Asia Market Update :Worst case scenarios abound

Local traders remain the huge sellers of risk but are now pricing in worst case scenarios 
*Japan Securities Clearing Corporation (JSCC): Emergency margin call triggered for Index Futures trading
*South Korea closely monitoring markets

Oil Update

Brent crude continues moving sharply lower on today triggered by the deeper sell-off on global equities on concerns rising interest rates could severely derail global economic growth. But more specifically DOE monthly Short-Term Energy Outlook revised non-OPEC supply higher for 2019, which is leading more support to the supply side of the equations.

So with prospects of lower demand and additional supply in 2019, there has been no place to go but lower as bullish bets are heading for the exits with nary a substantial bid in sight.

Now if we get a bearish surprise in tomorrows DOE weekly status report, selling will intensify two folds. With tail risk mounting, bullish sentiment has evaporated quickly.

Equity update

Equity markets were pulverised today as investors remain in full out retreat and even the most pessimistic of equity bears are still in shock by the sheer magnitude of the move. This meltdown isn’t just a mild case of the sniffles suggesting the latest sneeze from the US equity market could morph into a global markets pandemic.


Presidents Trump’s scathing and ramped up attack on the Fed has the dollar bulls retreating as even the hint of policial interference on monetary policy is unsettling also if it doesn’t lead to the Feds to taking their foot off the gas. But if these higher US rates are trigger more than risk aversion and this move turns into the next significant correction, it could give the FOMC some pause of a cause.


Speaking of worse case scenarios

USDCNY fixed at 6.9098 today, +26 pips from last fixing and -96 pips from the previous closing at 6.9194 on 16:30 Beijing time as the counter-cyclical mechanism takes effect, but higher than everyone expected. So, another dubious fixing. Traders aren’t reading much ambiguity in today setting which is little more than a call to action for Yuan bear. The Pboc appears to be in little rush to steam the weakening tide.  Despite the apparent risk from capital outflows and more equity liquidations.

The Yuan has such a far-reaching influence on regional markets but even more so as the markets are becoming very suspicious of Pboc currency policy that in the face of being declared a currency manipulator, they could discard the YCC and let the currency go (weaker)

It’s potentially destabilising for global markets as it could trigger colossal liquidation in China equities and will trigger capital outflows.

The tail risk if they did for shock value, even as a temporary retaliation to the US Treasury accusations. Eventually, they would need to intervene.

However, instead of using reserves they could sell US treasuries to raise dollars to sell back to the currency markets(USDCNH) creating a nasty feedback look that will trigger broader-based US bond markets sell-off and more equity collapse

High hopes give way to steeper slopes

High hopes give way to steeper slopes

The markets are fraught with peril as the focus not too unexpectedly remains on US equity and bond markets. And while there is not one plausible explanation for the latest equity tumult, the horrible intersection of risk aversion due escalating US-China tensions and rising US rates has spooked out investors overnight triggering abroad selloff which took the S&P 500 to the lowest level since February. Technology stocks took a big hit today, recording their worst today since August 2011 the “fear gauge ” VIX rose above 20 for the first time since April which triggered more than just a wave of profit taking; investors were genuinely panicked. All of which has investors cowering trying to determine if this is a case of risk aversion of the beginning of a massive correction.

But cheap money has been the rocket fuel for equities as investors piled in the past two years given that it was the only game in town to get a decent yield. But the more aggressive Fed rate-hike schedule has brought the gravy train to an end sooner than expected. But the real question facing investors is just how far is the Fed prepared to go.?

Investors have become used to and perhaps over complacent from FOMC’s in the past that approached rate hikes cautiously. So, the markets are still going through the reality check with Jay Powell at the helm who has unambiguously signalled a significant policy change was afoot. And it’s not too much of a stretch to think he could be borrowing a page or two from Allan Greenspan when the Feds raised the Fed funds rates aggressively higher from 2004-2006 during the last cycle.

And despite the US yields correcting lower on a combination of risk aversion and foreign demand kicking in buying these very juicy yields post-auction, the equity carnage accelerated as investors continue to aggressively deleverage equity positions as high hopes give way to steeper slopes.

