No stopping the US dollar runaway train at the moment

No stopping the US dollar runaway train at the moment

US Markets 

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

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

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

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

Oil Markets 

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

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

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

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

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

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

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

Gold Markets

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

Currency Markets

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

 

EM Asia

A tale of 2 barrels of oil 

The Indian Rupee

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

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

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

Malaysian Ringgit 

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

ADP employment increased by 230,000 in September

Job growth surged in September to its highest level in seven months as the economy put up another show of strength, according to a report Wednesday from ADP and Moody’s Analytics.

Private companies added 230,000 more positions for the month, the best level since the 241,000 jobs added in February and well ahead of the 168,000 jobs added in August.

The total was well ahead of the 185,000 jobs expected by economists surveyed by Refinitiv (formerly Thomson Reuters).

Construction grew by 34,000 as goods-producing industries overall contributed 46,000 to the final count.

“This labor market is rip-roaring hot,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “The risk that this economy overheats is very high, and this is one more piece of evidence of that.”

If the current pace continues, Zandi said he expects the unemployment rate to fall near 3 percent over the next year. The headline jobless rate currently is at 3.9 percent.

The ADP/Moody’s count comes two days ahead of the Labor Department’s closely watched nonfarm payrolls report. Economists also expect that report to show job growth of 185,000.

The jump came despite the disruption of Hurricane Florence, which ravaged the Carolinas and was expected to dent the jobs count. The nature of ADP’s methodology is such that it doesn’t include the storm victims because it only counts employees on payroll and doesn’t account for those displaced by temporary events.

“This overstates the case a little bit,” Zandi said. He added that the actual count could come down about 25,000 once the storm impact is considered.

Job gains were spread across industries, as services led with 184,000. Professional and business services contributed 70,000, while education and health services was next with 44,000, and trade, transportation, and utilities added 30,000. Leisure and hospitality and financial services each saw growth of 16,000.

Businesses with between 51 and 499 employees added the most by size, with 99,000 new hires. Large businesses added 75,000 while small firms contributed 56,000.

The August private payrolls count was revised up by 5,000.

The report comes at a strong time for the economy, which is coming off 4.2 percent GDP growth in the second quarter a number that could be above 4 percent for the third quarter as well. Federal Reserve Chairman Jerome Powell in a speech Tuesday characterized the economy outlook among forecasters as “remarkably positive.”

CNBC

Italy: risk on, risk off?

Wednesday October 3: Five things the markets are talking about

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

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

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

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

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

1. Stocks mixed results

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

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

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

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

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

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

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

2. Oil trades atop of its four-year highs

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

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

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

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

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

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

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

3. Italian yields fall

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

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

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

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

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

4. TRY falls on inflation data

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

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

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

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

5. Eurozone retail sales fall for second consecutive month

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

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

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

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

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

Forex heatmap

US markets rescue global risk sentiment yet again.

US Markets 

It seems we can rely on the US markets to bail out souring Global risk sentiment again and again.  But the question should be, how long can we expect this to continue.

Almost like clockwork, The Dow Jones Industrial Average hit a record high on Tuesday feeding of investors optimism around global trade as the USMCA framework does remove at least one massive tariff related risk from the global financial market. I wouldn’t’ go as far as saying the markets are any less worried about China trade issues, however, but investors are breathing on a big sigh of relief that a significant barrier to global free trade has fallen. And indeed, just as significantly it allows the US administration to now focus exclusively on its escalating economic dispute with China.

Oil Markets 

Oil traders came up for air ahead of today API inventory report and while analysing production data for September, including Russian output that increased 150,000 bpd last month to a record 11.36 million barrels per day.

However, prices remain near four-year highs supported by the plethora of bullish narratives, Iran sanctions, Saudi Arabi capacity concerns and China refinery Iranian compliance.

The API inventory data has triggered a muted reaction of sorts. The American Petroleum Institute figures for the week ended September 28 included a slightly smaller 0.9 mmbls build in US commercial crude stocks, but a larger-than-expected 2.0 mmbls increase at the Cushing, Oklahoma delivery point for NYMEX WTI crude oil futures. A bit of a saw off indeed but would probably be interpreted as a touch bearish if not for the dominant bullish narrative.

