, however, with little to no breakthrough on Brexit likely to happen any time soon, The Bank of England will remain unwavering until clarity on Brexit it offered up so the market will likely look past next weeks UK data.

Great insights from our Senior Markets Analyst in London, Craig Erlam  

Sterling Down on May Brexit Warnings

OANDA Market Insights podcast (episode 32)

Craig reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Sterling wobbles on Brexit fears, US/China tariffs tit for tat, Inflation hike against expectations.

China 

China PMI which will be closely monitored. Also, we should expect more trade headlines to come into play as both US and China tease with the idea of resurrecting trade talks.

USD Price Action 

Gauging this weeks price action in the wake of Trump tariff announcement, the markets overwhelming viewed the 10 % on 200 billion tariff levy and the measured responses from China as a smoke signal for further negotiation shortly. So the unwind of global USD hedges ensued as the market just found themselves far too long USD at not such grand levels. But the robust fundamental storyline in the US economy coupled with weak PMI data in Eurozone this week, I don’t think we’ve heard the last from the dollar bulls just yet.

Currencies in focus next week

EUR: a huge disappointment to the bulls with a close below 1.1750. While Fed forward guidance will drive the bus next week, the negative  EU PMI lean could hang like an anvil around the EURO neck.

CNH: It has to be on everyone’s radar especially after this weeks exodus of long USD hedge position on a combination of Trade war de-escalation, comments that mainland will not weaponise the Yuan as a tool in the trade war and offshore funding squeeze on the back Pboc to sell bills in Hong Kong. Despite the correction lower in USDCNH, given that China’s current account surplus is expected to shrink as a result of US tariffs and if the Feds signal clear dot plot sailing or even shift slight higher, CNH could sell off again.

Oil markets

Traders will pay close attention to Sunday headlines from Algiers as OPEC, and cooperating non-OPEC producers will meet on Sunday in Algeria

Likely seeking to appease President Trump, unnamed members of OPEC suggested they would discuss adding 500 K barrels per day, and while it gave cause to book some profit and reduce risk, its highly unlikely anything dealing with supplies will happen before the December 3 OPEC summit.

Despite wire reports suggestions otherwise, most of the oil traders in my circle, and despite the usual OPEC headline noise, think the meeting will be little more than the steering committee review of production and market data.

Please join me on Live on Monday discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today