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

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

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

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

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

BFM Radio Kuala Lumpur 89.9

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

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

Money FM Singapore 89.3

 

 

All is quiet on the western trade war front

All is quiet on the western trade war front

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

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

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

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

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

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

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

Gold markets

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

Currency Markets

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

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

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

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

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

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

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

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

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

Fed Rhetoric to Dictate Dollar Direction

Friday February 23: Five things the markets are talking about

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

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

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

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

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

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

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

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

1. Stocks gain in thin trading

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

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

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

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

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

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

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

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

2. Crude oil prices rally, gold little changed

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

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

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

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

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

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

3. Sovereign yields fall

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

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

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

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

4. Dollar on the back foot

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

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

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

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

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

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

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

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

Forex heatmap

Higher Yields Pushing Dollar Up

Tuesday February 20: Five-things the markets are talking about

Overnight, global stock indexes have declined along with U.S futures, while the ‘big’ dollar has rallied a tad as U.S Treasury yields back up towards their four-year highs.

No central bank meetings are scheduled for this week although minutes from the latest FOMC (Wed) and the ECB meetings (Thurs.) will be published.

Note: Given the forthcoming March FOMC meeting (March 20 -21) when markets expect another +25 bps increase, dealers will be looking for signs that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC’s views on inflation have evolved.

In the U.K, there will be two major releases – the labor market report (Wed) and the second estimate of Q4 GDP (Thurs.) Elsewhere, Canada will post December retail sales (Thurs.) and consumer prices for January (Fri).

With little to no economic U.S data on tap, the markets focus now turns to the U.S Treasury department, which opens its auction floodgates beginning with today’s record supply of +$151B of three- and six- month bills (Total new debt supply is +$258B this week).

The U.S debt sales should provide a better market understanding of how steep yields can back up in the short-term.

Note: Fed policy makers speaking this week include NY Fed President Dudley and Atlanta Fed President Bostic and Cleveland Fed President Mester is among speakers at the U.S Monetary Policy Forum in NY.

1. Global stocks see ‘red’

Asian equities took their cue from Monday’s European bourse direction as U.S stocks and Treasuries took a break for the Presidents’ Day holiday.

In Japan, the Nikkei fell -1%, surrendering some of its early-week rise thanks to weakness in its electronics and banking sectors. Selling came despite a slip in the yen outright (¥107.10). The Topix fell -0.7%.

Down-under, the Aussie’s S&P/ASX 200 ended flat. In S. Korea, the Kospi fell -1.1%, dragged lower by index heavyweight Samsung Electronics, which dropped another -2% after falling -1.3% on Monday.

In Hong Kong, the Hang Seng Index pared an early slide, down -0.2%, on its first full day of trading in nearly a week. The main benchmark in Singapore fell -0.2%; while Indian’s Sensex was last up +0.4%.

Note: With Chinese and Taiwanese markets still closed for the Lunar New Year holiday, investors should be cautioned against reading too much into recent price action due to thin volumes.

In Europe, indices trade mostly higher across the board following the weakness seen yesterday, with the FTSE under performing being weighed on by HSBC and BHP Billiton following results.

U.S stocks are set to open in the ‘red’ (-0.8%).

Indices: Stoxx600 flat at 378.3, FTSE -0.5% at 7213, DAX -0.1% at 12373, CAC-40 flat at 5257, IBEX-35 +0.2% at 9829, FTSE MIB +0.1% at 22582 , SMI flat at 8907, S&P 500 Futures -0.8%

2. Oil markets mixed, Brent and WTI move in opposite directions

U.S crude prices are still carrying momentum from Friday’s gains due to yesterday’s President Day’s holiday while international Brent prices have eased.

U.S West Texas Intermediate (WTI) crude futures are at +$62.31 a barrel, up +63c, or +1% from Friday’s close. Ongoing supply reductions from Canada to the U.S due to pipeline reductions are supporting WTI prices.

Brent crude has eased on the back of a dip in Asian stocks and a stronger dollar. Brent crude futures are at +$65.54 per barrel, down -13c, or -0.2% from yesterday’s close.

Note: Oil markets remain well supported due to supply restraint by the OPEC. Yesterday, OPEC Secretary-General Barkindo said the organization registered a +133% compliance with agreed output reduction targets in January.

However, soaring U.S production is threatening to erode OPEC’s efforts. Last week, the amount of U.S oilrigs drilling for new production rose for a fourth consecutive week to +798.