But China concerns ahead of the US Treasury report on FX are likely aggravating sentiment as this could trigger a worsening of global trade outlook. But let’s not forget tonight’s CPI report. From a pure fundamental trader perspective, given the hawkish tail risk from a higher inflation print has also weighed down sentiment.

Oil markets

Oil prices were weighted down most of the NY session by the sharp stock market sell-off. However, prices were primarily driven by the uncertainty concerning the real impact of US sanctions on Iranian oil supply, which continues to seesaw. While rising output concerns from the likes of Saudi Arabia and Russia, contiued to weigh. As well, given traders tend to” sell the landfall ” scenario, and with the surprising intensity of Hurricane Michael, it will likely have negative short-term ramification for petrol demand across the US Southeast if not further up the coast, suggesting yet more inventory builds. So, the market has swung aggressively from the Supply to the Demand side of the equation especially with the IMF global growth downgrades fresh in the memory banks.

But then sentiment completely buckled when the American Petroleum Institute (API) reported a significant build of 9.75 million barrels of United States crude oil inventories for the week ending October 5, which was colossally bigger than analysts expected. While builds at the Cushing, Oklahoma delivery point for NYMEX WTI crude stocks increased 2.2 million barrels per day.

According to Reuters sources Saudi Arabia is set to deliver an extra 4 million barrels of its oil to India in November in what looks to be an aggressive move by Saudi move to replace the loss of Iranian barrels due to the U.S. sanctions and ease the suffering of one of the worlds biggest oil consumers.

Gold markets 

Gold prices ignored the .2% rise in US PPI, but hedgers were stepping back into the fray as US equity markets were tanking. But the moves were tempered by high US yields.

Currency Markets

While the Tech-heavy NASDAQ bore the brunt of the selling, the S&P500 which is more correlated to currency markets broke through some substantial support level, suggesting the move could run much more profound.

Japanese Yen

USDJPY came off sharply with the risk-aversion sentiment permeating throughout the London afternoon/NY morning amid massive USD selling for the second day in a row. There was plenty of USD selling following the double whammy of Nikki Haley’s surprise resignation and President Trump weighing in on Fed policy, and with the markets leaning lower on USDJPY due to focus on a possible BoJ shift, the trap door sprung on an aggressive break of 113.

The Chinese Yuan

Trader continues to test the 6.93 USDCNH level as increasing chatter about the 7 level intensifies. But it would be folly to move in front of the US Treasury’s Currency Report is due by Monday, October 15 where there’s a consensus building that the US Treasury will classify China  as a currency manipulator

The Euro

There’s enough risk weighing down the EURO to sink a battleship, but the single unit has caught a reprieve from broad-based USD selling rather than any significant shift in EU sentiment. Which makes it a prime target for a beat on tonight’s CPI

The Malaysian Ringgit

The Ringgit could face additional pressure from negative risk sentiment and lower oil prices. The upcoming budget has triggered another unwanted wave of uncertainty, especially around new taxes. Markets hate tax increases even if they are necessary to balance the budget.

OANDA Trading Podcast Market Update (11 Oct 2018) 938NOW

Stephen Innes head of trading Asia discusses his view on last night’s US  equity meltdown

U.S producer prices increase for first time in three months

U.S. producer prices rose for the first time in three months amid a surge in gauges reflecting airfares and rail-transportation costs, a Labor Department report showed Wednesday in Washington.


  • Producer-price index rose 0.2% m/m (matching est.) after a 0.1% drop in prior month; up 2.6% y/y (est. 2.7%) after 2.8% gain
  • Excluding food and energy, core gauge rose 0.2% m/m (matching est.); up 2.5% y/y (matching est.) after 2.3%
  • PPI excluding food, energy and trade services, a measure some economists prefer because it strips out the most volatile components, rose 0.4% m/m, most since Jan.; up 2.9% y/y, same as Aug.
  • Key Takeaways

    The monthly increase in the broad index stemmed partly from a 1.8 percent rise in transportation and warehousing services, a record in data back to 2009. That reflected a 5.5 percent jump in the category of airline passenger services, also a high in figures dating to 2009, while rail transportation of freight and mail was up 1.4 percent, the most since 2012.

