Markets underpricing China risk( OANDA Trading Podcast BFM Kuala Lumpur 89.9)

Stephen Innes, Head of Trading in Asia-Pacific, OANDA, Singapore
Stephen reckons markets are “seriously underpricing economic risk in China”.

Economists suspect the direct impact from the two sets of US tariffs aimed at Beijing could drag China’s GDP down by 0.3 percentage points in the longer run.

Stephen also shares some insights on how China can contain the adverse impact from its ongoing trade war with the US.

We also discuss the market expectation on China’s 2Q GDP that is scheduled to be out today.

BFM Radio Kuala Lumpur 89.9

Trade ,earnings ,teapots and the US dollar

Trade, earnings, teapots and the US dollar

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

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

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

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

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

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

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

US markets

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

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

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

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

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

Oil markets

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

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

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

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

Gold Markets

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

Currency Markets

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

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

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

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

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

MYR and the knock-on effects of the Yuan

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

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

What sparked the dollar rally ? ( OANDA Trading Podcast on Money FM 89.3)

Stephen Innes Head of Trading Asia tells Michael Switow why the yen is weak, and stocks are rallying.

Money FM Singapore 89.3

 

 

The sky hasn’t fallen just yet

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

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

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

Equities shrug off trade tariff tensions

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

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

Chairperson Powell’s Marketplace interview

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

Oil market

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

Gold market

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

Currency Markets

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

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

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

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

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

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

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

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

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

When the going gets tough, the tough get going

When the going gets tough, the tough get going

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

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

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

Oil Markets

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

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

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

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

Gold Markets

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

Currency Markets

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

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

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

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

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

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

APAC Tuesday Morning Market Update ( OANDA Trading Podcast 938NOW Singapore )

We’re tracking the market movements with Oanda Asia-Pacific Head of Trading Stephen Innes. We explore Brexit developments, Asian economic numbers as well as whether trade fears have eased.

938NOW Singapore

 

All is quiet on the western trade war front

All is quiet on the western trade war front

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

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

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

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

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

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

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

Gold markets

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

Currency Markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Oil Market

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

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

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

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

Gold Market

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

China Market

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

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

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

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

Malaysia market 

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

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

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

Currency Market

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

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

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

Fed Rhetoric to Dictate Dollar Direction

Friday February 23: Five things the markets are talking about

Ahead of the U.S open, Euro equities are struggling for direction after a positive Asian session as the market debates the outlook for central banks ‘normalizing’ their policies.

Euro bonds have gained along with Treasuries, while the dollar steadies after yesterday’s drop.

With no U.S data on the docket today, the market will shift its attention towards a plethora of Fed speakers doing the rounds.

First up will be New York Fed Chief, William Dudley, who kicks off proceedings at 10:00 am EDT as he addresses the “Monetary Policy Forum” in Chicago.

Note: Dudley is making his final rounds of appearances before his retirement.

Appearing at the same conference shall be Boston Fed President Rosengren, who is one of the Fed’s more “dovish” members, but who is not a “voter” this year.

Ms. Mester, the President of the Cleveland Fed, will be speaking at the same conference this afternoon at 1:00 PM EDT. She is a “voter” this year and a “hawk.”

Finally, Mr. Williams, the President of the San Francisco Fed, a “voter” on the FOMC this year and generally considered a “moderate,” will be speaking to a group on the west coast on the economy and monetary policy at 03:40 pm EDT.

1. Stocks gain in thin trading

In Japan, stocks rallied in light trade as receding fears of more aggressive U.S interest rate hikes boosted sentiment. The benchmark Nikkei ended +0.7% higher. For the week, it was up +0.8%.The broader Topix gained +0.8%.

Down-under, Australia’s S&P/ASX 200 closed +0.8% higher to cap its best week since Oct. In S. Korea, the Kospi had its best day since Oct. 10 rising +1.5%.

In Hong Kong, stocks rose overnight, capping a holiday-shortened trading week, as main indexes managed to recover much of the damage done during the recent rout. The Hang Seng index rose +1.0%, while the China Enterprises Index gained +1.7%.

In China, shares extended their rebound overnight, on sign’s that the Chinese government is once again supporting the stock market. The blue-chip CSI300 index ended up +0.5%, while the Shanghai Composite Index gained +0.6% in a holiday-shortened week. Both indexes have rebounded over +7% from a low print on Feb. 9.