NOPEC

Also given the markets are thinking that OPEC or more specifically Saudi Arabia is powerless to stop oil from hitting $100 per barrel m there has been increasing focus on NOPEC.
Reuters

It’s apparent that, next to China trade, OPEC is the president’s biggest bugbear based on his frequent criticism of the Organization of the Petroleum Exporting Countries.

US Lawmakers have already introduced a version of the “No Oil Producing and Exporting Cartels Act,” or NOPEC, in May to address what US Congress believes is OPEC price rigging.

Various iterations of the of the bill have been tabled since 2000, but both George W. Bush and Barack Obama threatened to use their veto power to halt it from becoming law given the stratic important of Saudia Arabia in maintaining peace in the middle east. However, the considerable tail risk for oil prices is that President Trump could break with this president to deflect the knock-on effect of his administration’s foreign policy, ahead of midterm elections, which has effectively resulted in higher oil prices.

Regardless, oil traders are writing this off as idle banter given Saudi Arabia strategic importance in the middle east. But just as significantly using the US judicial system as an aggressive form of market intervention, sends off horrible signals to investors, not to mention the massive US oil and gas industry.

Gold Markets

Gold prices have been aggressively rallying overnight. Rather odd that the USD is not leading this move that has triggered a significant and very convincing short squeeze. Remember that according to CFTC data GOLD speculative net positioning increased to its highest since December 2001 as prices declined for a sixth straight month in September. Accounts sold an additional 6,804 contracts in the week to September 25, according to the latest CFTC data published last Friday, bringing total net short positions to 17,648, the most since the week of December 11 2001.

Gold has moved higher overnight primarily driven by the return of safe-haven appeal, keeping Italy risks in mind. Interesting I was discussing that fact yesterday, that in the past when we were not dealing with a strong USD narrative, Gold would pop $15-20 higher in a heartbeat on EU contagion fears. Sometimes, it’s easy to be blind to the facts, especially when getting so accustomed to positioning gold off the US dollar moves. But with l tightness in Copper markets influencing the base metal complex higher. There’s likely some knock-on effect from that correlation as well; indeed, shorts are being caught out on this one, and weaker near-term stops above $1200 level are probably contributing the flow. But for a specific technical trigger, commodity traders were focusing a Gold cross currency relationship, and it was the break of Gold vs EUR 1030 that triggered the short position carnage.

Currency Markets

The Euro
Claudio Borghi is the head of the budget committee in Italy’s lower house and unsettled markets by saying Italy would have solved fiscal problems with its currency. Indeed “Italexit” concerns have triggered a massive wave of risk aversion, but one would think the EURO should be trading much lower. Sometimes trader psychology can win over logic near-term, as traders get antsy about the risk-reward of selling EURUSD below 1.1500. I think the NFP along with US market absorbing the waves of risk aversion is causing some traders to profit take on shorts. However, is we do break the 1.1500, on full blow Italy risk, all hell could break loose, and the EURUSD could easily topple to the 1.1300 handles.

The Japanese Yen
The yen is strengthening on risk aversion but comfortable holding above secondary support levels buffeted  by US interest rate differentials

The Malaysian Ringgit

Asia risk sentiment trades poorly in Asia as a toxic elixir of weaker China PMI, stronger USD and escalating geopolitical tension in the South China Sea. And factoring in the Italy risk, and slightly lower oil prices, we should expect the Ringgit to trade with a defensive posture today.

Media

Join me live from the studio on 938Now at 6:50 AM SGT  Oct 3, discussing overnight price action 938 Now Singapore

Join me live in studio on Channel News Asia at 7:30 AM SGT Oct 3 discussing  ASEAN currencies and oil prices Channel News Asia

Join me via remote  on  Sky Biz Australia  at 2:30 PM SGT Oct 3  discussing currencies and commodities  Sky Biz your money

Asia Wrap : decidedly risk off

Oil
After registering a four year high on the back of a slow down in U.S. drilling that compounded supply losses from Iran and Venezuela. Oil prices consolidated gains throughout most the Asia session, but with the USD looking poised to move through Asia currencies like a wrecking ball, oil prices have come off the boil on waning risk sentiment.

