Asia market midday market note

Hang Seng Index

After a positive start during the morning trading session, risk continues to wobble on the heavily subscribed HSI. Don’t mistake short side profit-taking for a reverse in negative sentiment as this market is far from bullish on Asia risk. Despite positive developments on the US-China trade front, the playbook remains unchanged, and it would be a total surprise for many market participants if the Trump administration didn’t follow through with 200 billion in tariffs.

Currency Markets

Much of today’ price action, outside of the Australian Dollar, could be a function of paring risk ahead of the hugely busy day with BOE, ECB,  German, French and US CPIs to navigate. But everyone across the currency world is also watching to see just how definitive a signal the Turkish Central Bank will deliver to quell emerging markets bloodletting.

Australian Dollar

Positions are much cleaner now after the short squeeze on the back of last night CNH move, and today stable domestic jobs report. While there is interest to sell between .7190-7200 levels, in the absence of greater participation, we could set into a consolidation pattern ahead of the critical US CPI data. However, .7200 AUDUSD  a desirable standard for Aussie bear and ultimately they will re-engage  as longer-term interest rate differentials will continue to weigh on AUD and eventually led to a convincing break of .7100 level

Aussie rallies after strong jobs data

The Euro

Participation was meagre again in Asia, but if Draghi sounds all the right dovish tones ahead of the politically contentious Italian budgets, and with the Feds on  Dot Plot autopilot gave the run robust US economic data the Euro bears could be rewarded. Its way too quiet and something has to give on the Euro post.

The Chinese Yuan

CNY fixing at 6.8488, slightly lower than market expectation.

Traders were buying the overnight dip as there remains a high-level uncertainty that any progress will come from these possible trade negotiations. The market was pricing in the US midterm election as a likely timeline for development on the US-China trade front, so the overnight move does look like the unwinding of long USD hedges may have exacerbated it and compounded by stop loss triggers. Fundamentally, the CNH remains, and we could see some topside follow through on a stronger than expected CPI print later this evening.

Canadian Dollar
The market is not making to much of a meal of this headline.
There was some news on the NAFTA front that Minister Freeland want to be attending Thursday trade discussion but reinforce the notion that the intent is to work towards a deal there was no ‘stalemate’. It’s not even registering on my pessimistic ire monitor that would sound alarms if this was a case of where their smoke there’s fire. But until there is a breakthrough in these negotiations the Canadian dollar ” permabans” will put up a good defence around 1.3000. And trust me after cutting my chops trading the CAD on Bay Street back in the day, most CAD traders are Fairweather players at best!!

 

Oil markets 

Despite the favourable convergence of bullish near-term signals, Iran sanctions and sinking US crude inventories, which should keep oil prices supported for the remainder of the week. Oil markets continue to trade rather poorly in Asia.

Asia risk continues to wane as traders remain acutely focused on possible trade fall out, which could weigh negatively on regional crude demand. Brent and WTI have slipped throughout today’s Asia trading session despite the US offering an olive branch by formally inviting China to resume trade discussion.

Southeast Asia risk is an entirely different kettle of fish and one look at the weakening currency profile of one of South East Asia major crude importers, India, does suggest the weaker Rupee could dent  Oil demand as real fuel cost factored directly through the seriously weaker currency profile.

Monday blues or Dog days of summer

Monday blues or Dog days of summer

Whether a case of the Monday blues, the Dog Days of summer setting in or a combination of both, markets struggled for direction despite upbeat US economic data while quarterly earnings have failed to inspire investors. And we might chalk it up to a typical summer afternoon NY trading session.

Event-wise, apart from the Tump/Putin headline which managed to supplant China-US trade headlines, there has been very little news worth to report as the markets hardly budged on the positive US retail sales print and remained in stasis during the Empire survey. And  Sterling barely blinked after UK PM May scraped through a Customs Union amendment by 305 votes to 302. However, with May yet again snatching victory from the jaws of defeat, it should provide a reasonable underpin for the Pound over the near term although this morning activity has been remarkably muted

US markets
Wall Street opened with a misfire. Investor expectations were running at peak optimism, and while banks stocks looked favourable, sentiment turned sour, as oil price worries intensified.

