Another ominous Yuan fix?

The Yuan
Another ominous signal from this mornings Yuan fix has sent Yuan bears into action. While the counters cyclical mechanism pegged the fix lower than yesterday close, we’re still trading at year highs suggesting the central bank is in no rush to stem the weakening tide. However, this does run contrary to statements from the bank overnight that they will not use the Yuan as a tool in a trade war, but as history reminds us, the Pboc remains very fluid when it comes currency policy.

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Equity market reaction

The local equity markets, along with global equity index futures markets are not reacting well to traders pushing the Yuan envelope, USDCNH higher. Market continue to underprice the destabilising effect of a weaker Yuan will have on global equity markets.

 

Gold Market
While keeping a close eye on equity sentiment, gold traders gently buying gold in the event the latest markets developments could trigger and downwards spiral on global equities. While I don’t believe this is a significant enough trigger at this stage, but when compounded with the potholed encumbered landscape, it’s worth keeping an eye on

Oil Markets

Batten down the hatches Hurricane Micheal is intensifying, adding some support to prompt contracts

Japanese Yen
Price action can be very deceiving, a ten-pip range in USDJPY but given the heightened level of discussions around Yen and BoJ this morning, something is going to give.

Japan’s economy is alive kicking by any measure but today’s over the top machine orders data that printed 6.8%MoM versus -3.9% expected and the YoY number rose by 12.6% versus 1.8% is a stunner by any stretch of the imagination prompting the Cabinet Office upgraded its assessment of machinery orders, saying they are in recovery.

The markets are still positioning for to a 115-year-end target of USDJPY, but the economic revival along with the weaker Yen of late does suggest the BoJ does have some wiggle room to tack to a more hawkish target.

Australian Dollar
Not to unexpectedly the Australian dollar ran into a wave of interbank offers and has traded off intersession highs.

A potholed encumbered landscape

Market sentiment: risky business

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

Politics back in the fray: odd timing 

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

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

US Bond Markets: valuations vs sentiment

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

Oil Markets: headline bluster 

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

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

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

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

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

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

Gold Market: song remains the same 

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

Currency Markets: another day another dollar 

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

Chinese  Yaun

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

Australian Dollar

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

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

Will the bond market bloodbath resume?

Tuesday October 9: five things the markets are talking about

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

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

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

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

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

1. Stocks mixed results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Sovereign yields on the move

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

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

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

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

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

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

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

4. Dollar supported by yields

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

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

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

5. German exports slipped in August

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

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

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

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

Forex heatmap

Noisy Markets

Noisy Markets

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

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

Asia Equity Markets

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

Oil markets

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

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

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

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

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

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

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

Gold Markets

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

Currencies

Japanese Yen

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

Malaysian Ringgit 

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

NFP – what to expect

Friday October 5: Five things the market is talking about

The granddaddy of economic indicators – U.S non-farm payrolls (NFP) for September – will be released later this morning (8:30 am EDT) along with the Canadian jobs report.

Today’s U.S number is ‘big,’ especially with this week’s aggressive backing up of the U.S yield curve. The sell-off in Treasuries, in part, has been justified by U.S data supporting the strength of their economy and the markets future inflation fears.

This morning’s payrolls headline print, coupled with wage growth numbers, will provide substance to what investors should expect, from an interest rate perspective in particular. Does the Fed’s dot-plot line up neatly or will the Fed push its benchmark past the neutral level?

Consensus is looking for a September headline print of +185K new jobs and an unemployment rate to ease another one-tenth to +3.8%. However, expect dealers to look beyond the headline and focus intently on the increase in average hourly earnings.

The August wage growth print at +2.9% was the largest y/y gain in nearly a decade. If September’s number comes in even stronger, will justify some dealers fears that inflation pressures are building, maybe faster than originally perceived.

Current expectations for wage growth m/m are +0.3%, which would equate to approximately +2.8% y/y.

1. Stocks mixed reactions ahead of payrolls

Euro equities are struggling for traction after the Asian session ended the week with a further sell-off overnight as the region’s tech companies were battered by concerns about their U.S business.

In Japan, the Nikkei fell to its lowest close in a fortnight, tracking Wall Street’s slide yesterday as rising U.S Treasury yields have reduced the attraction of most stocks except financial ones. The Nikkei share average ended -0.8%, while the broader Topix dropped -0.5%.

Down-under, Aussie shares edged higher on Friday, supported by gains from the financial sector, which managed to advance for a second session. The S&P/ASX 200 index closed +0.2% higher. The benchmark is off -0.4% for the week. In S. Korea, Kospi stock index also ended lower this morning (-0.31%) on fears of foreign fund outflows after U.S yields surged to a new seven-year high.

Note: China’s financial markets are closed for the National Day holiday and will resume trade on Oct. 8.