Ahead of the U.S open, gold prices have slid for a third consecutive session as the ‘mighty’ buck rebounds from its three-year lows, while the market waits Wednesday’s Fed minutes for clues on the outlook for U.S interest rates. Spot gold is down -0.2% at +$1,343.22 an ounce.

3. Sovereign yields trade atop record highs

This is a huge week for bond investors, as the U.S Treasury prepares to sell +$258B worth of new debt, starting with today’s record sale of +$151B of three- and six- month bills. These debt sales should provide a better understanding of how steep U.S yields could back up in the short-term.

After building up a record “short” position in U.S 2-year futures and historically large short positions across other maturities, higher volatility this month has seen a sharp reduction in these record shorts over the past week.

The biggest reversal was in two-year product – net short positions were slashed by +76,772 contracts to -133,986.

The U.S 10-year is now at +2.92% ahead of the first trading day this week after yesterday’s holiday.

In Japan, BoJ Governor Kuroda did not discuss monetary policy during an appearance in parliament. Speculation has been swirling about the possibility the BoJ might scale back its stimulus since they reduced their purchases of JGB’s last month.

Down-under, the Reserve Bank of Australia (RBA) reiterated in its minutes of this month’s policy meeting that inflation is expected to “only gradually” accelerate as the economy strengthens and wage pressures increase.

4. Dollar gains against most G7 pairs

Ahead of the U.S open, the U.S dollar has seen some steady gains outright versus G7 currency pairs, aside from sterling. The gains are reflective of U.S yields pushing a tad higher.

Sterling has jumped from its overnight low of £1.3934, to again trade north of the psychological £1.4000 handle on news that the European Parliament is putting a document together outlining its desire for an “association agreement” with post-Brexit Britain. This is a break from the position of the chief E.U negotiator Barnier and could allow Britain to retain “privileged” access to the single market.

5. German ZEW Survey moves off from record highs

Germany’s ZEW Indicator of Economic Sentiment recorded a decrease of 2.6 points this month and currently stands at 17.8 points.

The indicator remains slightly below the long-term average of 23.7 points. The assessment of the current economic situation in Germany decreased by 2.9 points, with the corresponding indicator currently standing at 92.3 points.

Comments from ZEW President Wambach: “The latest survey results continue to show a positive outlook for the German economy. The assessment of the current economic situation is still on a very high level and the economy is expected to improve in the coming six months. Economic growth in Germany is substantially driven by the very good development of both the global economy and private consumption. Inflation expectations for Germany and the Eurozone have also started to increase.”

Forex heatmap

Don’t go barking up the wrong tree in the Year of the Dog

Don’t go barking up the wrong tree in the Year of the Dog

A predictable wave of profit taking and risk reduction, as is standard form ahead of US long weekends, dominated Friday session leading to USD gains as US  yields pulled back. And while the broader  US dollar negativity continues to seep through capital markets, some traders are suggesting of potential shifts in conviction levels while others believe  Friday to be little more than pre-weekend risk reduction. But one thing that’s clear, even the most prolific purveyors of price action are baffled regarding the breakdown of historical correlations across most asset classes.

One telling feature, however, is long-term investors continue to shun the greenback and this should continue to weigh on near-term sentiment. So no don’t  go barking up the wrong tree in this Year of the Dog, stick to the basics and follow the flow.

By way of the ordinary course of developments, the various market holiday observances might challenge liquidity conditions. Golden Week celebrations continue across Asia through Wednesday, while both the US and Canada take holidays Monday. Still, it could be an actionable week with numerous Fed speakers on tap and the FOMC minutes are sure to liven things up. Keep in mind; March rate hike is all but entirely priced-in so the markets will be keying on forwarding guidance.

As the markets pivot to Fed speak and the FOMC minutes this week, “deficit mania” is sounding a few decibels lower this morning.But none the less, ongoing concerns about swelling deficit’s and the Feds sequence of interest rate normalisation should be the markets key focus this week and the primary drivers of near-term volatility.

And while US Bond yields eased on Friday,  traders see icebergs ahead suggesting Friday’s price action was little more than a reprieve amidst a bear market.

Equity Markets

Equity markets continue climbing the wall of worry despite inflationary fears gaining momentum and Bond Yields moving higher.Eventually, something has to give, but so far investors are betting on corporate earning rather than the shifting macro narratives.