Rupee and Oil
There is some concern a weaker INR could weigh on India’s oil demand. But as we move towards the USDINR 74, it could be catastrophically destabilising for India capital markets as India would have increased problems servicing their US dollar-denominated debt. While the direct currency impact of a weaker INR to Oil demand remains debatable, what’s not, is a possible capital market meltdown in India that will undoubtedly hurt oil demand.

Gold
After trading a bit higher on waning risk sentiment, with the dollar reasserting itself as king of the hill, gold ran into a wave of sellers at $1194, and the yellow metal is heading south again

Asia equities

A word of caution as liquidity, due to Golden Week is running extremely thin which could be contributing to some outsized moves

Wow, that was a quick turnaround as Asia equities bled a sea of red (HSI -1.850%, TWSE -1.25%, KOSPI -1.10%) as a toxic elixir of weaker China PMI, stronger USD and escalating geopolitical tension in the South China Sea when a Chinese destroyer came within meters of ramming USS Decatur. So much for the USMCA euphoria, indeed that fizzled quickly.

EM Asia currencies in focus 

Indonesian Rupiah

USD Asia traded higher across the board, but there was an outsized focus on the IDR which breached the psychological USDIDR 15,000 level, and now vols are getting paid aggressively across the weaker links of the ASEAN currency chain. (IDR-PHP-INR) Those  that  fell for the intervention and higher interest rate “dangling the carrot” are running for the exits en masse

Korean Won 

Korean won weakened as the services and investments sectors data remained tepid and triggered a reported 200 million in equity outflows

Singapore Dollar 

The SGD weekend following its Asian peers and we could expect more weakness as short dollar positions get pared ahead of MAS

G-10 currencies in focus

Euro

The USD the dollar is back in the driver’s seat after eurosceptic Claudio Borghi suggested: “Italy would have solved fiscal problems with its currency.” The market was not short near enough Euro, and traders have relentlessly hammered the single unit to the psychologically significant 1.1500 level

Australian Dollar
RBA seemed to be a non-event in the first, but the AUD has traded lower as ASEAN risk has evaporated. But perhaps there were more misguided positions heading into today’s rate announcement possibly hoping for a hawkish flash in the statement, that may be unwinding and contributing to a more significant sell-off than one would have expected.

Media

Join me live from the studio on 938Now at 6:50 AM SGT  Oct 3, discussing overnight price action 938 Now Singapore

Join me live in studio on Channel News Asia at 7:30 AM SGT Oct 3 discussing  ASEAN currencies and oil prices Channel News Asia

Join me via remote a camera on ON Sky Biz Australia  at 2:30 PM SGT Oct 3  discussing currencies and commodites  Sky Biz your money

Risk sentiment is shifting and headline-driven

Tuesday Oct 2: Five things the markets are talking about

Capital markets are in a sombre mood as a number of reasons for caution come to the fore.

Brexit rhetoric and the Italian government’s fiscal plans top the agenda, followed closely by trade deals and tariffs and political drama in Washington.

Amid the risk-off mood the ‘big’ dollar again has found support against G10 pairs. Euro stocks and U.S futures are currently following Asian declines, as Treasuries and bund prices advance.

The EUR (€1.1517) remains under pressure for a fifth consecutive day, pressured by remarks from Italy’s Deputy PM Luigi Di Maio that they will not change its budget deficit targets despite pressure from Brussels and its E.U partners.

Elsewhere, the pound (£1.2960) succumbs to Brexit rhetoric at the Conservative Party annual conference.

On tap: Fed Chair Powell is due to speak (12:45 pm EDT) about the outlook for employment and inflation at the National Association for Business Economics Annual Meeting, in Boston. Audience questions expected.