    Overall, services prices increased 0.3 percent while the cost of goods fell 0.1 percent, reflecting declines in both food and energy. The decrease in goods prices was the first since May 2017.

    While the figures — which highlight wholesale and other selling prices at businesses — are less prominent in investors’ minds than the consumer price index out Thursday, they illustrate how changes in input costs are feeding into inflation. PPI reports have limited usefulness in predicting the monthly CPI reports, JPMorgan Chase & Co. economists said in a recent note.

    Amid trade tariffs and retaliatory levies, inflation pressures are being closely watched, particularly for signs of how likely they filter through production pipelines and on to businesses and consumers. Benchmark Treasury yields have climbed to multi- year highs this month amid investor expectations that the Federal Reserve will continue raising interest rates to the point of eventually restricting growth.

    Other Details

  • Energy prices fell 0.8 percent from the prior month, biggest drop since March; food costs dropped 0.6 percent, same decline as prior month
  • One-third of advance in final demand services stemmed from airline passenger services, which mostly reflects airfares

    A potholed encumbered landscape

    Market sentiment: risky business

    US politics is back in forefront Tuesday adding more spice, and another air of unpredictability to the mix as markets contiued their tenuous voyage through a potholed encumbered landscape dealing with the fragile US-China relations book ended by Italy and Brexit developments providing more ambiguity. And if you add the IMF slashing global growth forecast to the fray, although this news was leaked and widely expected, its no wonder investors have a high degree of misgivings.

    Politics back in the fray: odd timing 

    On the political front, Nikki Haley’s resignation has come as a bit of a shock which sent the USD temporarily lower as markets saw her as a voice of reason within the US administration where it sometimes appears gut feel or twitter tirades drives foreign policy. Of course, something is very very odd about this significant departure ahead of US midterms, which has some pointing to her as the “senior administration official” who penned the op-ed New York Times article. So there we have it the first crack leading up to the contentious US midterm election, in what is likely to be a plethora of fissures to navigate.

    Speaking for cracks, closer to home in two of the world’s hottest property markets. Bloomberg Reports There have been protests by homebuyers in China after developers discounted apartments during holiday sales last week, while CLSA says banks in Hong Kong are cutting valuations, threatening to fuel a downward spiral in prices.

    US Bond Markets: valuations vs sentiment

    On the US bond market front, word from the futures “pits ” is there’s enormous momentum building that could move the yield thermometers higher by at least another ten basis points in 10Y UST’s. But 10y and 30y yields retraced overnight as traders bought back shorts, but multi-year levels of significance remain broken. There are two school’s of thought on the current bond market carnage. The first is traders are thinking it’s a matter of time before inflation kicks in and secondly primary bond dealers have little appetite owning inventory due to the glut of debt issues coming to market this week. But when it comes to trading, the truth usually lies somewhere in the middle. None the less this will keep the equity valuations vs sentiment debate front and centre.

    Oil Markets: headline bluster 

    Oil markets shook off the weekend stories about waivers on Iranian sanctions, and the widely expect lower global growth forecast from the IMF. But on the waivers front, these were never unconditional and contingent on  100 %  0 Iran import compliant by a specific time horizon.

    Hurricane Michael is also helping a bit as gulf production gets shut in for a few days as the storm is expected to hit landfall near on the Florida panhandle as a Category 3 storm.

    Yesterday’s Iran export data according to tanker reports were viewed supportive, it’s not that surprising given that global refineries have been pulling back on Iran imports while sourcing out other supplies. Perhaps India  being the exception to that rule. But none the less in a bullish environment trader will trade the headline moment. While Iran’s Oil Minister Bijan Zanganeh on Monday was calling out a Saudi claim that the kingdom could replace Iran’s crude exports “nonsense.” as little more than self-serving bluster to push prices higher much to the disdain of President Trump.

    Oil market remains overly bullish on the dwindling spare capacity argument, but not too unexpectedly the level of OPEC and US oil boisterousness will continue to swamp markets as we near the Nov 4 sanction. Leaving oil trader stuck separating the wheat from the chaff. We should expect resident trump calling for lower prices, even if prices fall while the market remains rife with contradictory spare capacity signals.