Oil markets 

Oil prices finished modestly higher on Friday to chalk up a weekly gain as prices continue to see-saw between the binary descriptions from OPEC’s ongoing efforts to blow out the worldwide glut against the indications of rising U.S. production.Although Fridays price movements were likely  position sensitive amid USD risk reduction and book squaring ahead of tomorrows Oil contract expiration

We should expect the WTI whipsaw to continue as debate rages between US shale and OPEC, but we’re starting to carve out near-term ranges as longer-term oil bulls remain in dip buying mode with shale oil hedger looking to sell upticks.
Gold Markets

Gold prices eased late Friday as the dollar tentatively lifted off the canvas, despite taking a standing eight count earlier in the session when the DXY hit a three year low. A couple of hours USD short covering is unlikely to change the broader USD negativity, but when coupled with inflationary concerns heightening and a probable follow-up correction in equities markets around the corner, golds haven demand should continue to glitter.

On the physical side of demand, China Lunar New Year has seen few gold bars change hands despite physical premiums easing as futures prices continue to grind higher.

G-10 Currency Markets

Japanese Yen

Although the reappointment of Kuroda and the reshuffle of deputy governors is slightly more dovish BoJ, it is hard to reverse USDJPY downside given that continuous USD weakness could further drag USDJPY into the abyss. With the tables turned upside down on ten year US yield to JPY correlation and the US ” deficit mania. ” likely to return, USDJPY is in a precarious position.

Predictably we heard from Japan as Currency Chief Asakawa that he’s readying the necessary action to prevent “one-sided” currency moves, but with the Buck getting pounded against all major currencies, Japans verbal intentions are falling on deaf ears.
The Euro

The pace of the EURUSD rally post-CPI last week surprised everyone but none the less if not for timely comments( seems always to happen when EUR rallies) from ECB Cœuré, we should have closed closer to the 1.2500 rather than 1.2400 handles. His remarks spooked the markets in pre-weekend risk reduction mode after he suggested policymakers are unanimous in sequence when market positioning was suggesting the Hawks were gaining the upper hand. But at some juncture, the market will ignore this verbal balderdash, and in reality, 1.3000 shouldn’t be unimaginable before long predicated on strong fundamentals, the realisation of more hawkish ECB guidance but also the mechanics of the taper could reverse bond outflows.

Asia FX

Malaysian Ringgit 

External drivers and specifically the broader USD moves will dictate the Ringgit momentum this week with the critical focus on USDJPY 106 level.But on the positive side of the equation, one of the primary headwinds that we considered to be a negative for the Ringgit was higher US yields which typically and historically have supported the USD. But the US interest rate to FX correlation broken, and despite USD bond yields pushing much higher t, the USD continues to sell off.

The markets are still feeling the hangover effect from the Chinese Lunar New Year, and risk appetite is waning and with a plethora of Fed speak along with the FOMC minutes likely to cause an uptick in volatility this week, offshore demand could remain muted. None the less, 106 level USDJPY will be a crucial US dollar sentiment gauge, and if the market pushes through again this week, we could see the Ringgit move to 3.87 and below as traders would then set sights on the critical 3.85 level.

Singapore Dollar

The US CPI fallout was somewhat unusual; triggering moves out of the dollar and into riskier currencies, so the SGD benefited as the CNH rallied hard this week.But  CNH could start to underperform. Let me qualify this next comment as no one, and I mean no one knows what the Pboc are going to do. So we can only make hay from innuendo and strategically placed criticisms from regulators in HK  press. But there seems to be a  pickup in debate onshore about the merits of further RMB appreciation which could dent SGD appeal. But in the mean times, we should enjoy the SGD strength ( not because I get paid in SGD, although that is always a welcome bonus). But there is some real value appeal that has emerged in SGD  ahead of this weeks budget, as a rosier outlook in the statement could be the precursor to monetary tightening.But also appealing to foreign investors is the government will take measures to cover the current operating fiscal deficit gap.

Dollar Dives on Confidence, No Support from Fundamentals

Thursday February 15: Five things the markets are talking about

U.S bond yields have backed after an unexpected rise in U.S consumer inflation to its fastest pace in a year – the core’s +1.8% y/y print yesterday was higher than expected, but still below the Fed’s +2% target – making it more likely the Fed will raise interest rates three or more times this year. But, higher U.S rates have not been able to make the U.S dollar more attractive.