1. Stocks mostly see ‘red’

Asian equity markets traded generally lower as China remains on holiday, with Japan being the exception.

In Japan, the Nikkei edged up to a fresh 27-year high overnight, building on recent strength thanks to upbeat earnings hopes, mostly on the back of a weaker yen. The Nikkei share average ended +0.1% higher, while the broader Topix was up +0.3%.

Down-under, Aussie shares closed at their lowest in more than three-months overnight as financial stocks extended losses following a Royal Commission interim report on the sector. The S&P/ASX 200 index fell -0.8%, after dropping -0.6% on Monday. In S. Korea, stocks saw their worst day in nearly two-months on heightened U.S-China tensions. The Kospi fell -1.25%, marking its biggest percentage loss since August 13.

In Hong Kong, stocks also fell overnight on signs of weakness in China’s manufacturing sector. Resuming trade after a public holiday yesterday, the benchmark Hang Seng Index was down -1.64%.

In Europe, regional bourses open down across the board with Italy at the fore, as concerns over Italian finances keeps risk sentiment depressed. Four year high Brent prices are supporting energy stocks. The financial sector remains the worst performer.

U.S stocks are set to open in the ‘red’ (-0.4%).

Indices: Stoxx50 -1.2% at 3,374, FTSE -1.1% at 7,447, DAX -1.0% at 12,220, CAC-40 -1.1% at 5,449, IBEX-35 -1.2% at 9,297, FTSE MIB -1.4% at 20,324, SMI -0.7% at 9,060, S&P 500 Futures -0.4%

2. U.S oil hits four-year peak ahead of sanctions on Iran, gold higher

Earlier this morning, U.S oil prices hit their highest level since November 2014, while Brent crude trades atop of yesterday’s four-year high print, as markets prepare for tighter supply once U.S sanctions against Iran begin to hit in November.

U.S West Texas Intermediate (WTI) crude futures are at +$75.90 a barrel – WTI has rallied +18% since mid-August, while Brent crude oil futures are at +$85.28 per barrel, up +30c, or +0.4%, from Monday’s close. Brent has risen by more than +20% from its lows in August.

Market sentiment also got a boost from yesterday’s announcement of a “new” trilateral pact between the U.S, Mexico and Canada (USMCA), saving a +$1.2T a year open-trade zone that had been on the verge of collapse.

Iran’s oil industry, which at its most recent peak this year, supplied +3% of the world’s almost +100M barrels of daily consumption. U.S sanctions are set to start on Nov. 4.

Ahead of the U.S open, gold prices have found some support as risk appetite wanes, one day after getting a boost from the USMCA deal. Spot gold is up +0.5% at +$1,193.80, after declining about -0.3% in yesterday’s session. U.S gold futures are +0.5% higher at +$1,197.60 an ounce.

3. BTP/Bund yield gap at its widest in five-years

The Italian/German 10-year bond yield spread trades atop of its five-year highs as eurozone officials warned of a return to crisis days and an Italian lawmaker said most of Italy’s problems would be solved if it returned to its own currency.

As Italian bond yields surged +11-20 bps, the yield premium investors demand to hold Italian paper over German debt shot higher. The BTP/Bund 10-year bond yield gap has widened out to +302 bps.

Note: Bunds remain exposed to opposing forces, with safe-haven runs triggered by Italy jitters pushing German yields lower, but expectations of rate raises by the ECB next year is pointing to higher Bund yields.

The yield on U.S 10’s has decreased -2 bps to +3.06%. In Germany, the 10-year Bund yield has decreased -3 bps to +0.44%, the lowest in almost three weeks, while Italy’s 10-year yield has gained +12 bps to +3.421%, the highest in more than four-years.

4. Pound under pressure

As the market waits for PM May’s new Brexit draft proposal on the Irish border, uncertainties continue to threaten sterling (£1.2966) and this morning’s weaker construction PMI survey has caused it to fall further. Sterling fell to a three-week low of £1.2957, from 1.2987 beforehand, after data showed construction PMI fell to 52.1 in September from 52.9 in August, signalling “the weakest upturn in output for six-months.”