    IEA executive director Fatih Birol took to Bloomberg TV yesterday suggesting markets are entering the ” red zone” suggesting prices are peaking at the most  opportunistic time given waning global growth narrative

    But this brings us full circle to this week’s US inventory reports, while the markets were not overly sensitive to last weeks increases, given the focus is shifting to a more buoyant near-term supply narrative, there will be heightened market focus which could temper any upside ambitions. But regardless bullish sentiment does suggest the market will continue to probe higher on any oil price positive headlines gently.

    Gold Market: song remains the same 

    The market remains neck deep in oversold territory none the less; the stronger dollar keeps the complex on offer although gold has been holding the $1185 level so far. But which higher US Interests rates were influencing a stronger USD, it is hard to see the upside for gold or silver without a more significant correction in equities developing which could then create some haven buying. Gold trader remains on S&P index watch looking for any considerable buckling in equities investor sentiment.

    Currency Markets: another day another dollar 

    ITV is reporting progress made in the Irish border Brexit backstop, and Olly Robbins has made significant progress in talks with EU’s Barnier which has provided a mild boost to both the Euro and Pound in early Asia trade. But we’ve been down this road how many times before ??

    Chinese  Yaun

    Vols look stable this morning after China reiterated they have no intention to use the RMB as a weapon in the trade war. But history does tell us Pboc policy remains very fluid, so there remains outsized focus on the RMB complex. But traders remain buyers on the dip.

    Australian Dollar

    The Aussie has pushed above the fundamental .7100 level as Westpac consumer confidence index came in better than expected. Lots of shorts still in play so Aussie bears have been a bit hesitant to re-engage but given the heightened focus US-China relations, which are not looking too cheery at this stage after President Trump threated to derail his meeting will Xi at G-20 in November. So sellers will be layered between the .7125-.7150 levels which should temper any upside ambitions.

    Malaysian Ringgit 
    Markets are pivoting to the budget and based on yesterday news the government is looking to shore up deficits by selling off assets and possibly looking at new taxes. Markets don’t like taxes but love when a government addresses deficiencies. For today Oil prices remain supportive, while local banker CIMB suggest bond markets are now in a better position due to governments fiscal prudence would ensure Malaysia debt rating.

    Will the bond market bloodbath resume?

    Tuesday October 9: five things the markets are talking about

    The first day back in a holiday-shortened trading week again sees U.S Treasury yields creeping higher, trading atop of their seven-year high yields. This aggressive backing up of sovereign yields this month is again putting pressure on risk assets.

    However, overnight, equities traded mixed, with Asian bourses and U.S futures on the back foot, while Euro stocks have been able to move higher.

    Yesterday saw the biggest one-day sell off in three-months of China stocks despite the People’s Bank of China (PBoC) cutting its RRR for the third time this year. Their easing actions have again put pressure on the yuan, which is sure to annoy Washington.

    The IMF has cuts world 2018 and 2019 GDP forecast by -0.2% to +3.7%. It’s the first cut in two-years as the risk of balance has shifted to the downside due to escalating trade conflicts and tighter financial conditions.

    On tap: The U.S Treasury is auctioning +$230B worth of debt this week. On Friday, the IMF and World Bank will hold meetings in Bali, with the world’s finance chiefs.

    1. Stocks mixed results

    Global risk aversion has put the yen (¥113.17) in demand, which is hurting Japanese stocks. Overnight, the Nikkei fell to a three-week low after stocks of firms with exposure to China weakened on worries about its economy while chip equipment makers tumbled, tracking weakness in U.S tech firms’ overnight. The Nikkei share average ended -1.3% lower, while the broader Topix dropped -1.8%.

    Down-under, Aussie shares have also extended their sharp declines from Monday overnight; trading atop of their four-month lows, on investor concerns over growth outlook for the country’s largest trading partner China hurt sentiment. The S&P/ASX 200 index fell -1% at the close of trade, after losing -1.4% yesterday. In S. Korea, the Kospi was closed for a holiday.