The dollar remains under pressure, building on yesterday’s slide in the Euro session, as the market seems to be losing confidence in the long-run state of the U.S economy.

The Dollar Index is down -0.5% and poised to log another three-year low if the decline persists as we head to U.S session open.

Without any new positive U.S demand or supply shocks that could change the landscape for the country’s economy, it’s easy to see the weak dollar story persisting.

For the dollar to rise with Treasury yields, which it has not been doing this year, there needs to be a return in relative confidence over the medium-term U.S.

Also yesterday, January retail sales fell unexpectedly in their biggest drop in 11- months, declining -0.3%, raising new concerns about the U.S economy as a weaker sale print will lead to lower expectations for Q1 GDP growth.

1. Stocks edge higher

The global stock rally is marching ahead as investors take in stride a jump in sovereign yields.

In Japan, the Nikkei posted a solid rise despite a stronger yen (¥106.31). The index ended up +1.5% overnight, after tumbling to a four-month low on Wednesday. The broader Topix advanced +1.0%.

Down-under, Australia’s S&P/ASX 200 rebounded +1.2% as the stock index’s energy component rallied +2.4% to reverse some of this month’s decline.

In a shortened session ahead of the Lunar New Year holiday, Hong Kong’s Hang Seng Index jumped +2%. Its rise of +5.4% this week has erased +50% of last week’s decline, its biggest fall in a decade.

Note: China, South Korea, Taiwan, Vietnam markets were all closed.

In Europe, regional indices continue their ascent higher, tracking another positive session in Asia and on Wall Street yesterday. The French CAC is +1% higher following earnings from a host of Index components. The Swiss SMI is underperforming after Nestle reported mixed results.

U.S stocks are set to open in the ‘black’ (+0.8%).

Indices: Stoxx600 +0.9% at 378.0, FTSE +0.7% at 7264, DAX +0.9% at 12455, CAC-40 +1.6% at 5248, IBEX-35 +1.3% at 9808, FTSE MIB +1.1% at 22687, SMI +0.2% at 8924, S&P 500 Futures +0.8%

2. Oil rises on Saudi commitment to withhold output, gold higher

Oil prices have rallied +1% overnight to extend their gains from yesterday’s session, lifted by a weak dollar and Saudi comments that it would rather see an undersupplied market than end a deal with OPEC.

Brent crude futures are at +$64.99 a barrel, up +63c, or +1%, extending Wednesday’s +2.6% climb. U.S West Texas Intermediate (WTI) crude futures are up +83c, or +1.4%, from Wednesday’s close at +$61.43 a barrel, adding to its +2.4% gain.

Oil markets have got a push from comments by Saudi Arabia, voicing support for output cuts backed by OPEC and other producers including Russia since 2017 in an effort to tighten the market and prop up prices.

OPEC Secretary General Barkindo said that preliminary data for January points to high compliance of cuts by producers.

Ahead of the U.S open, gold prices have edged a tad higher as the dollar weakens and investors’ bank on the precious metal as a hedge against inflation. Spot gold is up +0.3% at +$1,354.34 an ounce and is heading for a fourth consecutive session of gains.

3. Sovereign yields rise

The yield on U.S 10-year Treasuries is nudging closer to +3%, continuing its steady advance from last year’s low of +2.01% in September.

Following this weeks U.S inflation data, and the potential implications that it has for the pace of Fed rate increases this year, the market will be closely scrutinize speeches later today by ECB policy makers to see whether the recent market turmoil will convince them to ease off plans to taper their bond purchases.

Note: Fed-fund futures show a +21% chance of at least four interest-rate increases by year-end, compared with +17% earlier this week.

In Germany, the 10-year Bund yield has gained +1 bps to +0.77%, the highest in more than two years on the biggest gain in a week.

4. Dollar dives again

The USD remains on the defensive despite higher U.S yields –the currency is usually highly correlated to short-term rates. Market seems to be reacting to concerns over weak U.S policies and/or diverging central bank policies as both the BoJ and ECB could begin tightening monetary policy.

The EUR/USD (€1.2467) probed the upper end this week’s and year range as the pair re-tested the €1.25 handle. Sterling (£1.4042) is a tad higher initially aided by reports that the E.U Commission was looking to ease the Brexit transition conditions. However, the E.U later refuted the reports. The pound is also finding support not only from the dollar’s weakness, but also a perceived higher probability that the current U.K government will serve its full five-year term.