The EUR (€1.1517) continues to decline falling over -0.4% against the U.S dollar and -0.6% against the Yen (€130.98) on Italian Budget uncertainty.

Down-under, AUD/USD (A$0.7173 down -0.77%) has retraced earlier gains after the Reserve Bank of Australia (RBA) left rates on hold (see below), while the NZD/USD has declined after yesterday’s NZIER Business Confidence (-30 vs. -20) fell to the lowest level in nine-years.

5. RBA rate statement

It was as expected from the Reserve Bank of Australia (RBA), leaving the key policy rate at record lows (+1.5%) and traders with the impression that the RBA plans to remain sidelined for some time.

Nevertheless, Governor Lowes’s big concerns remain low wage growth and higher debt levels – a potential combo that could dissuade consumer spending and in turn ‘slows’ the country’s economy.

However, global expansion and recent domestic growth are positives and the RBA continues to expect GDP growth of more than +3% through 2019 and for the unemployment to drift down towards +5% over time.

Forex heatmap

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

Bloomberg TV

The risky business of trading an interest rate view

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

The risky business of trading an interest rate view

US Rates 

The markets are pricing in a higher probability of the terminal rate over 3.5%, signalling a convincingly hawkish view from last week FOMC. Chair Powell’s language around a healthy economy while emphasising data dependency suggests the Fed will continue to hike well into the restrictive territory or at least until the data weakens. It appears Powell is not a big fan of FOMC  forward guidance and sees interest rate condition too loose. But when considering labour market tightness, which should eventually drive inflation higher, the markets were far too sceptical and are now reversing out some of that pessimism as the Fed’s appear on course to raise quarterly interest rates for the foreseeable future.

Oil Markets

Brent crude finished the quarter most spectacularly as the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refiner was cutting back on purchases.

As reported by Reuters Singapore on Friday:

“China’s Sinopec Corp is halving loadings of crude oil from Iran this month, as the state refiner comes under intense pressure from Washington to comply with a U.S. ban on Iranian oil from November, said people with knowledge of the matter.”

Reuters

Show me the barrels 

So, given the  evolving China refinery narrative, until sizable supply is offered up by OPEC, ultimately traders will continue to push the envelope even more so with rampant speculation running amok  that US$ 100 per barrel  Brent is not just an oil pipe dream

So, what’s the next bullish catalyst?

Over the weekend U.S. President Donald Trump called Saudi Arabia’s King Salman, and they discussed efforts being made to maintain supplies for the market, stability and global economic growth, state news agency SPA reported late on Saturday.

But let’s make no mistake, higher oil prices bring tears of joy to oil producer including those in Texas and Oklahoma. And while Saudi Arabia continues to make concessionary overtones, but the real question is even if they wanted to bend to President Trumps wishes, how much spare capacity does the Kingdom have?   We’re going to find that out very soon as approximately 1.5 million barrels of Iranian oil is effectively going offline on November 4. If the market senses that Saudi Arabia capacity is tapped out at 10.5 million barrels per day, despite their fabled bottomless well, oil prices will rocket higher with the flashy $ 100 per barrel price tag indeed a reasonable sounding target.

The Middle East powder keg 

The Middle East  smouldering embers are set to ignite again as the New York Times reported that the US is evacuating its consulate in Southern Iraq because of attacks in recent weeks by militias supported by the Iranian government.“Iran should understand that the United States will respond promptly and appropriately to any such attacks,” Mr Pompeo said in the statement

The New York Times

At a minimum, this could derail any of those thoughts Tehran had of circumventing US sanctions by making side deals to supply oil to Europe. At maximum, further escalations by Iranian backed militias could see the US administration foreign policy hawks take flight. And don’t take John Bolton’s comments at the UN general assembly as an idle threat, ”  If you cross us, our allies, or our partners; if you harm our citizens; if you continue to lie, cheat, and deceive, yes, there will indeed be hell to pay.”  This policy hawk is all business when to comes to beating war drums,  even more so when they’re primarily directed at Iran. Any signs of growing unrest in the middle east could cause oil prices to rise.