Note: One of China’s largest insurance companies, Anbang Insurance Group, was seized as it violated laws and regulations that could seriously endanger the solvency of the company.

In Europe, regional indices trade mixed this morning with strength in the Italian MIB offset by weakness in the Spanish Ibex and FTSE.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx600 flat at 380.4, FTSE -0.2% at 7238, DAX +0.1% at 12470, CAC-40 flat at 5310, IBEX-35 -0.2% at 9858, FTSE MIB +0.4% at 22541, SMI -0.6% at 8917, S&P 500 Futures +0.3%

2. Crude oil prices rally, gold little changed

Crude oil prices remain better bid and range bound following the release of this week’s EIA inventory report, which showed a somewhat surprising decline in crude oil inventories on the order of -2.3m barrels compared to the average increase of +3.4m barrels in the previous five-years.

U.S oil production last week was steady at +10.27m bpd, a record level, while crude exports jumped to more than +2m bpd, close to a record +2.1m hit in October.

Crude bulls are beginning to ask if the “bull” rally could fade away as the U.S. oil production undermines the OPEC production cut commitments.

Note: The decline in crude inventories was particularly acute in Cushing. U.S oil refineries averaged approximately +15.8m bpd during the week ending February 16 or about -330k fewer bpd than last week previous.

Ahead of the U.S open, gold prices are little changed, but the ‘yellow metal’ remains on track for its sharpest weekly drop in nearly three-months. Spot gold is down -0.1% at +$1,329.16 an ounce.

Note: Prices gained +0.6% Thursday, their biggest one-day percentage rise since Feb. 14. The precious metal remains on track for its biggest weekly fall since the week ended Dec. 8, 2017.

3. Sovereign yields fall

Capital markets remains somewhat sceptical that the recent streak of data on wage growth, consumer prices and producer prices points to a rapid acceleration in inflation on either side of the Atlantic.

Data this morning from the Eurozone showed that consumer price growth slowed slightly last month (see below), but the core-measure edged a tad higher for the first time in months.

The ten-year U.S yield has eased, but remains atop of their 2014 high print, while those on German bunds dropped to the lowest since early January.

The yield on 10-year Treasuries decreased -2 bps to +2.90%. In Germany, the 10-year Bund yield has fallen -2 bps to +0.70%, the lowest in four weeks. In the U.K, the 10-year Gilt yield has declined -2 bps to +1.546%. In Japan, 10-year JGB’s yield has dipped less than -1 bps to +0.05%, the lowest in more than seven-weeks.

4. Dollar on the back foot

The U.S dollar is modestly weaker as the market is apparently ready to accept as a given that the Fed shall move at least three times this year to tighten monetary policy and to raise the overnight fed funds rate. The only question is whether the Fed shall move for a fourth time and by how much?

For the ‘single’ unit, it’s not only next weekend’s Italian general election (Mar 4) that poses a risk to the EUR (€1.2313), but also Sunday week is the same date that Germany’s SPD party members will vote on the proposed CDU/SPD coalition. The market is currently pricing in a +40-50% chance of a rejection, a result that could see Chancellor Angela Merkel step down.

Elsewhere, the pound (£1.3950) has edged a tad higher after U.K’s PM Theresa May won the backing of her divided Brexit “war cabinet” to ask for an ambitious trade deal with the E.U.

The SEK (€10.0388) is a tad softer outright as the market felt that the Riksbank Feb minutes this morning were on the softer side with concerns lingering over inflation and the exchange rate given the recent negative surprise with Jan CPI data.

5. Eurozone Jan CPI unrevised, but still a distance from target

Eurostat said consumer prices in the 19 countries sharing the ‘single unit’ fell -0.9% m/m in January for a +1.3% y/y increase.

Ex-food and energy, or core-inflation, fell -1.3% m/m and rallied +1.2% y/y, accelerating from +1.1% in the previous three months.

An even broader measure of core inflation, which in addition excludes alcohol and tobacco prices, also increased to +1.0% y/y in January from +0.9% in the previous three-months.

Forex heatmap

24 hours of reconciliation

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

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

Bond Markets

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

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

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

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

The Japanese Yen

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

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

The Malaysian Ringgit 

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

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

The Chinese Yaun

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

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