USD/JPY (¥106.69) continues to trade atop of its 15-month lows as the pair probed below ¥106.20 overnight. Japan’s Finance Minister Aso comments that the yen’s strength is not abrupt enough to require intervention supported the yen’s rally.

In cryptocurrencies, bitcoin (BTC) is moving back toward $10,000, up +6% on the day at +$9,840 – the price had slumped some -70% in the past six weeks.

5. Crisis in the Northern Ireland

U.K PM Theresa May is facing a political crisis in Northern Ireland as the DUP, who are part of the government’s coalition, have stated there was “no prospect” of a power sharing deal and suggested a return to direct rule.

This crisis threatens to throw the Good Friday agreement into jeopardy and would be a significant blow to P.M May’s authority as she attempts to agree to a crucial Brexit deal over the Irish border.

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USD Under Pressure as Traders eye U.S Inflation

Tuesday February 13: Five things the markets are talking about

Euro equities are trading steady despite a late down swing in Asia, as investors wrestle to find direction after this month’s early collapse.

The dollar has weakened against G10 currency pairs while Treasuries have edged a tad higher along with gold. Crude is heading for its first advance in eight sessions.

Investors are looking to tomorrow’s U.S. consumer-price data for some clues on direction, given that pressure on stocks have been stemming from the outlook for inflation.

The market is expecting U.S consumer-price index to probably increase at a moderate pace last month along with U.S retail sales – both due out tomorrow.

Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

1. Stocks mixed review

In Japan, the Nikkei share average closed at a four-month low overnight as investors turned somewhat risk averse as the yen rallies outright. The Nikkei ended -0.7% lower, its lowest closing level in four months.

Down-under, Aussie shares tracked Wall St into positive territory. The S&P/ASX 200 index rose +0.6% at the close of trade, after a -0.3% yesterday. In S. Korea, the Kospi climbed +0.35%.

In Hong Kong, stocks rose overnight, tracking a global rebound, on bargain hunting. At close of trade, the Hang Seng index was up +1.29%, while the Hang Seng China Enterprises index rallied +0.88%.

In China, stocks rebounded, supported by investor sentiment aided by signs of government support and record bank lending last month. At the close, the Shanghai Composite index was up +1%, while the blue-chip CSI300 index was up +1.19%.

In Europe, regional indices trade mostly lower taking the lead from weaker U.S futures. The FTSE trades little changed following a slightly hotter CPI reading, as Gilt yields pare declines.

U.S stocks are set to open in the ‘red (-0.6%).

Indices: Stoxx600 -0.1% at 372.7, FTSE flat at 7173, DAX -0.1% at 12266, CAC-40 -0.1% at 5133, IBEX-35 -0.6% at 9708, FTSE MIB -0.5% at 22215, SMI -0.3% at 8799, S&P 500 Futures -0.6%

2. Oil prices firm on weaker dollar, gold higher

Oil prices are better bid, supported by a rebound in global equities, as well as by a weaker dollar, which potentially supports more fuel consumption.

Brent crude futures are at +$62.97 per barrel, up +38c, or +0.6% from Monday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$59.60 a barrel, up +31c or +0.5% from yesterday’s settlement.

The stronger prices came after crude registered its biggest loss in two years last week as global stock markets slumped.

Nonetheless, rising U.S production continues to undermine the efforts led by the OPEC and Russia to tighten markets and prop up prices.

Note: U.S oil production has rallied above +10m bpd, overtaking top exporter Saudi Arabia and coming within reach of top producer Russia.

There are also strong signals the output will rally further. Data last Friday showed that U.S energy companies added 26 oilrigs looking for new production, boosting the count to +791, the highest since April 2015.

Gold prices have hit a one-week high overnight, aided by a weaker dollar and as the market awaits for tomorrow’s U.S inflation data for clues on the pace of interest rate hikes. Spot gold is up +0.4% at +$1,327.81 an ounce.

Note: Yesterday, the yellow metal rose +0.5%, its biggest single-day percentage gain in more than one week.

4. Sovereign yields fall

G7 sovereign bond yields look attractive across the curve after yields rallied on a recovering global economy and on expectations central banks will tighten policy faster than previously thought.

With the lack of economic market news the fixed income market looks attractive and reason why yields fell in the overnight session.

The yield on U.S 10-year Treasuries fell -3 bps to +2.83%, the biggest drop in more than a week. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, the lowest in a week, while in the U.K the 10-year Gilt yield has dipped -1 bps to +1.601% despite the higher inflation print (see below).