Gold Markets

A reality check as spot gold sold off very aggressively as the US dollar started to reassert itself on Friday. For the past three months, gold has traded more like a currency rather than a go-to safe have an asset. With the Euro tumbling head over heels, the $1190 trap door gave way and selling intensified as stop losses trigged, and short-term leveraged players raced to get downside exposure. However, the sub $1190 move was retraced heading into the weekend as the traders realised they were neck deep in oversold territory and frankly, they ( we) needed the weekend to reflect on what just happened!!

It could be a make or break week for golds near-term ambitions, and the story will likely unfold at Friday’s  US Non-Farm Payrolls release.

Gold has been a seller’s market for some time, but with $1190 level yielding, we’re now firmly in the gold bear zone and as such with the USD dollar likely to strengthen on the back of widening interest rates differentials, selling activity could intensify with speculators likely to target the August low when the yellow metal hit $1160 before rebounding.

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Non-Farm Payroll already in focus

Little more than a week after the FOMC, Friday’s US Non-Farm Payrolls take on the tremendous importance for near-term USD momentum as a critical focus will fall on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates. Indeed, this week will probably go out with another sonic boom!

US Equity Markets: higher US interest rates should eventually factor.

US equity markets remain on solid footing supported by the impervious tech sector. For the time being US stock markets are showing incredible reliance in the face of higher interest rates and a possible escalation in the US-China trade war, as markets remain buoyed by the robust domestic economy. But at some point, the disconnect between the US and the rest of the world economies will flow through the asynchronous global growth feedback loop. But when you start factoring in higher US interest rates and the Feds dogged determination to drain the punch bowl, we could be nearing that turning point as the markets have been living on cheap borrowed money for some time. Eventually, higher US interest rates will become a significant negative factor.

China Markets: Manufacturing PMI wobbles 

Not surprisingly China’s official factory barometer decelerated more than expected in September, while the index for services and construction unexpectedly picked up.

The manufacturing PMI registered a disappointing 50.8 in September versus 51.3 in August, lower than Bloomberg survey median estimate of 51.2, but remains marginally above contraction. But the non-manufacturing PMI picked up to 54.9, versus 54.2 in August, so a bit of saw off, even more so when you factor that China is de-emphasising exports in favour of domestic demand.

While tariffs are causing some fraying at the brick and mortar level, China continues to support the demand side of the equation so while the manufacturing PMI is weak, the decline is not entirely uncontrollable.

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

NAFTA 
Bloomberg is reporting U.S. and Canadian negotiators are close to a deal on NAFTA and there’s optimism it will be reached by the Sunday deadline — an outcome that would avoid an impasse that imperils $500 billion in annual trade, people familiar with the talks said.

There’s renewed urgency to nail down a new North American Free Trade Agreement that could be published by Sunday, so Mexican President Enrique Pena Nieto can sign it before he leaves office, the people said. The U.S. and Mexico reached their agreement in August, triggering talks between the U.S. and Canada, which are being held around the clock this weekend. (Bloomberg)

Bloomberg

My View: steveinnes123

What’s interesting about this latest twist, is that The U.S. trade representative was expected to post text online this weekend that will lay out more of what Mexico has agreed to so far in NAFTA2. But the text was supposed to exclude details about Canada. Since the version was never posted online, could US trade representatives be holding it back, so they can post one for a trilateral agreement which includes a Canada provision? A lot of smoke signals on this call, and where there’s smoke there’s usually fire.

The Canadian Dollar

The implication for the Canadian dollar is enormous. Given the stellar GDP print last week, a data-dependent BoC governor Poloz, and skyrocketing oil prices, 1.28’s would seem like a lock. But with commodity Bloc of currencies expected to receive a fillip from rising hard and soft commodity prices, perhaps there is even more juice to be squeezed out if the Canadian dollar.

