Stephen Innes Head of Trading Asia tells Michael Switow why the yen is weak, and stocks are rallying.
Stephen Innes Head of Trading Asia tells Michael Switow why the yen is weak, and stocks are rallying.
When the going gets tough, the tough get going
U.S. stocks are trading off their intraday highs late in the NY session weighed down by financials profit-taking ahead of the deluge of bank earnings reports on Friday, robust US economic data had temporarily overshadowed fears over global trade disputes. That was until a late NY session headline suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter. But a list is a list and not an actual tariff, so lots to be ironed on this one. But regardless, it will put the markets back on the defensive for the time being
Until that point, the market was indeed embracing the raft of outstanding US economic data, and despite the apparent downside risks from an escalating trade war the fact investors continue to plough cash into equities, that was a central dictating market theme. And given the likelihood of a strong earnings season, and at one point investors were heard yelling down Wall Street “what trade war”?? Indeed, when the going gets tough, the tough get going. That was until the latest headline when much of the tough slogging was quickly unwound in minutes as the SPX shed 100 points in the flash of an eye reminding investors we are in tricky markets, and nothing can be taken for granted.
The currency markets, however, are a different kettle of fish where the market risk is relatively light with Forex traders doing little more than rotating from what currency pair is hot from what is not. In other words, chasing the fear of missing out seems to be a common theme among G-10 trades after a considerable volume of USD long positions have been culled over the past few weeks, especially against the EUR and AUD. There is a reason why risk is so low in currency land; it’s the real fear of getting sideswiped by trade war headline risk.
Oil prices continue to gain on yet more production outages with Brent briefly breaching the $ 80 per barrel high water mark as strikes by workers in Norway and Gabon added to global production outages.
Without question, supply risk continues to dominate trader psyche and after the API reported another massive draw traders are now positioning for another sizeable drop in today’s EIA weekly report.
ON the bigger picture, the markets continue to access the intermediate-term supply impact as the Nov. 4 US-imposed deadline for allies to halt Iranian imports moves nearer. All the while the Libyan disruptions continue to run on.
At the end of the day, supply concerns and more disruptions continue to skew bullish for oil prices
After a brief peak above 1265 Gold prices resumed its downward path as global stock markets trade well. However Gold prices pulled came off session lows on NATO concerns as the EU countries are worried about possible side agreement between Putin and Trump which could profoundly weaken the alliance. Also, the latest tariff headlines suggesting the US is reportedly preparing the release of a new $200B China tariff list according to two people familiar with the matter should keep a bid under the market. Gold dips remain attractive especially for investors knowing that gold should be an essential part of any diversified portfolio, especially in these highly charged political times.
With this morning’s tariff headline risk, I need to remind myself that the trade war is good for the dollar, as the US has the upper hand in negotiations and whichever way this issue gets resolved it’s likely to be positive for the US current account.
GBP: Cable remains the land of the brave requiring a sharp eye and quick trigger given the plethora of Brexit headline risk. But indeed, in this muddied UK political landscape it does suggest the endgame will be the UK never leaves the EU, and in this scenario, the Pound is ” cheap as chips”. When the UK political malaise subsides, Sterling will be the shining star of the market
JPY: The USD did look poised to break out topside given the fading of trade rhetoric and a real risk-on environment developing. US equities have held up remarkably well as the bull market keeps marching her despite the reams of negative news thrown at the benchmarks. Long USDJPY is entirely under-owned as risk-off trades are still prevalent vs the JPY, and on a break of 111.50-75 levels, dealers will be forced into a risk on trade. But as usual, nothing ever works out as planned so we may have to re-explore this scenario later once we iron our fact from fiction over the latest US trade escalation headline.
MYR: It was an up and down day for the Ringgit which was in high demand and dare I say outperformed early on Bond related inflows as investors position for dovish pause for the BNM. The MGS curve was in firm demand particularly the attractive long end yields which are usually the domain for real money investors and pension funds. Indeed, last weeks Bond market awakening was the real deal!!
As for the BNM policy decision, we anticipate no actual shift in rates, Nor Shamsiah is a BNM veteran, and it would suggest policy continuity, but the markets will be more focused on forwarding guidance. Given the political and fiscal struggles ahead, I think it’s easy to assume this will not be a hawkish pause.
Oil prices continue to flourish and should push higher given the bullish supply skews which should go a long way in supporting the government coffers.
At the Edge of a Cliff
Was it the mixed data, skewed positioning or merely a lack of confidence that has the USD dollar precariously perched at the edge of the cliff.
Everyone one to a tee went all in on a dollar buying frenzy after the CPI number, but the lack of follow-through was very telling, and the quick rebound stopped out all those newly minted positions and then some. The markets sold AUD, NZD heavily at the lows and then got summarily spanked when traders started to factor in the conflicting data prints.
While the Strong CPI reading does present a hawkish risk for the Feds dot plots in March, the miss in the US retail sales data has the street scrambling to revise GDP estimates lower.The divergent data stream has escalated the market debate of critical importance, specifically is it inflation or growth that will dictate the Fed pace of interest rate normalisation?
But the bottom line for the US dollar in my view, amidst rising inflation the prospect of increasing deficits, both trade and budget, should weigh like an anvil around the dollar bulls neck
In seemingly absurd fashion, US equity investors ignored the inflationary signals and focused on weaker-than-expected US retail sales report. There is an increasing possibility that the Powell may blink and the Feds will be more hesitant to guide monetary policy given the waning growth narrative.
Higher US inflation combined with the USD exhibiting zero correlation to higher interest rates amidst burdening duel deficits should play out favourably for Gold markets. The weaker dollar narrative is playing out most favourably across, the broader commodity space and gold demand could surge and push above this year’s highs. Also, the sustainability of the frothy equity market given the weak retail sales print suggest increasing gold equity hedges is a practical move.