4. Sterling reaction muted

The pound (£1.3896) has edged a tad higher after U.K January annual inflation unexpectedly remained at +3% (see below) as worries about the U.K. getting a transitional deal after breaking up from the E.U persist. EUR/GBP trades down -0.1% at €0.8868. Although the high inflation number will add to expectations for another BoE hike, futures prices would suggest that the market has priced in two rate increases for the next 12-months.

Note: PM Theresa May’s government will aim to address the Brexit transition in a series of six speeches by the prime minister and other senior ministers in the next few weeks, which her office dubbed “The Road to Brexit.” May’s first speech is to be delivered at a conference in Munich next Saturday, while Foreign minister Boris Johnson will begin the series with a speech tomorrow.

Elsewhere, the USD is modestly lower as President Trump’s proposed budget brings into focus the U.S twin deficits. The EUR/USD (€1.2337) is higher by +0.2%, while USD/JPY (¥107.55) is lower by -0.9% as fixed income dealers ponder the limits of an expansionary BoJ policy.

5. U.K inflation above target in January

Data this morning showed that U.K consumer prices rose +3% y/y in January. This headline print suggests that the Bank of England (BoE) case for higher borrowing costs is somewhat justified to bring borrowing costs back to its +2% annual goal.

The ONS said that the price gains were driven by clothing, footwear and recreational goods and services, especially tickets for zoos and gardens.

Note: Market consensus was expecting annual inflation in January to slow to +2.9%, from +3% m/m.

U.K Inflation has been above the BoE’s +2% annual target for 12-consecutive months. Last week the BoE said that they expected to raise interest rates at a swifter pace than they anticipated last year to contain growth in prices.

Note: The BoE raised its benchmark rate for the first time in a decade in November, to +0.5%. Futures prices suggest that the central bank will lift it again as soon as May.

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FX and Equities Brace for a Bumpy Week

Monday February 12: Five things the markets are talking about

Investors are bracing for another bumpy ride this week after market volatility has returned with a vengeance, delivering the biggest rout in global stocks in a number of years.

Despite stocks getting a reprieve overnight, investor fears of interest rate hikes that started the market correction continues to persist.

Last week, the CBOE volatility index ended almost three times higher than its Jan. 26 level. The ten-year Treasury yield finished last week atop of where they started at +2.85%.

Stateside, this week’s inflation report – U.S consumer-price data on Wednesday – could be the catalyst for a major struggle between equities and bonds that triggered the initial market turbulence.

Elsewhere, while the coming week is absent of G10 central bank meetings, there are a number of important economic indicators to be released. In the U.K, consumer and producer price indexes and retail sales for last month should be a challenge for the pound (£1.3560). While in Japan, its first estimate of Q4 growth along with last month’s producer price index and December’s machinery orders (a proxy for capital spending) should be capable of moving the yen (¥108.70).

Later today, President Trump will deliver his 2019 budget blueprint.

1. Stocks breath a ‘sigh of relief’

Global equities overnight have found some temporary support while volatility remains elevated.

Note: In Japan, equity markets were closed due to a bank holiday Feb. 12, while Chinese New-Year celebrations for the ‘Year of the Dog’ begin (Feb 15-21) and follow across much of Asia, including Hong Kong, Taiwan, Singapore, Malaysia and Indonesia.

Down-under, the Aussie S&P/ASX 200 was down -0.6%, weighed down by a fresh -1.6% drop in the energy sector, while in S. Korea, the Kospi rallied +0.4%.

China and Hong Kong stocks rebounded after last week’s aggressive sell-off. In China, the Shanghai Composite index was up +0.8%, while China’s blue-chip CSI300 index was up +1.3%. In Hong Kong, the Hang Seng Index was up +0.71%.

In Europe, regional indices are trading sharply higher across the board following on from a sharp rebound on Wall Street Friday and positive Asian markets.

U.S stocks are set to open deep in the ‘black (+1.2%).

Indices: Stoxx600 +1.5% at 374.1, FTSE +1.2% at 7181, DAX +1.9% at 12336, CAC-40 +1.5% at 5153, IBEX-35 +1.5% at 9785, FTSE MIB +1.1% at 22404, SMI +1.8% at 8831, S&P 500 Futures +1.2%

2. Oil prices rally +1%, gold higher

Oil prices start the week better bid, recovering some of this month’s steep losses as global equities find some firm footing after last week sea of red.