    In China, stocks rebounded overnight from Monday’s steep losses as authorities took further steps to support the economy and contain the effects of an escalating trade war with the U.S. The Shanghai Composite index closed +0.2% higher, while the blue-chip CSI300 index was up +0.3%. In Hong Kong, the Hang Seng closed down –o.1%.

    Note: Dealers attribute yesterday’s steep losses in China to investors playing catch-up after a weeklong holiday, during which a sharp sell off in global bond markets had dragged down equity markets.

    In Europe, regional bourses are trading mixed in quiet trading thus far.

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

    Indices: Stoxx600 0% at 372, FTSE +0.1% at 7238, DAX -0.1% at 11938, CAC-40 0% at 5301, IBEX-35 +0.3% at 9232, FTSE MIB +0.3% at 19900, SMI -0.2% at 8951, S&P 500 Futures -0.3%

    2. Oil prices rise as Iranian crude exports fall, gold higher

    Oil prices remain better bid, as further evidence emerges that crude exports from Iran, OPEC’s third-largest producer, are declining before the imposition of new U.S sanctions. Also providing price support is a slow hurricane in the Gulf of Mexico.

    Brent crude is up +55c at +$84.46 a barrel, after having fallen as low as +$82.66 yesterday. Brent hit a four-year high of +$86.74 last week. U.S light crude (WTI) is up +45c at +$74.74.

    According to tanker data and an industry source, Iran’s crude exports fell further in the first week of October, as buyers sought alternatives ahead of U.S sanctions that are to take effect on Nov. 4.

    Iran exported +1.1M bpd of crude in the first week of October, down from at least +2.5M bpd in April – before President Trump imposed sanctions.

    Saudi Arabia, the biggest producer in the OPEC, said last week it would increase crude output next month to +10.7M bpd, a record. The market will wait to see if they follow through.

    Meanwhile, oil companies operating in the Gulf of Mexico have closed -20% of oil production as Hurricane Michael moves toward the eastern Gulf States including Florida.

    Ahead of the U.S open, gold prices are better bid on risk aversion amid concerns over a potential slowdown in China’s economic growth. Spot gold is up +0.2% at +$1,189.58 an ounce.

    Note: Yesterday, it fell -1.2%, its biggest one-day percentage fall since the middle of August, and also touched a more than one-week low of +$1,183.19.

    3. Sovereign yields on the move

    On the weekend, China cut its Required Reserve Ration (RRR) for major banks by -100 bps to +14.50% to prevent the country’s credit conditions from getting too ‘tight.’ The PBoC’s easing bias highlights their policy divergence with the Fed.

    The impact from Sino-U.S trade tensions is to become more noticeable in coming quarters, so an easing bias in monetary policy, coupled with an expansionary fiscal policy is expected to support China’s economy. The PBoC stated that it would continue with “prudent and neutral” monetary policy. Will investors buy into Beijing’s policy-easing measures or do they require more market-orientated reforms?

    In Italy, BTP yields have backed up to new highs after Economy Minister Giovanni Tria addressed the parliament on the government’s budget plans. He called for a “constructive discussion with Brussels over the budget” and said Italy’s “structural deficit will recover once GDP and employment returns to pre-crisis levels.”

    Italy’s five-year bond yield rose to +3.042%, its highest level in almost five-years, while 10-year bond yields hit a new 5-year high at +3.63%.

    Elsewhere, the yield on 10-year Treasuries has advanced +2 bps to +3.25%, hitting the highest in more than seven-years with its fifth consecutive advance.

    Note: The U.S treasury is to auction +$230B worth of debt this week.

    In Germany, the 10-year Bund yield has climbed +3 bps to +0.56%, while in the U.K, the 10-year Gilt yield has increased +4 bps to +1.714%.

    4. Dollar supported by yields

    The USD is maintaining its firm tone across the G10 currency pairs as U.S Treasuries are still holding last week’s gains in yields.