A weaker dollar and verbal intervention from Saudi Energy minister who suggested significant oil producers would prefer tighter markets than end supply cuts too early has seen oil prices do an about-face. The Suadi signal is reasonably convincing suggesting OPEC and their partners are committed to maintaining an absolute floor on oil prices
As indicated earlier in the week, the battle lines are forming around this key WTI 60.00 bpd as the Shale oil gusher will continue to weigh heavily on OPEC effort to blow out the worldwide glut.
However physical demand remains weak globally so traders will continue to monitor the USD /Oil price correlation and at first sign of flutter, it could signal a downdraft.
With the Interest rate to FX correlation is in “Neverland”, It could be open season on USDJPY after convincingly crossing the 107 USDJPY Rubicon. If the market focuses aggressively shift to the US’s duelling deficit amid higher inflation, the dollar days are numbered in the 107’s if we factor in an expected Exporter flow panic which could be exacerbated by push Japanese investors to raise their hedge ratios on US investments fearing a further fall in the greenback.
While we should expect the usual verbal lashing from Japan’s currency officials, I suspect we are still ways off from overt intervention
The Austrailian Dollar
It’s always good to go into critical economic data with a plan B even if it’s from outer space. Expect the unexpected and today we see Aussie is benefiting from resurgent Commodities and US dollar weakness as the greenback is showing no correlation to higher US rates.
A weaker US dollar, rebounding commodity prices have the MYR sitting well supported by yesterday’s robust GDP print adding good measure
Dollar weakness is seeping in the USDJPY and USDCNH which will provide a positive backdrop for regional currency markets, and we should expect the MYR to be one of the keys go to currencies as positions remain under positioned post-January monetary policy meeting. Higher US interest rates are showing little obstacle for regional currency appreciation so the MYR should benefit
Not to weave a cautionary tales but liquidy is a bit thin given in regional markets given the proximity of China Lunar New Year so best to be nimble in these conditions
Hawks coming home to roost
Equity markets were trounced on the back of Global yields parading to multi-year highs Thursday. Indeed, it was less dovish Fed speak that continued to be the driver, and the BoE provided a hawkish bounty for good measure.
The ruckus in the bond pits these days appears hell-bent on marching towards 3 % 10Year UST yields much quicker than anyone had suspected which suggest equity markets will come under the hammer for some time to come. Yields are becoming the real storyline as a combination of tighter monetary policy and the US burdening deficit leading to more supply, suggests we have crossed a 2.75 % 10Y UST bridge of no return, and the ride could get bumpier for equity investors.
The issue is not so much the 3% level but rather the pace that Bond yields have been rising in the US that is sending the markets into disarray. The rapidity of the moves has caught the markets by surprise, and we are going through the predictable panicked repricing of most asset classes.
Crude prices continued to tank overnight as the commodity complex has suffered dearly due to the uptick in market volatility. But the toxic combination of rising US output and a stronger US dollar has nullified OPEC production cut momentum.
With the markets factoring in US crude production to continue hitting new record highs through 2018, the supply dynamics suggest a move below $ 60 WTI is in the offing.
Gold toppled to a five-week low after the Bank of England whispered a sooner and more substantial rate rises after revising their growth and inflation forecast. The quicker than expected shift on Central Bank Monetary Policy outlooks coupled with the rapid increase in US bond yields continues to dampen investor sentiment. However, Gold prices quickly recovered as the equity market drawdowns continue to attract risk off hedges while the Syria Standoff with Turkey is offering support on the geopolitical front.
The Australian Dollar
The rise in US bond yields has toppled the Aussie dollar and dented risk sentiment as global equity market continues to tumble.
Market volatility is weighing negatively on commodities, add in a dose of dovish RBA rhetoric, and therein lies the heart of the Aussie dollar woes.
Also, the Aussie was trampled on when USDCNH shot up from 6.3050 to 6.3750 as it seems that China is opening up more channels for outflows to slow RMB appreciation. (See below)
The Aussie dollar tends not to flourish in these types of markets.
The $ Bull in the China Shop: Chinese Yuan
The dollar bull was let loose in the China shop yesterday as a confluence of events had trader paring back short US dollar risk from the morning fix.
The fix came in a bit higher than expected which usually causes a bit of a move higher but, it was the article in China Economic Daily that was creating the most noise as the report urges corporates to enhance FX risk management. (Nudge Nudge)
China has also resumed its Qualified Domestic Limited Partnership plan after a two-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments. While it does not have a massive Foreign Exchange flow impact, and more symbolic than anything else, it is none the less suggestive that the Pboc is less sensitive to capital outflow
Given that positions were skewed short US dollar, the confluence of events had traders covering positions aggressively knowing that liquidity will be sure to dry up the closer we get to Lunar New Year.
The China trade numbers were perceived disappointing ( I have opposite view) which contributed to some currency negativity.
But from any logical perspective, it was hard to ignore the Mainland equity fire sales this week which certainly had a negative bias on currency sentiment
The Malaysian Ringgit
Negative regional currency signals abound.
The rapid repricing higher in US bond yields has taken investors by surprise. Moreover, with US yields looking to push higher, we could be in for a bit more pain before the markets find some solid footing.
Higher US yields are supporting the USD and weighing on global equity sentiment which is hurting overall regional risk appetite.
US record crude production continues to weigh negatively on oil prices.
The proximity of Chinese Lunar New year has traders paring back risk.
The market, at least for now, is hedging against the Fed potentially leaning more hawkish, which is explaining the uptick in USD, US Yields and lower equity markets.