The Euro

The Italian budget aside, higher US interest rate expectation amidst the backdrop of divergence between the Fed and the ECB, even more so after the tepid Eurozone inflation print on Friday, will underpin US dollar sentiment.

The Japanese Yen

If the NKY and US 10 y yields continue to track higher, there is no reason the markets shouldn’t take out 114 this week. However, counter to my original thoughts that the USDJPY was an under-owned position, the latest CFTC data is painting a decidedly different picture as Yen shorts are at the highest level since early March. However, these derivative positions could have different paths of dependency than strictly the USD. Regardless, with US interest rates set to rise for the foreseeable future albeit with caveats that the US economy doesn’t go into the tank, USDJPY should move higher.

The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent.  While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.

Asia EM 

Malaysian Ringgit

The two primary competing narratives, surging Oil Prices vs higher US interest rates should see the MYR trading with a neutral to negative bias this week. The fact that there has been limited positive follow through from skyrocketing oil prices suggests investors remain incredibly nervous about the rising US dollar and higher US interest rates. Mind you my views up until last weeks FOMC was swinging like a pendulum on the Ringgit, but with Chair Powell making headway for Fed hawkishness, in contrast with a neutral to dovish BNM bias, my MYR  lean is shifting negative over the short term.

Media: Please Join me on Bloomberg TV live from the Singapore Studio at 7:10 AM SGT Monday, Oct 1, discussing my views on the  RBA, Brexit and splashed with a bit of Brent and a sprinkled with  Iron Ore flakes.

  Bloomberg TV Asia

Later in the day, join  me on my weekly  France 24 TV European open spot  at 12:15 PM SGT discussing how Asia markets are faring today

 France 24 TV

An incredible end to Q3 could be an even bumpier ride   in Q4

An incredible end to Q3 could be an even bumpier ride   in Q4

Well, that was an astonishing end to  Q3 as we herald in what is certainly shaping up to be a bumpy ride in the markets for  Q4. While the eerily familiar themes will continue to dominate, US-China trade, NAFTA, Brexit and Italian budget which will confront traders at every twist and turn. But as US lawmakers rush to make final preparations ahead of what is shaping up to be a fierce midterm election run, headline risks will abound.

China markets will shutter for the Golden Week Holidays during the first week of the month. But focus is in PMI data none the less.

Not an overly busy docket next week, but on the data front, the granddaddy of them all, Non-Farm Payroll,  will be released next Friday and as usual the primary focus is on US wages, and how quickly they expanded in September could have a significant impact on the projected course of US interest rates.  Recall in August wage growth accelerated the fastest since June 2009, an if the average hourly wages prints north of .4 % expectation, and given the USD has gained the upper hand again,  it could drive a stake through dollar bears hearts. Indeed a make or break report for USD’s near-term momentum.

On the Central Bank front, the RBA will announce there interest rate decision but absent inflation suggests the RBA’s half glass full approach to monetary policy continues but as usual there will be more focus on the policy statement.

Local EM traders will focus on the RBI rate decision. Given the RBI recent defend the Rupee at all cost stance, its widely expected the RBI will match the latest Fed hike.

Local eyes are on Singapore PMI data as the market is positioned for a rebound after last month manufacturing forecast fell to the lowest level since June 2017 as exports plummeted.

Oil Markets
Everyone is telling me my views are far too unabashedly bullish, but from my seat until sizable supply is offered up by OPEC and with pandemic market chatter raging about the $100 per barrel market, its hard not to be blatantly bullish.

Brent crude oil finished the quarter in a spectacular note on Friday as concern over the potential impact of US sanctions on Iranian exports continued to mount on a report that at least one Chinese refiner was cutting back on purchases. WTI prices followed Brent higher.

Gold Markets
After falling to a fresh one-month low water mark as the USD was bullying around the Euro. Gold bounced off the intraday lows.But frankly, the Gold market is so oversold that we should expect consolidation to set in before the next leg lower. We’re in the domain of the Gold Bears who have August $1160 lows in their crosshairs.