In Hong Kong, stocks fell for a fourth consecutive session, dragged by a selloff in tech stocks on fears that these companies will be the latest casualties in the Sino-U.S trade war. The Hang Seng Index was down -0.42%.

In Europe, regional bourses trade lower across the board, pressured by rising sovereign yields. Investors will take their cue from this mornings N. American employment reports.

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

Indices: Stoxx600 -0.7% at 377.2, FTSE -0.8% at 7359, DAX -0.8% at 12142, CAC-40 -0.5% at 5385, IBEX-35 -0.5% at 9264, FTSE MIB -0.9% at 20438, SMI -0.5% at 9053, S&P 500 Futures -0.2%

2. Oil prices rise on Iran sanctions, gold little changed

Oil prices trade atop of their four-year highs this morning as traders predict a tighter market due to U.S sanctions on Iran’s crude exports.

Brent crude oil is up +10c a barrel at +$84.68. Yesterday, Brent fell by -$1.34 a barrel or -1.6% – the contract is on course for a gain of +2.5% on the week. U.S light crude is up +30c at +$74.63, a gain of +2% on the week.

The market remains very ‘bullish’ with speculators gunning for $100 a barrel on fears that the U.S demands for an Iran oil embargo will create a significant supply shortfall.

Both benchmarks retreated yesterday following a rise in U.S oil indicated that they would raise output, however, pullbacks have been aggressively bought.

Ahead of the U.S open, gold prices are little changed as the market remains cautious after U.S Treasury yields hit seven year high yesterday and on expectations that a strong U.S payrolls report could boost the Fed case for a tighter monetary policy. Spot gold has inched down -0.1% to +$1,197.64 an ounce, while U.S gold futures are flat at $1,201.3 an ounce.

3. Reserve Bank of India (RBI) surprises

The RBI kept its policy steady in a surprise hold this morning, but changes its stance from “neutral” to “calibrated” tightening.

The central bank left the Reverse Repo Rate (RRR) unchanged at +6.25% (not expected) and the Cash Reserve Ratio (CRR) at +4.00% (as expected).

It’s the first pause in three-decisions in the current tightening cycle. Governor Patel is to keep a ‘close vigil’ on inflation outlook for the coming months, as the outlook is clouded with several uncertainties. He indicated that the benefits of a weaker INR currency would become somewhat muted from a slowdown in global trade and escalating tariff war.

INR stays near record lows as the ‘big’ dollar hit a fresh record high of $74.05 vs. $73.65 before the statement.

The euro area bond market is heading for its worst week in five-months, with fears about tighter central bank monetary policy and strong U.S economic data will push borrowing costs to new highs.

Germany’s 10-year Bund yield has gained +2 bps to +0.55%. In the U.K, the 10-year Gilt yield has climbed +3 bps to +1.697%, the highest in almost three-years. While further anti-E.U. rhetoric by Italy’s Deputy PM Salvini is again pushing BTP yields higher. Italy’s 10-year yield has jumped +3 bps to +3.363%.

4. Dollar remains strong ahead of payrolls

The ‘big’ dollar is maintaining a firm tone, trading atop of its three-month high, against G10 currency pairs ahead of this morning’s NFP print.

EUR/USD (€1.1497) remains within striking distance of this week’s low outright. Italian anti-E.U rhetoric coupled disappointing Italian draft budget details is again providing EUR ‘bears’ with further ammo.

GBP/USD (£1.3034) is holding above the psychological £1.30 handle as EU Brexit negotiators were said to believe that an agreement with Britain was ‘very close.’

USD/JPY (¥113.88) remained below the ¥114 level after testing above it earlier in the week due to higher U.S Treasury rates.

4. German factory orders

Data this morning showed that factory orders in Germany rose strongly in August after two months of declines, boosted by strong foreign demand from outside the eurozone.
Orders, seasonally adjusted, rose +2% m/m. That follows a -0.9% drop in July and a -3.9% drop in June.

Note: Orders are still down -2.1% on the year, however, current data would suggest solid German growth has appeared in H2, 2018.

Digging deeper, domestic orders dropped -2.9% in August, but that was offset by a +5.8% rise in foreign orders.

Foreign orders from countries using the EUR dropped -2.2%, but those from non-eurozone countries rose +11.1%.

Forex heatmap

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

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

Italian ” fondere”

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, the keep it simple pragmatic approach to this trade suggests the dollar remains clearly 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 we cannot push into the 114 zones next week.

There are some chunky structural long EURJPY and a lot of underlying derivatives that add up to the same trade still sitting on traders books. These positions are clearly at risk during this Italy induced panic as we leak near yet another psychological support level EURJPY 131. However, these structures  should not come under any stress provided EURJPY  130 remain intact

Oil markets 

I’ve been told 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.

Gold Markets

Gold has been trading in a rather begin range after dropping to fresh one-month lows on the stronger USD dollar narrative. But frankly, the 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.