    Rising Italian bond yields continue to weaken the EUR (€1.1460), but major falls are not in the cards as long as the ‘single’ unit’s existence is not threatened, and as long as the ECB indicates ‘whatever it takes’ promise is in place. EUR/USD is last down -0.25% at €1.1460 even though 10-year Italian yields reach +3.628%, just shy of yesterday’s 2018 high of +3.631%

    China’s effort to support its decelerating economy continues to heap pressure on the yuan. The yuan weakened beyond ¥6.93 this week, coming within striking distance of its lowest level in nearly two-years, after China moved over the weekend to free more funds for domestic banks. The currency briefly recovered to around ¥6.91 earlier this morning.

    5. German exports slipped in August

    Data this morning showed that German exports slipped for the second-straight month in August, which may suggest that, the Sino-U.S trade conflict are dampening demand for goods.

    According to the Federal Statistical Office, the total exports of goods fell -0.1% in August from the month before, while imports of goods dropped -2.7% in the period.

    Note: German exports stumbled in August despite a weaker EUR. The EUR traded around $1.14 in mid-August compared with levels around $1.25 in early February.

    Germany’s adjusted trade surplus stood at €18.3B in August, undershooting a consensus forecast of €19.0B and a surplus of €21.3B in August last year.

    Forex heatmap

    Noisy Markets

    Noisy Markets

    The headline noise has been deafening and showing few signs of abating. In Asia focus will be squarely on equity sentiment even more with the Yuan under pressure as US/China tensions are set to escalate this week. US Secretary of State Michael Pompeo cited “fundamental disagreement” with China’s foreign minister after meetings, while a senior Treasury official suggested that the US is concerned about the recent depreciation in China’s currency and is monitoring developments. This should provide enough noise to wake the dead. But I think the real focus will fall on how US Treasuries Yields carry through in the context of the broader risk environment. But the market remains understandably brittle with US/China tension in the fore, EU stress over the budget and fiscal targets; and soaring US treasury yields that have caught the market complete flatfooted and have forced a repricing of the markets overly pessimistic view of Fed policy for 2019 through 2020.

    However, Treasury markets reopen on Tuesday and after a tumultuous start to the month, it’s not going to get much more comfortable for bond investors as there is a significant amount of supply this week: USD230bn of Treasuries will be up for auction. Give the sizable number of bonds on sale, its unlikely bond trader had the stomach to go into this week’s auction owning to much inventory, so this too could have contributed to the recent Treasury sell-off

    Asia Equity Markets

    Equity markets have been trading poorly since US yields breached multi-year levels of resistance last Wednesday and continue to do so despite stimulus efforts by the Pboc, as China returned from its Golden Week holiday and played catch up to last week’s global equity weakness.  The massive near-term tail risk is that traders are back on US-China watch. A possible train wreck on the negotiation front could completely derail global markets. We should not underestimate the potentially destabilizing effect from a weaker Yuan will have on regional markets if not global markets. Indeed a path no one wants to go down.

    Oil markets

    Oil initially traded heavy by the prospect of the US potentially permitting waivers to countries who are seeking to continue the purchase of Iranian crude after the November 4 deadline.

    But looking at last weeks data net longs in both crude benchmarks were slashed as investors’ confidence sagged not to untypically after printing multi-year highs as last weeks Inventory reports, and the ratification of NAFTA suggest supply-side risks dropped slightly.

    Investors were clearly in profit-taking mode, and with the US potentially permitting waivers to countries who are seeking to continue the purchase of Iranian crude after the November 4 compounded by Saudi Arabia repeatedly stating that they had indeed boosted their output to offset the loss of Iranian barrels. They provided more than sufficient inputs to trigger a sell-off especially when the market was leaning in that direction.

    However, prices reversed in the morning NY session after Canada’s biggest oil refinery, Saint John, was hit by an explosion and fire early Monday. The refinery processes about 300k barrels per day.

    Traders remain on hurricane watch as some O & G platform in the Gulf of Mexico have shuttered as Tropical Storm Michael, which is expected to morph into a category 2 or 3 hurricane rips through the Gulf and will smash into the Florida panhandle midweek. Gulf oil insiders are reporting that 19% of Gulf oil production and about 11% of the natural-gas output have gone offline.