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

Currencies to keep an eye on next week

The Euro

EUR continues to leak lower as Italy’s government has shattered the budget and challenged the EU’s mandate. BTPs have driven a good chunk of the move lower. The Euro was holding on the 1.1600 handles by a thread, but the less -than -vigorous Eurozone September Core CPI came in lower than expected at 0.9%YoY (1.1% estimated, 1.0% prior) which sprung the 1.1600 trap door triggering a wave of stop losses as that fundamental and psychological level ceded.

Indeed, music to EURO bears ears as the ECB will be in no mood to signal a quicker pace of interest normalisation anytime soon. And with the Fed laying their cards on the table and guiding the markets to a December rate hike. While markets pulled off the intraday lows, the keep it simple pragmatic approach to this trade suggests the dollar remains in favour as US growth and positive USD differentials will stay supportive.

The Japanese Yen

For all the right macro reason spot USDJPY is looking to break higher, and if the NKY and US 10 y yields continue to track higher, there is no reason the markets shouldn’t take out 114 next week given the dollar is completely under-owned vs the JPY.

There are some chunky structural long EURJPY and a lot of underlying derivatives that add up to the same view but have different path dependency.
These positions are clearly at risk during this Italy induced panic as we leak near yet another psychological support level EURJPY 131. But the market pressure points are probably more towards EURJPY 130 level, so we could assume these positions will remain safe with USDJPY marching higher.

The British Pound
Its a mess and the markets are fraying beyond the fringe as signs of stress related to a potential No-Deal Brexit remains a significant possibility. Unfortunately, vols in GBP have rallied significantly of late, so buying the downside insurance to protect against a Hard Brexit fallout is rather expensive.

Cable is stuck in a broader range still getting knocked around by various Brexit headlines. It’s impossible to filter out the political nose so best to remain cautious on GBP as it’s tough to predict next rate move. There were a few hawkish tidbits from  Haldane and Ramsden this week albeit with caveats that the Brexit outcome is a smooth one.

The Australian Dollar
Much more focus on the US rates outlook in the wake of the FOMC, and this plays into the USD ‘s hand short term. I think the markets are tricky as USD moves are entirely data dependent over the next few weeks. While the RBA rate decision is on tap, there will be an outsized focus on next weeks NFP but more toward wage growth component as by all account the US job growth is rocking, but the Feds are looking for that elusive inflation spark. But this is where I temper my bearish Aussie expectations. With commodity prices going higher, this will undoubtedly be a boon for commodity-linked currencies so against a lot of forecasts I see the Aussie moving higher on that narrative alone.

The Canadian Dollar

Canadian GDP was a beat at 2.4%YoY vs 2.2% forecast, showing a healthy bounce back in July after June weakness. It suggests upside risk to Q3 growth. And with BoC Poloz sounding very neutral and data dependent, CAD was able to hold onto gains. But ultimately CAD upside will be capped until trade talks between the US and Canada progress meaningfully. But 1.2700 on a NAFTA 2 signing looks possible given surging oil prices and a higher chance for a BoC rate hike on the GDP beat.

Lessons Learned

The big lesson learned last week was analysing the knee jerk reaction to Wednesday FOMC meeting which caused a rally across the US yield curve and temporarily weakened the US only for the move to be reversed out when the Fed chair Powell explained that both policy and financial conditions are still accommodative. Mind you, given the time zone difference in Singapore, all this happened while I slept and without knowing all the facts my initial knee jerk reaction, which I incorrectly elaborated in my morning note by castigating the FOMC for verbal gymnastics, could not have been further from the truth. In reflection, Jay Powell is a breath of fresh air, and by removing accommodative, he’s signalling that forward guidance should be removed as rates move toward normal, and that dot plot projections should be taken with a grain of salt as FOMC policy will be dependant on incoming data.

Media: Please Join me on Bloomberg TV live from the Singapore Studio at 7:10 AM SGT Monday, Oct 1, discussing my views on the  RBA, Brexit and splashed with  Brent and a sprinkled with  Iron Ore flakes.   Bloomberg TV Asia