Brent crude futures are at +$63.54 per barrel, up +75c, or +1.2% from Friday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$60.04 a barrel – that’s up +84c, or +1.4% from the close.

The stronger prices came after crude registered its biggest loss in two years last week as global stock markets slumped.

Nonetheless, rising U.S production continues to undermine the efforts led by the OPEC and Russia to tighten markets and prop up prices.

Note: U.S oil production has rallied above +10m bpd, overtaking top exporter Saudi Arabia and coming within reach of top producer Russia.

There are also strong signals the output will rally further. Data on Friday showed that U.S energy companies added 26 oilrigs looking for new production, boosting the count to +791, the highest since April 2015.

Ahead of the U.S open, gold prices have edged a tad higher as the dollar eased against G7 currency pairs after last week’s rally. Expect investors to take their cues from this weeks U.S inflation data. Spot gold is up +0.3% percent at +$1,320.19 an ounce.

Note: Prices touched their lowest since Jan. 4 at +$1,306.81 last week.

3. Sovereign yields creep higher

U.S and eurozone government bond yields have edged higher overnight, heading back towards multi-year highs on unease that a pick up in inflationary pressures globally and a strong domestic economy will encourage the ECB and the Fed to signal to be more aggressive than originally priced in at the beginning of the year.

In Europe, bond yields across the bloc were +1-2 bps higher in early trade, while in the U.S the 10-year note trades atop of its four-year highs.

In Germany, the 10-year Bund yield is up almost +2 bps at +0.77% and within sight of its nearly three-year high hit last week at around +0.81%. The yield on the U.S 10-year note has rallied +4 bps to +2.90%, the highest in more than four years, while in the U.K, the 10-year Gilt yield has gained +4 bps to +1.605%.

4. The U.S dollar’s quiet trading session

A broad-based flight to safe haven, such as U.S treasuries or the Japanese yen (¥108.70), has not happened to date despite the recent turmoil on equity markets.

The dollar ‘bulls’ are looking for the USD to rally this week, despite financial market volatility to remain high near-term as looser U.S fiscal policy and upside risk to U.S. inflation raises concerns.

Overnight, FX saw a quiet session ahead of some key inflation data this week (U.K Jan CPI Feb 13 and U.S Jan CPI on Feb 14).

Note: The recent pick up in global bond yields has been led stateside, while capital market wait for more details from President Trump’s budget and his infrastructure plan.

EUR/USD (€1.2272) is little changed, but holding below the psychological €1.23 handle. On the weekend, ECB’s Nowotny (Austria) reiterated the concerns about attempts by the U.S to politically influence the exchange rate.

GBP/USD (£1.3860) trades atop of Friday’s close despite the BoE having turned more rates ‘bullish’ last week. Dealers are now putting more weight on Brexit concerns as the U.K previously admitted that the growth potential of the economy had declined.

USD/JPY (¥108.70) is steady as Japanese markets were closed for a bank holiday.

5. Swiss inflation still super low

Data this morning showed that Swiss consumer prices slid -0.1% in January from December leaving the annual inflation rate at +0.7% and slightly below expectations.

Digging deeper, the decrease compared with the previous month is due in particular to the decrease in prices for outpatient hospital medical services. Prices for air transport also declined, along with prices for clothing and footwear, in particular because of sales. In contrast, prices for overnight stays in hotels, heating oil and electricity increased.

Inflation is still low despite the Swiss National Bank’s (SNB) efforts to raise it through negative interest rates and a willingness to intervene in currency markets.

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This too shall pass.

This too shall pass

It seems anytime I left my desk last week the market was sure to fall apart but after witnessing 25 years + of market corrections, I know storms don’t last forever, and as far as the recent bout of market mayhem is concerned, this too shall pass.

Traders quickly conjectured that the ‘crash’ was mainly due to over-crowded positioning in short equity volatility trades and, therefore, was a relatively isolated event. But this does not mean equity markets are out of the weeds just yet.

With US cash flow models factoring in higher US bond yields, equity markets repricing was always on the cards, but unequivocally the rapidity of the move higher in yields was stifling and stop losses were combatively triggered. And when factored with the unbridled use of leverage in equity positions it likely caused everyone to head for the exits due to cash and margin requirements. The great unknown in the debate is just how much equity froth is based on leverage and to what extent will higher US bond yields squeeze these positions either from a cash position or through asset rotation perspectives.