    While St Johns and Gulf supply disruptions will provide a near-term fillip to prompt WTI, however, based on the dwindling global spare capacity narrative this rally could continue. And we don’t have to look much further than China ‘s policy efforts to bolster that view. Over the medium to long-term, it’s not too much of a stretch to assume more policy easing measures and increased infrastructure spending after China economy expanded at the slowest pace on record last month. So, for oil markets and commodities in general, the positive effects of China’s monetary and fiscal ambition could be significant.

    But this brings us full circle to this week’s US inventory reports, while the markets were not overly sensitive to last weeks increases, given the focus is shifting to a more buoyant near-term supply narrative, there will be highted market fucus.

    Gold Markets

    The markets again found themselves neck deep on oversold territory and with more chatter this morning about central bank purchases, the market is mulling. However, we’re still looking for confirmation on that Central Bank storyline. Update later but please call for any comments.


    Japanese Yen

    With US yields providing a modicum of support but the sagging global equity markets have all but drained the life out the USDJPY battery. JPY traders were getting antsy as the 114 level was an immovable force given the sour equity market sentiment. When you start factoring in the negative implication of a move to 3.5-3.75 in UST’s its difficult to make a positive case for equity valuations. But the prospect of US-China discussion likely to deteriorate further in coming weeks, the 113.50 support gave way like a hot knife through butter,and with the markets on risk alert mode, no one is overly eager to get back on the USDJPY bullish bus.

    Malaysian Ringgit 

    China and US Treasuries remain the primary focus for EM FX, and with US-China negotiation going nowhere, we should see more upside pressure on the regional currencies.

    OANDA Trading podcast Oct 8 with BFM 89.9 Kuala Lumpur ,VIX in the mix

    Stephen Innes, Head of Trading in the Asia Pacific, OANDA, Singapore discusses China’s central bank has reduced the required reserve ratio for the fourth time this year, as Chinese markets are set to return after a week-long holiday.

    Stephen also shares his take on Treasury yields and oil prices, both rising of late.

    BFM 89.9

    Markets Yield to pressure?

    Markets Yield to pressure?

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

    Non-Farm Payroll

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

    Equity Markets

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

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

    The Kavanaugh Effect 

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

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

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

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

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

    European Markets

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

    Oil Markets

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

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

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

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

    Some headwinds to greet markets this morning.

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

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

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

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

    Overcrowded trade and the ” porthole effect.”

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

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

    Gold Markets 

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

    Currency Markets

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

    The Chinese Yuan 

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

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

    The Australian Dollar 

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

    The Malaysian Ringgit

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

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

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

    Employment: U.S miss, Canada beat expectations

    U.S unemployment rate falls to a 49-year low

    The September U.S unemployment rate fell to +3.7% from +3.9% in August, the lowest rate since 1969.

    The U.S non-farm payrolls rose to a seasonally adjusted +134K in September, the smallest gain in the past 12-months.

    It would appear that Hurricane Florence may have had a bigger than expected negative impact on September payrolls.

    Digging deeper, +150K Americans entered the labor force, keeping the number of adults working or seeking work steady at +62.7% participation rate.


    Wages increased last month and advanced +2.8% as expected. The market was looking for a headline print of +185K and a +3.8% unemployment rate.

    Average hourly earnings for all private-sector workers increased +8c last month to +$27.24.

    Today’s solid report will likely keeps the Fed on track to gradually lift its benchmark interest rate.

    Today’s report showed the manufacturing, construction and health-care sectors added jobs last month, while the retail and leisure and hospitality lost jobs.


    Markets are swinging in both directions following the mixed report, with S&P 500 futures now down 6 points after initially gaining. The 10-year yield has backed up to +3.233% from +3.196% and the dollar also remains better bid across the board.

    Canada added more jobs than expected in September, as a sharp rebound in part-time hiring pushed the unemployment rate down to +5.9%.

    The economy added a net +63.3K jobs in September on a seasonally adjusted basis. Market expectations were looking for a net gain of + 25K on the month.

    Canada’s jobless rate eased to +5.9%, matching market expectations.

    Average hourly wages advanced +2.4% in September on a one-year basis.

    After initially rallying on the release, the loonie (C$1.2930) trades close to unchanged.