Then the thud that was heard up and down wall street as Netflix fell off a cliff in late trading after posting dispiriting subscriber growth last quarter. Indeed, with one of the markets key highfliers going into the tank, it could be a tough 24 hours for FANG stocks. FANGS ‘s have been the undisputed heavyweight champions of the equity world, and pretty much impervious to risk off and trade wars. But when you start looking under the hood and strip away a couple of FANG outperformers, US equity markets aren’t all that cheery. This negative Netflix result could spur more moves into to cash as investors may finally adopt a delayed sell in May and go away strategy.

Oil markets

Oil markets

Oil markets are slip sliding away under renewed selling pressure from long liquidation as bearish sentiment grows thick k with the US  actively considering tapping the Strategic Petroleum Reserve, the chatter of increased Russian oil production after Putin extends the US an olive branch to add more barrels, while the US considers waivers on Iranian sanctions. The sweeping slew of bearish signals has wholly eroded market sentiment with Brent Crude breaking bad now trading below May 2018  lows.

Also, with the market ignoring bullish indicators, specifically the latest production outage in Libya, where the 290,000 bpd Sharara oil field is reducing output due to an act of terrorism.  It calls attention to just how big of a shift market sentiment has undergone since last Wednesday’s high-volume meltdown.

Gold markets

Bearish sentiment continues to engulf the precious metal space after a break of the fundamental $ 1,240 support level overnight while breaching multi-year trendlines. Markets are becoming more e convinced about a strengthening dollar, which will unquestionably act as a most significant headwind and could continue to pressure gold lower as safe-haven demand remains muted.

In fact, the dollar slipped lower in modest price action, yet gold still fell below critical support. Ignoring even the slightest bullish indicator is an unfortunate sign and suggests we could push significantly lower when the USD moves out of its current melancholic state and starts to reassert its presence.

Currency Markets

The USD eased lower for the third consecutive day as trade war headline decreased and some of last week’s froth give way to position neutrality. But we’ve been in this back and forth momentum on the USD since the beginning of June. Whenever the USD picks up steam, everyone boards the rally bus only to get whipped sawed by a brutal correction. But as we move into the dog days of summer, expect volumes to taper but volatility to remain elevated given considerable headline risk. But overall. caution prevails

When markets turn directionless, it’s time to revert into the interest rate matrix for clarity which suggests the USD has more gas in the tank than say the EUR, JPY or the AUD.

GBP: In general, I think everyone likes GBP higher. Therefore, the crowded trade phenomena make correction even more brutal. Again, back to basics. Assuming Brexit risk remains contained (big headline risk assumption) and with the surprisingly hawkish shift from Cunliffe, the BOE’s standing dove, a rate hike in August is all but inevitable GBP should remain in favour.

JPY: Equity momentum has waned this week but increasing JPY outflows to suggest we may only be in the early stages of this move higher in USDJPY. With US yields ticking higher, the fundamental differential argument remains intact.

AUD: Shorts should continue to lead the way, China remains a significant risk despite some favourable commodity forecast based on positive what if scenarios. i.e. what if Trade war abates

MYR: There was a regional sigh of relief after China GDP matched market expectations. While of course taking the data print at face value, the markets are reading this as more or fewer things are not as bad as they could have been. But there is little to get excited about a slowing economy in my views.

With no  “risk on catalysts”, the MYR will take cues from the RMB complex as the local markets will wait for Wednesday  Malaysia CPI data. The data will be of interest given the BNM neutral stance from last week. But the market does think the zero GST effects will likely see inflation drop to the 1.7 %level which will not change markets view that BNM stays on hold for some time. Suggesting the MYR will get little support from interest rate differentials for the foreseeable future.