It was a crazy week for US rate markets, but with powerful US economic signals and interest rates most certainly to rise quicker than expected,  last week tumult could be little more than the start of the equity rollercoaster. If cumulative boost from tax reform and fiscal stimulus nudges GDP outline 1.5% higher over the next six to 9 months how does the Fed possibly stick to their three dot plot projections for 2018?

Bond markets are only in the early stages of buying into the global reflation theme, and increasing inflation expectations are driving nominal yields higher. Last week there was a significant topside move in US yields which suggest we could easily tack on another 30-35 basis points 2’s through 10’s given the US fiscal stimulus backdrop. But even without inflation, global central banks will move rates higher, and this will add to higher yield environment, higher inflation or not.

The Feds seem undeterred from the path of gradual normalisation by the recent market turmoil, and we should not expect a Powell ” Put.” given the economic indicators remain strong. And with FED Dudley chiming in, the recent Stock market volatility is ” no big potatoes.” , just imagine a big potato !!
Oil Markets

U.S. crude oil fell below $59 a barrel for the first time in 2018.Rising US production and a resurgent dollar have stacked pressure on oil prices amid a broad financial market sell-off. And on Friday WTI nosedived after the U.S. rig count rose by 26 rigs in the week through Feb. 9 to a total of 791, supporting the EIA revised production forecast that the US would reach the lofty 11 million bpd by the end of 2018

Also, the possible demise of the OPEC agreement has traders on pins and needles after The head of Russian energy giant Gazprom Neft on Friday said producers could adjust their commitments under the deal as soon as next quarter.

Gold Markets
Without question last week was a stressful week in the Gold markets which saw a little appeal for traditional haven assets as Wall streets sinkhole expanded.

At the moment higher US yields continue to weigh negatively on gold’s appeal over the short term, but the recent market tumult likely has overleveraged equity positions scrambling for margin top-ups, and to a degree, there was cause for some cross-asset unwinds including gold allocations which were probably used to fund margins.

In the more extended run with inflation expectations increasing on the back of US stimulus, this should be a consideration for growing one’s gold portfolio.
At the retail levels, Mainland Gold consumption is rising in preparation for Chinese Lunar New Year holidays, not to mention a last-minute splurge for Valentine’s day should keep retailers busy.

Currency Markets

Currency markets were more or less a mixed bag last week, a potpourri of events but not one convincing driver. And with little to glean from Friday close, currency traders could remain sidelined watching equities markets swings in wonderment at least until this week’s US CPI. Given all this rukus started with an uptick in the wage growth component from this months NFP release; this weeks US inflation data will be a monster of a print.
Japanese Yen

Funding positions continue to unwind which at least in the case of JPY, is having a more significant influence over USDJPY than higher US yields. The reappointment of Kuroda could retrace some speculations on the policy adjustments; the Yen will remain the puppet whose strings are manipulated by equities and fixed income price movements.

Australian Dollar

RBA and SOMP behind us and signalling nor rush to hike for a considerable period given the slight dovish lean in the inflation outlook. The AUD should, therefore, be back trading off risk sentiment, commodity prices and ultimately the underlying USD movements. While the Aussie bounced higher above 78 on positive US equity close on Friday, we should expect commodity currencies trade poor amid the recent volatile market. Rallies will likely remain subdued near-term, so the Aussie should remain vulnerable.

Long Euro short Aussie trade set up should return in vogue over the short term given divergent central bank policy expectations.

Malaysian Ringgit

The market continues to grapple with growth versus the inflation narrative, and as this volatility irons itself out, Asian markets tend to exhibit a higher sensitivity to global fluctuations.

And while the Ringgit is better positioned than regional peers to withstand the recent uptick in Global volatility due to strong Marco foundations and the BNM on the path to interest rate normalisation, The domestic economic landscape will come under intense glare when Q4 GDP is released on Wednesday.

While March a rate hike expectations are low due to the dovish inflation overtones expressed by BNM in January,  but a notable above consensus print on this weeks GDP  will increase the odds of a rate hike later in 2018 and strengthen the Ringgit. ( Consensus is 5.8 )

While oil prices continue to move lower due to US supply concerns, I believe this is more technical driven as dollar index is holding above 90 cents, putting pressure on all commodities. Once this period of excess volatility decreases, the global growth narrative should reassert and commodity prices should rise.