Also, the bearish sentiment in the oil markets continues to permeate every nook and cranny which should skew negative for MYR sentiment today.

US Bond Auction TIPS the dollar

US Bond Auction TIPS the dollar

A dismal US 30year TIPS auction is weighing on dollar demand as the sagging bid to cover ratio of 2.31 is signalling dwindling investor appetite as inflationary headwinds build. The dollar is lower because no one wants to own US bonds despite the higher yield, knowing the inflationary headwinds will push yields higher and bond prices lower

The market remains nonplussed by the breakdown of FX /Interest rate correlations and while the debate still rages concerning Wednesday dollar sell-off. I think its time to throw textbook economics out the window as well as the so-called interest rate pivot point. G-10 yield differentials are so tiny that traders could care less about differentials as they become increasingly focused on the future outlook of the expanding US deficits and in particular the budget deficit

Another hot inflation reading as PPI showed a substantial gain but provided no bounce to the buck. When real money is taking the dollar to the woodshed and reluctant to own greenbacks in anyway shape or form, it matters little what the Feds are doing or yields for that matter. And by all indications, we could be in the early stages of protracted dollar sell-off.
Equity Markets

Equity investors are in a happy spot as US stock markets carved out their fifth consecutive day of gains. Despite a midday swoon, markets roared back as investors view the uptick in inflation as non-threatening and remain in buy on dip mode as last weeks equity meltdown looks more and more like an illogical outlier than ever.

Oil Markets

After the decent bounce on the back weaker dollar and Khalid al-Falih suggesting no imminent demise of OPEC and non-member compliance. Not unexpected the markets are becoming a bit more position sensitive heading into the weekend. The weaker US dollar has been a significant component driving market sentiment, and with the dollar entering oversold territory at weeks end, we could see short dollar position pared which could negatively impact interday oil prices.

Frankly giving the evolving vital narratives surrounding OPEC compliance vs Shale output I expect the WTI whipsaw to be as active next week as it was this week. But given the overly bearish outlook for the greenback, we may have printed a short-term floor and dips will remain supported.

Gold Markets

There was very little follow through on the much hotter than expected US PPI print which convinced investors to book some profits after gold rallied hard the previous session. A while the weaker USD is underpinning gold prices, the short dollar speculators a bit overextend suggesting the market could pare back US short dollar risk which may temper topside expectations for Gold prices today. Medium-term bullish conviction remains intact given the higher US inflation profile and weaker USD narrative.

Crypto Markets

Bitcoin buyers were back en masse chasing the dream as the fear of missing ( FOMO)out propelled BTC above 10,000. It appears the recent wave or regulatory worries have been tempered as the massive South Korean market could roar back to life as rumours are circulating that Seoul is looking at licencing several exchanges adding a level of credibility and shoring up severely dented investor confidence.
Currency Markets

The Japanese Yen

Talking about FOMO, is there anyone who is not short USDJPY? Of course, “the crowded trade theory” did cross my mind overnight, for second or two, as USDJPY powered back to 106.80 overnight on the Wakatabe headline, before pressing the sell button again. Dovish or not the market cares little about centeral bank policy these days while looking for any and all opportunities to hammer the dollar mercilessly. With very little chance of intervention at these levels, the JPY bulls should continue to have their way near-term.But short-term speculators are a bit stretched so now is not the time to get greedy.Let’s see what fortunes next week brings.

The Euro

It looks like the grind higher is back in fashion, and the upticks have been relentless over the past 24 hours. But unlike the recent test of 1.25 positioning is much lighter so we could punch higher as traders continue moan over not buying the dips to the low 1.22’s

The Malaysian Ringgit

Powerful bullish signals are falling on deaf ears as investors are far and few between due to Chinese Lunar New Year and quite frankly it’s not worth paying the holiday liquidity premiums to put on risk. Very little offshore interest today so expect the market to remain quiet.